UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number:
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel:
(Name, Telephone, E-mail and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| * | Not for trading, but only in connection with the listing on the |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s class the period covered by the annual report:
As of December 31, 2022, there were
83,109,689 ordinary shares in issue1, being the sum of (i)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐
Yes ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐
Yes ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Emerging growth company | ||
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes
This Annual Report on Form 20-F is incorporated by reference into the Registrant’s Registration Statements on Form F-3 (File No. 333-256630) filed with SEC on May 28, 2021, Form S-8 (File No. 333-238679) filed with SEC on May 26, 2020, Form S-8 (File No. 333-259748) filed with SEC on September 23, 2021, and Form S-8 (File No. 333-265413) filed with SEC on June 3, 2022.
TABLE OF CONTENTS
i
| PART II | 153 | |
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | 153 |
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 153 |
| ITEM 15. | CONTROLS AND PROCEDURES | 153 |
| ITEM 16 | [RESERVED] | 155 |
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT | 155 |
| ITEM 16B. | CODE OF ETHICS | 155 |
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 155 |
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES | 155 |
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 155 |
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT | 155 |
| ITEM 16G. | CORPORATE GOVERNANCE | 156 |
| ITEM 16H. | MINE SAFETY DISCLOSURE | 156 |
| ITEM 16I. | DISCLOSURE REGARDING FOREIGN JURISDICATION THAT PREVENT INSPECTIONS | 156 |
| PART III | 157 | |
| ITEM 17. | FINANCIAL STATEMENTS | 157 |
| ITEM 18. | FINANCIAL STATEMENTS | 157 |
| ITEM 19. | EXHIBITS | 157 |
ii
INTRODUCTION
We began our operations by incorporating AnPac Bio-Medical Science Co., Ltd., or AnPac Bio, in January 2010 as a British Virgin Islands, or BVI, business company limited by shares under the BVI Business Companies Act. On May 9, 2023, we changed our name to Fresh2 Group Limited to reflect our entry into the Asian e-commerce food business in the U.S.
The chart below summarizes our corporate structure and identifies our principal subsidiaries as of the date of this report. operating subsidiaries in the People’s Republic of China (the “PRC” or “China”) and the United States. Our corporate structure contains no variable interest entities. We are not a Chinese operating company and our structure involves unique risks to investors. As used herein the terms “we,” “us,” “our,” “Fresh2” and the” Company” means Fresh2 Group Limited. a BVI business company and its subsidiaries.
iii
Fresh2 Group Limited is the public company in which investors hold our American Depositary Shares (‘ADSs”) and as a holding company does not conduct any of our operations. All of our subsidiaries are wholly-owned. A listing identifying the place of incorporation, type of legal entity, principal activity and the ownership interest in our Company and each of its subsidiaries follows:
| Entity Name | Place of Incorporation |
Type of legal entity |
Ownership Percentage |
Shareholder(s) | Principal activities |
|||||||
| Fresh2 Group Limited | BVI | Public company | 100% | Public company | Holding Company | |||||||
| Fresh2 Group Inc | Delaware | Corporation | 100% | Fresh2 Group Limited | Holding Company | |||||||
| Fresh2 HF Inc | Delaware | Corporation | 100% | Fresh2 Group Inc | Holding Company | |||||||
| Fresh2 Logistics Inc | New York | Corporation | 100% | Fresh2 Group Inc | Distribution of products | |||||||
| Fresh2 Technology Inc | Delaware | Corporation | 100% | Fresh2 Group Inc | Operating company | |||||||
| Foodbase Group Inc | Delaware | Corporation | 100% | Fresh2 Group Inc | Holding Company | |||||||
| ANPC Merger Sub Inc. | Delaware | Corporation | 100% | Fresh2 Group Limited | No activity yet | |||||||
| GISN(HK) Limited | Hong Kong | Limited liability company | 100% | Fresh2 Technology Inc | Holding Company | |||||||
| Hua You Sheng Future (Beijing) Technology Co., LTD | PRC | Limited liability company | 100% | GISN(HK) Limited | Technology development | |||||||
| GuanShi Technology ( Beijing) Co. , Ltd | PRC | Limited liability company | 100% | GISN(HK) Limited | Technology development | |||||||
| Fresh2 Ecommerce Inc | Delaware | Corporation | 100% | Fresh2 Technology Inc | Operating company | |||||||
| Fresh2 EZ Inc | Delaware | Corporation | 100% | Fresh2 Technology Inc | Owner of core technology platform | |||||||
| Fresh2 Information Inc | Delaware | Corporation | 100% | Fresh2 EZ Inc | No activity yet | |||||||
| Anpac Technology USA CO., LTD (“AnPac US”) | Delaware | Corporation | 100% | Fresh2 Group Limited | Clinical trials for research on cancer screening and detection tests | |||||||
| AnPac Bio-Medical Technology (Lishui) Co., Ltd. (“AnPac Lishui”) | PRC | Limited liability company | 100% | Fresh2 Group Limited | Cancer screening detection tests and device manufacturing | |||||||
| Changhe Bio-Medical Technology (Yangzhou) Co., Ltd. | PRC | Limited liability company | 100% | Fresh2 Group Limited | Cancer screening and detection tests | |||||||
| Changwei System Technology (Shanghai) Co., Ltd. (“Changwei”) | PRC | Limited liability company | 100% | Fresh2 Group Limited | Research and development | |||||||
| AnPac Bio-Medical Technology (Shanghai) Co., Ltd. | PRC | Limited liability company | 100% | AnPac Lishui (56%); Changwei (44%) | Cancer screening and detection tests | |||||||
| Lishui AnPac Medical Laboratory Co., Ltd. | PRC | Limited liability company | 100% | AnPac Lishui | Cancer screening and detection tests | |||||||
| Shiji (Hainan) Medical Technology Ltd. | PRC | Limited liability company | 100% | AnPac Lishui | Cancer screening and detection tests | |||||||
| Anpai (Shanghai) Healthcare Management and Consulting Co., Ltd. | PRC | Limited liability company | 60% | AnPac Lishui | Cancer screening and detection tests | |||||||
| Shanghai Muqing AnPac Health Technology Co., Ltd. (“AnPac Muqing”) | PRC | Limited liability company | 51% | AnPac Lishui | Cancer screening and detection tests | |||||||
iv
Significant Factors Relating to PRC Government Oversight of Our Operating Businesses.
Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in the PRC or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past four decades, growth has been uneven across different regions and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are currently applicable to us. In addition, in the past the Chinese government implemented certain measures, including interest rate increases, to manage the pace of economic growth and prevent the economy from overheating. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations.
Status under Holding Foreign Companies Accountable Act
In December 2021, the SEC adopted rules (the “Final Rules”) to implement the Holding Foreign Companies Accountable Act (the “HFCAA”). The HFCAA includes requirements for the SEC to identify issuers who file annual reports with audit reports issued by independent registered public accounting firms located in foreign jurisdictions that the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of a position taken by a non-U.S. authority in the accounting firm’s jurisdiction (“Commission-Identified Issuers”). The HFCAA also requires that, to the extent that the PCAOB has been unable to inspect an issuer’s independent registered public accounting firm for three consecutive years since 2021, the SEC shall prohibit the issuer’s securities registered in the United States from being traded on any national securities exchange or over-the-counter markets in the United States. In December 2022, the Accelerating Holding Foreign Companies Accountable Act amended the HFCAA to shorten the three-year period to two years.
Under the Final Rules, the SEC adopted submission and disclosure requirements by amending Form 10-K and other annual reporting forms and established procedures to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA. Specifically, the Final Rules require each Commission-Identified Issuer to submit documentation to the SEC annually on or before its annual report due date that establishes that it is not owned or controlled by a government entity in its public accounting firm’s foreign jurisdiction and require additional specified disclosures by “foreign issuers” as defined in Rule 3b-4 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SEC identifies an issuer as a Commission-Identified Issuer after the issuer files its annual report and on a rolling basis, and will impose an initial trading prohibition on an issuer as soon as practicable after it has been conclusively identified as a Commission-Identified Issuer for two consecutive years. To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements that include an audit report signed by such a registered public accounting firm.
In August 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations from September to November 2022, and in December 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition under the HFCAA.
Given that Marcum Asia CPAs LLP, a New York based independent accounting firm, serves as the principal accountant to audit our consolidated financial statements to be filed with the SEC, we believe we are compliant with the HFCAA, which should preclude a finding by the SEC that we are a Commission-Identified Issuer and therefore the delisting of our ADSs from the Nasdaq Capital Market. For a detailed description of risks related to our doing business in China and status under the HFCAA, see “Item 1A. Risk Factors - Risks Related to Our Doing Business in the PRC”.
Recent Regulatory Developments in China
The PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted outside of China and over foreign investment in China-based companies. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China, including enforcement actions against illegal activities in the securities market, enhancing supervision over China-based companies listed outside of China using the variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. For example, in July 2021, the relevant PRC government authorities made public the Opinions on Intensifying Crack-Down on Illegal Securities Activities (the “Securities Opinions”) which emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. In November 2021, the Cyberspace Administration of China (the “CAC”) released the draft Administrative Regulations on Cyber Data Security for public comments, which requires, among others, that a prior cybersecurity review should be required for listing abroad of data processors which process over one million users’ personal information, and the listing of data processors in Hong Kong which affects or may affect national security. On February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five relevant guidelines, which became effective on March 31, 2023, requiring the Chinese domestic companies’ overseas offerings and listings of equity securities be filed with the CSRC.
v
The Chinese government may further promulgate relevant laws, rules and regulations that may impose additional and significant obligations and liabilities on overseas listed PRC companies regarding data security, cross-border data flow, anti-monopoly and unfair competition, and compliance with China’s securities laws. It is uncertain whether or how these new laws, rules and regulations and the interpretation and implementation thereof may affect us, but among other things, our ability to obtain external financing through the issuance of equity securities in the United States, Hong Kong or other markets could be negatively affected, and as a result, the trading prices of our Common Stock could significantly decline or become worthless. For a detailed description of risks related to our doing business in China, please see the section of this Annual Report titled “Item 1A. Risk Factors—Risks Related to Our Doing Business in the PRC.”
Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. For more details, see “Item 1A. Risk Factors—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us or result in a material adverse change to our subsidiaries’ business operations, and damage our and our subsidiaries’ reputation, which would materially and adversely affect our financial condition and results of operations and cause our Common Stock to significantly decline in value or become worthless.”
In light of such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. Any future PRC, U.S. or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect our business and results of operations. Any such action, once taken by the Chinese government, could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors, and could cause the value of our Common Stock to significantly decline or become worthless. If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States or other governments deteriorate, our business in China and United States may also be adversely affected. For more details, see “Item 1A. Risk Factors—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us or result in a material adverse change to our subsidiaries’ business operations, and damage our and our subsidiaries’ reputation, which would materially and adversely affect our financial condition and results of operations and cause our ADSs to significantly decline in value or become worthless.”
Except where the context otherwise requires:
| ● | “ADME test” refers to our immunology test named AnPac Defense Medical Examination; |
| ● | “ADRs” refers to the American depositary receipts that evidence our ADSs; |
| ● | “ADSs” refers to our American depositary shares, each of which represents one Class A ordinary share; |
| ● | “CDA test” refers to our cancer screening and detection test using the CDA technology; |
| ● | “CDA-based tests” refers to either or both of our CDA tests and combination tests; |
| ● | “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Hong Kong, Macau and Taiwan; |
| ● | “Class A ordinary shares” refers to our Class A ordinary shares of par value US$0.01 per share; |
| ● | “Class B ordinary shares” refers to our Class B ordinary shares of par value US$0.01 per share; |
| ● | “combination test” refers to a test that combines our CDA test with an auxiliary test based on another cancer screening and detection technology, such as biomarker-based test (which have historically been our primary combination test) and the ct-DNA test (which we refer to as the APCS (AnPac Pan Cancer Screening) test), using our proprietary algorithm; |
| ● | “detection” of cancers by our CDA-based device or tests refers to the detection of the risk of whether cancer may occur or has occurred, not to cancer diagnosis, and “detect” has the corresponding meaning; |
| ● | “RMB” or “Renminbi” refers to the legal currency of China; |
| ● | “shares” or “ordinary shares” refers to our ordinary shares, including Class A and Class B ordinary shares, par value US$0.01 per share; |
| ● | “US$,” “U.S. dollars,” “$” or “dollars” refers to the legal currency of the United States; and |
| ● | “we,” “us,” “our company,” “our” or “Fresh 2 Group” refers to Fresh2 Group Limited and its subsidiaries; |
Our reporting currency is the Renminbi. Certain of our financial data in this annual report on Form 20-F are translated into U.S. dollars solely for the reader’s convenience. Unless otherwise noted, all convenience translations from Renminbi to U.S. dollars in this annual report on Form 20-F were made at a rate of RMB 6.8972 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System on December 31, 2022. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, at the rate stated above, or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions.
vi
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe-harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “projects,” “intends,” “potential,” “target,” “aim,” “predict,” “outlook,” “seek,” “goal” “objective,” “assume,” “contemplate,” “continue,” “positioned,” “forecast,” “likely,” “may,” “could,” “might,” “will,” “should,” “approximately” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
| ● | the implementation of our new business model and growth strategies; | |
| ● | our future business development, financial condition and results of operations and our ability to obtain financing cost-effectively; | |
| ● | potential changes of government regulations; |
| ● | trends and competition in the cancer screening and detection market; |
| ● | our expectations regarding demand for and market acceptance of our cancer screening and detection tests and our ability to expand our customer base; |
| ● | the duration of COVID-19 and its impact on our business and financial performance; |
| ● | our ability to obtain and maintain intellectual property protections for our CDA technology and our continued research and development to keep pace with technology developments; |
| ● | our ability to obtain and maintain regulatory approvals from the PRC National Medical Products Administration (the “NMPA”), U.S. Food and Drug Administration (the “FDA”) and the relevant U.S. states and to have our laboratories certified or accredited by authorities including under CLIA; |
| ● | general economic and business conditions in China and elsewhere; |
| ● | our ability to hire and maintain key personnel; and |
| ● | our relationship with our major business partners and customers. |
This annual report on Form 20-F also contains estimates, projections and statistical data obtained from various government and private publications. This market data speaks as of the date it was published and includes projections that are based on a number of assumptions and are not representations of facts. The cancer screening and detection market may not grow at the rates projected by market data, or at all. The failure of this market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this annual report. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by U.S. federal securities law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we reference in this annual report and have filed as exhibits to this annual report, completely and with the understanding that our actual future results may be materially different from what we expect. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
vii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business
Risks Related to Our CDA E-Commerce Food Businesses
There are doubts about our company’s ability to continue as a going concern.
Our company’s independent auditors have raised doubts about our ability to continue as a going concern. There can be no assurance that sufficient funds that will be required during the next year or thereafter will be generated from operations or that funds will be available from external sources, such as securities, debt or equity financing or other potential sources. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination of new sources of revenues, with interim cash flow deficiencies being addressed through additional financing. We anticipate raising additional funds through public or private financing, securities financing and/or strategic relationships or other arrangements in the near future to support our business operations; however, we may not have commitments from third parties for a sufficient amount of additional capital. We cannot be certain that any such financing will be available to us on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Our ability to obtain additional funding will determine if we can continue as a going concern. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and share price and require us to curtail or cease operations, sell off assets, seek protection from creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of our shares, and debt financing, if available, may have onerous terms. including restrictive covenants. Any additional financing could have a negative effect on our shareholders.
We have incurred losses each year since our inception, we expect to continue to incur losses for the foreseeable future, and we may not be able to achieve or maintain profitability.
We have incurred losses each year since our inception. For the years ended December 31, 2020, 2021 and 2022, we incurred net losses of RMB80.6 million, RMB120.1 million and RMB103.6 million (US$15.0 million), respectively. As of December 31, 2022, we had an accumulated deficit of RMB 577.5 million (US$ 83.7 million). To the date of this annual report, we have financed our operations primarily with proceeds from equity and debt offerings, borrowings, and loans from related parties. We have devoted and expect to continue to devote substantially all of our resources to the research, development and commercialization of our CDA technology, device and test. We expect to continue to incur losses for the foreseeable future. We cannot predict the extent of these future losses, or when we may achieve profitability, if at all. If we are unable to generate sufficient revenue from our business and control our costs and expenses to achieve and maintain profitability, the value of your investment in us could be negatively affected.
1
We require substantial funding for our operations. If we cannot raise sufficient capital on acceptable terms, our business, financial condition and prospects may be materially and adversely affected.
We require substantial capital to expand our business, pursue strategic investments and for other reasons, including to:
| ● | increase our sales and marketing efforts to drive market adoption of our cancer screening and detection tests and address competitive developments; |
| ● | expand our technologies into other types of cancer screening and detection products, such as our CDA test’s application in assistance in diagnosis, prognosis and recurrence; |
| ● | acquire or invest in technologies or other food service businesses; |
| ● | seek regulatory and marketing approvals for our cancer screening and detection tests and devices; |
| ● | conduct research studies for our CDA test and any additional cancer screening and detection tests; |
| ● | maintain, expand and protect our intellectual property portfolio; |
| ● | hire and retain additional personnel; |
| ● | develop, acquire and improve operational, financial and management information systems, including personnel to support our business activities and help us comply with our obligations as a public company; |
| ● | add equipment and physical infrastructure to support our businesses; and |
| ● | finance general and administrative expenses. |
We will be required to obtain further funding through public or private equity offerings, debt financings or other sources. Accordingly, our shareholders’ ownership interest will be diluted, Further financing may not be available to us on acceptable terms, or at all. If we fail to raise capital as and when needed it would have a negative impact on our financial condition and our ability to pursue our business strategy. To the extent that we raise additional capital through the sale of equity or convertible debt, and the terms of such securities may include liquidation or other preferences that adversely affect shareholder rights. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures.
Our principal sources of liquidity have been cash generated from financing and operating activities. As of December 31, 2022, we had RMB1.9 million (US$0.3 million) of cash and cash equivalents and a working capital deficit of RMB28.6 million (US$4.1 million). For the years ended December 31, 2020, 2021 and 2022, we incurred losses of RMB 80.6 million, RMB120.1 million and RMB103.6 million (US$15.0 million), respectively. For the year ended December 31, 2022, we incurred RMB55.1 million (US$8.0 million) of negative cash flows from operations. The recent resurgence of COVID-19 and lockdown policies in Shanghai, China also has negative impact on our operation. The above-mentioned facts raise substantial doubt about the Group’s ability to continue as a going concern.
In assessing our liquidity, we monitor and analyze our cash on-hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. With respect to capital funding requirements, we budgeted capital spending based on ongoing assessments of needs to maintain adequate cash. We intend to finance our future working capital requirements and capital expenditures from financing activities until our operating activities generate positive cash flows, if ever. We expect to engage in continuous capital financing through debt or equity issuances to support our working capital requirements.
In December 2022 and January 2023, the Company signed definitive investment agreements with several third-party investors. The investors agreed to purchase 33,171,421 newly issued Class A ordinary shares of the Company at a price of US$0.175 per ordinary share or, for a total purchase price of approximately US$5.8 million (RMB40.0 million). The Company received approximately US$5.1 million (RMB 35.3 million) by April 22, 2023.
In March 2023, the Company signed definitive investment agreements with several shareholders, whereby the investors agreed to purchase an aggregate of 16,666,665 Class A ordinary shares at a price of US$0.30 per ordinary share for a total purchase price of $5,000,000 (RMB34,486,000). The Company has not received any proceeds from these agreements.
2
On April 6, 2023, the Company completed its sale to institutional investors a total of 12,500,000 Class A ordinary shares, pre-funded warrants exercisable for 2,500,000 Class A ordinary shares, issuable to investors whose purchase of American Depositary Shares and warrants exercisable for 750,000 ADSs. The purchase price of each pre-funded warrant is equal to the price per one ADS, minus $0.0001, and the exercise price of each pre-funded warrant will equal $0.0001 per share. The pre-funded warrants are immediately exercisable and may be exercised at any time until exercised in full. The warrants are immediately exercisable, will expire five (5) years from the original issuance date and have an exercise price of $4.00 per ADS. The Company also issued warrants exercisable for 37,500 ADSs to the sole placement agent with the placement agent, with an exercise price of $4.80 per ADS (the “Placement Agent Warrants”), pursuant to a placement agency agreement (the “Placement Agency Agreement”) dated March 31, 2023. Other than in respect of the exercise price, the Placement Agent Warrants have terms identical to the pre-funded warrants. The Company received of approximately US$3.0 million from this investment.
As of December 31, 2022, we had short-term debt of RMB5.0 million (US$0.7 million). However, our estimate as to how long we expect these financial resources to be sufficient to fund our operations is based on assumptions that may prove to be wrong. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. Going forward, we expect to need additional fundraising if our cash flows generated from operations do not increase substantially. Our present and future funding requirements will depend on many factors, including:
| ● | the scope, progress, timing, costs and results of the development of our CDA technology and our other products; |
| ● | the costs of expanding our e-commerce business; |
| ● | our rate of progress in, and costs of the sales and marketing activities associated with, encouraging adoption of our cancer screening and detection tests; |
| ● | our rate of progress in, and cost of research and development activities associated with, our CDA test, any additional cancer screening and detection tests and other tests; |
| ● | the impact of competing technological and market developments; |
| ● | costs related to entering the U.S. market; |
| ● | the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; |
| ● | the costs, timing and outcome of obtaining regulatory approvals and changes in regulatory policies or laws that may affect our operations; and |
| ● | the costs of operating as a public company. |
3
Material weaknesses in our internal control over financial reporting have been identified, and if we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
As a result of the initial public offering we have become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Nasdaq Stock Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our year ended December 31, 2021, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, when we cease to be an “emerging growth company” as the term is defined in the Jumpstart Our Business Startups Act, our independent registered public accounting firm may be required to 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. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. We may experience difficulty in meeting these reporting requirements in a timely manner.
In the course of preparing and auditing our consolidated financial statements for the year ended December 31, 2022, we identified three material weaknesses in our internal control over financial reporting, the material weaknesses identified were (i) lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) lack of financial reporting policies and procedures to establish formal risk assessment process and internal control framework; and (iii) deficiencies noted in (a) IT policy; (b) risk and vulnerability assessment. (c) program change and security patch management; (d) backup and recovery management; (e) audit trail and separation of duty management; (f) password management. For details, see “Item 15. Controls and Procedures—Internal Control Over Financial Reporting.” However, we cannot assure you that all these measures will be sufficient to remediate our material weakness in time, or at all.
To remedy our identified material weaknesses, we have started to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring additional qualified accounting and financial reporting personnel with U.S. GAAP and SEC reporting experience, (ii) obtaining advisory services from professional consultants with experience in the requirements of the Sarbanes Oxley Act of 2002 and internal audit guidance on SEC reporting, (iii) expanding the capabilities of our existing accounting and financial reporting personnel through continuous training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (iv) developing, communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for our recurring transactions and period-end closing processes, and (v) establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our company’s consolidated financial statements and related disclosures. However, these measures have not been fully implemented and we concluded that the material weakness in our internal control over financial reporting has not been remediated as of December 31, 2022. We will continue to implement measures to remediate the material weaknesses.
In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
4
Impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets could adversely affect our financial condition and results of operation.
We review our amortizable intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and other indefinite-lived intangible assets for impairment at least annually, or more frequently if events or changes in circumstances indicate an asset may be impaired. Relevant factors, events and circumstances that affect the fair value of goodwill and indefinite-lived intangible assets may include external factors such as macroeconomic, industry, and market conditions, as well as cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations.
Impairment analysis requires significant judgment by management and the fair value of goodwill, indefinite-lived intangible assets or other long-lived assets are sensitive to changes in key assumptions used in the projected cash flows, which include forecasted revenues and perpetual growth rates, among others, as well as current market conditions in both the United States and globally, all of which were unfavorably impacted by the COVID-19 pandemic. To the extent that business conditions deteriorate further, or if changes in key assumptions and estimates differ significantly from management’s expectations, it may be necessary to record additional future impairment charges, which could be material. For more information on our goodwill impairment assessment and related impairment charge, see Note 9 - Goodwill and Acquired Intangible Assets in our consolidated financial statements of this Annual Report.
We face risks related to natural disasters, health epidemics, civil and social disruption and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to social and natural catastrophic events that are beyond our control, such as natural disasters, health epidemics, and other catastrophes, which may materially and adversely affect our business. Since December 2019, there has been an outbreak of a novel strain of coronavirus (COVID-19) in China and around the world. COVID-19 is considered to be highly contagious and poses a serious public health threat. The World Health Organization labeled the coronavirus a pandemic on March 11, 2020, given its threat beyond a public health emergency of international concern that the organization had declared on January 30, 2020. In response to this pandemic, China, the United States and many other countries and jurisdictions have taken, and may continue to adopt, additional restrictive measures to contain the virus’ spread, such as quarantines, travel restrictions and work from home policies. These measures have slowed down the development of the Chinese economy and the U.S. economy and adversely affected the global economic conditions and financial markets. We currently derive all our revenues in China and we have one laboratory in the United States. The outbreak of this virus caused wide-ranging business disruptions and traffic restrictions in China and the United States in 2020, and with its continued spread globally, the virus’ adverse impact on business activities, travels and overall GDP in China, the United States and other parts of the world has been unprecedented and is expected to continue in the foreseeable future. While the Chinese government’s efforts have slowed down the virus’ spread, there has been resurgences in China from time to time, particularly in winter and spring. As the pandemic expands globally, the world economy is suffering a noticeable slowdown. Commercial activities throughout the world have been and could continue to be curtailed with decreased consumer spending, business operation disruptions, interrupted supply chains, difficulties in travel, and reduced workforces.
As a result of the pandemic of COVID-19 in China, the United States and the world, our operations have been, and may continue to be, adversely impacted by disruptions in business activities, commercial transactions and general uncertainties surrounding the duration of the outbreaks and the various governments’ business, travel and other restrictions. These adverse effects could include our ability to market and conduct our tests in China, commercialize our tests in the United States and carry out research studies and activities in China and the United States. In addition, our business operations could be disrupted if any of our employees is suspected of contracting the coronavirus or any other epidemic disease, since our employees could be quarantined and/or our offices be shut down for disinfection. Although we have validated a COVID-19 antibody test using Roche’s FDA authorized equipment, we have not begun to commercialize our offering of this test and we cannot guarantee the market acceptance of and demand for this test. We have no control over the development of the COVID-19 situations in China, the United States or around the world and therefore cannot assure you that we will be able to maintain a revenue growth in future periods.
Resurgence of COVID-19 and followed lock-down policies in some cities could cut the demand and revenue depending on length of lock-down. Starting March 27, 2022, the lockdown policy in Shanghai has forced us to temporarily halt operations in our Shanghai office. Most of the CDA tests are performed in our subsidiary located in Lishui, Zhejiang, which is not impacted by the resurgence of COVID-19. However, the close of our Shanghai office caused delay in the issuance and delivery of test reports to our customers, which will delay our revenue recognition in such period. The downturn brought by and the duration of the coronavirus pandemic is difficult to assess or predict and the actual effects will depend on many factors beyond our control, including the increased world-wide spread of COVID-19 and the relevant governments’ actions to contain COVID-19 or treat its impact. While China, the U.S. and many other countries have been administering COVID-19 vaccines, it remains uncertain whether and when the vaccines will be able to effectively contain the pandemic. The extent to which COVID-19 continues to impact our results remains uncertain, and we are closely monitoring its impact on us. Our business, results of operations, financial condition and prospects could be adversely affected directly, as well as to the extent that the coronavirus or any other epidemic harms the Chinese and the United States’ economies in general.
5
Our businesses may be affected by the impacts of unfavorable geopolitical events or other market disruptions on consumer confidence and spending patterns.
Our net sales, profit, cash flows and future growth may be affected by negative local, regional, national or international political or economic trends or developments that reduce consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. The Russian invasion of Ukraine in February 2022 and the financial and economic sanctions and other measures imposed by the European Union, the United States, and other countries and organizations in response thereto is creating, and may continue to create, market disruption and volatility and instability in the geopolitical environment. The extent to which this conflict escalates to other countries and the resulting impact on the global market remains uncertain. We are monitoring the conflict, but do not, and cannot, know if this situation will result in broader economic and security concerns or in material implications for our business. These events could have a material adverse effect on our customers, our business partners and our third-party suppliers.
We have a limited amount of financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is limited.
In order to continue to pursue our acquisition strategy, we may be required to obtain additional financing. We may obtain such financing through a combination of traditional debt financing and/or the placement of debt and equity securities. We may finance some portion of our future acquisitions by either issuing equity or by using shares of our common stock for all or a portion of the purchase price for such businesses. In the event that our common stock does not attain or maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our common stock as part of the purchase price for the sale of their businesses, we may be required to use more of our cash resources, if available, in order to maintain our acquisition program. If we do not have sufficient cash resources, we will not be able to complete acquisitions and our growth could be limited unless we are able to obtain additional capital through debt or equity financings. The terms of our credit facility require that we obtain the consent of our lenders prior to securing additional debt financing. There could be circumstances in which our ability to obtain additional debt financing could be constrained if we are unable to secure such consent.
To the extent we make any material acquisitions, our earnings may be adversely affected by non-cash charges relating to the amortization of intangible assets.
Under applicable accounting standards, purchasers are required to allocate the total consideration paid in a business combination to the identified acquired assets and liabilities based on their fair values at the time of acquisition. The excess of the consideration paid to acquire a business over the fair value of the identifiable tangible assets acquired must be allocated among identifiable intangible assets including goodwill. The amount allocated to goodwill is not subject to amortization. However, it is tested at least annually for impairment. The amount allocated to identifiable intangible assets, such as customer relationships and the like, is amortized over the life of these intangible assets. We expect that this will subject us to periodic charges against our earnings to the extent of the amortization incurred for that period. Because our business strategy focuses, in part, on growth through acquisitions, our future earnings may be subject to greater non-cash amortization charges than a company whose earnings are derived solely from organic growth. As a result, we may experience an increase in non-cash charges related to the amortization of intangible assets acquired in our acquisitions. Our financial statements will show that our intangible assets are diminishing in value, even if the acquired businesses are increasing (or not diminishing) in value.
6
We have granted, and may continue to grant, stock incentive awards, which may result in increased share-based compensation expenses.
As of December 31, 2022, options to purchase 4,986,606 Class A ordinary shares were outstanding, consisting of (i) options to purchase 2,334,906 Class A ordinary shares held by our directors, officers and employees, and (ii) options to purchase 2,651,700 Class A ordinary shares held by non-employees. In March 2023, our broad of directors approved our 2023 Share Incentive Plan (the "2023 Plan"). The maximum number of ordinary shares that may be issued under the 2023 Plan is 13,000,000 Class A ordinary shares to our directors, officers, employees and consultants to incentivize their performance and align their interests with ours. Any future grants will result in more stock-based compensation expense and additional dilution.
We believe the granting of stock incentive awards is of significant importance to our ability to attract and retain our management, employees and consultants, and we will continue to grant stock incentive awards to our management, employees and consultants 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. In addition, the granting, vesting and exercise of the awards under these stock incentive plans will have a dilutive effect on your shareholding in our company.
We rely on technology in our businesses and any cybersecurity incident, other technology disruption or delay in implementing new technology could negatively affect our business and our relationships with customers.
We use technology in our business operations, and our ability to serve customers most effectively depends on the reliability of our technology systems. Our Clients use our software to place orders and we use software and other technology systems, among other things, to process clients’ orders, to make purchases, to manage warehouses and to monitor and manage our business on a day-to-day basis. Further, our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers’ personal information, private information about employees, and financial and strategic information about us and our business partners.
These technology systems are vulnerable to disruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, espionage, cyber-attacks, viruses, theft and inadvertent releases of information. Any such disruption to these software and other technology systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage, any or all of which could potentially adversely affect our customer service, decrease the volume of our business and/or result in increased costs and lower profits.
A significant breach of our cybersecurity infrastructure may result from actions by our employees, suppliers, third-party administrators, or unknown third parties or through cyber-attacks. The risk of a breach can exist whether software services are in our technology systems or are in cloud-based software services. Breaches have occurred, and may occur again, in our systems and in the systems of our suppliers and third-party administrators. Any such breach could result in operational impairments, significant harm to our reputation and financial losses.
A significant breach could affect our data framework or cause a failure to protect the personal information of our customers, suppliers or employees, or sensitive and confidential information regarding our business and could give rise to legal liability and regulatory action under data protection and privacy laws. Any such breach of our or our suppliers’ cybersecurity infrastructure could have a material adverse effect on our business, results of operations and financial condition.
7
Further, as we pursue our strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, we are also expanding and improving our information technology, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Information technology systems continue to evolve and, in order to remain competitive, we need to implement new technologies in a timely and efficient manner. Investments will continue to be made in attracting, retaining, and training our human capital to remain current on the ever-changing industry best practices related to information security. If our competitors implement new technologies more quickly or successfully than we do, such competitors may be able to provide lower cost or enhanced services of superior quality compared to those we provide, which could have an adverse effect on our results of operations.
We may be subject to litigation and other claims and legal proceedings, and may not always be successful in defending ourselves against these claims or proceedings.
We are subject to lawsuits and other claims in the ordinary course of our business. We have been, and may in the future be, subject to lawsuits and other legal proceedings brought by our customers, competitors, employees, business partners, investors, other shareholders of the companies we invest in, or other entities against us, in matters relating to intellectual property rights, contractual disputes, competition claims and employment disputes, among others. We may also be subject to regulatory proceedings, such as any non-compliance with licensing requirements, advertising practices, and protection of data privacy of the tested individuals. We may not be successful in defending ourselves, and the outcomes of these lawsuits and proceedings may be unfavorable to us. Lawsuits and regulatory proceedings against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our customer base, market position and our relationships with our research partners and other business partners. In addition to the related costs, managing and defending litigation and other legal proceedings and related indemnity obligations can significantly divert our management’s attention from operating our business. We may also need to pay damages or settle lawsuits or other claims with a substantial amount of cash, negatively affecting our liquidity. As a result, our business, financial condition and results of operations could be adversely affected.
We have limited business insurance coverage.
Our business insurance is limited, and we do not carry business interruption insurance to cover our operations. We have determined that the costs of insuring for related risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical. Any uninsured damage to our facilities or technology infrastructures or disruption of our business operations could require us to incur substantial costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.
Our business has been affected and may in the future be affected by steps taken by the Chinese government to address the COVID-19 pandemic.
We purchase a portion of our inventory directly or indirectly from Chinese suppliers. In addition, our R&D center is located in China. Beginning with the outbreak of the COVID-19 pandemic in 2020, quarantines, travel restrictions, and the closure of stores and business facilities have been imposed in China as part of the government’s “zero-COVID” policy to limit the impact of the pandemic, and these measures were not relaxed until the beginning of 2023. If the PRC government reinstitutes policies that have been relaxed, or institutes new restrictive policies, we may not be able to procure certain inventory items from our suppliers, we may experience further supply chain bottlenecks and price increases, or we could have temporary disruptions in the function of our R&D center, any of which could adversely impact our business.
8
Risks Related to Our CDA Business
We are a development-stage biotechnology company with a limited operating history, which makes it difficult to evaluate our prospects and may increase the probability that we will not be successful.
We commenced our operations in 2010. We achieved commercialization of our CDA test and started generating revenue in China in 2015; we currently do not have commercial operations in the U.S. We are a development-stage biotechnology company with a limited operating history, and our history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. Furthermore, we may not have sufficient experience or resources to address the risks frequently encountered by development-stage biotechnology companies, which include our potential failure to:
| ● | achieve and maintain profitability; |
| ● | acquire and retain customers and increase adoption of our cancer screening and detection tests—including primarily our CDA test and combination tests (namely a combination of our CDA test and, on an auxiliary basis, biomarker-based or ct-DNA cancer screening and detection tests)—by physicians, key opinion leaders, or KOLs (including research scientists and doctors in the U.S. who are willing to validate our tests after research), patients, hospitals, medical institutions, healthcare payers and others in the medical community; |
| ● | commercialize and/or increase the market adoption for our other products, such as a COVID-19 antibody test and our ADME (AnPac Defense Medical Examination) immunology test, and extend the use of our CDA technology to screen pre-cancer diseases and increase its adoption by the medical community; |
| ● | respond to competitive market conditions; |
| ● | attract, train, motivate and retain qualified personnel; |
| ● | protect our proprietary technologies and intellectual property rights; |
| ● | secure a stable supply of blood samples to support our research and clinical studies; |
| ● | keep up with evolving industry standards and market developments; |
| ● | obtain and maintain the regulatory licenses, certifications, and approvals required for us to further market our cancer screening and detection tests and commercialize our CDA device in China and to commercialize our tests and CDA device in the United States; |
| ● | increase the awareness of our tests and protect our reputation; |
| ● | maintain adequate control of our operational costs; and |
| ● | manage our relationships with our research partners. |
If we are unsuccessful in addressing any one or more of these risks, they could adversely affect our business, financial condition and results of operations and increase the probability that we will not be successful.
9
Our success depends heavily on the success of our CDA technology and related cancer screening and detection test.
We derive our revenue primarily from our CDA-based tests, which depend on our CDA technology. If we obtain relevant approvals from the NMPA to sell our CDA device, we also anticipate generating revenue from the sales of our CDA device. We believe that our commercial success will depend upon our ability to achieve and maintain market acceptance of our current and future cancer screening and detection tests, which will depend on a number of factors, including:
| ● | our ability to further validate and improve the clinical utility and superiority of our CDA technology by increasing its sensitivity and specificity and through research studies and accompanying publications; |
| ● | the timing and scope of additional approvals from the NMPA for our CDA device and test and our ability to maintain these approvals; |
| ● | acceptance of our CDA test by physicians, KOLs, patients, hospitals, medical institutions, healthcare payers and others in the medical community; |
| ● | our ability to obtain the Class III medical device registration certificate from the NMPA for our CDA device and enter and develop the China hospital market for our CDA device and test; |
| ● | sufficient coverage and reimbursement by third-party payers for our services, which may depend on multiple factors such as the enforceability of relevant laws that mandate the coverage of cancer or pre-cancer disease screening; |
| ● | our ability to maintain and expand our customer base in China, especially among insurance companies, corporate customers and the hospital market; |
| ● | our sales and marketing capabilities, including our success in expanding our sales and marketing team and establishing our own sales network in China; |
| ● | the amount and nature of competition from other early cancer screening and detection products and procedures; |
| ● | our ability to obtain regulatory approvals for our U.S. laboratories to conduct commercial tests and successfully penetrate the U.S. market; and |
| ● | negative publicity regarding our or our competitors’ tests and technologies resulting from defects or errors. |
If we are unsuccessful in addressing these or other factors that might affect the market acceptance of our tests, our business and results of operations will suffer.
10
Our ability to grow our CDA business is substantially dependent on our ability to penetrate the Chinese hospital market.
In China, we currently can only conduct our cancer screening and detection tests on our devices in our own certified laboratories. Given these restrictions, our customer base is primarily direct customers such as corporations and life insurance companies, as well as sales agents such as health management companies and medical device dealers. China’s largest market for cancer screening and detection tests is the hospital market, in which patients go to Chinese hospitals for cancer screening and other medical tests. Currently we cannot conduct our tests in hospitals. We have applied for an NMPA Class III medical device registration certificate for our CDA devices to assist in multi-cancer diagnosis. If we receive this certificate, together with an updated medical device manufacture license, we would be permitted to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnosis of specified multiple cancers. We expect to receive the Class III license by the end of the first quarter of 2024. Even if we obtain the certificate and license, we will need to successfully market our CDA device and test to Chinese hospitals. Our ability to grow our China business depends substantially on our ability successfully to penetrate the Chinese hospital market, and we cannot assure you as to when or whether we will be able to do so.
Our plans to enter the U.S. market with our CDA technology may not be successful.
Currently, we conduct commercial operations only in China with respect to our CDA technology, and the substantial majority of our business, assets, management and employees are located in China. We have been making efforts to enter the U.S. market. We commenced operations of our new laboratory in Philadelphia, Pennsylvania with the completion of our facility renovation and first phase equipment installation in July 2020. We obtained a CLIA Certificate of Registration for this laboratory in August 2020, and accreditation by the College of American Pathologists, or CAP, and a Certificate of Accreditation under the Clinical Laboratory Improvement Amendments of 1988, or CLIA for this new laboratory. Our U.S. operations currently include collaborating with U.S. health organizations to conduct research tests of our CDA technology, planning to commercialize our CDA tests.
Although our strategy is to expand our U.S. operations and eventually commence commercial sales of our CDA-based tests and other tests (such as COVID-19 antibody tests) in the United States, this strategy is subject to a number of risks and uncertainties, including:
| ● | our ability to secure research agreements with reputable U.S. hospitals, medical institutions and other health organizations to conduct research studies for our test; |
| ● | our ability to obtain sufficient blood samples for our planned research tests; |
| ● | the substantial costs and time required for U.S. research tests and clinical studies; |
| ● | positive outcomes of our U.S. research tests sufficient to support the clinical validity, safety, and effectiveness of our tests in the U.S. market; |
| ● | U.S. federal and state regulatory risks, including our ability to commence marketing of our CDA test as a laboratory developed test, or LDT, without premarket clearance, market authorization or approval from the United States Food and Drug Administration, or the FDA, our ability to comply with all applicable laws and other regulations, and costs and timing of obtaining relevant approvals; |
| ● | development of a U.S. infrastructure, including sales and marketing resources, sufficient to commercialize our test; |
| ● | substantial competition in the U.S. cancer screening and detection market, including from companies with substantially greater resources than we have; and |
| ● | market acceptance of our test in the U.S. |
Our ability to successfully address these factors and penetrate the U.S. market, as well as the costs and timing of these efforts, are highly uncertain. We expect that our commercial activities and revenues will continue to be derived solely from China for the foreseeable future.
11
The cancer detection business is subject to rapid change, and other companies or institutions may develop and market novel or improved early cancer screening and detection methods, which may make our CDA technology less competitive or obsolete.
Our CDA-based tests depend on the effectiveness of our CDA technology, and we may be unable to maintain the competitiveness of this technology. Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current CDA-based test obsolete. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. We must continuously enhance our CDA technology and develop new tests to keep abreast of evolving standards of early cancer screening and detection. Other companies and institutions may possess significantly greater financial and other resources and research and development capabilities than we do. These other companies and institutions may devote significant resources to develop new methods of detecting cancers and pre-cancer symptoms, and these methods and related tests could represent significant competition for our CDA technology and cancer screening and detection test, or even render our CDA technology obsolete.
We may be unable to compete effectively against our competitors because their products and services may be superior. They may also have more expertise, experience, financial resources or stronger business relationships in developing and marketing their products and services, more mature technologies and products, greater market adoption and greater brand recognition than we do. Further, even if we do develop new marketable tests or services, our current and future competitors may develop tests and services that are more commercially attractive than ours and they may bring those tests and services to market sooner than we are able to.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.
Our operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including:
| ● | the level of demand for our cancer screening and detection tests, which may vary significantly; |
| ● | our entry into the e-commerce food distribution business; |
| ● | the timing and cost of, and level of investment in, research, development, regulatory approval and commercialization activities relating to our CDA technology and our cancer screening and detection tests and device, which may change from time to time; |
| ● | the volume, customer mix and product mix for our cancer screening and detection tests and e-commerce revenues; |
| ● | the introduction of new cancer screening and detection tests and services by us or others in our industry; |
| ● | expenditures that we may incur to acquire, develop or commercialize our e-commerc business and additional tests, devices and technologies; |
| ● | coverage and reimbursement policies with respect to our cancer screening and detection tests and tests that compete with our tests; |
| ● | changes in government regulations or in the status of our regulatory approvals or applications; |
| ● | future accounting pronouncements or changes in our accounting policies; and |
| ● | general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. |
The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.
12
If our cancer screening and detection or other tests or our competitors’ comparable tests do not meet customer expectations, our operating results, reputation and business could suffer.
Our success depends on the market’s confidence in our ability to provide reliable, high-quality cancer screening and detection tests and other tests. We believe that our customers are likely to be particularly sensitive to defects or errors in our tests, in particular if our tests fail to accurately detect the risk of pre- and early-stage cancers from blood samples, and we cannot guarantee that our tests will meet their expectations. We may be subject to legal claims arising from any defects or errors in our tests. Furthermore, if comparable tests offered by competing companies fail to perform to expectations, consumers may have lower confidence in cancer screening and detection tests in general. As a result, the failure of our tests or our competitors’ tests to perform as expected could significantly impair our operating results, business prospects and reputation.
We do not carry product liability or professional liability insurance. If we were to be sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.
We could face product liability claims if someone alleges that our cancer screening and detection tests or other tests gave inaccurate or misleading information regarding the patient’s risk of cancer or otherwise failed to perform as designed. A claimant could allege that our test results caused unnecessary treatment or other costs or resulted in the patient missing the best opportunity or timing for treatment. A patient could also allege other mental or physical injury or that our testing provided inaccurate or misleading information concerning the screening and detection, assistance in diagnosis, prognosis or recurrence of, or available therapies for, a cancer or other diseases. We may also be subject to liability for errors in, a misunderstanding of or inappropriate reliance upon, the information we provide in the ordinary course of our business activities. Product liability or professional liability claims could result in substantial damages and be costly and time-consuming for us to defend and could divert our management’s attention.
We do not carry product liability or professional liability insurance. Even if we purchase these kinds of insurance, the insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage. Additionally, any product liability or professional liability lawsuit could damage our reputation, or cause our research partners to terminate existing agreements and cause potential research partners to seek other partners, or cause us to lose our current or potential customers. Any of these developments could adversely impact our results of operations, business prospects and financial condition.
We may be subject to liability claims for defective services provided by third-party physical checkup centers, which could harm our reputation and adversely impact our results of operations.
In addition to our cancer screening and detection tests, we also provide annual physical checkup packages to our customers. We typically outsource the physical checkup services in these packages (other than cancer screening and detection tests) to third-party physical checkup centers. As a result, the administration of the physical checkup services by these third parties may subject us to litigation and liability for personal damages to consumers. Potential judgments, settlements or costs relating to these claims, complaints or lawsuits could subject us to significant fees and costs in defending ourselves, adversely affecting our results of operations. In addition, our business, reputation and growth prospects could suffer if we face negative publicity in connection with these liability claims.
We may be unable to support demand for our cancer screening and detection tests and manage our future growth effectively, which could make it difficult to execute our business strategy.
Since our inception, we have experienced rapid growth, and we anticipate further growth in our business operations. Our growth could strain our organizational, administrative and operational infrastructure. As the sales volume of our cancer screening and detection tests grows, we will face increased demands on our capacity and efficiency for sample intake, testing results analysis and other laboratory operations, quality control, customer service, and general workflow management processes. To effectively manage our future growth, we plan to continue to improve our technology, as well as our operational, financial and management controls. We also plan to hire, train and manage additional qualified scientists, laboratory technicians and sales and customer service personnel. We will also need to maintain the quality and expected turnaround time of our tests. The time and resources required for these improvements, and failure to achieve them in a timely and effective manner, could adversely affect our operations, making it difficult for us to execute our business strategy.
13
We have limited selling and marketing resources and limited sales, marketing, customer support, manufacturing and commercial laboratory experience, which may restrict our success in commercializing our cancer screening and detection tests.
To grow our business as planned, we must expand our sales, marketing, customer support, manufacturing and commercial laboratory management capabilities, which will require developing and administering our commercial infrastructure and/or collaborative commercial arrangements and partnerships. We have limited experience in these respects, and we may encounter difficulties in retaining and managing the specialized workforce that these activities require. For example, our customer base is large and diverse, which requires us to retain a sales team with established industry expertise and experience. We rely on third-party suppliers for the supply of blood samples for our tests and for reagents that we use in the auxiliary biomarker-based tests that form part of our combination tests. We engaged third parties to conduct substantially all of the biomarker-based tests as part of our combination tests in 2018. We later gradually phased out this outsourcing arrangement beginning in 2019 and now perform our combination tests primarily in-house. We also engage third parties to conduct physical checkups. We also rely on contract manufacturers that manufacture key components of our CDA device. While we primarily rely on our own sales and marketing personnel to market our tests, we also engage sales agents, including companies we invested in. However, we may not be able to effectively manage and maintain our relationships with these third parties, including ensuring their compliance with our controls and procedures. Our future growth will also impose significant added responsibilities on our management. If we fail to meet these demands, it would negatively affect our business growth and profitability. We may seek to partner with others to assist us with our sales, marketing and manufacturing functions. However, we may be unable to find appropriate third parties that meet our requirements, in a timely manner or on terms acceptable to us. In addition, our third-party business partners may not perform as we expect or our arrangements with them may otherwise prove to be detrimental to our results. Our third-party arrangements may also be terminated prematurely, including due to factors out of our control. As a result of such developments, our business and prospects may be harmed.
If we are unable to attract and retain qualified key management, scientists, staff and consultants, our ability to implement our business plan may be adversely affected.
We are highly dependent upon certain of our key management, scientists, staff and consultants, particularly Dr. Chris Yu, our founder, co-Chairman and co-Chief Executive Officer (“CEO”). Dr. Chris Yu resigned from his position as sole CEO of the Company and Chairman of the Board of Directors (the “Board”) on April 6, 2022 and was re-appointed as co-chairman of the Board and co-CEO of the Company on May 7, 2022. He resigned as the co-chairman of the Board on October 3, 2022 but continued to serve as the co-CEO of the Company. Each of our key management and scientific personnel may terminate his or her employment with us. Our success is also largely attributable to the qualified and experienced key management and scientific personnel that we have been able to train, attract and retain. If we lose any of our key management and scientific personnel, we may be unable to find replacements suitable to us. The loss of their services could significantly delay or prevent our achievement of our technology development, sales and other business objectives. We do not carry any key-man life insurance. In addition, we face intense competition for qualified individuals from numerous biotechnology and pharmaceutical companies, universities, governmental entities and other research institutions. Our limited operating history and the uncertainties attendant to being a development-stage biotechnology company with limited capital resources could limit our ability to attract and retain personnel. We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan.
If we are unable to effectively protect our intellectual property, our business would be harmed.
We rely on patent protection as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary devices, tests and technologies, all of which provide limited protection and may not adequately protect our rights. If we fail to effectively protect and/or maintain our patented devices, tests and technologies, our competitive position and prospects could be adversely affected. Furthermore, we could incur substantial litigation costs in our attempts to recover or restrict use of our patents and other intellectual property.
14
We cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be issued, if at all. It is possible that, for any of our patents that have been issued or that may be issued in the future, our competitors may design their products around our patented technologies. Further, we cannot assure you that other persons will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid, enforceable, and/or infringed. We cannot guarantee you that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge or challenges to our patents could result in the unenforceability or invalidity of these patents, or these patents being interpreted narrowly and/or in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors and/or market entrants may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example:
| ● | we might not have been the first to make the inventions claimed or disclosed by our pending patent applications or issued patents; |
| ● | we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us, and could possibly result in a loss or narrowing of our patent rights. We cannot assure you that our patent applications or granted patents will have priority over any other patent or patent application involved in such a proceeding, or will be held valid as an outcome of the proceeding; |
| ● | other persons may independently develop similar or alternative products and technologies or duplicate any of our products and technologies, which can potentially impact our market share and revenue, regardless of whether our intellectual property rights are successfully enforced against these other persons; |
| ● | it is possible that our pending patent applications will not result in granted patents, and even if these pending patent applications are issued as patents, they may not provide intellectual property protection of commercially viable products or product features, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties, patent offices, and/or the courts; |
| ● | we may be unaware of or unfamiliar with prior art and/or interpretations of prior art that could potentially impact the validity or scope of our patents or pending patent applications, or patent applications that we intend to file; |
| ● | we take efforts and enter into agreements with employees, consultants, collaborators, and advisors to confirm ownership and chain of title in intellectual property rights. However, an inventorship or ownership dispute could arise that may permit one or more third parties to practice or enforce our intellectual property rights, including possible efforts to enforce rights against us; |
| ● | we may elect not to maintain or pursue intellectual property rights that, at some point in time, may be considered relevant to or enforceable against a competitor; |
| ● | we may not develop additional proprietary products and technologies that are patentable, or we may develop additional proprietary products and technologies that are not patentable; |
| ● | the patents or other intellectual property rights of others may have an adverse effect on our business; and |
| ● | we apply for patents relating to our devices, tests and technologies, as we deem appropriate. However, we or our representatives or their agents may fail to apply for patents on important devices, tests and technologies in a timely fashion or at all, or we or our representatives or their agents may fail to apply for patents in potentially relevant jurisdictions. |
15
To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct or indirect competition. If our intellectual property does not provide adequate coverage over our competitors’ products, our competitive position and our business could be adversely affected.
In addition to patent protections, we also try to protect our trade secrets, know-how and other proprietary information through non-disclosure and confidentiality provisions in our agreements with parties who have access to them, such as our employees, consultants and research partners. These agreements may not be enforceable or may not provide meaningful protection for our trade secrets, know-how and/or other proprietary information in the event of unauthorized uses or disclosure or other breaches of the provisions, and we may not be able to prevent such unauthorized uses or disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. In addition, monitoring unauthorized disclosure and uses of our trade secrets is difficult, and we do not know whether the steps we have taken to prevent such disclosure and uses are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, and the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside the United States may be less willing to protect trade secrets.
In addition, competitors could purchase our devices and tests and attempt to replicate and/or improve some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, and design their devices and tests around our protected technologies or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect our market share against competitors’ devices and tests, our competitive position could be adversely affected, as could our business.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to be unenforceable, and/or being interpreted narrowly. Adverse results of these types could also put our patent applications at risk of not being issued and/or impact the validity or enforceability positions of our other patents. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that part of our confidential information could be compromised by disclosure.
Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations, continue our internal research programs, pursue, obtain or maintain intellectual property rights, or enter into research and development partnerships that would help to validate and commercialize our tests.
In addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all.
16
We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.
The validity, enforceability and scope of intellectual property rights protection in biotechnology industries, particularly in China, are uncertain and still evolving. We cannot be certain that our devices, tests and technologies do not or will not infringe patents, copyrights or other intellectual property rights held by third parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks or copyrights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual property rights. Any such proceeding and claims could result in significant costs to us and divert the time and attention of our management and technical personnel from the operation of our business. These types of claims could also potentially adversely impact our reputation and our ability to conduct business and raise capital, even if we are ultimately absolved of all liability. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more devices or tests and could result in a substantial award of damages against us. In addition, since we may indemnify customers or collaboration partners, we may have additional liability in connection with any infringement or alleged infringement of third-party intellectual property. Intellectual property litigation can be very expensive, and we may not have the financial means to defend ourselves or our customers or collaboration partners.
Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our devices, tests or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our devices or tests. There is a substantial amount of litigation involving patents and other intellectual property rights in our industry. If a third-party claims that we or any of our customers or collaboration partners infringe upon a third-party’s intellectual property rights, we may have to:
| ● | seek to obtain licenses that may not be available on commercially reasonable terms, if at all; |
| ● | abandon any product alleged or held to infringe, or redesign our products or processes to avoid potential assertion of infringement; |
| ● | pay substantial damages including, in exceptional cases, treble damages and attorneys’ fees, if a court decides that the device, test or proprietary technology at issue infringes upon or violates the third-party’s rights; |
| ● | pay substantial royalties or fees or grant cross-licenses to our technology; and |
| ● | defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources. |
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties.
Some of our employees were previously employed at other life science companies, including our potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, and we are not currently subject to any claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties, we may in the future be subject to such claims. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
17
If our laboratories and other facilities become damaged or inoperable, our ability to conduct our laboratory analysis and our research and development efforts may be jeopardized.
We currently derive substantially all of our revenue from cancer screening and detection tests conducted at our laboratory located in Lishui, Zhejiang Province, China. We also intend to sell our CDA device in China after obtaining relevant approvals from the NMPA. We use our own facilities in Lishui to assemble our CDA device, in addition to engaging third-party contract manufacturers to manufacture its key components. In the United States, we intend to perform all our research and commercial tests in our new laboratory in Philadelphia, Pennsylvania. Our facilities and equipment, or those of our third-party contract manufacturers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, power loss, communications failure or terrorism. These types of developments could render it difficult or impossible for us to operate our cancer screening and detection tests and assemble our device for some period of time. If we are unable to perform our tests or to reduce the backlog of analysis that could develop if our facilities are inoperable, for even a short period of time, it could result in a loss of customers or harm to our reputation, and we may be unable to regain those customers or repair our reputation. We have purchased property insurance, but not any business interruption insurance. Damages to, or interruptions in the operations of, our laboratories and other facilities could have a material adverse impact on our results of operations and financial condition. Furthermore, our facilities and the equipment we use to perform our research and development work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming and expensive to rebuild our facilities and purchase our equipment, to locate and qualify a new facility or equipment or to license or transfer our proprietary technology to a third-party, particularly in light of licensure and accreditation requirements. Even in the unlikely event that we are able to find a third party with such qualifications to enable us to conduct our test, we may be unable to negotiate commercially reasonable terms.
Security threats to our information technology infrastructure could expose us to liability and damage our reputation and business.
Because our testing services and research and development activities enable us to access customers’ and research partners’ proprietary information, it is essential to our business strategy that our information technology infrastructure remains secure and is perceived by our customers and research partners to be secure. Despite our security measures, we may face cyber-attacks that attempt to penetrate our network security, sabotage or otherwise disable our research, tests and services, misappropriate our or our customers’ and research partners’ proprietary information, which may include personally identifiable information, or cause interruptions of our internal systems and services. We have not purchased any cyber insurance. Any cyber-attacks could negatively affect our reputation, damage our network infrastructure and our ability to deploy our products and services, harm our relationship with customers and research partners that are affected, and expose us to significant financial liabilities.
We depend on third-party suppliers, sales agents, service providers and research partners for different aspects of our CDA business.
We depend on third parties for different aspects of our CDA business, including supplying blood samples for our research studies and reagents required for biomarkers used in our combination tests, performing a portion of auxiliary biomarker-based tests in our combination tests, sales of our cancer screening and detection tests to our customers, and collecting blood samples for our commercial cancer screening and detection tests. Selecting, managing and supervising these third-party suppliers, sales agents and service providers requires significant resources and expertise. Poor performance by these third parties, including their failure to provide services or products according to applicable legal and regulatory requirements, the terms of our contracts or otherwise below standard, could significantly and negatively affect the quality of our cancer screening and detection tests and damage our reputation. Decreases in the level of sales agents’ purchases of tests from us for resale to the end-customers could adversely affect our revenue growth. In addition, the service or cooperative agreements we have with third-party suppliers, sales agents and service providers are subject to a term, and are not on an exclusive basis. If these third parties do not continue to maintain or expand their cooperation with us, we would be required to seek new suppliers and sales agents, which could cause delays in services to us and negatively affect the quality and availability of our cancer screening and detection tests. Any of the above factors could adversely impact our results of operations and financial position.
In addition, certain of our research partners, which are primarily renowned hospitals and medical institutions, collaborate with us and provide blood samples that we use to conduct various research studies. These partners may cease cooperation with us in the future, especially if they enter into similar agreements or arrangements with our competitors. If we are unable to readily access sufficient blood samples to conduct our commercial tests and research studies, we may be unable to compete effectively with other laboratories that have greater access to blood samples, and our business, financial condition and results of operations may be harmed.
18
We rely on third-party contract manufacturers for the manufacturing of key components of our CDA devices.
We design and configure all of the key components of our CDA device and have outsourced the manufacturing of these components of our CDA devices to third-party contract manufacturers. Our revenue is generated primarily from our CDA tests conducted using our CDA devices. Our contract manufacturers may fail to deliver these key components for reasons beyond our control. For example, they may encounter financial difficulties or experience disruptions in their manufacturing operations due to equipment breakdowns, labor disputes or shortages, raw material shortages, cost increases or other similar reasons. If they fail to timely deliver those key components for us to assemble our CDA device or maintain the quality of their products, our ability to conduct our commercial CDA-based tests could be adversely affected. Currently, we do not have any long-term or exclusive supply contracts with any of our contract manufacturers. Our contract manufacturers may cease to provide us with the key components of our CDA devices. Since qualifying a new contract manufacturer could be costly and time-consuming, the termination of a contract manufacturer could cause disruption to our business and adversely impact our results of operations.
We rely on commercial courier delivery services to transport blood samples to our laboratory facilities in a timely and cost-efficient manner, and if these delivery services are disrupted, our business will be harmed.
Our business depends on our ability to quickly and reliably deliver test results to our customers. We rely on commercial courier delivery services to transport blood samples to our laboratory facilities timely and cost efficiently. Blood samples are typically received within a few days in China for analysis in our laboratories. Disruptions in third-party delivery service, whether due to labor disruptions, bad weather, natural disaster, health epidemics, terrorist acts or threats or for other reasons, could adversely affect specimen integrity and our ability to process blood samples and conduct tests in a timely manner and to service our customers satisfactorily, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.
Risks Related to Our E-Commerce Food Business
We are in the early stages of development of our e-commerce food-related business and have limited operating history on which you can base an investment decision.
We have historically been a biotechnology company focused on early cancer screening and detection. We recently entered into the fast-growing Asian e-commerce food business in the U.S. We intend to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently and in the future to provide one-stop fulfillment services from food sourcing to last-mile delivery. As a result, we may encounter many expenses, delays, problems, and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that we will successfully develop or acquire a significant base of customers, operate profitably, or that we will have adequate working capital to fund our operations or meet our obligations as they become due.
Our recently acquired operations are subject to all of the risks inherent in the initial expenses, challenges, complications, and delays frequently encountered in connection with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop new markets. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to successfully acquire businesses on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that we will not lose our entire investment.
19
The food service industry is characterized by low margins, and periods of significant or prolonged inflation or deflation will affect our product and operational costs, which may negatively impact our profitability.
The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profit margins. Volatile food costs have a direct impact on our industry. Recently, there have been significantly elevated commodity and supply chain costs including the cost of labor, sourced goods, energy, fuel, packaging materials and other inputs necessary for the distribution and production of our products, and elevated levels of inflation which may continue or worsen in 2023.
Periods of significant product cost inflation or deflation may adversely affect our results of operations if we are unable to pass on all or a portion of such product cost increases to our customers in a timely manner. In addition, periods of rapidly increasing inflation may adversely affect our business due to the impact of such inflation on discretionary spending by consumers and our limited ability to increase prices in the current, highly competitive environment.
Unfavorable macroeconomic conditions in the U.S. may adversely affect our business, financial condition and results of operations.
Our operating results are substantially affected by the operating and economic conditions in the regions in which we operate. Economic conditions can affect us in the following ways:
| ● | A reduction in discretionary spending by consumers could adversely impact sales of Chinese/Asian restaurants and supermarkets, and their purchases from us. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, inflation, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending; |
| ● | Food cost and fuel cost inflation experienced by consumers can lead to reductions in the frequency of and the amount spent by consumers for food away from home purchases, which could negatively impact our business by reducing demand for our products; |
| ● | Heightened uncertainty in the financial markets negatively affects consumer confidence and discretionary spending, which can cause disruptions with our customers and suppliers; and |
| ● | Liquidity issues and the inability of our customers to consistently access credit markets to obtain cash to support their operations can cause temporary interruptions in our ability to conduct day-to-day transactions involving the collection of funds from such customers. |
The geographic concentration of our operations in the United States creates an exposure to economic conditions in the United States and any financial downturn in the United States could materially adversely affect our financial condition and results of operations.
Competition may increase intensively in the future, which may adversely impact our margins and ability to retain customers, and make it difficult to maintain our market share, growth rate and profitability.
The foodservice distribution industry in the United States is fragmented and highly competitive, with local, regional, multi-regional distributors, and specialty competitors. However, we believe that the market participants serving Chinese restaurants and supermarkets are highly fragmented. Currently, we face competition from numerous competitors focusing on the niche market serving Chinese/Asian restaurants and supermarkets. However, with the growing demand for Chinese cuisines, other competitors may begin operating in this niche market in the future. Those potential competitors include: (i) national and regional foodservice distributors, (ii) local wholesalers and brokers, (iii) food retailers, and (iv) farmers’ markets. The national and regional distributors are experienced in operating multiple distribution locations and expanding management, and they have greater marketing and financial resources than we do. Even though they currently offer only a limited selection of Chinese and Asian specialty foods, they may be able to devote greater resources to sourcing, promoting and selling their products if they choose to do so. Conversely, the local wholesalers and brokers are small in size with a deep understanding of local preferences, but their lack of scale results in high risk and limited growth potential.
If more competitors enter this market segment aiming to serve Chinese/Asian restaurants and supermarkets in the future, our operating results may be negatively impacted through a loss of sales, reduction in margins from competitive price changes, and/or greater operating costs, such as marketing costs, due to the increase of competition.
20
Increased commodity prices and availability may impact profitability.
Many of our products include ingredients such as wheat, corn, oils, sugar, and other commodities. Commodity prices worldwide have been increasing. While commodity price inputs do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our vendors to seek price increases from us. We may not be able to mitigate vendor efforts to increase our costs, either in whole or in part. In the event we are unable to mitigate potential vendor price increases, we may in turn consider raising our prices, and our customers may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may affect our gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.
We may not be able to fully compensate for increases in fuel costs when fuel prices experience high volatility, and our operating results would be adversely affected.
Volatile fuel prices have a direct impact on the industry. We require significant quantities of fuel for delivery vehicles and are exposed to the risk associated with fluctuations in the market price for fuel. The price and supply of fuel can fluctuate significantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns. The cost of fuel affects the price paid by us for products, as well as the costs we incur to deliver products to the customers. There is no guarantee that we will be able to pass along a portion of increased fuel costs to our customers in the future. The conflict in Ukraine led to a significant increase in fuel prices. If fuel costs remain elevated or increase further in the future, we may experience difficulties in passing all or a portion of these costs along to our customers, which may have a negative impact on our results of operations.
Disruption of relationships with vendors could negatively affect our business. Suppliers may increase product prices, which could increase our product costs.
We purchase our food items and related products primarily from third-party suppliers. Although our purchasing volume can provide benefits when dealing with suppliers, suppliers may not provide the products and supplies needed by us in the quantities and at the prices requested. The cancellation of our supply arrangement with any of our suppliers or the disruption, delay and/or inability to supply the requested products by our suppliers could adversely affect our sales. If our suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms.
In addition, we purchase seasonal Chinese vegetables and fruits from farms and other vendors. Increased frequency or duration of extreme weather conditions could impair production capabilities, disrupt our supply chain or impact demand for our products. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Our inability to obtain adequate supplies of food items and related products as a result of any of the foregoing factors or otherwise could mean that we are unable to fulfill our obligations to customers, and customers may turn to other distributors.
The purchase prices of our products vary from time to time, which is subject to market conditions and negotiation with our suppliers. The prices of some of our products, especially seasonal products, such as vegetables and fruits, have significant fluctuation. We may not always be able to mitigate the impact of these price fluctuations, and our performance results could be adversely affected by such fluctuations.
As a foodservice distributor, it is necessary for us to maintain an inventory of products that may have declines in product pricing levels between the time we purchase the product from suppliers and the time we sell the product to customers, which could reduce the margin on that inventory, adversely affecting our results of operations.
We are dependent upon the timely delivery of products from our vendors. Prolonged diminution of global supply chains may impact the availability and price stability of future food supplies, which may in turn adversely impact our business.
The global supply chain, ranging from consumer goods, electronics, and industrial raw materials to food supplies, was negatively impacted by the COVID-19 pandemic, shipping bottlenecks, and rapidly rising freight costs. We procure the majority of our food supply domestically, which includes certain imported products we purchase from domestic brokers. Food production is widely dispersed throughout the U.S. and we depend on producers of food and restaurant supply products to timely deliver these components of our inventory in quantities sufficient to meet customer demand. Any disruptions or delays in our supply chains as a result of labor shortages, commodity shortages, or inefficiencies in distribution or logistical services could cause delays in the shipment or delivery of our products to our customers. Any prolonged diminution of global supply chains may impact the availability and price stability of future food supplies, which may in turn adversely impact our business.
21
Our relationships with customers may be materially diminished or terminated. The loss of customers could adversely affect our business, financial condition, and results of operations.
We would like to establish long-standing relationships with our customers. However, those customers could unilaterally terminate their relationship with us or materially reduce the amount of business they conduct with us at any time. Our customers may shift their purchase orders from us to other competitors due to market competition, change of customer requirements and preferences, or because of the customer’s financial condition. There is no guarantee that we will be able to maintain relationships with any of our customers on acceptable terms, or at all. The loss of a number of customers could adversely affect our business, financial condition, and results of operations.
We may fail to increase or maintain the highest margin portions of our business, including sales to restaurant and supermarket customers.
Our most profitable customers are independent restaurants and supermarkets. Our ability to continue to gain market share of independent restaurant and supermarket customers is critical to achieving increased operating profits. Changes in the buying practices of independent restaurant and supermarket customers, including their ability to require us to sell to them at discounted rates, or decreases in our sales to this type of customer could have a material negative impact on our profitability.
Changes in consumer eating habits could materially and adversely affect our business, financial condition, and results of operations.
We provide foodservice distribution to Chinese/Asian restaurants, primarily Chinese takeout restaurants, which focus on serving Chinese food to non-Chinese Americans and to Asian supermarkets. Changes in consumer eating habits (such as a decline in consuming food away from home, a decline in portion sizes, or a shift in preferences toward western foods) could reduce demand for our products. Consumer eating habits could be affected by a number of factors, including attitudes regarding diet and health or new information regarding the health effects of consuming certain foods. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio, and we may experience higher costs and/or supply shortages associated with our efforts to accommodate those changes as our suppliers adapt to new eating preferences. Additionally, changes in consumer eating habits may result in the enactment or amendment of laws and regulations that impact the ingredients and nutritional content of our food products, or laws and regulations requiring us to disclose the nutritional content of our food products. Compliance with these laws and regulations, as well as others regarding the ingredients and nutritional content of food products, may be costly and time-consuming. We cannot make any assurances regarding our ability to effectively respond to changes in consumer culture preference, health perceptions or resulting new laws or regulations or to adapt our product offerings to trends in eating habits.
We engage in transactions with related parties and such transactions present possible conflicts of interest that could have an adverse effect on us.
We acquire services from related parties and provide service to related parties. These related-party transactions create the possibility of conflicts of interest with regard to our management, including that:
| ● | we may enter into contracts between us, on the one hand, and related parties, on the other, that are not as a result of arm’s-length transactions; |
22
| ● | our executive officers and directors that hold positions of responsibility with related parties may be aware of certain business opportunities that are appropriate for presentation to us as well as to such other related parties and may present such business opportunities to such other parties; |
| ● | our executive officers and directors that hold positions of responsibility with related parties may have significant duties with, and spend significant time serving, other entities and may have conflicts of interest in allocating time; and |
| ● | such conflicts could cause an individual in our management to seek to advance his or her economic interests or the economic interests of certain related parties above ours. Further, the appearance of conflicts of interest created by related-party transactions could impair the confidence of our investors. Our Special Transactions Review Committee regularly reviews these transactions. Notwithstanding this, it is possible that a conflict of interest could have an adverse effect on our business, financial condition and results of operations. |
For more information on our related party transactions, see Note 16 - Related Party Transactions in our consolidated financial statements in this Annual Report on Form 20-F.
We may be unable to protect or maintain our intellectual property, which could result in customer confusion, a negative perception of our brand and adversely affect our business.
We believe that our intellectual property has substantial. In particular, our “Fresh2” logo is valuable assets that reinforce our customers’ favorable perception of our products. Failure to protect our trademark rights could cause customer confusion or negatively affect customers’ perception of our brand and products, and eventually adversely affect our sales and profitability.
If we are unable to renew or replace our current leases on favorable terms, or any of our current leases are terminated prior to expiration of their stated terms, and we cannot find suitable alternate locations, our operations and profitability could be negatively impacted.
We currently have leases for some of our warehouses. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and our ability to negotiate favorable lease terms for additional locations, could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords, and/or other factors that are not within our control. Any or all of these factors and conditions could negatively impact our growth and profitability.
Failure to retain our senior management and other key personnel may adversely affect our operations.
Our success is substantially dependent on the continued service of our senior management and other key personnel. These executives have been primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture, and our reputation with suppliers and consumers. The loss of the services of any of these executives and other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause our stock price to decline. The loss of key employees could negatively affect our business.
23
If we are unable to attract, train and retain employees, we may not be able to grow or successfully operate our business.
The foodservice distribution industry is labor intensive. Our success depends in part upon our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and customers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the regions in which we are located, unemployment levels within those regions, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation.
In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our profits to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.
Changes in and enforcement of immigration laws could increase our costs and adversely affect our ability to attract and retain qualified employees.
Federal and state governments from time to time implement immigration laws, regulations or programs that regulate our ability to attract or retain qualified foreign employees. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome or reduce the availability of potential employees. Although we have implemented, and are in the process of enhancing, procedures to ensure our compliance with the employment eligibility verification requirements, there can be no assurance that these procedures are adequate and some of our employees may, without our knowledge, be unauthorized workers. The employment of unauthorized workers may subject us to fines or civil or criminal penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and makes it more difficult to hire and keep qualified employees. We may be required to terminate the employment of certain of our employees who are determined to be unauthorized workers. The termination of a significant number of employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in adverse publicity. Our financial performance could be materially harmed as a result of any of these factors.
Potential labor disputes with employees and increases in labor costs could adversely affect our business.
A considerable amount of our operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage and benefit costs. As a result, we are exposed to risks associated with a competitive labor market. Rising health care costs and the nature and structure of work rules will always be important issues. Any work stoppages or labor disturbances as a result of employee dissatisfaction with their current employment terms could have a material adverse effect on our financial condition, results of operations and cash flows. We also expect that in the event of a work stoppage or labor disturbance, we could incur additional costs and face increased competition.
If we fail to comply with requirements imposed by applicable law and other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.
We are subject to regulation by various federal, state, and local governments, applicable to food safety and sanitation, ethical business practices, securities, transportation, minimum wage, overtime, other wage payment requirements, employment discrimination, immigration, and human health and safety. While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations. If we fail to comply with applicable laws and regulations, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, and prohibitions on exporting. The cost of compliance or the consequences of non-compliance, including debarments, could have an adverse effect on our results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require us to incur substantial increases in costs in order to comply with such laws and regulations.
24
If the products distributed by us are alleged to have caused injury or illness, or to have failed to comply with governmental regulations, we may need to recall our products and may experience product liability claims.
We, like any other foodservice distributor, may be subject to product recalls, including voluntary recalls or withdrawals, if the products we distribute are alleged to have caused injury or illness, to have been mislabeled, misbranded, or adulterated or to otherwise have violated applicable governmental regulations. We may also choose to voluntarily recall or withdraw products that we determine do not satisfy our quality standards, whether for taste, appearance, or otherwise, in order to protect our brand and reputation. Any future product recall or withdrawal that results in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation, and/or lost sales due to the unavailability of the product for a period of time, could materially adversely affect our results of operations and financial condition.
We also face the risk of exposure to product liability claims in the event that the use of products sold by us are alleged to have caused injury or illness. We cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Further, even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
The U.S. government is currently imposing increased tariffs on certain products imported into the U.S., including products imported from China, which may have an adverse impact on our future operating results.
We sell our products based on the cost of such products plus a percent markup. The U.S. government is currently imposing and proposing increased tariffs on certain products imported into the U.S., including products imported from China. Some of our imported products and imported products purchased from domestic brokers may be subject to these increased tariffs and accordingly, our purchase costs will be increased. We may determine to increase our sales prices in order to pass these increased costs to our customers. In the event we determine to take such action, our customers may reduce their orders from us, which could negatively affect our profitability and operating results.
Risks Relating to Government Regulations in the PRC
The filing with the CSRC is required in connection with our follow-on overseas offerings under PRC law, and we cannot predict whether or for how long we will be able to complete such filing.
On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and five supporting guidelines, or, collectively, the Trial Measures, which came into effect on March 31, 2023.
The Trial Administrative Measures establish a new filing-based regulation to overseas offerings of stocks, depository receipts, convertible corporate bond, or other equity securities, and overseas listing of these securities for trading, by domestic companies. According to the Trial Administrative Measures, an overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. According to the Trial Administrative Measures, an issuer like us is required to submit the filing with respect to its follow-on offering within three business days after completion of such follow-on offering. The Trial Administrative Measures also sets forth certain regulatory red lines for overseas offerings and listings by domestic enterprises and additional reporting obligations for listed companies in the case of material changes. Any failure to perform such filing or reporting procedure would subject us to administrative penalties by the CSRC which could harm our reputation and may adversely affect our results of financial condition. For more details of the Trial Administrative Measures, please refer to “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations Relating to Overseas Securities Offering and Listing.”
Furthermore, on February 24, 2023, the CSRC released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering and Listing by Domestic Enterprises, or, the Confidentiality Provisions, which came into effect on March 31, 2023. Pursuant to the Confidentiality Provisions, any future inspection or investigation conducted by overseas securities regulator or the relevant competent authorities on our PRC domestic companies with respect to our overseas issuance and listing shall be carried out in the manner in compliance with PRC laws and regulations.
It is uncertain whether we can, or how long it will take us to, complete such filing procedures and any such filing could be rescinded or rejected. Any failure to obtain or delay in completing such filing procedures for our overseas offerings, or a rescission of any such filing if completed by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC filing for our overseas offerings. Any uncertainties or negative publicity regarding such requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our ADSs.
As a biotechnology company, we are required to comply with extensive regulations and obtain and maintain a number of permits and licenses to carry on our business in China; future government regulation may place additional burdens on our efforts to commercialize our cancer screening and detection tests and device.
As a biotechnology company, we are subject to extensive government regulation and supervision in China. Violation of applicable laws and regulations may materially and adversely affect our business. For example, we are required to obtain a medical institution practice license from the PRC National Health Commission, or the NHC, for our laboratories to conduct cancer screening and detection tests in China. We also need to obtain a medical device manufacture license and a medical device registration certificate from the NMPA for the manufacturing and commercial use and sale of our CDA device.
25
Each of our current NHC medical institution practice licenses and our NMPA Class II medical device manufacture license and registration certificate has a five-year term. We are applying for a Class III medical device registration certificate from the NMPA. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. In December 2021, our first-Class III medical device, a medical device for lung cancer assisting in diagnosis utility, has successfully passed rigorous tests at a medical device testing lab designated by NMPA. The medical device is planned to start clinical trial in selected hospitals in late second quarter of 2023. If we are unable to renew our existing licenses and certificates or obtain the Class III medical device license or update our medical device manufacture license, or obtain or renew any other material permits or approvals required for our operations, we may be unable to continue to sell our cancer screening and detection tests or to commercialize our CDA device in China and, as a result, our business may be adversely affected.
In addition, China’s regulatory framework governing biotechnology companies is subject to change and amendment from time to time. Any such change or amendment could materially and adversely impact our business, financial condition and prospects. The PRC government has introduced various reforms to the Chinese healthcare system in recent years and may continue to do so, with an overall objective of expanding basic medical insurance coverage and improve the quality and reliability of healthcare services. The specific regulatory changes under the reforms still remain uncertain. The implementing measures to be issued may not be sufficiently effective to achieve the stated goals, and as a result, we may not be able to benefit from these reforms to the level we expect, if at all. Moreover, the reforms could give rise to regulatory developments, such as more burdensome administrative procedures, which may have an adverse effect on our business and prospects.
If we are unable to maintain our medical device or laboratory related licenses and certificates, our growth strategy may be compromised.
Pursuant to the Regulation on the Supervision and Administration of Medical Devices as amended by the PRC State Council in December 2020, which came into effect in June 2021, medical devices are classified into three classes according to their risk levels. Class II medical devices are medical devices with moderate risks that must be strictly controlled and regulated to ensure their safety and effectiveness. Class III medical devices are medical devices with relatively high risks that must be strictly controlled and regulated through special measures to ensure their safety and effectiveness. In addition, the Measures for the Supervision and Administration of the Operation of Medical Devices, issued on March 10, 2022, regulate entities that engage in business activities involving medical devices in the PRC in accordance with the medical devices’ risk levels. The Class II medical device registration certificate and the Class III medical device registration certificate are required for an entity to conduct business activities involving these medical devices.
We have obtained the Class II medical device registration certificate from the NMPA, which allows us to conduct our tests in our licensed laboratories. To perform our CDA test outside of our laboratories and market them to Chinese hospitals, in December 2018, we applied for a Class III medical device registration certificate from the NMPA for our CDA device. We expect to receive Class III license by the end of the first quarter of 2024. In August, 2021, the Company filed a second class III medical device license application with 11 types of cancer auxiliary diagnosis utility with NMPA, which includes lung, esophageal, gastric, rectal, colon, liver, breast, cervical, thyroid, pancreatic and brain cancers. After we obtain this license, we will update our medical device manufacture license, which we believe is a relatively straightforward procedure. However, there is no assurance that we will receive this NMPA approvals on a timely basis, or at all. If we fail to maintain and renew our Class II medical device registration certificate or if we are unable to obtain the Class III medical device license and update our medical device manufacture license, our ability to grow our business could be adversely affected.
26
We believe our NHC medical institution practice license and NMPA Class II medical device registration certificate and manufacture license are effective and cover our current commercialized CDA test, which provides a cancer risk assessment. However, the PRC laws and regulations governing cancer screening and detection devices and tests are subject to uncertainties and regulatory discretion, including changes in interpretation and application, such as in respect of restrictions on foreign investments in clinical laboratories. There is also a risk that the relevant regulatory authorities could disagree with our assessment of the commercial activities permitted by our certificates and licenses. For more information on this, see “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Other Significant PRC Regulations Affecting Our Business Activities in China.” Moreover, if we begin to commercialize our CDA test for other purposes such as assisting in diagnosis, prognosis and recurrence, this regulatory uncertainty and risk would be greater. If the relevant regulatory authorities were to assert that our current or future commercial cancer screening and detection tests were not permitted by our licenses or revoke any of our NMPA or NHC licenses and certificates and require us to take remedial actions to their satisfaction, or if we were unable to obtain amended or additional required licenses or approvals, then our business and financial results would be adversely affected.
We are subject to ongoing obligations and continued regulatory review and to future changes in laws, regulations or enforcement policies in China.
We are subject to ongoing obligations and continued regulatory review in relation to our laboratories and our medical devices. Even if the NMPA grants our application for a Class III medical device registration certificate and allows us to update our medical device manufacture license accordingly, or if we successfully maintain and renew our Class II medical device manufacture license and registration certificate, our CDA device will be subject to extensive and ongoing regulatory requirements.
In addition, there could be a subsequent discovery of previously unknown problems with our device (including problems with third-party manufacturers or manufacturing processes) or failure to comply with existing or future regulatory requirements (including in respect of our conducting of cancer screening and detection tests). For example, if we were found to have conducted any of these tests in premises other than a licensed laboratory, we could be subject to confiscation of revenue from the relevant tests as well as other penalties. For more information on this, see “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Regulation on Medical Devices and Medical Institutions—Medical Institutions Laws and Regulations.” Any government investigation of alleged violations of law could require us to expend significant time and resources and could result in adverse government actions (including penalties on us) and negative publicity on our brand.
Moreover, laws, regulations and enforcement policies in China, including those regulating medical institutions, devices and supplies, are evolving. Changes in these areas could impose more stringent requirements on us, including fines or other penalties, and increase our compliance and other operating costs. Changes in government regulations could also prevent, limit or delay regulatory approvals in relation to our CDA device. If we are unable to maintain regulatory compliance, any regulatory approval that has been obtained may be lost and we may not be able to achieve or sustain profitability. In addition, regulatory changes may relax certain requirements that could benefit our competitors or lower market entry barriers and increase competition. Further, regulatory agencies in China may periodically, and sometimes abruptly, change their enforcement practices. Any litigation or governmental investigation or enforcement proceedings against us in China may be protracted and may result in substantial costs and diversion of resources and management attention, negative publicity, damage to our reputation and decline in the price of our ADSs.
Food-related businesses in the PRC are required to comply with food safety laws and food related regulations.
The PRC Regulation for the Implementation of the Food Safety Law, or the Regulation of Food Safety Law was amended on December 1, 2019. The Regulation of Food Safety Law outlines detailed rules for monitoring and assessment of food safety risk, food safety standards, food production and food business, food inspection, food import and export and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food safety law may result in severe administrative and criminal penalties imposed on us, as well as its legal representatives, senior management in charge, directly accountable person-in-charge and other directly accountable employees. If any penalties imposed on our company could negatively affect our business operations and have a material adverse impact on our reputation.
Concerns regarding the quality or safety of food products or the food supply chain, even if factually incorrect or based on isolated incidents, could cause consumers to avoid purchasing certain products from us, or to seek alternative food sources. If any report linking us to food contamination, food tampering, mislabeling, or other food safety issues could adversely impact our business and prospect may be materially and adversely affected.
27
Any lack of requisite approvals, licenses, permits or filings or failure to comply with any requirements of PRC laws, regulations and policies may materially and adversely affect our daily operations and hinder our growth.
The e-commerce food-related business is subject to comprehensive government regulations and supervisions, and we are required to hold or apply for various permits, licenses or filings for conducting our business covering various business type, such as hot or cold food production, food sale or food distribution. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations.” As of the date of this annual report, we have not obtained and will apply for licenses and permits that are necessary for our business operation, which is subject to regulatory approvals.
As the online industry is still evolving in China, new laws and regulations may be adopted from time to time and regulators may interpret existing laws and regulations differently from what they do now to require additional licenses and permits other than those we currently have, and to address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to online businesses. If the PRC government considers that we were operating without the proper approvals, licenses, filings, registration or permits or promulgates new laws and regulations that require additional approvals or licenses or impose additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these and other regulatory actions by the PRC governmental authorities, including issuance of official notices, change of policies, promulgation of regulations and imposition of sanctions, may adversely affect our business and have a material and adverse effect on our results of operations. In addition, if we were to use new or additional domain names to conduct our business, we would have to apply for the same set of government authorizations or amend the current ones. There is no assurance that we will be able to complete such procedures timely.
In addition to licenses, filings, registration and permits, laws and regulations may require e-commerce operators to take measures to protect consumer rights. Failure to do so may subject the e-commerce operators to rectification requirements and penalties. If the government authorities deem that we fail to meet such requirements, we may receive warnings, be ordered to make rectifications, or subject to other administrative sanctions that may have material adverse effect on our business, financial condition and our results of operations.
The absence of patent linkage, patent term extension and data and market exclusivity for NMPA-approved medical products could increase the risk of early generic competition against our tests in China.
The life of a patent and the protection it affords are limited under PRC law. Currently, while certain foreign laws regulate patent term extension, patent linkage to products to delay generic entry, or extension of data exclusivity (often referred to as regulatory exclusivity) in certain circumstances, China does not have any effective law or regulation in these aspects. Chinese regulators have set out a framework for delaying generic launches by adding patent linkage and data exclusivity into the Chinese regulatory regime, as well as for establishing a pilot program for patent term extension. However, these measures will require the adoption of specific regulations. In October 17, 2020, the Standing Committee of the National People’s Congress amended The Patent Law of the PRC, which came into effect in June 2021. The Patent Law of the PRC provides for the mechanism of compensation for the patent term in the case of any unreasonable delay. If we are unable to obtain patent term extension or if such extension is shorter in length than requested, our competitors may obtain approval of competing products prior to or following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed.
28
Any change in the regulations governing the use of personal data in China, which are still under development, or any data leakage or unauthorized use of data by third parties could adversely affect our business and reputation.
We provide early cancer screening and detection services to tens of thousands of individuals in China. As a result, we have access to these tested individuals’ personal data, including their age, gender, disease status and medical records. We use this personal data internally to expand our test database and improve the clinical utility of our CDA technology. Any such unauthorized access, loss, or dissemination of information could result in legal claims, proceedings or liability under PRC laws and regulations that protect the privacy of personal data. The Civil Code of the PRC which was promulgated in May 28, 2020 and came into effect on January 2021, provides for the protection of personal data. And The Personal Information Protection Law of the PRC, as adopted on August 20, 2021 and came into force on November 1, 2021, provides detailed regulations governing the collection and use of personal data. Other than the requirements for non-tampering with any personal data collected or retained, we believe that there is no PRC legal restriction on our internal use of such data. Any change in the regulatory regime in this regard could potentially affect our ability with regard to the collection and use of these personal data, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Moreover, we may not be able to prevent third parties from illegally obtaining and misappropriating personal data of the tested individuals that we collect. Concerns about data leakage or unauthorized use of data by third parties, even if unfounded, could damage our reputation and negatively affect our results of operations.
Our e-commerce business has a R&D center in China, which is facing various risks.
Our e-commerce business has a R&D center in China, which may subject us to the following risks:
| ● | Regulatory Risks: Our R&D center in China is subject to various laws and regulations, including those related to data privacy, intellectual property, and export control. Any failure to comply with these regulations could result in fines, legal action, and reputational damage. |
| ● | Political Risks: Our R&D center in China may be affected by changes in the political landscape, including trade disputes, changes in government policies and regulations, and geopolitical tensions. These factors could lead to increased costs, supply chain disruptions, and decreased revenue. |
| ● | Human Resources Risks: Our R&D center in China may be subject to human resources risks, including labor disputes, talent shortages, and changes in labor laws and regulations. These factors could lead to increased costs, supply chain disruptions, and reputational damage. |
| ● | Economic Risks: Our R&D center in China is subject to the overall economic conditions of the markets we operate in. Any downturn in the economy could lead to decreased revenue, increased costs, and operational challenges. |
Our e-commerce food business plans to source goods globally, including from China, which has inherent risks.
Importing food from China has various inherent risks, including:
| ● | Quality Control Risks: Products imported from China may be subject to quality control issues due to differences in manufacturing standards and regulations between China and our home country. Any failure to identify or address these issues could lead to reputational damage, product recalls, and decreased revenue. |
| ● | Logistics Risks: Importing goods from China may be affected by logistics risks, including delays in shipping, customs clearance, and transportation issues. These factors could lead to supply chain disruptions, increased costs, and decreased revenue. |
29
| ● | Currency Risks: Importing goods from China may be subject to currency risks, including fluctuations in exchange rates. These factors could lead to increased costs and decreased revenue. |
| ● | Political Risks: Importing goods from China may be affected by changes in the political landscape, including trade disputes, changes in government policies and regulations, and geopolitical tensions. These factors could lead to increased costs, supply chain disruptions, and decreased revenue. |
| ● | Regulatory Risks: Importing goods from China may be subject to various laws and regulations, including those related to trade, customs, and product safety. Any failure to comply with these regulations could result in fines, legal action, and reputational damage. |
Risks Relating to Government Regulations in the United States
Our biotechnology business is heavily regulated, and changes in regulations or violations of regulations may, directly or indirectly, reduce our revenue, adversely affect our results of operations and financial condition and harm our business.
The U.S. life sciences industry is highly regulated, and the regulatory environment in which we operate may change significantly and adversely to us in the future. Areas of the regulatory environment that may affect our ability to conduct business in the United States include federal and state laws relating to:
| ● | laboratory testing, including the CLIA and state laboratory licensing laws; |
| ● | the development, testing, use, distribution, promotion and advertising of research services, kits and clinical diagnostics, including certain LDTs which are regulated by the FDA under the U.S. Federal Food, Drug, and Cosmetic Act, or the FDCA; |
| ● | test ordering, documentation of tests ordered, billing practices and claims payment under the U.S. Centers for Medicare & Medicaid Services, or CMS, and the enforcement of those laws and regulations by the U.S Department of Justice and the U.S. Department of Health and Human Services, or HHS, Office of the Inspector General; |
| ● | medical device and in vitro diagnostic, or IVD, clearance, marketing authorization or approval; |
| ● | FDA’s policy of enforcement discretion to not regulate the majority of LDTs as IVDs; |
| ● | laboratory anti-mark-up laws (which are laws or regulations that can limit the prices of medical tests); |
| ● | the handling and disposal of medical and hazardous waste; |
| ● | fraud and abuse laws such as the U.S. Federal False Claims Act, or FCA, the Federal Health Care Program Anti-Kickback Statute, or AKS, the Criminal Health Care Fraud Statute and Stark Law (defined below), and state equivalents; |
| ● | Occupational Safety and Health Administration rules and regulations; |
| ● | the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and other U.S. federal and state medical data privacy and security laws; |
30
| ● | the Genetic Information Non-discrimination Act and similar state laws; and |
| ● | coverage and restrictions on coverage and reimbursement for research services, kits, clinical diagnostics and cellular therapies and Medicare, Medicaid, other governmental payers and private insurers reimbursement levels. |
In particular, the laws, regulations and policies governing the marketing of an LDT and clinical diagnostic tests and services are extremely complex, and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Among other things, pursuant to the FDCA and its implementing regulations, the FDA regulates the research, design, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance, authorization or approval, marketing and promotion and sales and distribution of medical devices in the United States to ensure they are safe and effective. Medical devices are defined by the FDCA to include, among other things, instruments and in vitro reagents or other similar or related articles, which are intended for use in the diagnosis of disease or other conditions. In addition, the FDA regulates the import and export of medical devices. Most LDTs, however, are not currently regulated as medical devices under FDA’s current regulatory framework, although components of LDTs, including, for example, instruments, reagents, and sample collection devices, may be regulated as medical devices. If we are subject to these FDA requirements and do not comply, or later become subject to these requirements and fail to adequately comply, our business operations may be harmed. These requirements may additionally cause delays in our ability to market and sell our products or services, which may, directly or indirectly, reduce our revenue, adversely affect our results of operations and financial condition and harm our business.
We plan to market our CDA test initially as an LDT, and future changes in the FDA’s regulation of LDTs could subject our operations to much more significant regulatory requirements.
We plan to initially market our CDA test in the United States as an LDT. LDTs have generally been considered to be tests that are designed, developed, validated and used within a single laboratory. The FDA has historically exercised a policy of enforcement discretion with respect to LDTs, whereby the FDA does not actively enforce its medical device regulatory requirements for these tests. In October 2014, the FDA issued two draft guidance documents stating that it intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing classification of medical devices. The FDA halted finalization of the draft guidance documents in November 2016 to allow for further public discussion of an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution. In January 2017, FDA issued a discussion paper laying out key elements of a possible revised future LDT regulatory framework. On August 19, 2020, HHS rescinded all guidance documents and informal policy statements that FDA had previously issued concerning LDTs, and announced that FDA would no longer require premarket authorization for LDTs unless the FDA engaged in notice-and-comment rulemaking. On November 15, 2021, the U.S. Department of Health and Human Services withdrew the policy that directed FDA not to enforce premarket review requirements for LDTs. HHS no longer has a policy on LDTs that is separate from FDA’s longstanding approach in this area. The former FDA Commissioner and the Director of the Center for Devices and Radiological Health, or CDRH, have expressed significant concerns regarding disparities between LDTs and IVDs that have been reviewed and cleared, authorized or approved by the FDA. The FDA has also determined that certain LDTs do not qualify for enforcement discretion because these tests pose higher risk to the public health. If we market our test initially as an LDT in the United States and the FDA were to determine that our test is not within the enforcement discretion policy for LDTs for any reason, including as a result of new rules, policies or guidance, or due to changes in law, our laboratory and test may become subject to extensive FDA requirements or otherwise impact our business. These types of changes could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition. If required, the regulatory marketing authorization process required to bring our LDT into compliance may involve, among other things, successfully completing additional clinical validations and submitting to and obtaining from the FDA pre-market clearance (510(k)), authorization for a de novo petition, or approval of a Premarket Approval Application, or PMA. Furthermore, legislative proposals could create new or different regulatory and compliance burdens on us and could have a negative effect on our ability to keep products on the market or develop new products, which could have a material effect on our business. In the event that we market our test initially as an LDT in the United States and then the FDA requires marketing authorization of our LDT in the future, the FDA ultimately may not grant any clearance, authorization or approval requested by us in a timely manner, or at all.
31
Our proprietary CDA device is an analytical instrument used as part of our CDA test, which may increase our risk that the FDA concludes that our test does not qualify as an LDT.
While the FDA has historically exercised enforcement discretion over the majority of LDTs, there are certain factors that have led to increased regulatory oversight. One such factor is the use of customized equipment and reagents. If the FDA were to conclude that our CDA device requires clearance, market authorization, or approval to be used as part of an LDT, it could prevent us from being able to offer our test. Even if we submit our CDA device for clearance, authorization, or approval, the FDA ultimately may not grant such clearance, authorization or approval requested by us in a timely manner, or at all.
Failure to comply with U.S. federal or state laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority or accrediting body, could cause us to lose the ability to perform testing in the United States, experience disruptions to our business, or become subject to administrative or judicial sanctions.
We are subject to CLIA, a U.S. federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Any testing subject to CLIA regulation must be performed in a CLIA-certified laboratory. CLIA certification is also required in order for us to be eligible to bill U.S. state and federal healthcare programs, as well as commercial payers, for our tests. We have commenced operations of our new laboratory in Philadelphia, Pennsylvania with the completion of our facility renovation and first phase equipment installation in July 2020. We obtained a CLIA Certificate of Registration for this laboratory in August 2020. We have also accredited by CAP, and have obtained a CLIA Certificate of Accreditation for this laboratory. To maintain our CAP accreditation and CLIA certification, we are subject to survey and unannounced inspection every two years.
We are required to maintain a Pennsylvania clinical laboratory license for our Philadelphia laboratory to conduct testing. In addition, some other states may require our Philadelphia laboratory to be licensed there in order to accept blood samples from those states or may have such requirements in the future. To maintain our state licenses, we may be subject to survey and inspection.
Failure to comply with applicable clinical laboratory certification and licensure requirements, including proficiency testing, may result in a range of enforcement actions, including suspension, limitation or revocation of our CAP accreditation, CLIA certificates and/or state licenses, imposition of a directed plan of corrective action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services. Any of these enforcement actions or our failure to renew our CLIA certificates, a state license or other accreditation could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.
If we are unable to obtain or maintain regulatory clearance or approvals in the United States, or if we experience delays in receiving clearance or approvals, our growth strategy may not be successful.
In the United States, we plan to initially offer our CDA test for clinical use as an LDT in our laboratory in Philadelphia, Pennsylvania. Because we developed this test and will offer this test solely for use within our laboratory, we believe that we may market the test as an LDT. Under current FDA policies, the FDA does not enforce its premarket clearance or approval requirements for certain LDTs before commercialization. The FDA could disagree with this assessment, however, in which case we would be required to obtain clearance, authorization, or approval for our device and/or test to continue marketing.
A key element of our longer term business strategy is to place our CDA device in other laboratories to broaden access to our technology and increase demand for our tests and any future tests that we may develop. In order to distribute our cancer screening and detection test and device outside of our laboratory, we will need to obtain FDA clearance, authorization, or approval for our test and device.
32
The FDA regulates medical devices, including IVDs, that are sold and distributed in U.S. interstate commerce. Unless an exemption applies, generally, before a new medical device or a new use for a medical device may be sold or distributed in the United States, the medical device must receive either a 510(k) premarket notification clearance, de novo marketing authorization, or a PMA approval from the FDA. As a result, before we can market or distribute our device and test in the United States for use by other clinical testing laboratories, we must first obtain 510(k) clearance, de novo marketing authorization, or PMA approval from the FDA. We are pursuing obtaining LDT for our CDA test at our Philadelphia, PA laboratory. Once we have received LTD status for our CDA test, we plan to offer commercial CDA tests at our Philadelphia, PA laboratory. Once we apply, we may not receive the FDA clearance, marketing authorization, or approval for the commercial use of our CDA device and test on a timely basis, or at all.
The FDA can delay, limit or deny clearance, authorization or approval of a device for many reasons, including:
| ● | inability to demonstrate to the satisfaction of the FDA that the products are safe or effective for their intended uses; |
| ● | the FDA’s disagreement with the design, conduct or implementation of the clinical studies or the analysis or interpretation of data from preclinical studies, analytical studies or clinical studies; |
| ● | serious and unexpected adverse device effects experienced by participants in clinical studies; |
| ● | the data from preclinical studies, analytical studies and clinical studies may be insufficient to support clearance, authorization or approval, where required; |
| ● | the inability to demonstrate that the clinical and other benefits of the device outweigh the risks; |
| ● | an advisory committee, if convened by the FDA, may recommend against approval of a PMA or other application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical studies, limitations on approved labeling or distribution and use restrictions, or even if an advisory committee, if convened, makes a favorable recommendation, the FDA may still not approve the product; |
| ● | the FDA may identify deficiencies in our marketing application, and in our or our suppliers’ manufacturing processes, facilities or analytical methods; |
| ● | the potential for policies or regulations of the FDA to change significantly in a manner rendering clinical data or regulatory filings insufficient for clearance, authorization or approval; and |
| ● | the FDA may audit clinical study data and conclude that the data are not sufficiently reliable to support a PMA application. |
There are numerous FDA personnel assigned to review different aspects of marketing submissions, and uncertainties can be presented by their ability to exercise judgment and discretion during the review process. During the course of review, the FDA may request or require additional data and information, and the development and provision of these data and information may be time-consuming and expensive. The process of obtaining regulatory clearances, authorizations or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances, authorizations or approvals on a timely basis or at all for our proposed products. If we are unable to achieve clearance or approval or if other laboratories do not accept our device and test, our ability to grow our business could be compromised.
33
Clinical studies involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
In order to receive FDA clearance, marketing authorization, or approval for the commercialization of our CDA test and/or device in the United States, we must conduct, at our own expense, extensive analytical testing and clinical studies to demonstrate safety and effectiveness of our device and test for the intended indication of use. Clinical testing is expensive, can take many years to complete, if at all, and its outcome is uncertain. Failure can occur at any time during the clinical study process. Also, our CDA device and test may not prove to be safe and efficacious in the clinical studies, and they may not meet all the applicable regulatory requirements needed to receive FDA clearance, authorization, or approval. The results of our clinical studies may not support the clinical validation needed to offer our cancer screening and detection test in the U.S. In addition, clinical claims for our CDA test that are supported by the clinical studies results may not be commercially viable.
If we receive FDA clearance, marketing authorization, or approval of our CDA device and test, we will continue to be subject to extensive FDA regulatory oversight.
Medical devices are subject to extensive regulation by the FDA in the United States. If our CDA device is cleared, authorized, or approved by the FDA, we will need to comply with the applicable regulatory requirements and our failure to do so could result in enforcement action by the FDA or state agencies. Any of these enforcement actions could also result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action in the United States. For example, the U.S. has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these executive actions will be implemented and the extent to which they will affect the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees. Misconduct by our employees could include intentional failures to comply with the regulations of the FDA or non-U.S. regulators, to comply with healthcare fraud and abuse laws and regulations in the United States and abroad, or to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant civil, criminal and administrative penalties, including, without limitation, damages, monetary fines, individual imprisonment, disgorgement of profits, possible exclusion from participation in Medicare, Medicaid and other U.S. federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment or restructuring of our operations, which could have a significant impact on our business. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.
If we fail to comply with healthcare laws and regulations, we could face substantial enforcement actions, including civil and criminal penalties and our business, operations and financial condition could be adversely affected.
34
We could be subject to healthcare fraud and abuse laws and patient privacy laws of both the U.S. federal government and the states in which we conduct our business. The laws include, but are not limited to:
| ● | the AKS, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for an item or service or the purchasing or ordering of a good or service, for which payment may be made under U.S. federal healthcare programs such as the Medicare and Medicaid programs; |
| ● | the FCA which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other payers that are false or fraudulent, and which may apply to entities like us which provide coding and billing information to customers; |
| ● | HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and |
| ● | state law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by U.S. federal laws, thus complicating compliance efforts. |
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable U.S. federal and state privacy, security and fraud laws may prove costly.
Our collection, use and disclosure of individually identifiable information, including health and/or employee information, is subject to U.S. state, federal, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
The privacy and security of personally identifiable information stored, maintained, received or transmitted, including electronically, is a major issue in the United States and abroad. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, legal standards for privacy, including but not limited to “unfairness” and “deception,” as enforced by the U.S. Federal Trade Commission and state attorneys general, continue to evolve, and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose customers, which could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about the activities of various government agencies and in the number of private privacy-related lawsuits filed against companies. Concerns about our practices with regard to the collection, use, retention, disclosure or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.
Numerous U.S. federal and state laws and regulations govern the collection, dissemination, use and confidentiality of personally identifiable health information, or PHI, including state privacy and confidentiality laws (including state laws requiring disclosure of breaches); U.S. federal and state consumer protection and employment laws; HIPAA; and European and other foreign data protection laws. These laws and regulations are increasing in complexity and number, may change frequently and sometimes conflict.
HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, including PHI by health plans, healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically, or covered entities, and their business associates, which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve creating, receiving, maintaining or transmitting PHI.
35
Penalties for violations of these laws vary. For instance, penalties for failure to comply with a requirement of HIPAA and the Health Information Technology for Economic and Clinical Health Act, or HITECH, vary significantly, and can include civil monetary penalties of up to $60,226 per violation, not to exceed $1.80 million per calendar year for each provision that is violated. A single breach incident can result in findings of violations of multiple provisions, leading to possible civil penalties in excess of $1.80 million in a single year. Violations of HIPAA may also result in criminal penalties. For example, a person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. In certain circumstances, criminal fines up to $250,000 per violation and/or up to ten years’ imprisonment may be imposed. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. Responding to government investigations regarding alleged violations of these and other laws and regulations, even if ultimately concluded with no findings of violations or no penalties imposed, can consume company resources and impact our business and, if public, harm our reputation.
Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more protective, we may have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. The interplay of U.S. federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our clients and potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as PHI, or personally identifiable information along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand for our services, reduce our revenue and/or subject us to additional liabilities.
We may be exposed to liabilities under the United States Foreign Corrupt Practices Act, or FCPA, and Chinese anti-corruption laws, and any determination that we have violated these laws could have a material adverse effect on our business or our reputation.
We are subject to the FCPA. The FCPA generally prohibits us from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We are also subject to the anti-bribery laws of China. Our current customers include state-owned enterprises and, after we obtain the Class III medical device registration certificate, we plan to sell our CDA tests and devices to hospitals in China, many of which are state-owned. As a result, we may engage with Chinese officials or persons of equivalent status during the ordinary course of our business. We do not fully control the interactions that our employees and sales agents have with those officials or persons, and they may try to increase sales volumes of our tests through means that constitute violations of the FCPA, the PRC anti-bribery laws or other related laws. As our business expands, the applicability of the FCPA and other anti-bribery laws to our operations will increase. Our procedures and controls to monitor anti-bribery compliance may fail to protect us from reckless or criminal acts committed by our employees or sales agents. If we, due to either our own deliberate or inadvertent acts or those of others, fail to comply with applicable anti-bribery laws, our reputation could be harmed and we could incur criminal or civil penalties, other sanctions and/or significant expenses, which could have a material adverse effect on our business, including our financial condition, results of operations, cash flows and prospects.
Risks Relating to Doing Business in China
The new business requires us to maintain food safety and quality globally, including in China. Any failure to maintain food safety and quality could adversely impact our reputation, results of operations and financial performance.
The PRC Regulation for the Implementation of the Food Safety Law, or the Regulation of Food Safety Law was amended on December 1, 2019. The Regulation of Food Safety Law outlines detailed rules for monitoring and assessment of food safety risk, food safety standards, food production and food business, food inspection, food import and export and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food safety law may result in severe administrative and criminal penalties imposed on us, as well as its legal representatives, senior management in charge, directly accountable person-in-charge and other directly accountable employees. Penalties imposed on our company could negatively affect our business operations and have a material adverse impact on our reputation.
In addition, regarding the quality or safety of food products or the food supply chain of our new business, even if factually incorrect or based on isolated incidents, could cause consumers to avoid purchasing certain products from us, or to seek alternative food sources. If there is any report linking our new business to food contamination, food tampering, mislabeling, or other food safety issues could adversely impact sales and our business and prospect may be materially and adversely affected.
36
We may be adversely affected by the complexity, uncertainties and changes in PRC laws and regulations of E-Commence and Internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
As online business is evolving rapidly in China, new laws and regulations may be adopted from time to time to require us to obtain additional licenses and permits or to comply with new regulatory requirements. The PRC government authorities may continue to promulgate new laws, regulations and rules governing the e-commerce industry, tighten enforcement of existing laws, rules and regulations, and impose additional requirements and other obligations on our business.
For example: In August 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce Law imposes a number of new requirements and obligations on e-commerce platform operators. As no detailed interpretation and implementation rules have been promulgated, it remains uncertain how the newly adopted E-Commerce Law will be interpreted and implemented. We will adopt a series of measures to comply with such requires under the E-Commerce Law.
We have to assure that our new business operations meet the requirements under the E-Commerce Law in all respects. Otherwise, if the PRC governmental authorities determine that we are not in compliance with all the requirements under the E-Commerce Law and other applicable laws and rules, we may be subject to fines and/or other sanctions. Substantial uncertainties exist regarding the interpretation and implementation of PRC laws and regulations applicable to online businesses.
In addition, the PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
For example: in November 2016, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law, which requires, among others, that network operators take security measures to protect the network from unauthorized interference, damage and unauthorized access and prevent data from being divulged, stolen or tampered with. Network operators are also required to collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and strictly within the scope of authorization by the subject of personal information unless otherwise prescribed by laws or regulations. Significant capital, managerial and human resources are required to comply with legal requirements, enhance information security and to address any issues caused by security failures. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect in September 2021. The Data Security Law, among others, provides for data security and privacy obligations on entities and individuals carrying out data processing activities, introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, as well as the degree of harm it will cause to nation security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used, provides for a national security review procedure for those data activities which may affect national security and imposes export restrictions on certain data and information. The Civil Code promulgated in 2020 also provides specific provisions regarding the protection of personal information.
The Cyber Security Law, the Data Security Law and the Civil Code are relatively new and subject to interpretation by the regulators. The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding our new businesses and activities of internet businesses in China. We cannot assure that we will obtain all the approvals, permits or licenses or filings required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. Any lack of requisite approvals, licenses or permits applicable to our business or any failure to comply with applicable laws or regulations may have a material and adverse impact on our new business, financial condition and results of operations.
37
We are subject to many of the economic and political risks associated with emerging markets due to our operations in China. Changes in China’s economic, political or social conditions or government policies and the current tensions in international economic relations could have an adverse effect on our business and operations.
Most of our assets and operations are located in China, the world’s largest emerging market. In light of our operations in an emerging market, we may be subject to risks and uncertainties including fluctuations in GDP, unfavorable or unpredictable treatment in relation to tax matters, expropriation of private assets, exchange controls, restrictions affecting our ability to make cross-border transfer of funds, regulatory proceedings, inflation, currency fluctuations or the absence of, or unexpected changes in, regulations and unforeseeable operational risks. 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. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, allocation of resources, evolving regulatory system and lack of sufficient transparency in the regulatory process.
The economies of emerging markets are typically more vulnerable to market downturns and economic slowdowns elsewhere in the world. While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on China’s overall economic growth. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our cancer screening and detection test and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Recent statements by the PRC government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. The PRC government recently initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively, the “New Administrative Rules Regarding Overseas Listings”), which came into force on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. According to the Trial Administrative Measures, Article 2, where a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC and where a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within three (3) working days after the relevant application is submitted overseas. If an issuer offers securities in the same overseas market where it has previously offered and listed securities subsequently, filings shall be made with the CSRC within three (3) working days after the offering is completed. According to the Trial Administrative Measures Article 22, upon occurrence of any material event, such as change of control, investigations or sanctions imposed by overseas securities regulatory agencies or other relevant competent authorities, change of listing status or transfer of listing segment, or voluntary or mandatory delisting, after an issuer has offered and listed securities in an overseas market, the issuer shall submit a report thereof to CSRC within three (3) working days after the occurrence and public disclosure of such event. Further, according to the Trial Administrative Measures Article 21, an overseas securities company that serves as a sponsor or lead underwriter for overseas securities offering and listing by domestic companies shall file with the CSRC within 10 working days after signing its first engagement agreement for such business, and submit to the CSRC, no later than January 31 each year, an annual report on its business activities in the previous year associated with overseas securities offering and listing by domestic companies. If an overseas securities company has entered into engagement agreements before the effectuation of the Trial Administrative Measures and is serving in practice as a sponsor or lead underwriter for overseas securities offering and listing by domestic companies, it shall file with the CSRC within 30 working days after the Trial Administrative Measures take effect. On February 24, 2023, the CSRC promulgated the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which also became effective on March 31, 2023. The Confidentiality and Archives Administration Provisions set out rules, requirements and procedures relating to provision of documents, materials and accounting archives for securities companies, securities service providers, overseas regulators and other entities and individuals in connection with overseas offering and listing, including without limitation to, domestic companies that carry out overseas offering and listing (either in direct or indirect means) and the securities companies and securities service providers (either incorporated domestically or overseas) that undertake relevant businesses shall not leak any state secret and working secret of government agencies, or harm national security and public interest, and a domestic company shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level, if it plans to, either directly or through its overseas listed entity, publicly disclose or provide any documents and materials that contain state secrets or working secrets of government agencies. Working papers produced in the Chinese mainland by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in the Chinese mainland. Where such documents need to be transferred or transmitted to outside the Chinese mainland, relevant approval procedures stipulated by regulations shall be followed. While we believe we do not involve leaking any state secret and working secret of government agencies, or harming national security and public interest in connection with provision of documents, materials and accounting archives, there is uncertainty how the new provisions will be interpreted and implemented in the future, and we may be required to perform additional procedures in connection with the provision of accounting archives after the Confidentiality and Archives Administration Provisions come into effect. Any failure by us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ADSs or our other securities, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our ADSs or such other securities to significantly decline in value or become worthless.
38
Recently there have been heightened tensions in economic relations between the United States and China. The U.S. government has recently imposed, and proposed to impose additional, new or higher tariffs on products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing largely commensurate tariffs on products imported from the United States. The lasting impact of these trade conflicts on the PRC economy remains uncertain. As a biotechnology company with operations primarily based in China as well as the United States, our plan to commercialize our CDA test in, and export our CDA device to, the United States after obtaining relevant approvals from the FDA could be adversely affected by these or future trade developments. In addition, political tensions between the United States and China have escalated due to, among other things, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC, and the U.S. sanctions on a number of Chinese entities and relevant individuals. Rising political tensions could reduce levels of trade, investment, technological exchange and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
Uncertainties with respect to China’s legal system could have a material adverse effect on our business and operations.
We conduct our businesses in China primarily through our PRC subsidiaries. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. The PRC legal system is evolving rapidly, and the interpretation of many laws, regulations and rules may contain inconsistencies, and the enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations. Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies and rules. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.
39
PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offshore equity and debt offerings 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 or we may make additional capital contributions to our wholly foreign-owned subsidiaries in China. Any loans by us to our wholly foreign-owned subsidiaries in China to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the PRC State Administration of Foreign Exchange, or SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope.
In March 2015, SAFE promulgated the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises, or SAFE Circular 19, which took effect and replaced certain previous SAFE regulations from June 1, 2015. SAFE further promulgated the Circular of the SAFE on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which took effective on June 9, 2016 and, among other things, amended certain provisions of SAFE Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope, or to provide loans to persons other than affiliates, unless otherwise permitted under its business scope. SAFE Circular 19 and SAFE Circular 16 may limit our ability to transfer the net proceeds from our offshore equity and debt offerings to our PRC subsidiaries and convert the net proceeds into RMB.
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 wholly foreign-owned subsidiaries in China. 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 our offshore equity and debt offerings 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.
40
Our business benefits from certain financial incentives and discretionary policies granted by local governments. Expiration of, or changes to, these incentives or policies would have an adverse effect on our results of operations.
In the past, local governments in the PRC granted certain financial incentives from time to time to our PRC subsidiaries as part of their efforts to encourage the development of local businesses. The timing, amount and criteria of government financial incentives are determined within the sole discretion of the local government authorities and cannot be predicted with certainty before we actually receive any financial incentive. We generally do not have the ability to influence local governments in making these decisions. Local governments may decide to reduce or eliminate incentives at any time. In addition, some of the government financial incentives are granted on a project basis and subject to the satisfaction of certain conditions, including completion of the specific project therein. We cannot guarantee that we will satisfy all relevant conditions, and if we do not, we may be deprived of the relevant incentives. We cannot assure you of the continued availability of the government incentives currently enjoyed by us. Any reduction or elimination of incentives would have an adverse effect on our results of operations. Government grants and subsidies we recognized for the years ended December 31, 2020, 2021 and 2022 was RMB7.5 million, RMB0.6 million and RMB0.9 million (US$0.1 million), respectively.
Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders, and have a material adverse effect on our results of operations and the value of your investment.
Under the EIT Law and its implementation rules, an enterprise established outside China may be considered as a PRC resident enterprise provided that its “de facto management body” is located within China. According to the implementation rules, “de facto management body” is interpreted as a body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation, or the SAT, issued the Circular of the SAT 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 incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s general position on how “de facto management body” rule 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 minutes, are located or maintained in China; and (iv) at least 50% of voting board members or senior executives habitually reside in China.
According to these rules and regulations, we may be considered as a PRC resident enterprise by the PRC tax authorities for tax purposes and a number of unfavorable tax consequences could follow. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we will 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 tax from dividends we pay at a rate of 10% in case to non-PRC enterprise shareholders (including ADS holders) or 20% in case to non-PRC individual shareholders (including ADS holders); in addition, gains realized on the sale or other disposition of our ordinary shares or ADSs may be subject to PRC tax, at a rate of 10% in case of non-PRC enterprise shareholders (including our ADS holders) or 20% in case of non-PRC individual shareholders (including ADS holders), if such dividends or gains are deemed to be from PRC sources. Any such PRC tax liability may be reduced under an applicable tax treaty. However, it is unclear whether non-PRC shareholders (including our ADS holders) of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.
41
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-Tax 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 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 that directly owns the taxable assets, may report such indirect transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. 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 our company acquired and sold on public securities markets.
In October 2017, the SAT issued the Public Notice on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which took effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority. If the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid the 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 should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB is no longer pegged to the U.S. dollar, and the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from any equity or debt offerings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
42
Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our holding company incorporated in the BVI primarily relies on dividend payments from our PRC subsidiaries to fund our cash and financing requirements. 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.
In light of the flood of capital outflows, the PRC government may from time to time impose more restrictive foreign exchange policies and increase scrutiny of major outbound capital movements. More restrictions and substantial vetting processes may be required by SAFE or other government authorities to regulate cross-border transactions falling under the capital account. 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 laws and regulations have more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
PRC laws and regulations, such as the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, Anti-Monopoly Law of the PRC and the Rules of the PRC Ministry of Commerce, or the MOFCOM, on Implementation of the Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where offshore companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.
According to these laws and regulations, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns, and for mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises that have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
43
We might grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the 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.
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.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration on Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing, referred to as “offshore special purpose vehicle.” In addition, such PRC residents must update their SAFE registrations when the offshore special purpose vehicle undergoes any change of basic information (including change of such PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Notice on Further Simplifying and Improving the Foreign Exchange Administration Policies on Direct Investment, or SAFE Notice 13, released on February 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the foreign exchange registration under SAFE Circular 37 from June 2015.
Due to the inherent uncertainty in the implementation of regulatory requirements by the PRC governmental authorities, SAFE Circular 37 registration might not be always practically available under all circumstances as prescribed in those regulations. In addition, we may not at all times be fully aware or informed of the identities of all the PRC residents holding direct or indirect interest in our company. We cannot assure you that all of our PRC resident registered or beneficial owners are in compliance and will comply with SAFE regulations, including those requiring them to make necessary applications, filings and amendments. To our knowledge, certain of our PRC resident individual shareholders who hold an insignificant number of our shares have not completed their SAFE Circular 37 registration yet. The failure or inability of our PRC resident shareholders to comply with the SAFE registrations, or failure by us to update the foreign exchange registrations of our PRC subsidiaries, may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and 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 laws for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.
44
Failure to comply with PRC regulations regarding the registration requirements for stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. Certain of our directors, executive officers, employees and consultants who are PRC residents may participate in our 2019 Plan, and therefore are subject to these regulations. Failure of these PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.
In addition, the SAT has issued certain circulars concerning employee share incentives. Under these circulars, our employees working in the PRC who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.
Our business and our profitability may be negatively affected by the rising labor costs and potential obligations to make additional contributions of social insurance premium and housing funds.
In recent years, labor costs in China have continued to increase, driven by increased inflation, as well as enactment of new labor laws. As a result, we expect our labor costs, including wages and employee benefits, to continue to increase in the foreseeable future. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations may be adversely affected.
In addition, we are required by PRC laws and regulations to participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance, work-related injury insurance, employment injury insurance, maternity insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. The relevant government agencies may examine whether an employer has made adequate payments of these requisite statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We have historically failed to promptly make social insurance and housing fund contributions in full with respect to our employees. If the relevant PRC authorities determine that we shall make supplemental social insurance and housing fund contributions, and that we are subject to fines and legal sanctions, our business, financial condition and results of operations may be adversely affected.
45
If for any reason we were to fail to meet the audit requirements of the HFCAA for two consecutive years, we may be prohibited from listing our securities on a national securities exchange, including Nasdaq, or on over-the-counter markets in the United States, which could adversely affect the market price of our Common Stock and our ability to raise capital.
In recent years, the U.S. Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in mainland China and with auditors located in mainland China. For example, PCAOB inspections of auditors located in mainland China and Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, and limitations on the ability of the PCAOB to inspect or investigate auditors in mainland China or Hong Kong could deprive investors of the benefits of PCAOB inspections, which could adversely affect the ability of companies using such auditors to access U.S. capital markets.
As part of the continued focus on access to audit and other information for companies with substantial operations in China, in December 2020, the United States enacted the Holding Foreign Companies Accountable Act (the “HFCAA”), which requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). Under the HFCAA, as amended in December 2022, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for two consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States.
In 2021, the PCAOB issued a Determination Report, which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. In December 2022, the PCAOB vacated its determination that it was unable to inspect and investigate PCAOB-registered public accounting firms in mainland China. As a result, until such time as the PCAOB issues a new determination, the SEC has determined that there are no issuers currently at risk of having their securities subject to a trading prohibition under the HFCAA.
Our auditor prior to January 12, 2023, Friedman LLP, or Friedman, and current auditor, Marcum Asia CPAs LLP (“Marcum Asia”), the independent registered public accounting firms that issue the audit reports included elsewhere in this annual report, as auditors of companies that are traded publicly in the United States and firms registered with the PCAOB, have been subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Both Friedman and Marcum Asia have been inspected by the PCAOB on a regular basis, with the last inspection in 2020. Neither Friedman nor Marcum Asia is subject to the determinations announced by the PCAOB on December 16, 2021. The PCAOB is expected to continue to demand complete access to inspections and investigations against accounting firms headquartered in mainland China and Hong Kong in the future and states that it has already made plans to resume regular inspections in early 2023 and beyond. Each year, the PCAOB will determine whether it can inspect and investigate completely accounting firms headquartered in mainland China and Hong Kong. Furthermore, the Accelerating HFCA Act, which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within two years, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time. Our securities may be prohibited from trading if our auditor cannot be fully inspected. While the Company’s auditor is based in the U.S. and is registered with PCAOB and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such inability could cause trading in the Company’s securities to be prohibited under the Accelerating HFCA Act, and ultimately result in a determination by a securities exchange to delist the Company’s securities. If trading in our ADS is prohibited under the Accelerating HFCA Act in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq may determine to delist our ADS. A termination in the trading of our securities or any restriction on the trading in our securities would be expected to have a negative impact on the Company as well as on the value of our securities.
We have had a history of losses and our ability to grow sales and achieve profitability are unpredictable.
As of December 31 2022, we had an accumulated deficit of 577.5 million (USD83.7 million) and incurred net losses of RMB 120.1 million and RMB103.6 million (US$15.0 million) in the year ended December 31, 2021 and 2022, respectively. Our ability to achieve profitable operations depends on many factors, which include:
| ● | successfully implementing our business strategy; |
| ● | increasing revenues; and |
| ● | controlling costs. |
There can be no assurance that we will be able to successfully implement our business plan, meet our challenges and become profitable in the future.
46
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity
When we acquire a business, a substantial portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. The current accounting standards require that goodwill and intangible assets should be deemed to have indefinite lives, which should be tested for impairment at least annually (or more frequently if impairment indicators arise). Other intangible assets are amortized over their useful lives. For the year ended December 31, 2022, we recorded impairment losses of RMB 20.7 million (US$3.0 million).
Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire balance of our goodwill based on the quantitative assessment performed.
Changes in the political and economic policies of the PRC government or in relations between China and the United States or other governments may materially and adversely affect our business, financial condition, and results of operations and may result in our inability to sustain our growth and expansion strategies.
Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in the PRC or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past four decades, growth has been uneven across different regions and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. In addition, in the past the Chinese government implemented certain measures, including interest rate increases, to manage the pace of economic growth and prevent the economy from overheating. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations.
47
Additionally, the Chinese government has published new policies that significantly affect certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could require us to obtain additional permission from Chinese authorities to continue to operate our business in China, which may adversely affect our business, financial condition and results of operations.
Furthermore, statements made by the Chinese government have indicated an intent to increase the government’s oversight and control over offerings of companies with significant operations in China that are to be conducted in foreign markets.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
Substantially all of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources.
Risks Relating to Our ADSs
The Nasdaq Capital Market imposes listing standards on our ADSs that we may not be able to fulfill, thereby leading to a possible delisting of our ADSs.
As a listed Nasdaq Capital Market company, we are subject to rules covering, among other things, certain major corporate transactions, the composition of our Board of Directors and committees thereof, minimum bid price of our ADSs and minimum stockholders equity. In order to comply with the minimum bid price rule, in November 2022 we adopted an ordinary share / ADS ratio change from one (1) Class ‘A’ ordinary being equal to one (1) ADS to 20 Class ‘A’ ordinary shares being equal to one (1) ADS.
On January 13, 2023, we received a Staff determination letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us of the Staff’s determination to delist our ADSs from The Nasdaq Capital Market due to our failure to comply with the minimum $2.5 million stockholders’ equity requirement for continued listing on The Nasdaq Capital Market unless we timely request a hearing before a Nasdaq Hearings Panel. We timely requested a hearing, which stayed any delisting or suspension action relating to our ADSs through the hearing, which took place in March. On March 22, 2023, we were notified by the Nasdaq Hearing Panel that our request for continued listing on The Nasdaq Capital Market was granted, subject to the requirement that we demonstrate on or before July 12, 2023 our compliance with the shareholder equity requirement, as outlined in Listing Rule 5550(b)(1) (the “Equity Rule”). The Panel advised that July 12, 2023 represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant.
Previously in 2022, we had received two additional Staff determination letters from the Listing Qualifications Department of Nasdaq notifying us of the Staff’s determination to delist our ADSs for our failure to comply with the continued listing requirements of the Nasdaq Capital Market. After hearings held with respect to the Staff’s determinations, we in each instance received the determination from Nasdaq Hearing Panel that we had regained compliance with the requirements to remain listed on The Nasdaq Capital Market.
48
If our ADSs were to be de-listed, selling our ADSs could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our ADSs are delisted, broker-dealers have certain regulatory requirements imposed upon them, which may discourage broker-dealers from effecting transactions in our ADSs, further limiting the liquidity thereof. These factors could result in lower prices for our ADSs and/or limit an investor’s ability to execute a transaction. In addition, a delisting could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could lead to significant dilution to our stockholders caused by our issuing equity in financing or other transactions at a price per share significantly below the then market price.
The trading price of our ADSs may be volatile regardless of our operating performance.
The trading price of our ADSs could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. Furthermore, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our ADSs, regardless of our operating performance. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
| ● | variations in our revenues, earnings and cash flow; |
| ● | announcements of new investments, acquisitions, business partnerships or joint ventures by us or our competitors; |
| ● | announcements of new test and service offerings, solutions and expansions by us or our competitors; |
| ● | failure on our part to realize monetization opportunities as expected; |
| ● | changes in financial estimates by securities analysts; |
| ● | detrimental adverse publicity about us, our technology, our tests or our industry; |
| ● | additions or departures of key personnel; |
| ● | release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; |
| ● | regulatory developments affecting us or our industry; and |
| ● | potential litigation or regulatory investigations. |
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade, and you may not be able to sell your shares at prices you deem acceptable. In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
49
Our dual-class share structure with different voting rights will limit your ability to influence our corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
As of March 31, 2023, our issued ordinary shares consisted of 108,068,440 Class A ordinary shares (excluding treasury shares and shares reserved for potential conversion of convertible dentures) and 3,573,100Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one (1) vote per share, while holders of Class B ordinary shares will be entitled to ten (10) votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder to any person or entity who is not an affiliate of the holder, or upon a change of ultimate beneficial ownership of the holder of any Class B ordinary share to any person or entity who is not an affiliate of the holder, such Class B ordinary shares will be automatically and immediately converted into the same number of Class A ordinary shares. We sold Class A ordinary shares represented by our ADSs in our initial public offering.
All of the issued and outstanding ordinary shares held by Dr. Chris Chang Yu through CRS Holdings Inc. and a portion of our ordinary shares held by Zhangjiang GU KE Company Limited and Zhijun Sihang Holdings Limited, respectively, have been re-designated as Class B ordinary shares. Dr. Chris Chang Yu, Zhangjiang GU KE Company Limited and Zhijun Sihang Holding Limited beneficially owned approximately 20.68%, 2.44% and 1.72%, respectively, of the aggregate voting power of our company as of the date of this annual report, due to the disparate voting powers associated with our dual-class share structure. As a result of the dual-class share structure and the concentration of ownership, these holders of Class B ordinary shares will have considerable influence over matters such as decisions regarding change of directors, mergers, change of control transactions and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial
Share ownership has remained as of the date of this annual report, and will remain, concentrated in the hands of our principal shareholders and management, who are and will continue to be able to exercise a direct or indirect controlling influence on us.
Our directors, officers and current five percent or greater shareholders and affiliated entities together beneficially owned approximately 40.77% of the voting power of our ordinary shares issued and outstanding as of the date of this annual report, and this concentration of share ownership will remain in the foreseeable future. As a result, these shareholders, acting together, have significant influence over all matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other shareholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other shareholders may view as beneficial.
If securities or industry analysts do not publish 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 be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us, or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
50
Substantial future sales or perceived potential sales of ADSs in the public market, including upon the exercise of vested options and conversion of convertible securities, could cause the price of ADSs to decline.
Sales of substantial amounts of our ADSs, including upon the exercise of vested options and conversion of convertible debentures that we have issued, in the public market or at a discount to the market price, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through offerings of equity securities or securities convertible into or exchangeable for equity securities in the future. The ADSs sold in our initial public offering are freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and any applicable lock-up agreements. As of April 28, 2023, there were 148,130,095 ordinary shares outstanding (consisting of (i) 144,556,995 Class A ordinary shares, which included 1,322,853 escrow shares reserved for potential conversion of convertible debentures and (ii) 3,573,100 Class B ordinary shares. Sales of substantial amounts of ADSs in the public market or the conversion of convertible securities, or the perception that these sales or conversions could occur, could adversely affect the market price of our ADSs.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
Our memorandum and articles of association contain provisions which may have the effect of limiting 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 dual-class voting structure gives disproportionate voting power to the holders of our Class A and Class B ordinary shares. 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, 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.
As we do not expect to pay dividends in the foreseeable future, 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 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. 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 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.
51
You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary of the ADSs has agreed that if it or the custodian receives any cash dividends or other distributions on Class A ordinary shares or other deposited securities underlying the ADSs, it will pay them to you after deducting its fees and expenses pursuant to the deposit agreement. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary or the custodian is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933 but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying Class A ordinary shares which are represented by your ADSs.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you do not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You are only able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote by giving voting instructions to the depositary. If we instruct the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares represented by your ADSs in accordance with your instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. Under our M&A, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we instruct the depositary to 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 how to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
52
You may experience dilution of your holdings due to the inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate 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. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.
Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to the U.S. federal or state courts in the City of New York have non-exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, 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 any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. 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 waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/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 indifferent outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
53
Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company, and the ability of U.S. authorities to bring actions against us or our management may also be limited.
We are a business company incorporated under the laws of the British Virgin Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China, the world’s largest emerging market. In addition, certain of our directors and executive officers reside within China for a significant portion of a year or are PRC nationals and a substantial portion of their assets are within China. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British Virgin Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, due to jurisdictional limitations, matters of comity and various other factors, the SEC, Department of Justice and other U.S. authorities may be limited in their ability to take enforcement actions, including in instances of fraud, against us or our directors and officers in China. In addition, shareholder claims that are common in the United States, including class action securities law and fraud claims, generally uncommon in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the U.S. have not been efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties.
In addition, BVI companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. For more information, see “Item 10—B. Memorandum and Articles of Association—Differences in Corporate Law—Shareholders’ Suits”. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law, and to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory enforcement in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
Lastly, under the provisions of the BVI Act, the memorandum and articles of association of a company are binding as between the company and its members and between the members. In general, members are bound by the decision of the majority or special majorities as set out in the articles of association or in the Act. As for voting, the usual rule is that with respect to normal commercial matters members may act from self-interest when exercising the right to vote attached to their shares.
If the majority members have infringed a minority member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action. The BVI Act provides that any member of a company is entitled to payment of the fair value of his shares upon dissenting from certain matters. For more information, see “Item 10—B. Memorandum and Articles of Association—Differences in Corporate Law—Shareholders’ Suits.”
54
Generally any other claims against a company by its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights as members as established by the company’s memorandum and articles of association, which are more limited than the rights afforded investors under the laws of many states in the United States.
You may have difficulty enforcing judgment against us or our directors and officers.
We are a BVI holding company and most of our assets are located outside of the United States. In addition, certain of our directors and executive officers are residents of the PRC, and substantially all of their assets and our assets are located in the PRC. As a result, you may not be able to effect service of process upon us or these directors and executive officers, or to enforce against them judgments obtained in courts in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the BVI and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s ICFR. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of such extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies.
We may take advantage of the aforesaid exemptions for so long as we remain an emerging growth company until the fifth anniversary from the date of our initial listing. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we may need to increase the number of independent directors and will need to adopt policies regarding internal controls and disclosure controls and procedures. In addition, operating as a public company makes 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 may incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
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 United States domestic public companies.
Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) 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 (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
55
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of Nasdaq Stock Market LLC. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could subject U.S. Holders of our Class A ordinary shares or ADSs to adverse U.S. federal income tax consequences.
A non-U.S. corporation will be a PFIC, if, in any particular year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) the average percentage of the value of its assets that produce or are held for the production of passive income, based on the average of four quarterly testing dates, is at least 50% (the “asset test”). Because the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets may change, it is possible that we may be a PFIC in the current or a future year. In particular, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC.
If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our Class A ordinary shares or ADSs and on the receipt of distributions on our Class A ordinary shares or ADSs to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our Class A ordinary shares or ADSs, we will generally continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our Class A ordinary shares or ADSs, unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Status” for more details regarding the foregoing.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We began our operations by incorporating AnPac Bio-Medical Science Co., Ltd., or AnPac Bio, in January 2010 as a British Virgin Islands, or BVI, business company limited by shares under the BVI Business Companies Act. On May 9, 2023, we changed our name to Fresh2 Group Limited to reflect our entry into the Asian e-commerce food business in the U.S.
In March 2010, we established Changhe Bio-Medical Technology (Yangzhou) Co., Ltd., or AnPac Yangzhou, as our wholly foreign owned subsidiary in the PRC to market and sell our cancer screening and detection tests and conduct biology related research and development activities.
In March 2011, we established Changwei System Technology (Shanghai) Co., Ltd., or AnPac Changwei, as our wholly foreign owned subsidiary in the PRC as our global research and development center.
In October 2012, we established AnPac Bio-Medical Technology (Lishui) Co., Ltd. or AnPac Lishui, as our wholly foreign owned subsidiary in the PRC as our headquarters and to manufacture our CDA devices.
56
In October 2013, we established Shanghai Xinshenpai Technology Co., Ltd., or Shanghai Xinshenpai, as our wholly owned subsidiary in the PRC to market and sell our cancer screening and detection tests. In December 2020, we wound up Shanghai Xinshenpai.
In April 2014, we established AnPac Bio-Medical Technology (Shanghai) Co., Ltd., or AnPac Shanghai, as our wholly owned subsidiary in the PRC to market and sell our cancer screening and detection tests.
In September 2015, we established AnPac Technology USA Co., Ltd., or AnPac US, as our wholly owned subsidiary in the United States to conduct research studies and clinical studies for our research on cancer screening and detection tests.
In July 2016, we established Lishui AnPac Medical Laboratory Co., Ltd., or Lishui Laboratory, as our wholly owned subsidiary in the PRC to conduct cancer screening and detection tests.
In November 2017, we established Shiji (Hainan) Medical Technology Limited, or Shiji Hainan, as our wholly owned subsidiary in the PRC, which we acquired from third parties to conduct cancer screening and detection tests.
In May 2018, we established Penghui Health Management (Shanghai) Co., Ltd., or Penghui Health Management, as our wholly owned subsidiary in the PRC to market and sell our cancer screening and detection tests. In December 2020, we wound up Penghui Health Management.
In March 2019, we established Shanghai Muqing AnPac Health Technology Co., Ltd., or Shanghai Muqing, as our 51% owned subsidiary in the PRC to conduct cancer screening and detection tests.
On August 15, 2021, we completed a step acquisition of 40% equity interest in Anpai (Shanghai) Healthcare Management and Consulting Co., Ltd. (“Anpai Shanghai”), consisting of an acquisition of 40% equity interest of Anpai Shanghai acquired from Dr. Chris Chang Yu for a consideration of RMB 8.5 million approved by the Board of Directors (the “Board”), and an investment of 20% equity interest in Anpai Shanghai which the Group has already held prior to August 15, 2021. Anpai Shanghai is engaged in mainly provides physical examination services and other health consulting services in PRC.
On May 4, 2022, the Nasdaq Hearings Panel has granted the request of the Company to transfer its shares from the Nasdaq Global Market to Nasdaq Capital Market, effective at the open of trading on May 6, 2022.
We recently entered into the fast-growing Asian e-commerce food business in the U.S.
In October 2022, we established Fresh2 Technology to be the umbrella organization for this business. A team with extensive experience in the field was assembled to drive the project forward.
On January 28, 2023, we entered into an agreement with GISN (HK) LIMITED (“GISN”) to purchase 100% of the issued and outstanding equity interest of GISN, a technical solution and outsourcing consulting services provider focused on the digital, internet and Web 3 business transformation for start-ups and traditional enterprises to provides expertise in the development of e-commerce businesses.
On February 7, 2023, we entered into an agreement with Fresh2 Ecommerce Inc. to purchase 100% of the issued and outstanding equity interest in such company and expect to expand its reach in the US food market, targeting supermarkets.
On March 31, 2023, we entered into an Asset Purchase Agreement (the “EZ Agreement”) with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce company in the foodservice industry, through which we will acquire certain fixed assets of Easy Hundred and Easy Hundred’s intellectual property relating to ez100, 2Supply and 100WAY. Pursuant to the EZ Agreement, we agreed to purchase the intellectual property relating to ez100, 2Supply and 100WAY and certain fixed assets for the consideration of $8,149,595, payable in the form of $730,000 in cash and 17,665,702 Class ‘A’ ordinary shares of the Company. The initial closing of the transaction took place on March 31, 2023.
57
Our principal executive offices are located at 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China. Our telephone number at this address is +86-578-2051-666. Our registered office in the BVI is located at the office of Maples Corporate Services (BVI) Limited at Kingston Chambers, P.O. Box 173, Road Town, Tortola, BVI. Our agent for service of process in the United States is Fresh2 Group Inc, located at 1411 Broadway FL16 STE 24, New York NY 10018.
Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.anpacbio.com and https://fresh2.co/. The information contained on our website is not a part of this annual report.
The SEC maintains an Internet site (http://www.sec.gov) that contains our reports, proxy statements, and other information that we have submitted electronically with the SEC.
B. Business Overview
We are a biotechnology company focusing on early cancer screening and detection. We market and sell a multi-cancer screening and detection test that uses our innovative, patented CDA technology and our proprietary CDA device. In addition to early cancer screening and detection, our CDA technology has demonstrated potential to assist physicians in cancer diagnosis, prognosis and recurrence.
Our CDA technology provides a comprehensive platform, on which we have developed our CDA test and our proprietary CDA device. Our CDA test can detect and assess an individual’s overall cancer risk with high accuracy, including early stage cancer. We also offer combination tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies to detect the risk of specific cancer types. We have historically primarily combined our CDA test with the biomarker-based test in our combination tests. We began offering a new combination test product named APCS in the second quarter of 2020, which combines our CDA test with the ct-DNA test. When we refer to our technology or tests as a “cancer screening and detection” technology or test, we refer to the detection and assessment of the risk of cancer occurrence, not to cancer diagnosis.
Our CDA technology focuses on biophysical properties in human blood. Recent studies have shown that there is a correlation between certain biophysical properties, including acoustical, electrical, magnetic, nano-mechanical and optical properties, and cancer occurrence. These studies have revealed that biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties’ physical expressions of information in the blood can indicate risks of pre-cancerous states and cancers. These biophysical signals change over time as cancer occurs, progresses or regresses. Our proprietary CDA device uses an integrated sensor system to detect certain biophysical signals in blood samples. After collecting data on these signals, we use our CDA technology and proprietary algorithm to measure and analyze these signals at multiple biological levels (including the protein, cellular and molecular levels) and with multiple parameters (including the overall CDA value, the PTF value and the CTF value). According to Frost & Sullivan, we are one of the first biotechnology companies worldwide to focus on the detection and measurement of cancers’ biophysical properties. In our industry and related research fields, our CDA technology, as well as CTCs, ct-DNA, exosome, mRNAs and other emerging technologies, are known as “next-generation” cancer screening and detection technologies.
Our CDA technology provides a highly accurate, early-stage risk assessment of the occurrence of cancer. As of December 31, 2022, our CDA technology had been shown in numerous retrospective validation studies to be able to detect the risk of 26 cancer types with high sensitivity and specificity rates. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. Our CDA technology requires only a standard blood sample from a tested individual, which minimizes the inconvenience and invasive procedures and avoids the harmful side effects that are inherent to many other technologies.
58
We have established a test database that as of December 31, 2022 consisted of over 280,095 blood samples of various age, sex and disease groups. Our database includes approximately 239,759 samples from our commercial CDA-based tests and approximately 44,653 samples from our research studies. We believe that we rank among the leaders of companies offering next-generation early cancer screening and detection technologies in terms of the total volume of commercial and clinical samples for cancer screening and detection and in terms of the volume of commercial cancer screening and detection tests conducted.
In late February 2023 we received the first payment from a Malaysian customer who had signed a US$1.5 million purchase contract for our Model AP9080 cancer detection devices. The Model AP9080 cancer detection device is based on our patented, novel multi-cancer testing technology named Cancer Differentiation Analysis Technology (CDA). This was the first major sale of our cancer detection device into the Southeast Asia region and marks our entry into the global cancer detection equipment market, as well as confirmation of our novel technology, reputation, and capability to penetrate the vast global market for cancer detection.
We are continuing our multi-year and multi-cancer test follow-up study in the PRC. As of Feb 22, 2023, the study has enrolled over 18,000 individuals from a general population of 230,000 persons located in China. The test subjects were tested using our CDA method. We believe that the study is one of the largest multi-year and multi-cancer follow-up studies in the world. The multi-year study fully validated that the CDA method is a multi-cancer detection method which is capable of detecting multiple cancer types with statistical significance. We believe that the CDA method may become a cost effective, multi-cancer screening method.
We have established two clinical laboratories in China and one clinical laboratory in the U.S. Our principal laboratory is a licensed biomedical clinical laboratory located in Lishui, Zhejiang Province, China, where we perform our commercial CDA-based tests (including our CDA tests and combination tests), as well as a variety of other tests (including immunological and biochemical tests). Our laboratory in Haikou, Hainan Province, China is a licensed genomics clinical laboratory where we perform gene sequencing tests. In addition to these two clinical laboratories, we also have a research and development center located in Shanghai, China, where we develop our next-generation cancer screening and detection technology and tests. In the United States, we obtained a CLIA Certificate of Registration for our laboratory in Philadelphia, Pennsylvania. We have applied for a Pennsylvania state laboratory permit and plan to seek accreditation from CAP for this new laboratory. Our Philadelphia laboratory is equipped to perform our CDA tests and biochemical tests. The biochemical tests are cancer tumor biomarker tests. We plan to also conduct COVID-19 antibody tests in these two laboratories. We have entered into research agreements with U.S. universities and academic medical centers and are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology. Our Philadelphia laboratory is currently conducting research using the CDA technology and plans to conduct a correlation study with another qualified laboratory to validate a COVID-19 antibody test using Roche’s FDA authorized equipment.
We performed our first commercial CDA-based test in China in 2015 and have generated revenue since then. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold were 41,354 in 2020, 38,628 in 2021 and 30,390 in 2022. In mid-2020, we launched two new products, including our ADME immunology test and APCS cancer screening and detection test (which is included in our combination tests). Our revenue from sales of cancer screening and detection tests amounted to RMB18.5 million in 2020, RMB 14.9 million in 2021 and RMB 8.1 million (US$1.2 million) in 2022. We have not as yet commenced marketing our CDA test as a laboratory developed test.
We recently entered into the fast-growing Asian e-commerce food business in the U.S. In October 2022, we established Fresh2 Technology to be the umbrella organization for this business. A team with extensive experience in the field was assembled to drive the project forward. In February 2023, we acquired Fresh2 Ecommerce (“Fresh2”) and expect to expand its reach in the US food market, targeting supermarkets. This acquisition is expected to accelerate the development of a B2B e-commerce platform for Asian food products. The acquisition of GISN (HK) LIMITED (“GISN”), a technical solution and outsourcing consulting services provider focused on the digital, internet and Web 3 business transformation for start-ups and traditional enterprises in late January 2023 provides expertise in the development of e-commerce businesses. In March 2023, we entered into an Asset Purchase Agreement (the “EZ Agreement”) with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce company in the foodservice industry, through which we will acquire certain fixed assets of Easy Hundred and Easy Hundred’s intellectual property, including a full set of e-commerce platform source codes, covering websites, apps, and management systems.
59
We believe that we have built a core R&D team and have a comprehensive B2B e-commerce platform. We intend to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently and in the future to provide one-stop fulfillment services from food sourcing to last-mile delivery. In the future, the Company intends to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently and expects to be able to provide one-stop fulfillment services from food sourcing to last-mile delivery.
Our CDA Technology
Our CDA technology provides an innovative and comprehensive platform for us to develop multi-cancer screening and detection tests with high sensitivity, specificity and cost-efficiency.
Principal Mechanism
Focus on Biophysical Properties
Our CDA technology is a liquid-based technology. The critical difference between our CDA technology and other liquid-based cancer screening and detection technologies is that our technology focuses on biophysical properties rather than conventional biochemical or genomic properties. Specifically, our CDA technology is based on the correlations between biophysical properties and cancer occurrence. Recent studies have shown that there is a correlation between certain biophysical properties and cancer occurrence. These studies have revealed that certain biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties exist in all human beings, including healthy individuals, and the signals they express can be detected before a tumor has formed. Biophysical properties increase or decrease progressively in a statistically significant way from healthy state to non-cancerous disease, pre-cancer disease, early- and late-stage cancer states. The change in biophysical properties is a potential cause for the loss of immunity and increased occurrence of cancer. On the other hand, the strength of biophysical signals expressed by these biophysical properties—which our CDA technology is designed to detect—increase progressively from healthy through late-stage cancer states.
We have collected testing data on 26 types of cancer, including data on biophysical properties measured in multiple serial samples collected from the same person over time and corresponding pathological data. Our proprietary algorithm is based on this database, and it uses the testing data collected by our CDA device to determine the PTF value, CTF value and overall CDA value of a blood sample. The overall CDA value determined through our test factors in the PTF and CTF value, as well as other biophysical property characteristics of the blood sample. The overall CDA value, as the principal parameter for our CDA technology, is proportional to the cancer risk.
Based on the progressive changes of biophysical properties and their signals from healthy through late-stage cancer states, we believe that our CDA technology is ideally suited for early cancer screening and detection, as well as assistance in cancer diagnosis, prognosis and reoccurrence. Through tracking CDA values, we can obtain both static and dynamic (progression) of information on cancer risk.
Multi-level and Multi-parameter
Our CDA technology is designed to analyze biophysical properties that potentially influence body functions at multiple biological levels, including cellular, protein and molecular levels. By comparison, some other liquid-based cancer screening and detection technologies are based on detection signals that exist at only one of the cellular, protein and molecular levels—for example, conventional biomarkers at the protein level and CTCs at the cellular level. As a result of this multi-level analysis, we believe that our CDA technology is more comprehensive and that it can provide more dimensions of information, potentially making it more accurate in detecting cancers.
60
Our CDA technology quantitatively measures biophysical properties that are collectively possessed by a biological specimen. These properties may vary by health status at the cellular, protein and molecular levels. At the cellular level, biophysical properties may not only change with a cell’s surface properties, but they may also alter when interactions occur between cells (for example, intercellular repulsions and attractions) as well as possibly cell-to-cell signaling. At the protein and molecular levels, certain biophysical properties may modify proteins’ surface phases and structures and affect the molecular mechanism that maintains the nuclear and genomic integrity of normal cells. Shifts and aberrations in these biophysical properties may potentially lead to alterations in cell interactions and possibly affect functioning and replication of DNA. These shifts and aberrations could therefore cause increased mistakes in gene replications and even increased frequency of gene mutations that result in various diseases, including cancer. In addition, different cancers may share certain common biophysical properties, and our CDA technology captures and quantifies the biophysical signals of malignant cells that are in general distinct from those in normal cells. As a result of these measurements, our CDA technology can detect the risk of multiple cancers in one test. In contrast, certain other liquid-based cancer signals only exist at one of the above three levels (cellular, protein or molecular) and normally a specific signal corresponds to only one cancer. For instance, AFP tumor marker, a protein biomarker, is typically used to screen exclusively for liver cancer; and PSA, another protein biomarker, is typically only used to detect prostate cancer.
Our CDA technology, together with our CDA device, deploys various measurement parameters, primarily PTF, CTF and CDA values, by detecting certain biophysical properties in blood. After testing a blood sample, our CDA device generates a series of testing data, including the PTF value, the CTF value and the overall CDA value. The PTF value refers to the measured level of protein cancer-related factor in the blood. The CTF value refers to the measured level of cellular cancer-related factors in the blood. Using our proprietary algorithm, we arrive at the overall CDA value based on the PTF and CTF values, as well as other biophysical property characteristics of the blood. This overall CDA value is the principal analysis parameter that we use to assess an individual’s overall cancer risk. Based on the results of these parameters, we assess the risk of cancer to be low (normal), medium or high.
Analytical Validation
We have conducted numerous research studies on our CDA technology’s utility and accuracy. Since 2015, we have completed 25 research studies on our CDA technology with hospitals and medical institutes in China. Among them, the results of 18 research studies on which we collaborated with five Chinese hospitals and medical institutes have been published at ASCO annual meetings, a famous international medical journal Expert Review of Molecular Diagnostics and other medical conferences and in medical journal supplements. We have also completed an additional ten unpublished research studies with nine hospitals and medical institutes in China. As of March 31, 2023, we had tested more than 281,994 blood samples collected from various age, sex and disease groups, including over 237,206 samples from our commercial CDA-based tests and over 44,788 samples from our research studies.
61
Our research studies have demonstrated that our CDA technology can detect the risk of multiple cancers with high sensitivity and specificity rates. We have used meta-analysis to analyze the resulting data of all completed research studies for a specific cancer type up to December 31, 2022 and calculated our CDA technology’s sensitivity and specificity rates for that cancer type. Meta-analysis is a statistical analysis of a large collection of analysis results from individual studies for the purpose of integrating the findings. The following table sets forth the sensitivity and specificity rates of our CDA technology in detecting 26 cancers based on our completed research studies up to December 31, 2022:
| Aggregate | ||||||||||||||
| Cancer Type | Sample Size | Sensitivity | Specificity | Publication Information(1) | ||||||||||
| Lung Cancer | 2,277 | 82.4 | % | 83.0 | % | 2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 (co-author: Cancer Hospital of Chinese Academy of Medical Sciences); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University); 2015 Annual Congress of Chinese Thoracic Society; 2017 ASCO Annual Meeting, J Clin Oncol 35, e23131, 2017 (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University); 2019 ASCO Annual Meeting, J Clin Oncol 37, e20673, 2020 (co-authors: Shanghai Changhai Hospital and Lishui Central Hospital) | ||||||||
| Cerebral Cancer | 93 | 89.2 | % | 89.9 | % | 2019 ASCO Annual Meeting, J Clin Oncol 37, 2019 (suppl; abstr 2040) | ||||||||
| Nasopharyngeal Cancer | 188 | 86.6 | % | 89.1 | % | N/A | ||||||||
| Oral Cancer | 60 | 78.3 | % | 90.8 | % | N/A | ||||||||
| Laryngeal Cancer | 61 | 93.4 | % | 88.0 | % | N/A | ||||||||
| Thyroid Cancer | 39 | 100.0 | % | 83.6 | % | N/A | ||||||||
| Esophageal Cancer | 2,253 | 85.8 | % | 93.0 | % | 2015 ASCO Annual Meeting, J Clin Oncol 33, e15059, 2015 (co-author: Shanghai Changhai Hospital); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and Fudan University Shanghai Cancer Center); 2017 Gastrointestinal cancers Symposium (San Francisco), J Clin Oncol 35, 2017 (suppl 4S; abstract 42) | ||||||||
| Lymphoma | 528 | 87.1 | % | 92.4 | % | N/A | ||||||||
| Breast Cancer | 493 | 74.6 | % | 92.2 | % | 2015 San Antonio Breast Cancer Symposium(10.1200/JCO.2015.33.28_Suppl.13) | ||||||||
| Liver Cancer | 804 | 92.3 | % | 93.2 | % | 2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 and e22171, 2015 (co-author: Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University) | ||||||||
| Bile Duct Cancer | 26 | 87.5 | % | 94.0 | % | N/A | ||||||||
| Gallbladder Cancer | 28 | 100.0 | % | 63.4 | % | N/A | ||||||||
| Pancreatic Cancer | 162 | 89.3 | % | 90.6 | % | N/A | ||||||||
| Gastric Cancer | 1,438 | 88.7 | % | 93.8 | % | N/A | ||||||||
| Kidney Cancer | 55 | 88.9 | % | 77.7 | % | N/A | ||||||||
| Bladder Cancer | 29 | 72.4 | % | 88.3 | % | N/A | ||||||||
| Colon Cancer | 884 | 89.4 | % | 91.2 | % | 2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 (co-author: Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University); 2017 Gastrointestinal cancers Symposium (San Francisco), J Clin Oncol 35, 2017 (suppl 4S; abstract 564) | ||||||||
| Rectum Cancer | 653 | 89.2 | % | 88.0 | % | N/A | ||||||||
| Duodenal Cancer | 32 | 84.4 | % | 87.5 | % | N/A | ||||||||
| Prostatic Cancer | 46 | 90.7 | % | 93.2 | % | N/A | ||||||||
| Cervical Cancer | 401 | 87.0 | % | 90.2 | % | 2020 Shenzhen New Horizons in Cancer Research | ||||||||
| Ovarian Cancer | 474 | 90.5 | % | 90.1 | % | 2020 Shenzhen New Horizons in Cancer Research | ||||||||
| Uterine Cancer | 164 | 87.2 | % | 92.3 | % | N/A | ||||||||
| Leukemia | 196 | 77.6 | % | 88.0 | % | N/A | ||||||||
| Bone Cancer | 12 | 91.7 | % | 91.0 | % | N/A | ||||||||
| Skin Cancer | 18 | 88.9 | % | 93.7 | % | N/A | ||||||||
| Note: |
| (1) | For each specific cancer type shown in the table above, the references in this column “Publication Information” indicate the medical conferences and medical journal supplements where we have published any research results for that cancer type up to December 31, 2022, while “N/A” means that none of our completed research studies of that cancer type had been published up to December 31, 2022. |
62
Early Cancer Screening and Detection
Research studies
A number of our research partners, including hospitals and medical institutions in China, have validated our CDA technology’s ability to detect the risk of multiple cancers. This validation has been done through their un-blinding of our single- or double-blinded testing results for tested individuals in their institutions. Single-blinded test refers to the testing process in which we do not know, but our research partners know, about the pathological or clinical information of the tested samples or the makeup of the patient and control groups during the course of testing. By comparison, in double-blinded tests, neither us nor our research partners have this information until the un-blinding step. Un-blinding refers to the disclosure of the previously withheld information to us by our research partners in single-blinded tests, or the publication of this information by a third-party study administrator or by our research partners after they otherwise acquire the information. Set forth below are several representative examples of validation studies on our CDA technology that we have completed with Chinese hospitals:
| ● | Shanghai Changhai Hospital |
Since 2015, we have cooperated with Shanghai Changhai Hospital to research various cancers, including lung cancer. We have published six papers under this project. The latest paper was published at the 2019 ASCO Annual Meeting. In this study, 832 blood samples collected from patients with non-small cell lung cancer, or NSCLC, and 642 blood samples from healthy individuals (as the control group) were tested using our CDA technology. The results indicated that our CDA technology had good sensitivity and specificity rates even for lung cancer at stage I—85.2% and 93.0%, respectively.
| ● | A Cancer Hospital in Beijing |
This hospital is one of the first hospitals that has cooperated with us in conducting research studies. At the 2015 ASCO Annual Meeting, we published a paper evaluating our multi-level, multi-parameter CDA detection method for digestive system cancer diagnosis based on one of our joint research studies with this hospital. Although the sample size was limited, this was the earliest paper comparing our CDA technology with conventional biomarkers.
In this study, the hospital collected blood samples from nine HCC patients and six colorectal cancer patients, as well as from a control group of 20 healthy individuals. These blood samples were tested by both our CDA technology and methods based on conventional biomarkers, including AFP and carcinoembryonic antigen, or CEA. The results showed that there was a significant statistical difference in the measured overall CDA value between each of the HCC and colorectal cancer patient groups and the control group. Specifically, in the HCC group, our CDA technology had a sensitivity rate of 77.0% compared to the AFP-based method’s 33.0%, while the specificity rates of both methods were similar. In the colorectal cancer group, our CDA technology had a sensitivity rate of 83.0% compared to the CEA-based method’s 33.0%, while the specificity rates of both methods were similar.
| ● | Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University |
We have collaborated with Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University, or Lishui Central Hospital, primarily in liver and lung cancer studies. We published two papers, one on HCC and one on NSCLC, at the 2015 ASCO Annual Meeting.
63
In the HCC study, blood samples were collected from 485 HCC patients, 64 cirrhosis patients and 44 patients with benign liver diseases, or BLD, as well as from a control group of 75 healthy individuals. All the samples were tested using our CDA technology. The results indicated that there was a significant statistical difference in the measured overall CDA value between the HCC patient group and each of the control, BLD, and cirrhosis groups.
In the NSCLC study, three groups of blood samples were tested using our CDA technology, which included 383 samples collected from NSCLC patients, 103 samples from patients with non-cancerous lung diseases and a control group of 149 healthy individuals. The results indicated that our CDA technology can detect NSCLC with the sensitivity of 87.7% and specificity of 79.9%.
| ● | Shanghai Jiao Tong University School of Medicine |
A two-stage study to evaluate the value of CDA test was conducted and is still going.
The first stage of a cross-sectional study included 75,942 healthy individuals in routine health checkup and the second stage of a prospective population-based cohort which included 1,957 healthy community members. Forty-eight and ten cancer cases were identified among cross-sectional study and prospective population-based cohort, respectively. Using a pre-determined cutoff, we found that the CDA test could differentiate blood samples between healthy and cancer individuals with >93% specificity and >55% sensitivity in both studies.
With high specificity and moderate sensitivity of CDA test, the study indicates that CDA can analyze biophysical properties in the blood to rapidly and reliably screen healthy individuals from cancer patients in a health checkup setting where most individuals are healthy or with average risk of cancer.
We have completed an initial data analysis on a multi-year lung cancer prognosis clinical trial carried out in Shanghai ChangHai Hospital in which CDA data were collected on lung cancer patients though after cancer diagnosis, surgery, cancer treatment including drug treatment and, for some individuals, remission. The analysis showed that there is a strong correlation (statistically significant correlation) between CDA values and patient responses to treatment. It demonstrated that CDA technology has the potential to be a viable method for prognosis of cancer treatment. The above-mentioned results were also reported in a poster paper at 2022 American Association for Cancer Research (AACR) Conference in April, 2022.
Follow-up phone consultations
We conduct follow-up phone consultations with individuals for whom we have conducted commercial CDA-based tests, to validate our CDA technology’s utility in detecting the risk of cancer. These individuals were generally asymptomatic at the time they took our tests. We began our first follow-up call in 2017 and plan to do these follow-up phone consultations for five years. We have obtained preliminary results from this initiative.
We typically call a tested individual for the first time within 15 days (for individuals with high-risk results), three months (for those with medium risk results) or six months (for those with low-risk results), after issuing a cancer risk assessment report for a tested individual. We also have subsequent phone consultations with the tested individuals on an annual basis. During these consultations, our customer support and service personnel typically ask the tested individuals with medium or high risks of cancer about, among other things, their health conditions, whether or not they have taken follow-up checkup tests as we suggested in the cancer risk assessment reports, and the relevant follow-up diagnoses or test results, if any. As of April 15, 2023, we had contacted over 31,376 tested individuals, of whom 18,306 individuals gave us substantive feedback regarding their health conditions and disease development, and among them, 1,101 were previously tested as having high risk of cancer, 172,050 with medium risk of cancer and the rest with low risk of cancer. Based on the feedback from these calls, 2,882 of the tested individuals had been diagnosed with various major diseases or cancers by third-party hospitals and medical institutions within two years of taking our CDA-based tests, including 252 cases with cancers, 1,470 with pre-cancer diseases or benign tumors, and 1,160 with major non-cancerous diseases. All of these 22,882 individuals were previously tested as having medium or high risk of cancer. Among those 1,101 and 15,050 individuals tested with high and medium risk of cancer, respectively, 252 (or 22.8%) and 2,630 (or 17.5%) had been diagnosed with cancers, pre-cancer diseases or major non-cancerous diseases, respectively. As it may take years for diseases to progress into cancers or pre-cancer or major non-cancerous diseases, we expect that the percentage of cancer occurrence among these 18,306 cases will likely increase over time.
64
In addition, based a preliminary data analysis by a research partner in early December 2020 of the data of our follow-up phone consultations with over 13,000 individuals as of June 30, 2020, the initial results indicated that over 20 types of pre-cancer diseases were diagnosed at hospitals or physical testing centers following the individuals’ initial screening utilizing our CDA technology. Of the over 13,000 individuals included in the preliminary data analysis, we screened out pre-cancer cases at roughly 4.5 times of cancer cases.
Assistance in Diagnosis, Prognosis and Recurrence
Assistance in diagnosis
Oncologists typically use tissue biopsy as the “gold standard” method for cancer diagnosis, and they also utilize multiple technologies to provide multi-dimensional input to a cancer diagnosis. These technologies can be used for “assistance in diagnosis” because they provide input complementary to pathologic information drawn from a tissue biopsy, which helps physicians to ensure that their cancer diagnoses are comprehensive and unbiased. For example, a CT scan, in conjunction with the detection of CEA and other tumor markers, is often used to assist in diagnosing lung cancer.
Since 2015, we have collaborated with third-party oncologists and hospitals in utilizing our CDA technology to assist in the diagnosis of multiple cancer types in a number of research studies. These research studies are designed to evaluate the performance of our CDA technology in predicting cancer occurrence in a population with cancer symptoms or abnormal test results. To date, ten of these studies have been published at ASCO annual meetings and other medical conferences and medical journal supplements. The results of these studies demonstrated our CDA technology’s effectiveness in assisting in the diagnosis of multiple cancers—particularly lung and esophageal cancers. For example, in our joint study on NSCLC with Shanghai Changhai Hospital in 2017 (2017 ASCO Annual Meeting; J Clin Oncol 35, e23131, 2017), our CDA technology successfully detected NSCLC with sensitivity of 68.7%, higher than those of CT scans for all NSCLC stage groups. This indicates that compared to a CT scan, our CDA test provides more accurate and reliable diagnostic information and data for oncologists in diagnosing lung cancer.
In another study with Shanghai Changhai Hospital in 2015 (2015 ASCO Annual Meeting; J Clin Oncol 33, e15059, 2015), our CDA technology detected esophageal cancer with relatively high sensitivity of 70.0% and specificity of 90.0%. These results indicated our CDA technology’s effectiveness in assisting in the diagnosis of esophageal cancer.
Prognosis and recurrence
Prognosis refers to an assessment of whether and how a patient responds to cancer treatment. Effective prognostic tools can help oncologists dynamically monitor cancer treatment progression, make necessary and timely adjustments to cancer treatment, and correctly predict a patient’s treatment outcome, such as the survival rate—the percentage of people in a patient group who will be alive for a period of time, the survival time—life expectancy after diagnosis, and whether or not they will go into remission. In some circumstances, prognosis can be effective even before the cancer treatment starts. Recurrence means return of cancer after the patient has been treated and has gone into remission and happens more frequently for certain cancer types. Patients who have gone into remission have a substantially higher risk of cancer recurrence than the general population. It is therefore important to have technologies to detect cancer recurrence timely, cost-effectively and without side effects. Because biophysical properties in the blood increase or decrease progressively in a statistically significant way from healthy state to late-stage cancer states, we believe that our CDA technology can be used for prognosis of cancer treatment outcomes and for detecting the risk of cancer recurrence.
In a study published at the 2016 ASCO Annual Meeting (2016 ASCO Annual Meeting, J Clin Oncol 34, 2016 (suppl; abstr e23176)), we investigated our CDA technology’s potential for breast cancer prognosis by testing the blood samples collected from three breast cancer patients. The CDA data for each patient’s blood samples were grouped into three categories, namely before, during and after any post-operative treatment. Two of these patients showed favorable responses to the post-operative treatment and their average overall CDA values declined after the treatment. The third patient did not respond well to the post-operative treatment and their average overall CDA values remained high after the treatment. These results indicated that our CDA technology may be useful for monitoring a breast cancer patient’s response to the post-operative treatment, although this utility of our CDA technology needs more validation studies.
65
Since 2015, we have been working with multiple hospitals in China, including Shanghai Changhai Hospital, Lishui Central Hospital, a cancer hospital in Beijing and a cancer center in Shanghai, in a number of research studies. These studies are designed to explore our CDA technology’s effectiveness as a prognostic tool for lung cancer treatment.
In one of these studies in 2016, we collaborated with Shanghai Changhai Hospital and tested and collected the overall CDA values from 86 lung cancer patients. These patients were divided into two groups: the “good prognosis” group (with each member having an overall CDA value below 47) and the “bad prognosis” group (those with values above 47). We predicted that the “good prognosis” group would have a higher survival rate than that of the “bad prognosis” group due to their relatively low overall CDA values. After the grouping, both groups went through chemotherapy to treat their lung cancers. Two years after the chemotherapy, the survival rate of the “bad prognosis” group dropped below 50%, while that of the “good prognosis” group stayed at the level of 75%. The differences in those two outcomes are statistically significant and meaningful. The results of this clinical study demonstrate our CDA technology’s strong ability in predicting the outcome of lung cancer treatment and validate that it can predict treatment outcomes even before the treatment starts.
The following graph provides a comparison of the predicted progression-free survival rates (the percentage of the measured population that did not demonstrate worsening in their condition over a specified period), or PFS, for those two lung cancer patient groups in this study.
In another study, we tracked a number of patients throughout their approximately three years of cancer treatment. The following graph illustrates the changes of a representative patient’s CDA values throughout the tracking period.
66
CDA in Long-Term Cancer Monitoring (Stage IIA with Surgery)
This patient is a middle-aged man diagnosed with a stage IIA lung cancer. As illustrated in the graph above:
| ● | At the beginning of the tracking period, namely Day zero, the patient’s overall CDA value was relatively high, which corroborated the oncologist’s diagnosis that the individual had a cancer; |
| ● | From Day 7 to Day 28, as the cancer treatment progressed, the patient’s overall CDA value, as well as PTF and CTF values, continued dropping; |
| ● | After his surgery (around Day 52) and during his chemo-therapy treatment, the patient’s overall CDA value dropped below the cut-off value, indicating that by that time, the patient’s stage IIA lung cancer had been effectively controlled and he went into remission; |
| ● | However, after a period of remission (around Day 212), the patient’s overall CDA value went up again, which predicted a recurrence of cancer. Shortly after this uptick in the overall CDA value, the oncologists diagnosed that the patient’s cancer had come back and further spread to the liver, corroborating our CDA test’s prediction; |
| ● | Subsequently, the patient went through chemotherapy for liver cancer. Following this treatment (around Day 277), the patient showed an overall CDA value below the cut-off value, indicating that the patient responded positively to the chemotherapy and went into remission again; and |
| ● | From Day 383 to Day 904, the patient’s overall CDA value, as well as PTF and CTF values, remained relatively low, indicating that he was in remission. This was also confirmed by the oncologists’ clinical observations. |
67
To summarize, this representative example has shown that our CDA test can (i) dynamically monitor a patient’s treatment progression, indicating when the cancer is under control (namely, when the overall CDA value drops below the cut-off value) and when the patient enters the remission phase (namely, after the overall CDA value stays below the cut-off value for a period of time); and (ii) correctly predict cancer recurrence ahead of time (namely, when the overall CDA value resurges and exceeds the cut-off value).
Our CDA Device
Our proprietary CDA device, which we designed in-house and is covered by numerous patents, is used to conduct cancer screening and detection tests based on our proprietary CDA technology. This device uses an integrated, multi-level and multi-parameter sensor system to detect multiple biophysical properties in one single blood test. We believe that we are one of the first biotechnology companies worldwide to use such a sensor system to detect cancers’ biophysical properties.
Working Mechanism
Our CDA device consists of a blood sample input unit, a sample transport unit, a sample mixing chamber, a testing unit and a data storage unit. Because our CDA technology detects biophysical properties, our CDA device’s sensors play a dominant role in biophysical signal detection.
Our CDA device uses a microfluidic device, which is connected to a fluid delivery line inside the testing unit. This microfluidic device contains three primary components: micro-channels, micro-sensors and measurement instruments with automated data recording capabilities. After a blood sample goes into the micro-channels of the microfluidic device, the sensors will probe the blood and measure the relevant data. The measurement instrument that interfaces with the sensors applies a constant input to the blood and records the corresponding biophysical responses as a function of time. The resulting raw data contains both dynamic and static information, which is fed into our proprietary algorithm for further analysis.
Our CDA device is much less costly to manufacture than the equipment used by many of our competitors, especially the complex and expensive gene sequencing machines used in ct-DNA-based tests and micro-electrical mechanical devices used in CTC-based tests. As a result, we can offer our customers cancer screening and detection tests with high accuracy at prices significantly lower than many of our competitors’ tests.
Operation
Our CDA device is a fully-automated system requiring minimal human involvement. After collecting blood samples from the individuals, all our testing personnel needs to do is to properly place these blood samples on the test-tube racks and station the racks inside the sample input unit of our device. Our device will then automatically complete the subsequent test as programmed, including:
| ● | heating the blood samples to prepare them for testing; |
| ● | deploying multiple sensors inside the microfluidic device to detect relevant biophysical properties in each blood sample and obtain multi-level information; |
| ● | discharging the tested blood samples and cleaning the used test tubes; and |
| ● | transferring the testing data collected by the microfluidic device (including PTF and CTF values) to the computer connected to our CDA device, which will process this testing data with our proprietary algorithm and convert it into an overall CDA value. A series of CDA itemized values will also be generated, if we conduct biomarker-based tests in combination with our CDA test while offering our cancer-positioning services. |
68
Based on the resulting CDA values, our professionals can assess a tested individual’s likelihood of having or developing cancers and issue the corresponding cancer risk assessment report.
We design and configure all the key components of our CDA device and outsource production of these components to a number of qualified contract manufacturers. We assemble these components into our CDA devices in-house. We have implemented a strict selection process for our contract manufacturers and evaluate our contract manufacturers’ qualifications on an ongoing basis. We do not disproportionately rely on any particular contract manufacturer and have not entered into any long-term or exclusive supply contract with any of them. For our CDA device, we obtained a Class II medical device manufacture license in June 2013 (renewed in 2018) and a Class II medical device registration certificate April 2015 from the NMPA, Zhejiang Branch. These licenses, along with our clinical laboratory license, allow us to manufacture our device in Lishui, Zhejiang and use the device commercially in our licensed clinical laboratories in China. While conducting the final assembly, testing and packaging of our devices at our plant in Lishui, Zhejiang Province, we thoroughly inspect the key components of our devices sourced from contract manufacturers and closely follow applicable PRC regulations and recognized international quality control standards.
Our CDA-based Tests
Unlike conventional cancer screening and detection approaches such as imaging technology and tissue biopsy, our CDA test uses liquid-based technology to detect the risk of cancer and non-cancerous diseases based on our CDA technology. It is minimally invasive, side effect-free and highly automated. Because it focuses on changes in cancer-related biophysical properties as a disease progress, we believe that our CDA test can be used for multiple purposes, including early cancer screening and detection, as well as assistance in cancer diagnosis, prognosis and recurrence.
We maintain a comprehensive and flexible test menu to meet different customers’ needs. Our CDA test can detect and assess an individual’s overall risk of having or developing cancer, and we deliver a cancer risk assessment report as the final product of this test. This report presents the analytical parameters that our CDA test uses, including the PTF, CTF and overall CDA values. We set cut-off values for the PTF, CTF and overall CDA values based on the pathological data from our retrospective validation studies and the intended cancer screening and detection objectives. PTF or CTF values in excess of the specified cut-off values indicate a risk of cancer. In addition, we set two cut-offs to divide the overall CDA value into three categories: low risk (healthy), medium risk and high risk. These values, collectively, indicate a tested individual’s overall risk level of having or developing cancer, without identifying the specific types of cancer that the individual may have. For tested individuals with medium or high cancer risks as indicated by the overall CDA value, we normally suggest in our reports that they get follow-up medical examinations on the relevant organs.
In addition to our CDA test, a tested individual can pay a premium for our combination tests, which also include cancer-positioning services to identify the specific type(s) of cancer that he or she has a medium or high risk of having or developing. Our combination tests combine our CDA tests and, on an auxiliary basis, biomarker-based or ct-DNA cancer screening and detection tests performed either by us or by third-party clinical laboratories that we engage. These combination tests typically use two cubic centimeters of blood from the tested individual to perform our CDA test, three cubic centimeters of blood to perform the biomarker-based test and ten cubic centimeters of blood to perform the ct-DNA test. In the combination tests our CDA technology plays a dominant role in identifying the risk of cancer, while biomarkers or ct-DNA provide auxiliary information on the types of cancer that may be involved. We integrate the results of these separate tests using our proprietary algorithm and translate them into a series of itemized CDA values. We then analyze these itemized CDA values to identify the cancer type(s) that a tested individual has a medium or high risk of having or developing. These identified cancer types and the tested individual’s corresponding risk levels of having or developing them will also be included in that individual’s cancer risk assessment report.
We offer standardized CDA-based tests (with or without cancer positioning services). Generally, the more cancer types a standardized test with cancer positioning services can identify, the higher it is priced. In each standardized test with cancer-positioning services, the specific cancer types that can be identified vary between males and females. For instance, our popular CDA six-cancer test with positioning services identifies lung, liver, stomach and colon cancers for both genders, as well as rectal and prostate cancers for males and breast and ovarian cancers for females.
69
Commercialization
China
In China, we have established clinical laboratories in Lishui, Zhejiang Province and Haikou, Hainan Province. We obtained the medical institutional practice license from the NHC in 2016 and 2015, respectively, for these two laboratories to conduct medical tests, each for a five-year term. Our Lishui laboratory conducts substantially all of our commercial CDA-based tests (including our CDA tests and combination tests), as well as a variety of other tests (including immunology and biochemical tests). In 2020, we launched our ADME immunology test and APCS cancer screening and detection test (which combines our CDA test with the ct-DNA test and is a type of combination test). Both of these new tests are conducted at our Lishui laboratory. We performed our first commercial CDA-based test in 2015 and have generated revenue in China for four consecutive years. The number of our commercial CDA-based tests we sold were 41,354 in 2020, 38,628 in 2021 and 30,390 in 2022.
In addition to our CDA-based tests, we design annual physical checkup plans for certain of our corporate and life insurance company customers as value-added services and to facilitate these customers to procure physical checkup services from third-party physical checkup service providers. We also sell annual physical checkup packages to our customers, which are designed to include our CDA-based tests as part of the physical checkup services. We outsource a substantial portion of these checkup services in these packages to qualified physical checkup institutions. For the year ended December 31, 2022, we had completed total sales of RMB 1.6 million physical checkup packages.
We have been piloting our genomics tests in our Haikou laboratory operated by our subsidiary Shiji Hainan, which we acquired in November 2017. Our genomics tests primarily consist of genetic testing for the purpose of targeted therapy selection and pharmacogenomics, and ct-DNA mutation testing for multiple purposes, including early cancer screening and detection and prognosis.
Supported by our diverse tests and services, we intend to further expand our customer base in China. To achieve this objective, we plan to market our tests to Chinese hospitals. In December 2018, we applied to the NMPA for a Class III medical device registration certificate for our CDA device to assist in multi-cancer diagnosis. We expect that it would take us at least three years to obtain this registration certificate. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. With these Class III medical device licenses, we will be permitted to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnosis of specified multiple cancers. We expect our business in China to expand substantially following the commencement of this commercial cooperation with Chinese hospitals.
United States
In the United States, we have established a CLIA and CAP certified clinical laboratory in Philadelphia, Pennsylvania. We are currently permitted to conduct our CDA test for research use in the United States. To commercialize our CDA test in the United States, we intend to initially market it to U.S. customers as a Laboratory Developed Test (LDT). As an LDT, we do not expect that our CDA test will require premarket clearance, market authorization, or approval from the FDA prior to marketing. We may begin marketing our test as soon as we complete our validation studies Under CLIA, CAP, and state licensing requirements, and obtain any state laboratory licenses or other approvals that we are required to hold (with the exception of New York State) to offer our CDA test in the corresponding states. These studies are designed to demonstrate the analytical and clinical performance of the test. For more information about the state laboratory license for New York State and its application process, see “Item 4. Information on the Company—B. Business Overview—U.S. Regulations—Federal and State Laboratory Licensing Requirements.” We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology in the U.S.
In addition, we have validated under CLIA, CAP guidelines, six cancer biomarkers and a COVID-19 antibody test using Roche’s FDA approved Cobas platform and assay but we have not begun to commercialize the test.
70
Research and Development
The development of our CDA technology and device (together with our proprietary algorithm) is largely attributable to our integrated research and development team that comprises talent from both China and the United States. In our research and development center based in Shanghai, we conduct various ongoing research studies on our CDA technology and continue to improve our CDA device.
We believe that our research and development team possess industry-leading expertise in the early cancer screening and detection field. As of December 31, 2022, this team had 21 members, including four with M.D. degrees and three with Ph.D. degrees. Our research and development team has a multi-disciplinary background, and most members of this team specialize in areas related or helpful to the development of our CDA technology and device, including mechatronics, physics, biomedical science or computer science. Our co-founder, Dr. Chris Chang Yu, our vice president in charge of R&D, Mr. Xuedong Du, and our chief medical officer, Dr. He Yu, have led our research and development team since our inception, leveraging their multi-disciplinary expertise and industry experience. These key members have spearheaded our research and development team in achieving a number of technological breakthroughs, including the design and fabrication of the microfluidic device—the key functioning component of our CDA device—and the testing of multiple cancers in a single blood test. Since 2015, our research and development team had published 15 articles on ASCO and other medical conferences and medical journal supplements to demonstrate our CDA technology’s clinical utility.
Our joint technical paper on novel Cancer Differentiation Analysis (CDA) Technology for multi-cancer screening with multiple leading medical institutions was accepted and published online on November 30, 2021 by the Expert Review of Molecular Diagnostics, a peer-reviewed international medical journal that has an impact factor of 5.2.
At the 113th Annual Meeting of the American Association for Cancer Research (AACR) held during April 8 to 13, 2022, Fresh 2 Group presented and published the paper “CDA Technology Based on Innovative Biophysics” in the form of a poster. A Novel Bio-Physical Based CDA Approach to Lung Cancer Therapeutic Response. The co-authors of the paper are the State Key Laboratory team from the School of Life Sciences of Fudan University, a well-known university in China, and the excellent medical team from Shanghai Changhai Hospital.
We have invested significantly in research and development since our inception. Our research and development expenses were RMB11.6 million, RMB16.2 million and RMB9.5 million (US$1.4 million) in the years ended December 31, 2020, 2021 and 2022, respectively.
71
Our Ongoing Research Studies on CDA Technology
In recent years, we have collaborated with a number of Chinese hospitals and medical institutions in conducting clinical studies on our CDA technology. These collaborations have enabled us to validate the effectiveness and utility of our CDA-based test in a clinical setting, explore new applications of our CDA technology, and provide us access to clinically well-characterized patient data. In addition, we have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology in the United States. Currently, our ongoing clinical studies on our CDA technology mainly focus on: (i) improving our CDA technology’s utility in detecting early-stage cancers with high incidences in China and the United States, as well as certain cancer types that have been considered difficult for liquid-based technology to detect; (ii) exploring this technology’s potential to dynamically monitor cancer progression and for assistance in cancer diagnosis, prognosis and recurrence; (iii) expanding this technology’s application to different oncological areas, including veterinary cancer screening and detection; and (iv) validating this technology’s ability to detect the risk of major non-cancerous diseases. The following table summarizes our ongoing research studies on CDA technology.
| Estimated | ||||||||||
| Commencement Date | Research Partner | Cancer Type | Sample Size | Study Purpose | ||||||
| September 2019 | University of Pittsburgh Medical Center | esophageal cancer | 100 | for early cancer screening and detection | ||||||
| August 2019 | University of Pittsburgh Medical Center | gynecologic cancers | 40 | for early cancer screening and detection | ||||||
| May 2019 | A university in Shanghai | multiple cancers (with no specification of cancer types) | 15,000 | for early cancer screening and detection, as well as assistance in diagnosis, prognosis and recurrence | ||||||
| July 2017 | A cancer center in Shanghai | multiple cancers (with no specification of cancer types) | 200 | for early cancer screening and detection | ||||||
| July 2017 | University of California, Davis | sarcoma and carcinoma cancer | 186 | for CDA technology’s application to canine cancer areas | ||||||
| May 2017 | Shanghai Changhai Hospital | lung and esophageal cancer | 5,000 | for early cancer screening and detection | ||||||
| May 2017 | A hospital in Shanghai | lung, colorectal, gastric, breast and pancreatic cancers | 1,600 | for assistance in diagnosis, prognosis and recurrence, as well as early cancer screening and detection | ||||||
These ongoing research studies can be categorized into the following three groups by study purpose:
72
Studies for Early Cancer Screening and Detection
Our current ongoing research studies in collaboration with Shanghai Changhai Hospital are based on our research agreement dated April 2017. These research studies are designed to validate our CDA technology for the screening and detection of early-stage lung and esophageal cancers. According to Frost & Sullivan, in 2018 there were approximately 867,500 and 271,600 new incidences of lung cancer and esophageal cancer in China, respectively, and lung cancer ranked first among the five most frequent cancers in China. These two cancers are also generally considered difficult for liquid-based technologies to detect with high accuracy, according to Frost & Sullivan. In this project, Shanghai Changhai Hospital is required to provide us with approximately 5,000 blood samples for research studies. Certain preliminary published testing results have shown that our CDA technology can detect the risk of NSCLC with a sensitivity rate of 85.2% and a specificity rate of 93.0% (2019 ASCO Annual Meeting; J Clin Oncol 37, e20673, 2019).
We and a cancer center in Shanghai executed a research project agreement in July 2017. In this ongoing research project, this cancer center is required to provide us with approximately 200 blood samples for the research study to validate our CDA technology’s ability to detect the risk of multiple cancer types. These cancer types include certain cancers that are generally considered difficult for liquid-based technologies to detect, such as esophageal cancer.
We also entered into a research project agreement with a university in Shanghai in May 2019. In this ongoing research project, this university will provide us with approximately 15,000 blood samples for our research studies for multiple purposes, including early cancer screening and detection of multiple cancer types (including lung and esophageal cancers), as well as assistance in diagnosis, prognosis and recurrence. A population-based cohort study, the Prospective Population-based Cohort Study (the “PPCS”) was designed to further explore the performance of CDA test. Eligible participants were aged over 40 years and recruited from five communities in Changning District, Shanghai, China. Participants with a confirmed history of cancer at enrollment were excluded. As of December 31, 2022, a total of 1,957 participants were enrolled in the study, and all participants had a CDA test at baseline, with no further series of tests were performed.
Studies for Assistance in Diagnosis, Prognosis and Recurrence
Since May 2017, we have been working with a hospital in Shanghai on a research study on our CDA technology primarily for assistance in diagnosis, prognosis and recurrence. Under this ongoing study, this hospital is expected to provide us with approximately 1,600 blood samples. As December 31, 2022, 249 blood samples are collected from patients diagnosed with different subtypes of lung, colorectal, gastric, breast and pancreatic cancers and at different stages of cancer development. By analyzing the pre- and post-treatment CDA values of these patients, we have found correlations between the changes in a patient’s CDA values and the cancer treatment that the patient has received.
Studies for CDA Technology’s Application to Different Oncological Areas
We have been collaborating with the Department of Veterinary Medicine of the University of California, Davis in a study on early cancer screening for canines. Through this study, we plan to expand the application of our CDA technology to veterinary cancer screening and detection.
Studies for Major Non-Cancerous Disease Detection
In addition to the above ongoing studies on our CDA technology’s applications in oncological areas, we are also conducting research on our CDA technology’s ability to detect the risk of pre-cancer diseases and various major non-cancerous diseases, including lung diseases (such as pneumonia and tuberculosis), type II diabetes, heart diseases (such as heart failure and arrhythmia), liver diseases (such as cirrhosis and hepatitis), gastric diseases (such as gastritis and gastric polyp) and biliary diseases (such as calculus of bile duct and cholecystolithiasis). Our preliminary research studies indicate that our CDA technology is able to distinguish individuals with some major non-cancerous diseases from the control group and the cancer group. More studies and further analysis of the study results are needed to validate our findings on our CDA technology’s utility in these major non-cancer areas.
Our Research on Improving our CDA Device
We have conducted substantial research to increase the operational efficiency of our CDA device and, in turn, improve our CDA test’s signal-to-noise ratio to further elevate its accuracy. Our current research in this aspect primarily focuses on enabling our device to improve our CDA technology’s ability to identify cancer types, our CDA technology’s signal-to-noise ratio and its testing throughput. For the new device, we have finished design taping out, silicon processing and packaging, and now the device is under effectiveness and reliability assessment.
73
Sales and Marketing
We currently sell our cancer screening and detection tests only in China. We sell our tests primarily to our customers directly, as well as through our sales agents such as health management companies and medical device dealers. We select our sales agents based on their reputation, market coverage, sales experience and the size of their sales force, and we generally conduct credit assessments of our sales agents.
We set the prices of our tests primarily based on the numbers of cancers that they test. However, we do not set the resale prices for our tests, which our sales agents typically have the sole discretion to determine. We typically give our corporate customers and sales agents a credit term of one to three months for the payments.
Our marketing is focused on expanding the market awareness of our cancer screening and detection test and continuously growing our customer base. We primarily deploy our own sales and marketing personnel to market our tests. As of December 31, 2022, we had 9 sales and marketing personnel. In addition to conducting direct sales to our existing customers, our sales and marketing personnel prepare and deliver our brochures and product presentations to potential customers and attend academic conferences and industrial exhibitions to advertise our CDA technology and tests. Our sales and marketing personnel are generally well trained and educated about the complexities of our tests, and they typically have extensive experience in the cancer early screening and detection field or other medical areas. As our business grows, we plan to build up our sales and marketing team and strengthen our own sales network in China.
We also use sales agents to promote our tests. By referring our tests to their customers and inviting us to deliver product presentations at their promotional events, our sales agents have connected us with their quality customers and enabled us to utilize their network resources for marketing purpose.
Our Customers
We believe that our cancer screening and detection tests have significant market potential in China, as there is strong demand among China’s large, aging population for early cancer screening and detection services. Our existing customer base in China consists primarily of life insurance companies and other large corporations. Generally, they are frequent and high-volume users of our cancer screening and detection tests, because they provide our tests to their individual customers as value-added services or to their employees as benefits. While the majority of our sales has come from our direct sales to our customers, we expect that a significant portion of our sales will continue to be generated through our sales agents.
We believe our customer base provides a meaningful opportunity for our further growth. In addition, we believe an expansion in our customer base will encourage the market acceptance of our CDA technology and raise the public’s awareness of our brand. We plan to acquire additional customers for our CDA-based tests through the annual physical checkup packages we offer. In addition, we plan to further develop our non-CDA cancer screening and detection tests using other technologies, including expanding the genomics tests we currently conduct at our Haikou laboratory. After obtaining the Class III medical device registration certificate and updating our medical device manufacture license, we expect to provide our tests to more individual customers through Chinese hospitals.
Customer Support and Service
We maintain a dedicated team to provide customer support and service for our CDA-based tests. This Shanghai-based team is primarily responsible for operating our service hotline to answer customers’ questions regarding their test results and our cancer risk assessments. In addition, this team periodically conducts follow-up phone consultations with the tested individuals to check their current health conditions, diagnosis results and disease development. These consultations provide us valuable feedback to validate our CDA technology utility in detecting the risk of cancer.
74
Supply Chain and Quality Control
We devote significant attention to ensuring the accuracy and reliability of our cancer screening and detection tests. We have established a comprehensive quality control system for our tests in accordance with applicable PRC regulations and recognized international quality control standards.
Blood samples for our commercial CDA-based tests are typically delivered to us by a third-party commercial courier. We have also engaged third-party nursing service providers to collect blood samples on our behalf for our commercial cancer screening and detection tests. These service providers are generally responsible for any physical harm caused by the nurses to the tested individuals during the blood collection process. In addition, our research partners are responsible for collecting and delivering blood samples for our research studies. As the quality of blood samples directly affects the accuracy of our tests, we have designed a set of standardized blood sample collection and delivery procedures, including those for sample labeling, preservation and transportation. We require the commercial courier company, nurses and our research partners to follow these standardized procedures to minimize the risks of human errors and sample contamination. During the testing process, we strictly control the temperature and humidity in our laboratories. We carefully preserve the blood samples in a temperature-controlled environment. We also use control samples to ensure that our tests are properly performed and the test results are reliable. After the testing process, our designated personnel will verify the testing results before issuing the cancer risk assessment reports to our customers. In addition, because our CDA technology focuses on biophysical signals, our blood samples can remain stable for testing purpose for up to seven days.
We use a relatively small amount of reagents in our biomarker-based cancer screening and detection tests, which are part of our combination tests. We source these reagents from two third-party suppliers. We do not have an exclusive supply agreement with the supplier. The supplier typically engages commercial courier services to deliver the reagents. In addition, we outsourced substantially all the biomarker-based tests in 2017 and 2018 to two third-party clinical laboratories on a non-exclusive basis. These two laboratories are responsible for conducting the biomarker-based tests and delivering the test results to us for our data consolidation using our algorithm. These two laboratories are obligated to keep confidential all documents relating to the tested samples and the test results. We phased out this outsourcing arrangement in 2019 and are performing our combination tests entirely in-house.
| Competition |
As early detection of cancer may lead to decreased morbidity with improved survival, more and more biotechnology companies have focused on the immense market opportunities it represents and are attempting to enter the space.
Biotechnology companies worldwide currently use various technologies for early cancer screening and detection. We believe that none of these technologies has yet acquired a dominant market position. As a novel cancer screening and detection technology that focuses on biophysical properties in blood, our CDA technology faces competition primarily from conventional biomarker-based technologies and other next-generation cancer screening and detection technologies, including those based on CTCs and ct-DNA. Recent major advances in CTC- and ct-DNA-based technologies have introduced the possibility of using either or both as tests to screen for cancer, and they have made the possibility for simultaneous screening for multiple primary cancers particularly attractive.
Our major competitors include biotechnology companies that conduct cancer screening and detection using next-generating technologies, such as BGI in China and GRAIL, Guardant Health, and Exact Sciences worldwide. All of these competitors’ cancer screening and detection technologies target CTCs and/or genomics such as ct-DNA, cf-DNA and cf-RNA, as opposed to the biophysical properties that our CDA technology focuses on.
We believe that our competitive advantages include the cost-efficiency, high testing accuracy, and broad test coverage of our CDA-based tests, our expansive patent portfolio and our large proprietary test database. However, many of our competitors have more expertise, experience and financial resources, stronger business relationships in developing and marketing their products, more mature technologies and products, greater market adoption among physicians and patients and others in the medical community, broader test menus, larger test databases, or greater brand recognition than we do. We also cannot assure you that our CDA technology will not become obsolete if we cannot keep pace with constantly changing technologies in the cancer screening and detection market.
75
Intellectual Property
Intellectual property rights are fundamental to our business, and we devote significant time and resources to their development and protection. We rely on a combination of patent, trade secret and trademark laws, as well as confidentiality agreements, to establish and protect our proprietary rights. We do not rely on third-party licenses of intellectual property when developing our CDA technology and CDA device.
We have developed an early and strong patent position related to our CDA technology, and we continuously seek patent coverage over its new applications. As of March 31, 2023, we had filed 260 patent applications globally; among them, 155 patents had been granted, including 22 patents granted in the United States, 68 in greater China (including eight in Taiwan), and 65 in other countries and regions. Our granted patents are expected to expire between 2031 and 2037. As of the same date, we also had 105 pending patent applications, consisting of 27 in the United States, 36 in greater China (including one in Taiwan), 32 in other countries and regions, and four patent cooperation treaty, or PCT, applications.
Our patents and patent applications broadly cover apparatus and methods for detecting diseases at early stages, and they strategically encompass the important specific embodiments of these apparatus and methods. They generally fall into the following categories:
| ● | those relating to our CDA technology, including claims directed to methods for identifying and measuring various biophysical properties in blood samples and methods for detecting major cancer types and/or non-cancerous diseases, such as methods for detecting multiple cancers in a single blood test; |
| ● | those relating to our CDA device, including claims directed to its key components, such as the microfluidic device; and |
| ● | those relating to the multi-level, multi-parameter concept underlying our CDA technology, as well as our non-CDA early cancer screening and detection technologies, apparatus and methods. |
According to our public searches, some of our patents, including our newly issued U.S. patents, have been cited by patent examiners and third parties (including a number of well-known global corporations and Fortune 50 companies).
Our agreements with our employees generally include assignment provisions, providing that all patents, copyrights and other intellectual property rights arising from the course of their employment with us or their using our facilities belong to us, and the employee-inventors are required assign to us all and any of their rights and title to the relevant granted patents or patent applications. In addition, we also try to protect our trade secrets and know-how through confidentiality agreements and non-disclosure provisions in our other agreements with persons who have access to them, such as our employees, consultants and research partners.
As of March 31, 2023, we held 28 trademarks in greater China, and nine trademarks and three pending trademark applications in the US. In addition, as of the same date, we had 19 domain names.
As of March 31, 2023, we had filed 237 patent applications globally; among these, 142 patents have been granted, including 65 in greater China (including eight in Taiwan) and 20 in the United States, and 95 patent applications were pending in China, the United States and other countries and regions. Our patent applications broadly cover apparatus and methods for early stage disease detection, and they strategically encompass important specific embodiments of these apparatus and methods.
76
Our E-Commerce Food Business
The market
The Asian food supply sector is rapidly expanding, presenting what we believe is a significant market opportunity. In the US, the restaurant ingredient supply market is valued at $300 billion annually. The annual market for Asian food ingredients in the US is valued at $18 billion. We believe that despite the industry's size, there is still ample room for growth and optimization within the Asian food supply chain in the United States.
Business development
In October 2022, we established Fresh2 Technology as the umbrella organization for our new B2B food market business in the US. We assembled a team with extensive experience in the field to drive the project forward.
In February 2023, we acquired Fresh2 Ecommerce (“Fresh2”) to expand our reach in the US food market, targeting supermarkets. This acquisition is expected to accelerate the development of a B2B e-commerce platform for Asian food products. The acquisition of GISN in late January 2023 brought in expertise in the development of e-commerce businesses. GISN is a highly-qualified service provider with extensive experience in transitioning traditional operations to digital models from a technological perspective.
On March 31, 2023, we entered into an asset purchase agreement with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce company in the foodservice industry, through which we will acquire certain fixed assets intellectual property relating to ez100, 2Supply and 100WAY. The intellectual property includes a full set of e-commerce platform source codes, covering websites, apps, and management systems.
Our operations
Fresh2's business operations are built around an advanced e-commerce platform that will connect food suppliers and supermarket operators and restaurant owners in the US. Our platform includes mobile applications and a website, providing clients with convenient access to a wide range of high-quality Asian food and foodservice products and ingredients. As of April 2023, our sales reached approximately $200K, a strong indication of the potential of our business model. We believe that our focus on creating a user-friendly and streamlined experience for clients has been a key factor in driving sales. In addition to our online platform, we also have a dedicated sales team that actively engages with potential clients throughout the US. Our business operations are optimized for efficiency, sustainability and scalability, enabling us to achieve our vision of transforming the Asian food supply chain industry in the US.
Our goal is to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently and to provide one-stop fulfillment services from food sourcing to last-mile delivery. We intend to construct a B2B e-commerce platform and food supply chain network for Asian food products in the US, connecting food suppliers and supermarket operators and restaurant owners, and creating an internet ecosystem for the Asian food industry.
Our vision is to disrupt the Asian food supply chain industry in the US through the implementation of an advanced e-commerce platform. Our aim is to provide an unparalleled experience for clients, connecting them with top suppliers and offering a wide range of high-quality Asian food ingredients and products at competitive prices. We intend to streamline and optimize the entire supply chain, creating a more efficient and sustainable system that will benefit all stakeholders, including clients, suppliers, and the industry at large.
We believe that the traditional food supply industry is ripe for disruption, and Fresh2's advanced e-commerce platform is poised to lead the charge. Our disruptive business model will make it easier for clients to source products directly from suppliers, reducing the need for intermediaries and allowing for greater transparency in the supply chain. The e-commerce platform provides real-time data and analytics, empowering businesses to make data-driven decisions and improve their operations. In contrast, traditional food supply companies are limited by their reliance on outdated systems and processes that can be both time-consuming and expensive.
Our goal is to build long-lasting partnerships and transform the industry by becoming the go-to provider of high-quality Asian food ingredients and products. The team at Fresh2 consists of experienced professionals using cutting-edge technology, who are committed to delivering exceptional products.
77
Legal Proceedings
On September 2, 2022, three investors (the “Plaintiffs”) in the Company’s May 2022 private placements filed an action against the Company in the State of Delaware Court of Chancery, Chen Wenge, et al. v. Fresh2 Group Limited, C.A. No. 2022-0779-PAF (the “Action”). The Plaintiffs sued the Company for breaches of the investment agreements of May 2022. The Plaintiffs claimed that the entry into certain investment agreements and a merger agreement breached or would breach the terms of the plaintiffs’ (and several other investors’) securities purchase agreements, including a right of first refusal and a prohibition against certain acquisitions and changes of business. The Court issued a temporary restraining order concerning enforcement of the private placements on September 3, 2022, amended the temporary restraining order on September 9, 2022, and further amended the temporary restraining order on September 23, 2022 (“TRO”). In order to settle the Action, on October 15, 2022, the Company entered into Stock Repurchase Agreement with the Plaintiffs and all other investors in the May 2022 private placements with the original investment of $3 million, who beneficially owned an aggregate of 12,492,283 ordinary shares (“Shares”) of the Company and warrants to purchase a total of 2,475,000 ordinary shares at various exercise prices (the “Warrants,” together with the Shares, the “Securities”), for total consideration of $1.5 million. The Company fully settled the Action by October 27, 2022. In connection with the settlement, by November 7, 2022, Yuyang Cui and Jiawen Kang resigned from the Board of Directors and Yuyang Cui resigned as co-CEO of the Company. The related warrants bought back were fully canceled and the ordinary shares bought back become the Company’s treasury shares.
We may be subject to legal proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential outcomes, their existence alone may have an adverse material impact on us because of diversion of management time and attention as well as the financial costs related to resolving such disputes. Neither we nor any of our directors or executive officers are currently a party to, nor is any of our properties the subject of, any material legal or arbitration proceedings.
See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Key Components of Results of Operations—Revenues” for a breakdown of our net revenues by category of activity.
| Seasonality |
We do not expect our operating results and operating cash flows to be subject to seasonal variations. This pattern may change, however, as a result of growth, new market opportunities or new product introductions.
PRC Regulations
In China, we are subject to a variety of PRC laws, rules and regulations affecting many aspects of our business. This section summarizes the principal PRC laws, rules and regulations that we believe are relevant to our business and operations.
Regulations Relating to Overseas Securities Offering and Listing
On February 17, 2023, CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and its five ancillary guidelines, or the Trial Administrative Measures, which become effective on March 31, 2023. The Trial Administrative Measures stipulate that, PRC domestic companies that seek to offer and list securities in overseas markets, either through direct or indirect means, are required to complete the filing procedure with the CSRC. According to the Trial Administrative Measures, the issuer or its affiliated domestic company, is required to file with the CSRC: (i) with respect to its initial public offering and listing and its subsequent securities offering in an overseas market different from the market where it has listed, within three business days after its submission of listing application documents to the relevant regulator in the place of intended listing, (ii) with respect to its follow-on offering in the same overseas market where it has listed, within three business days after completion of such follow-on offering, (iii) with respect to listing by means of single or multiple acquisitions, share swap, transfers of shares and similar transactions, within three business days after its initial filing of the listing application or the first public announcement of the transaction, as case may be. The Trial Administrative Measures also explicitly forbid overseas offering and listing, if any of the following is applicable: (i) that is explicitly prohibited by specific laws and regulations, (ii) that constitutes threat to or endanger national security as reviewed and determined by competent departments of the State Council, (iii) the PRC domestic company, its controlling shareholders or actual controllers are involved in certain criminal crimes such as corruption, bribery, embezzlement, misappropriation of property or undermining the order of the socialist market economy during the latest three years, (iv) the PRC domestic company is currently under investigations for suspicion of criminal offenses or major violations of laws and regulations, and no conclusion has yet been made thereof; or (v) there are material ownership disputes over equity held by the PRC domestic company’s controlling shareholder(s) or by other shareholder(s) that are controlled by the controlling shareholder(s) and/or actual controller. Furthermore, an issuer is required to report to the CSRC within three business days after occurrence of any the following events: (i) its change of control; (ii) its being subject to investigation or sanctions by any overseas securities regulators or overseas authorities; (iii) its change of listing status or listing segment; (iv) voluntary or mandatory delisting; and (v) material change of its principal business operations to the extent that it ceases to be subject to the filing requirements of the Trial Administrative Measures. Failure to comply with the filing requirements may result in an order of rectification, a warning and fines up to RMB10 million to the non-compliant domestic companies, and the directly responsible persons of the companies will be warned and fined between RMB500,000 and RMB5 million. If the controlling shareholder and the actual controller of the non-compliant companies organizes or instigates the breach, they will be fined between RMB1 million and RMB10 million.
On February 24, 2023, CSRC released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering and Listing by Domestic Companies, or the Confidentiality and Archives Administration Provisions, which will take effect on March 31, 2023. The Confidentiality and Archives Administration Provisions stipulate that, if domestic companies offer the securities in overseas market, domestic companies and securities companies and securities service institutions providing relevant services shall strictly comply with the relevant laws and regulations of PRC, enhance the legal awareness of protecting state secrets and archive administration, establish and improve the system for confidentiality and archive work, take necessary measures to implement the obligations of confidentiality and archive administration, and shall not divulge state secrets and work secrets of state organs or harm state and public interests.
78
Regulation on Medical Devices and Medical Institutions
Medical Institutions Laws and Regulations
The Regulation on the Administration of Medical Institutions as promulgated by the State Council of the PRC on February 1994 and revised in 2016 and 2022 provides the requirements for the establishment and administration of medical institutions. The establishment of medical institutions must comply with local governments’ plans for the establishment of medical institutions and the basic standards for medical institutions. To establish a medical institution, an entity or individual shall be subject to the examination and approval of the health administrative department of the local government at or above the county level and obtain the written approval for the establishment of medical institutions. A medical institution providing relevant services must register and obtain a medical institution practice license. An entity or individual that has not obtained a medical institution practice license may not carry out diagnosis or treatment activities. The revised Rules for Implementation of the Administrative Regulation on Medical Institutions as promulgated by the NHFPC in February 2017 further regulates the approval on establishment, registration, validation, naming and practice of medical institutions. Our PRC subsidiaries, Lishui Laboratory and Shiji Hainan, obtained their medical institution practice licenses in 2021 and 2018, respectively.
The Regulation on the Administration of Biosafety of Pathogenic Microorganism Laboratories as promulgated by the State Council of the PRC on November 2004 and revised in 2016 and 2018 provides the requirements for the establishment and administration of Pathogenic Microorganism Laboratories. Pathogenic Microorganism Laboratories refer to the laboratories engaged in research, teaching, testing and diagnosis related to pathogenic microorganisms and microbial bacteria (viruses). The Pathogenic Microorganisms Laboratories are graded into four Grades, which are Grade I, Grade II, Grade III and Grade IV, according to their biosafety protection level against pathogenic microorganisms and in accordance with the provisions of the national standards for laboratory biosafety. The establishment, re-establishment and expansion of Grade I and Grade II pathogenic microorganism laboratories shall be filed with the competent health department or veterinary department of the people's government of a city divided into districts. Grade I and Grade II pathogenic microorganism laboratories shall not engage in experiments on highly pathogenic microorganisms. Our PRC subsidiary, Lishui Laboratory, obtained its Grade II Pathogenic Microorganism Laboratory Record-filing Certificate in 2022.
The Measures for the Administration of Clinical Gene Amplification Testing Laboratories in Medical Institutions as promulgated by Ministry of Health in December 2010 provides the requirements for medical institutions to carry out clinical gene amplification test technique. Clinical gene amplification testing laboratory refers to a laboratory that detects specific DNA or RNA by amplification and to perform disease diagnosis, treatment monitoring and prognosis determination. The PRC Ministry of Health is responsible for supervising and administering clinical gene amplification testing laboratories in medical institutions nationwide. The health administrative authorities at the provincial level are responsible for supervising and administering clinical gene amplification testing laboratories in medical institutions within their respective administrative regions. This regulation also provides the examination and establishment of clinical gene amplification testing laboratories, laboratory quality management and laboratory supervision and management. Our PRC subsidiary, Shiji Hainan, obtained its Certificate of Clinical Gene Amplification Testing Laboratory in 2016, and obtained its Qualified Certificate of Clinical Gene Amplification Testing Laboratory in Quality Evaluation Activity from 2017 to 2020.
Medical Devices Administration Laws and Regulations
The Regulation on the Supervision and Administration of Medical Devices as amended by the State Council in December 2020, which came into effect in June 2021, regulates entities that engage in the research and development, production, operation, use as well as supervision and administration of medical devices in the PRC. Medical devices are classified according to their risk levels. Class I medical devices are medical devices with low risks, the safety and effectiveness of which can be ensured through routine administration. Class II medical devices are medical devices with moderate risks, which are strictly controlled and administered to ensure their safety and effectiveness. Class III medical devices are medical devices with relatively high risks, which are strictly controlled and administered through special measures to ensure their safety and effectiveness. The evaluation of the risk levels of medical devices takes into consideration the expected objectives, structural features, methods of use and other factors of medical devices.
The Measures for the Supervision and Administration of the Manufacture of Medical Device as amended by NMPA in March 2022, which came into effect in May 2022, regulates entities that engage in the manufacturing of medical devices in the PRC. The food and drug administration at or above the county level regulates medical device manufacturing within its administrative region, including manufacturing related licensing and registration, contract manufacturing and manufacturing quality controls.
The Measures for the Supervision and Administration of the Operation of Medical Devices, as amended by NMPA in March 2022, which came into effect in May 2022, regulates entities that engage in business activities involving medical devices in the PRC. Business activities involving medical devices are regulated in accordance with the medical devices’ risk levels. No registration or license is required for business activities involving Class I medical devices. Registration is required for business activities involving Class II medical devices. A license is required for business activities involving Class III medical devices. Our PRC subsidiary, AnPac Lishui, obtained its Class II medical device manufacture license and registration certificate for our CDA device in 2020.
Packaging of Medical Devices
The Administrative Rules on Instruction Manuals and Labels of Medical Devices, as promulgated by the CFDA in 2014, provides the requirements for instruction manuals and labeling of any medical device to be sold and used in the PRC. The information contained in the instruction manual and label of a medical device must be scientific, authentic, complete, accurate and consistent with product characteristics. The information contained in the instruction manual and label of a medical device must be consistent with the relevant information registered or filed for record. The information contained in the label of a medical device must be consistent with the relevant information in its instructions.
79
Clinical Practice Reform
In October 2017, the Chinese government announced an administrative reform of clinical trial institutions. Certification of clinical trial institutions by the former CFDA and the former NHFPC is no longer required. Under this reform, a clinical trial institution can be engaged by a drug and medical device registration applicant (i.e., a sponsor) to conduct a clinical study after it has been duly recorded with the online platform designated by the NMPA. In November 2017, the CFDA and the NHFPC jointly released the Rules for Administration of the Requirements for and Filing of Medical Devices Clinical Trial Institutions. These rules specify requirements for medical devices clinical-trial institutions and filing procedures. Pursuant to these rules, medical devices clinical-trial institutions shall meet the requirements of the Quality Management Standards for Medical Devices Clinical Trials including corresponding professional technical level, organization and management capabilities and ethics review capability.
Regulation Related to Food Operation
In accordance with the PRC Food Safety Law, promulgated on February 28, 2009 and latest amended on April 29, 2021, and the Implementation Regulations of PRC Food Safety Law, issued on July 20, 2009 and latest amended on October 11, 2019 and effective on December 1, 2019, with the purpose of guaranteeing food safety and safe guarding the health and life safety of the public, the PRC sets up a system of the supervision, monitoring and appraisal on the food safety risks, compulsory adoption of food safety standards. To engage in food production, sale or catering services, the business operators shall obtain a license in accordance with the laws and regulations. Furthermore, the State Council implements strict supervision and administration for special categories of foods such as healthcare food, special formula foods for medical purposes and infant formula. Violations of these law and measures may result in civil liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as confiscation of tools, equipment, raw materials and other articles used in the illegal food production or trading, or even criminal penalties.
The Administrative Measures for Food Operation Licensing promulgated by the State Food and Drug Administration of the PRC, or the SFDA, on August 31, 2015 and amended on November 17, 2017 and effective on the same day, regulates the food operation licensing activities, strengthens supervision and management of food operation, and ensures food safety. Food operation operators shall obtain the food operation license, or the Food Operation Permit, for each business venue where they engage in food operation activities. The food operation license is valid for five years. Food operation operators shall properly keep their food operation licenses, and shall not forge, alter, resell, rent, lend, or transfer any food operation licenses. Those who fail to obtain a food operation license and engage in food operation activities shall be punished by the local food and drug administrative authorities at or above the county level according to these measures and PRC Food Safety Law.
In July 2016, the SFDA promulgated the Measures for Investigation and Handling of Illegal Acts Involving Online Food Safety, which was amended on April 2, 2021, pursuant to which a third-party platform provider for online food trading in the PRC shall file a record with the food and drug administration at the provincial level and obtain a filing number. Where an online food trading third-party platform provider fails to complete such filing, the provider may be ordered to make rectifications and given a warning by the competent food and drug administration, and failure to make such rectification may be subject to fines ranging from RMB5,000 to RMB30,000.
80
Regulation Related to E-commence and Online Trading
On August 31, 2018, the National People’s Congress promulgated the PRC E-Commerce Law, which became effective on January 1, 2019, and aims to regulate the e-commerce activities conducted within the territory of the PRC. Pursuant to the E-Commerce Law, an e-commerce platform operator shall (i) collect, verify and register the truthful information submitted by the third-party merchants that apply for selling products or providing services on its platform, including the identities, addresses, contacts and licenses, establish registration archives and update such information on a regular basis; (ii) submit the identification information of the third-party merchants on its platform to market regulatory administrative department in accordance with regulations and remind the third-party merchants to complete the registration with market regulatory administrative department; (iii) submit identification information and tax-related information of the third-party merchants on its platform to tax authorities in accordance with the laws and regulations regarding the administration of tax collection and remind the individual third-party merchants to complete the tax registration; (iv) record and retain the information of the products and services and the transaction information on its platform for no less than three years; (v) display the platform service agreement and the transaction rules or links to such information on the homepage of the platform; (vi) display the noticeable labels regarding the products or services provided by the platform operator itself on its platform, and take liabilities for such products and services; (vii) establish a credit evaluation system, display the credit evaluation rules, provide consumers with accesses to make comments on the products and services provided on its platform, and restrain from deleting such comments; and (viii) establish intellectual property protection rules, and take necessary measures when any intellectual property rights holder notify the platform operator that his intellectual property rights have been infringed.
An e-commerce platform operator may be subject to warnings and fines up to RMB2,000,000 where it fails to take necessary measures when it knows or should have known that the products or services provided by the third-party merchants on its platform do not meet the personal or property safety requirements or such third-party merchants’ other acts may infringe on the lawful rights and interests of the consumers. In addition, an e-commerce platform operator shall take joint liabilities with the relevant third-party merchants on its platform and may be subject to warnings and fines up to RMB2,000,000 where it fails to take necessary measures, such as deleting and blocking information, disconnecting, or terminating transactions and services, when it knows or should have known that the third-party merchants on its platform infringe any intellectual property rights of any other third party. With respect to products or services affecting the consumers’ life and health, if an e-commerce platform operator fails to verify the third-party merchants’ qualification or fails to fulfill its obligations to safeguard the safety of consumers, which results in damages to the consumers, it shall take corresponding liabilities and may be subject to warnings and fines up to RMB2,000,000.
On March 15, 2021, the SAMR has issued the Measures for the Supervision and Administration of Online Transactions, or the Measures for Online Transaction, which took effect on May 1, 2021. Measures for Online Transaction reinforces the operation requirements as provided under the PRC E-Commerce Law and the principles of legality, rationality and necessity in the collection and use of the users’ information and disclosure of the rules, purposes, methods and scopes of collection and use of user information specified in the Cyber Security Law. It also provides that the business operator through online platform (i) shall not use false transactions, fabricated user review etc to conduct false or misleading business promotion, so as to defraud or mislead consumers; (ii) shall not eliminate or restrict competition, damage or ruin the competitor’s reputation; (iii) shall not force consumers to agree with the collection and use of their personal information that is not directly related to such operator’s business activities by means of general authorization, default authorization, bundling with other authorization, termination of installation and use.
Regulation Related to Internet Security and Privacy Protection
On May, 2020, the National People’s Congress of the PRC approved the Civil Code of the PRC, which came into effect on January 1, 2021. Pursuant to the Civil Code of PRC, the personal information of a natural person shall be protected by the law. Any organization or individual that need to obtain personal information of others shall obtain such information legally and ensure the security of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase, sell, provide or make public personal information of others.
81
On November 7, 2016, the National People’s Congress Standing Committee promulgated the Cyber Security Law which came into effect on June 1, 2017 and applies to the construction, operation, maintenance and use of networks as well as the supervision and administration of cybersecurity in China. The Cyber Security Law defines “networks” as systems that are composed of computers or other information terminals and relevant facilities used for the purpose of collecting, storing, transmitting, exchanging and processing information in accordance with certain rules and procedures. “Network operators,” who are broadly defined as owners and administrators of networks and network service providers, are subject to various security protection-related obligations, including: (i) complying with security protection obligations in accordance with tiered cybersecurity system’s protection requirements, which include formulating internal security management rules and manual, appointing cybersecurity responsible personnel, adopting technical measures to prevent computer viruses and cybersecurity endangering activities, adopting technical measures to monitor and record network operation status and cybersecurity events; (ii) formulating cybersecurity emergency response plans, timely handling of security risks, initiating emergency response plans, taking appropriate remedial measures and reporting to regulatory authorities; and (iii) providing technical assistance and support for public security and national security authorities for protection of national security and criminal investigations in accordance with the law. Network service providers who do not comply with the Cyber Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which became effect in September 2021. The Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data shall designate the personnel and the management body responsible for data security, carry out risk assessments for its data processing activities and file the risk assessment reports with the competent authorities. In addition, the Data Security Law provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on certain data and information.
On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Personal Information Protection Law, which took effect from November 1, 2021. Pursuant to the PRC Personal Information Protection Law, personal information refers to the information related to an identified or identifiable individual recorded electronically or by other means, excluding the anonymized information, and processing of personal information includes among others, the collection, storage, use, handling, transmission, provision, disclosure, deletion of personal information. The PRC Personal Information Protection Law explicitly sets forth the circumstances where it is allowed to process personal information, including (i) the consent from the individual has been obtained; (ii) it is necessary for the conclusion and performance of a contract under which an individual is a party, or it is necessary for human resource management in accordance with the labor related rules and regulations and the collective contracts formulated or concluded in accordance with laws; (iii) it is necessary to perform statutory duties or statutory obligations; (iv) it is necessary to respond to public health emergencies, or to protect the life, health and property safety of individuals in emergencies; (v) carrying out news reports, public opinion supervision and other acts for the public interest, and processing personal information within a reasonable scope; (vi) processing personal information disclosed by individuals or other legally disclosed personal information within a reasonable scope in accordance with this law; or (vii) other circumstances stipulated by laws and administrative regulations.
On December 28, 2021, the CAC, the NDRC, the MIIT, and several other administrations jointly promulgated the Cybersecurity Review Measures, or the Review Measures, which became effective from February 15, 2022. The Review Measures, upon effective, will replace its previous version promulgated on April 13, 2020. According to the Review Measures, (i) when the purchase of network products and services by a critical information infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the Review Measures. The aforesaid operators shall file for a cybersecurity review with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or data processing activities affect or may affect national security.
82
Furthermore, on July 7, 2022, the CAC released the Measures on Security Assessment of Cross-border Data Transfer, which will take effect from September 1, 2022. Such measures requires that any data processor which exports personal information exceeding certain volume threshold under such measures shall apply for security assessment by the CAC before transferring any personal information abroad, including the following circumstances: (i) any important data will be provided overseas by a data processer; (ii) any personal information will be provided overseas by an operator of critical information infrastructure or a data processor processing personal information of more than one million individuals; (iii) any personal information will be provided overseas by a data processor processing the personal information of more than 100,000 individuals or the sensitive personal information of more than 10,000 individuals on a cumulative basis since January 1 of the previous year; and (iv) other circumstances where the security assessment is required as prescribed by the CAC.
Other Significant PRC Regulations Affecting Our Business Activities in China
Regulation on Foreign Investment
On March 15, 2019, the National People’s Congress promulgated the PRC Foreign Investment Law, or the FIL, which came into effect on January 1, 2020 and replaces the trio of previous laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The FIL embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Implementation Rules to the Foreign Investment Law were promulgated by the State Council on December 26, 2019 and became effective on January 1, 2020. The FIL and its Implementation Rules, by means of legislation, have established the basic framework for the access, promotion, protection and administration of foreign investment in view of investment protection and fair competition.
On October 26, 2022, the Ministry of Commerce and the NDRC promulgated the Catalogue of Encouraged Industries for Foreign Investment (2022 Version), which came into effect on January 1, 2023, and replaced the previous Catalogue of Encouraged Industries for Foreign Investment (2020 Version). In addition, according to the FIL, foreign investors shall not invest in any field with investment prohibited by the negative list for foreign investment access. Foreign investors shall meet the investment conditions stipulated under the negative list for any field with investment restricted by the negative list for foreign investment access. For the fields not included in the negative list for foreign investment access, management shall be conducted under the principle of consistency for domestic and foreign investment. On December 27, 2021 the MOFCOM and the NDRC jointly promulgated the Special Management Measures (Negative List) (2021 Version) for the Access of Foreign Investment, or the 2021 Negative List, which became effective on January 1, 2022 to amend the Catalogue and the previous negative list thereunder. Investment in medical institutions (such as clinical laboratories) belongs to the “restricted” category. In particular, according to relevant PRC foreign investment regulations, only domestic companies and foreign-invested joint ventures are allowed to hold an NHC medical institution practice license. However, it is unclear under PRC law whether a subsidiary of a wholly foreign owned enterprise is eligible to hold this license. We believe that the risks for the NHC medical institution practice license of each of our Lishui and Haikou laboratories—subsidiaries of AnPac Lishui, a wholly foreign owned enterprise—being held invalid or revoked by the NHC is remote, based on our confirmation with relevant regulatory authorities. However, we cannot assure you that the relevant regulatory authorities would not change their interpretation or position regarding the relevant laws and regulations.
On March 15, 2019, the National People’s Congress promulgated the PRC Foreign Investment Law, or the FIL, which came into effect on January 1, 2020 and replaces the trio of previous laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The FIL embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Implementation Rules to the Foreign Investment Law were promulgated by the State Council on December 26, 2019 and became effective on January 1, 2020. The FIL and its Implementation Rules, by means of legislation, have established the basic framework for the access, promotion, protection and administration of foreign investment in view of investment protection and fair competition.
83
On December 30, 2019, MOFCOM and the State Administration for Market Regulation jointly promulgated the Measures for Information Reporting on Foreign Investment, which became effective on January 1, 2020. Pursuant to these measures, where a foreign investor carries out investment activities in China directly or indirectly, the foreign investor or the foreign-invested enterprise shall submit the investment information to the competent commerce department.
PRC Regulation of Commercial Bribery
Medical device companies involved in a criminal investigation or administrative proceedings related to bribery are listed in the Adverse Records of Commercial Briberies by its provincial health and family planning administrative department. Pursuant to the Provisions on the Establishment of Adverse Records of Commercial Briberies in the Medicine Purchase and Sales Industry, which became effective on March 1, 2014, provincial health and family planning administrative departments formulate the implementing measures for establishment of Adverse Records of Commercial Briberies. If a company is listed in the Adverse Records of Commercial Briberies for the first time, their products may not be purchased by public medical institutions. A company will not be penalized by the relevant PRC government authorities merely by virtue of having contractual relationships with sales agents or third-party promoters who are engaged in bribery activities, so long as such company and its employees are not utilizing the sales agents or third-party promoters for the implementation of, or acting in conjunction with them in, the prohibited bribery activities. In addition, a company is under no legal obligation to monitor the operating activities of its sales agents and third-party promoters, and will not be subject to penalties or sanctions by relevant PRC government authorities as a result of failure to monitor their operating activities.
PRC Regulation of Product Liability
In addition to the strict new drug approval process, certain PRC laws have been promulgated to protect the rights of consumers and to strengthen the control of medical products in the PRC. Under current PRC law, manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by such products.
Pursuant to the Civil Code of the PRC promulgated on May 28, 2020, which came into effect on January 1, 2021, the manufacturer shall bear tort liability where a defect of a product causes damage to another person. The infringed person may claim compensation from the manufacturer or the seller of the product where a defect of a product causes damage to another person.
On February 22, 1993, the Product Quality Law of the PRC, or the Product Quality Law, was promulgated to supplement the Civil Law of the PRC aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control of the quality of products. The Product Quality Law was revised by the Ninth National People’s Congress on July 8, 2000, by the Eleventh National People’s Congress on August 27, 2009 and by the Thirteenth National People’s Congress on December 29, 2018. Pursuant to the revised Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business licenses revoked.
The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and was amended on August 27, 2009 and October 25, 2013 to protect consumers’ rights when they purchase or use goods and accept services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. Under the amendments made on October 25, 2013, all business operators must pay high attention to protecting customers’ privacy and strictly keeping confidential any consumer information they obtain during their business operations. In addition, in extreme situations, pharmaceutical product manufacturers and operators may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties.
84
PRC Tort Law
Under the Civil Code of the PRC promulgated on May 28, 2020, which came into effect on January 1, 2021, where a defect of a product is caused due to the fault of a transporter, a warehouse or any other third party, the manufacturer or the seller shall, after paying compensation, have the right to claim the same from the third party. Where a product is found to be defective after it is put into circulation, the manufacturer or the seller shall timely take such remedial measures as ceasing the sale, giving warning or recall the defective product. If any damage is aggravated due to the manufacturer or the seller’s failure to take timely or effective remedial measures, the manufacturer or the seller shall assume tort liability for the aggravated part of the damage. Where any manufacturer or seller produces or sells the products despite knowing that they are defective or fails to take effective remedial measures as prescribed in the preceding paragraph, thus causing death or serious damage to the health of another person, the infringed person shall have the right to claim appropriate punitive damages.
Regulation on Intellectual Property Rights
China has made substantial efforts to adopt comprehensive legislation governing intellectual property rights, including patents, trademarks, copyrights and domain names.
Patents
Patents in the PRC are principally protected under the Patent Law of the PRC, which was promulgated by the Standing Committee of NPC on March 12, 1984 and of which the most recent amendment took effect from June 1, 2021. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right. The Patent Law of the PRC and its implementation rules provide for three types of patents, namely, “invention”, “utility model” and “design”. Invention patents are valid for twenty years, while design patents and utility model patents are valid for ten years, from the date of application. The Chinese patent system adopts a “first-to-file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first. To be patentable, invention or utility models must meet three criteria: novelty, inventiveness and practicability. A third party must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement of the patent rights.
Copyrights
Copyrights in the PRC, including copyrighted software, are principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, promulgated in September 1990, implemented in June 1991, amended in October 2001, February 2010 and November 2020, and effective on June 1, 2021 the term of protection for copyrighted software is 50 years. The Regulation on the Protection of the Right to Communicate Works to the Public over Information Networks, as most recently amended on January 30, 2013, provides specific rules on fair use, statutory license, and a safe harbor for use of copyrights and copyright management technology and specifies the liabilities of various entities for violations, including copyright holders, libraries and Internet service providers.
Trademarks
Registered trademarks are protected under the Trademark Law of the PRC, which promulgated on April 23, 2019 and effective on November 1, 2019, and related rules and regulations. Trademarks are registered with the State Intellectual Property Office, formerly the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of this trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Names
Domain names are protected under the Administrative Measures on Internet Domain Names promulgated by the MIIT on August 24, 2017 and effective as of November 1, 2017. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
85
PRC Regulation on Data Protection
The Basic Standards for Clinical Laboratories (for Trial Implementation) as promulgated by the NHFPC in 2016 provides that clinical laboratories must establish information management and patient privacy protection policies. The Measures for the Administration of General Population Health Information (for Trial Implementation) as promulgated by the NHFPC in 2014 sets forth the operational measures for patient privacy protection in medical institutions. The measures regulate the collection, use, management, safety and privacy protection of general population health information by medical institutions. Medical institutions are required to establish information management departments in charge of general population health information and establish quality control procedures and relevant information systems to manage general population health information. Medical institutions must adopt stringent procedures to verify the general population health data collected, timely update and maintain the data, establish policies on the authorized use of general population health information, and establish safety protection systems, policies, practice and technical guidance to avoid divulging confidential or private information.
PRC Regulation on Labor Protection
Under the Labor Law of the PRC, effective on January 1, 1995 and subsequently amended on August 27, 2009 and December 29, 2018, the PRC Employment Contract Law, effective on January 1, 2008 and subsequently amended on December 28, 2012 and the Implementing Regulations of the Employment Contract Law, effective on September 18, 2008, employers must establish a comprehensive management system to protect the rights of their employees, including a system governing occupational health and safety to provide employees with occupational training to prevent occupational injury, and employers are required to truthfully inform prospective employees of the job description, working conditions, location, occupational hazards and status of safe production as well as remuneration and other conditions as requested by the Labor Contract Law of the PRC.
Pursuant to the Law of Manufacturing Safety of the PRC effective on November 1, 2002 and amended on August 27, 2009, August 31, 2014 and June 10, 2021, manufacturers must establish a comprehensive management system to ensure manufacturing safety in accordance with applicable laws, regulations, national standards, and industrial standards. Manufacturers not meeting relevant legal requirements are not permitted to commence their manufacturing activities.
Pursuant to the Administrative Measures Governing the Production Quality of Pharmaceutical Products effective on March 1, 2011, manufacturers of pharmaceutical products are required to establish production safety and labor protection measures in connection with the operation of their manufacturing equipment and manufacturing process.
Pursuant to applicable PRC laws, rules and regulations, including the Social Insurance Law, which became effective on July 1, 2011 and amended on December 29, 2018, the Interim Regulations on the Collection and Payment of Social Security Funds, which became effective on January 22, 1999 and amended on March 24, 2019, Interim Measures concerning the Maternity Insurance of Employees, which become effective on December 14, 1994, and the Regulations on Work-related Injury Insurance, which became effective on January 1, 2004 and was subsequently amended on December 20, 2010, employers are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, work-related injury insurance and maternity insurance. If an employer fails to make social insurance contributions timely and in full, the social insurance collecting authority will order the employer to make up outstanding contributions within the prescribed time period and impose a late payment fee at the rate of 0.05% per day from the date on which the contribution becomes due. If such employer fails to make the overdue contributions within such time limit, the relevant administrative department may impose a fine equivalent to one to three times the overdue amount
86
Regulations Relating to Foreign Exchange Registration of Offshore Investment by PRC Residents
In July 2014, SAFE issued the SAFE Circular 37, and its implementation guidelines. Pursuant to SAFE Circular 37 and its implementation guidelines, PRC residents (including PRC institutions and individuals) must register with local branches of SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established or indirectly controlled by PRC residents for the purposes of offshore investment and financing with their legally owned assets or interests in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are also required to amend their registrations with SAFE when there is a change to the basic information of the SPV, such as changes of a PRC resident individual shareholder, the name or operating period of the SPV, or when there is a significant change to the SPV, such as changes of the PRC individual resident’s increase or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger, division of the SPV. Failure to comply with the registration procedures set forth in the Circular 37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange administration regulations.
Regulations Relating to Employee Stock Incentive Plan
In February 2012, SAFE promulgated the Stock Option Rules. In accordance with the Stock Option Rules and relevant rules and regulations, PRC citizens or non-PRC citizens residing in China for a continuous period of not less than one year, who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain procedures. We and our employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who participate in our stock incentive plan will be subject to such regulation. In addition, the SAT has issued circulars concerning employee share options or restricted shares. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares vest, will be subject to PRC individual income tax, or the IIT. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold IIT of these employees related to their share options or restricted shares. If the employees fail to pay, or the PRC subsidiaries fail to withhold, their IIT according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.
Regulations Relating to Dividend Distribution
The principal regulation governing distribution of dividends paid by a PRC enterprise include Company Law of the PRC (1993), as amended in 1999, 2004, 2005, 2013, 2018 and 2021. The 2021 revision has not yet taken effect.
Under these laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulations Relating to Foreign Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.
87
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within China. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. In March 2015, SAFE issued SAFE Circular No. 19, which took effective and replaced SAFE Circular No. 142 on June 1, 2015. Although SAFE Circular No. 19 allows for the use of RMB converted from the foreign currency-denominated capital for equity investments in China, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for entrusted loans or for inter-company RMB loans. SAFE promulgated the Notice of the SAFE on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using 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 or Circular 16 could result in administrative penalties.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment and amended on May 2015, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g., pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts), the reinvestment of lawful incomes derived by foreign investors in China (e.g. profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.
In February 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment which took effect on June 1, 2015. The Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment delegates the authority to enforce the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment.
Regulations on Enterprise Income Tax
Pursuant to the EIT Law effective as of January 2008 and as last amended in December 2018, the income tax rate for both domestic and foreign-invested enterprises is 25% with certain exceptions. To clarify certain provisions in the EIT Law, the State Council promulgated the Implementation Rules of the EIT Law in December 2007, which became effective in January 2008 and as amended in April 2019. Under the EIT Law and the Implementation Rules of the EIT Law, enterprises are classified as either “resident enterprises” or “non-resident enterprises.” Besides enterprises established within the PRC, enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate for their global income. In addition, the EIT Law provides that a non-resident enterprise refers to an entity established under foreign law whose “de facto management bodies” are not within the PRC, but has an establishment or place of business in the PRC, or does not have an establishment or place of business in the PRC but has income sourced within the PRC.
88
The Implementation Rules of the EIT Law provide that since January 2008, an income tax rate of 10% shall normally be applicable to dividends declared to non-PRC resident enterprise investors that do not have an establishment or place of business in the PRC, or have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax on the dividends may be reduced pursuant to a tax treaty between China and the jurisdictions in which the non-PRC shareholders reside.
Other PRC National- and Provincial-Level Laws and Regulations
We are subject to changing regulations under many other laws and regulations administered by governmental authorities at the national, provincial and municipal levels, some of which are or may become applicable to our business. For example, regulations control the confidentiality of patients’ medical information and the circumstances under which patient medical information may be released for inclusion in our databases, or released by us to third parties. These laws and regulations governing both the disclosure and the use of confidential patient medical information may become more restrictive in the future.
We also comply with numerous additional national and provincial laws relating to matters such as safe working conditions, manufacturing practices, environmental protection and fire hazard control in all material aspects. We believe that we are currently in compliance with these laws and regulations; however, we may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory requirements or adoption of new requirements could therefore have a material adverse effect on our business, results of operations and financial condition.
U.S. Regulations
Federal and State Laboratory Licensing Requirements
Pursuant to the CLIA, a laboratory that performs testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health must hold a certificate applicable to the complexity of the laboratory examinations it performs, and it must comply with, among other things, standards covering operations, personnel, facilities administration, quality, and proficiency testing, which are intended to ensure, among other things, that its clinical laboratory testing services are accurate, reliable and timely. Laboratories performing high-complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. The CLIA requirements do not apply to research laboratories that test human specimens but do not report patient specific results for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of individual patients. In order to offer our test in the United States, our laboratory must have the appropriate CLIA certification and the applicable state licenses. A laboratory that has submitted its application but has not yet received CLIA certification, may be issued a CLIA Certificate of Registration which allows the laboratory to perform testing while the laboratory’s survey and inspection are pending. We obtained CAP accreditation and a CLIA Certificate of Accreditation for our San Jose laboratory in March 2020 but we closed San Jose laboratory in June 2021 for cost saving and streamlining laboratory operation and management purposes. We obtained a CLIA Certificate of Registration for our laboratory in Philadelphia, Pennsylvania in August 2020. CMS, the agency that oversees CLIA, has deemed CAP standards to be equally or more stringent than CLIA regulations and has approved CAP as a recognized accrediting organization. Inspection by CAP is performed in lieu of CMS inspections for accredited laboratories. to maintain and renew our CAP accreditation and CLIA certification, we are subject to survey and inspection every two years to assess our laboratory’s compliance with program standards. We also may be subject to additional unannounced inspections.
CLIA provides that a state may adopt laboratory regulations with more stringent requirements than those under U.S. federal law, and a number of states have implemented their own laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality control procedures, facility requirements or prescribe record maintenance requirements.
89
We are required to maintain a Pennsylvania state laboratory permit for our Philadelphia laboratory. The laboratory may also need to maintain licenses in other states with requirements for non-resident laboratories in order to perform tests on samples from patients who reside in those states. For example, in order to offer our test in New York, we must separately apply for a New York State clinical laboratory permit and approval of our test in New York, which will require submission of validation data as well as information regarding the test methods, among other things. Other states may currently have or adopt similar licensure requirements in the future. We will obtain any such necessary licenses before offering our cancer screening and detection test in a state requiring non-resident laboratory licensure.
Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of corrective action, on-site monitoring, civil monetary penalties, criminal sanctions, and revocation of the relevant laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity.
Regulation of Laboratory Developed Tests
LDTs have generally been considered by the FDA to be tests that are designed, developed, validated and used within a single laboratory. The FDA has the authority to regulate such tests as medical devices under the FDCA. However, the FDA historically has exercised its enforcement discretion and not enforced applicable provisions of the FDCA and FDA regulations with respect to LDTs. However, in recent years, legislative and administrative proposals addressing oversight of LDTs were introduced. For example, in 2014 the FDA issued two draft guidance documents proposing a risk-based framework with respect to applying the FDA’s oversight over LDTs. The draft guidance documents stated that the FDA intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing classification of medical devices. Thus, the FDA planned to begin to enforce its medical device requirements, including premarket submission requirements, on LDTs marketed without FDA premarket review and authorization. In November 2016, the FDA announced its intention not to finalize the 2014 draft guidance documents to allow for further public discussion of an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution. In January 2017, the FDA issued a discussion paper on possible approaches to the regulation of LDTs. On August 19, 2020, HHS announced that the FDA would no longer require premarket authorization for LDTs unless the FDA engaged in notice-and-comment rulemaking. HHS also rescinded all guidance documents and informal policy statements that FDA had previously issued concerning LDTs. On November 15, 2021, the U.S. Department of Health and Human Services withdrew the policy that directed FDA not to enforce premarket review requirements for LDTs. HHS no longer has a policy on LDTs that is separate from FDA’s longstanding approach in this area.
We expect that new legislative and administrative proposals regarding the oversight of LDTs will be introduced from time to time. It is possible that legislation could be enacted into law or regulations or guidance could be issued by the FDA, which may result in new or increased regulatory requirements for us to offer our tests as LDTs or to develop and introduce new tests as LDTs in the foreseeable future.
Although we believe we are within the scope of the FDA’s policy for LDTs, the initial commercialization and continued commercial availability of an LDT is subject to uncertainty given the FDA’s latitude in interpreting and applying its laws and policies. For example, FDA does not consider tests to be subject to its LDT enforcement discretion if they are designed or manufactured completely, or partly, outside of the laboratory that offers and uses them, or if they are offered “direct-to-consumer,” as opposed to being available to patients only when prescribed by a health care provider. Even for tests that appear to fall within FDA’s previously stated enforcement discretion, the FDA may decide to take action against certain LDTs on a case-by-case basis at any time if FDA views them as presenting a risk to patients. The former FDA Commissioner and the Director of FDA’s CDRH have expressed significant concerns regarding potential disparities in accuracy and quality between some LDTs and IVDs that have been reviewed and cleared, authorized or approved by FDA. In addition, the U.S. Congress has been considering various legislative proposals that would reform FDA’s regulation of laboratory tests, and such legislation might lead to heightened FDA scrutiny of LDTs, particularly new LDTs. Whether such legislation will be enacted and, if so, what effect it may have on how FDA regulates laboratory tests, including LDTs, is unknown. If FDA disagrees with a laboratory test’s LDT status, FDA may consider the test to be an unapproved medical device, may subject the company to FDA enforcement action, including, without limitation, requiring the company to seek clearance, authorization or approval for the laboratory test.
90
Regulation of Medical Devices
A medical device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part, or accessory which is: (i) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them; (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or (iii) intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. IVDs, are a type of medical device and include reagents and instruments used in the diagnosis or detection of diseases, conditions or infections, including, without limitation, the presence of certain chemicals, genetic information or other biomarkers. Predictive, prognostic and screening tests can also be IVDs.
In the United States, medical devices, including IVDs, are subject to extensive regulation by the FDA under the FDCA and its implementing regulations, and certain other U.S. federal and state statutes and regulations. The laws and regulations govern, among other things, the design, manufacture, storage, recordkeeping, approval, labeling, promotion, post-approval monitoring and reporting, distribution and import and export of medical devices. Failure to comply with applicable requirements may subject a device and/or its manufacturer to a variety of administrative sanctions, such as FDA refusal to approve pending PMAs, issuance of warning letters, mandatory product recalls, import detentions, civil monetary penalties, and/or judicial sanctions, such as product seizures, injunctions, and criminal prosecution.
Device Classification
Under the FDCA, medical devices are classified into one of three classes based on the risk associated with the device and the level of control necessary to provide a reasonable assurance of safety and effectiveness. Class I devices are deemed to be low risk and are subject to the fewest regulatory controls. Class III devices are generally the highest risk devices and are subject to the highest level of regulatory control to provide reasonable assurance of the device’s safety and effectiveness. Class III devices must typically be approved by FDA before they are marketed.
Most Class I devices and a minority of Class II devices are completely exempt from premarket review by FDA. Most Class II and a minority of Class I devices require 510(k) clearance. Devices that pose the highest risk, including life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k)-cleared device or a “pre-amendment” Class III device in commercial distribution before May 28, 1976 for which PMA applications have not been called, are placed in Class III requiring PMA approval. A novel device is placed in Class III by default, but it may be eligible to be placed in Class I or Class II via “de novo” classification if it can be shown to pose only low to moderate risk with appropriate regulatory controls.
The PMA approval pathway requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The 510(k) clearance pathway is much less burdensome and time-consuming than the PMA approval pathway. The de novo pathway has an enhanced burden compared to the 510(k) clearance pathway but is much less burdensome than a PMA approval process.
The 510(k) Clearance Pathway
Under the 510(k) clearance pathway, a device manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device may be a previously 510(k) cleared device or a pre-amendment device (unless the FDA has issued a regulation calling for PMA applications for this device type). To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and be shown to be equally safe and effective and not raise different questions of safety or effectiveness than the predicate device.
91
After the FDA accepts the 510(k) premarket notification, it begins a substantive review. By statute, the FDA is required to complete its review within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, typically ranging from three to nine months or longer, and clearance is never assured. The FDA’s 510(k) review generally compares a proposed device to a predicate device with respect to intended use and technology (design, materials, software, energy source, etc.). The information necessary to show substantial equivalence will depend upon the differences between the proposed device and the predicate device, which may include bench, cadaver, animal and/or clinical studies.
If the FDA agrees that the proposed device is substantially equivalent to the predicate device, it will grant clearance to commercially market the device. Otherwise, the device manufacturer must fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require reclassification through the de novo process or a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance, de novo classification, or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance, de novo classification, or PMA approval is obtained.
The De Novo Pathway
Devices of a new type that the FDA has not previously classified based on risk are automatically classified into Class III, regardless of the level of risk they pose. To avoid requiring PMA review of low- to moderate-risk devices classified in Class III by operation of law, the U.S. Congress created the de novo pathway that allows the FDA to classify a low- to moderate-risk device not previously classified into Class I or II.
Generally, a de novo petition contains a device description, indications for use statement, proposed labeling, data/performance testing (such as bench testing and/or clinical study data), the proposed classification, and a risk/benefit analysis. The risk/benefit analysis is the key element of a de novo petition and typically includes a summary of the benefits of the device, a summary of the known and potential risks, any risk mitigations, and an explanation of whether the benefits outweigh the risks.
The timing for review of a de novo petition is less certain than a 510(k). FDA’ s goal is review 70% of de novo submissions received in fiscal year 2022 in 150 calendar days during which a submission is under review at the FDA. As a practical matter, de novo marketing authorization often takes longer, ranging from a year or more, and marketing authorization is never assured due, in part, to stoppages of FDA’s 150-day timeline while the applicant responds to deficiencies identified by FDA. If the FDA authorizes the de novo petition, the device may be legally marketed and used as a predicate device for future 510(k) submissions. If the de novo petition is denied, the device remains in Class III and a PMA approval may be required before the device may be legally marketed in the United States.
The PMA Approval Process
A device not eligible for 510(k) clearance or de novo classification must follow the PMA approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The cost of preparing and submitting a PMA is substantial. Under U.S. federal law, the submission of most PMAs is additionally subject to a substantial annually-adjusted application user fee. For example, for fiscal year 2022, the user fee for an original PMA is $374,858. Satisfaction of FDA pre-market approval requirements typically takes years and the actual time required may vary substantially based upon the type, complexity, and novelty of the device or disease.
92
A PMA application must provide extensive preclinical and clinical trial data and also detailed information about the device and its components regarding, among other things, device design, manufacturing and labeling. There is typically advisory panel review of the clinical data. The FDA typically conducts a preapproval inspection of the manufacturer’s facilities and may also inspect the clinical trial documentation. FDA will not approve a device unless compliance is shown with Quality System Regulation, or QSR, requirements, which impose elaborate testing, control, documentation and other quality assurance procedures. During the review period, the FDA may also request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA.
By statute, the FDA has 180 days to review a filed PMA application, although the review more often occurs over a significantly longer period of time. If its evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter. An approvable letter usually contains a number of conditions that must be met in order to secure a final approval of the PMA application. When and if these conditions have been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in this approval letter, if any. If the FDA’s evaluation of a PMA application or the relevant manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA application, or the PMA application is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and lengthy and a number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing.
In approving a PMA application, as a condition of approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of these patients when necessary to protect the public health or to provide additional or longer term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use.
Even after approval of a PMA, new PMA applications or PMA supplements may also be required for modifications to any approved device, including modifications to the manufacturing processes, device labeling and device design, based on the findings of post-approval studies. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.
Post-market FDA Regulation
After a medical device enters commercial distribution, numerous regulatory requirements continue to apply. These include:
| ● | the FDA’s QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
| ● | labeling regulations, unique device identification requirements and FDA prohibitions against the promotion of devices for uncleared, unapproved or off-label uses; |
| ● | advertising and promotion requirements; |
| ● | restrictions on sale, distribution or use of a device; |
| ● | PMA annual reporting requirements; |
93
| ● | PMA approval of product modifications, or the potential for new 510(k) clearances for certain modifications to previously 510(k) cleared devices; |
| ● | medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; |
| ● | medical device correction and removal reporting regulations, which require that manufacturers report to the FDA their field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA; |
| ● | recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death; |
| ● | an order of repair, replacement or refund; |
| ● | device tracking requirements; and |
| ● | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
The FDA has broad post-market and regulatory enforcement powers. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, repair, replacement, refunds, recall or seizure of our devices; operating restrictions, partial suspension or total shutdown of manufacturing; the FDA’s refusal of our requests for 510(k) clearances, de novo classification, or premarket approvals of new devices, new intended uses or modifications to existing devices; the FDA’s refusal to issue certificates to foreign governments needed to export devices for sale in other countries; and withdrawing 510(k) clearances, de novo marketing authorization, or premarket approvals that have already been granted; and criminal prosecution.
Emergency Use Authorization
In extraordinary circumstances, such as the COVID-19 pandemic, the FDA may allow the use of unapproved medical devices, including laboratory tests, on an emergency basis through what is known as an Emergency Use Authorization, or EUA. Throughout the COVID-19 public health emergency, FDA has issued guidance documents for clinical laboratories and commercial manufacturers setting forth the FDA’s current thinking and approach to the offering of tests for COVID-19.
When FDA grants emergency authorization to a product, the EUA may include certain conditions for use of that product. For example, the EUA may include conditions limiting who can distribute, administer, or use the product. Manufacturers may also be required to collect and report information regarding the safety and effectiveness of the product once it is available in the market and being used for the emergency.
FDA has stated that laboratories that are performing testing using EUA-authorized test kits from commercial manufacturers need not notify FDA of or obtain an EUA from FDA for such testing. As an authorized laboratory, we must comply with the applicable regulatory requirements set forth in the EUA, including labeling requirements and reporting any significant deviations from the established performance characteristics of the product to FDA.
94
The EUAs are only in effect for the duration of the public health emergency as declared by the Secretary of the HHS. When the public health emergency is terminated, we will not be able to continue to offer the COVID-19 antibody tests unless we or Roche has sought clearance or approval for the assay and come into compliance with the QSR. We expect that HHS or FDA will institute a grace period or enforcement discretion period following termination of the public health emergency for products on the market subject to an EUA.
Federal and State Fraud and Abuse Laws
We are subject to U.S. federal fraud and abuse laws such as the AKS, the U.S. federal prohibition against physician self-referral, or Stark Law, and the FCA. We are also subject to similar state and foreign fraud and abuse laws.
The AKS prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce the referral of an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any good, facility, item or service that is reimbursable, in whole or in part, under a U.S. federal healthcare program. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.
The Stark Law and similar state laws prohibit physician referral of patients for designated health services payable by Medicare/Medicaid to entities with which the physician or an immediate family member has a financial relationship (ownership/investment interest or compensation arrangement), unless an exception applies.
Other U.S. federal fraud and abuse laws to which we are subject include but are not limited to the U.S. federal civil and criminal false claims laws, including the FCA, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the U.S. federal government, and the U.S. federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know that remuneration is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies. Under the FCA, private citizens can bring claims on behalf of the government through qui tam actions. We must also operate within the bounds of the fraud and abuse laws of the states in which we do business which may apply to items or services reimbursed by nongovernmental third-party payers, including private insurers.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.
HIPAA and HITECH
Under the administrative simplification provisions of the HIPAA, as amended by HITECH, HHS issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information, or PHI, used or disclosed by covered entities. Covered entities and business associates are subject to HIPAA and HITECH.
95
HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule covers the use and disclosure of PHI by covered entities and business associates and generally prohibits the use or disclosure of PHI except as permitted under the rule. The privacy rule also sets forth individual patient rights, such as the right to access or amend certain records containing PHI, or to request restrictions on the use or disclosure of PHI. The security rule requires covered entities and business associates to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI by implementing administrative, physical and technical safeguards. Under HITECH’s breach notification rule, a covered entity must notify individuals, the Secretary of the HHS, and in some circumstances, the media of breaches of unsecured PHI.
In addition, we may be subject to state health information privacy and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which sets forth standards in addition to HIPAA and HITECH with which all California health care providers must abide. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may complicate compliance efforts.
Entities that are found to be in violation of HIPAA as the result of a breach of unsecured PHI, a complaint about privacy practices or an audit by HHS, may be subject to significant civil and criminal fines and penalties and/or additional reporting and oversight obligations if such entities are required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.
U.S. Healthcare Reform
In the United States, there have been a number of legislative and regulatory changes at the U.S. federal and state levels which seek to reduce healthcare costs and improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the ACA, became law. This law substantially changed the way health care is financed by both commercial payers and government payers, and significantly impacted our industry. Since 2016 there have been efforts to repeal all or part of the ACA. For example, the Tax Cuts and Jobs Act, among other things, removed penalties for not complying with the ACA’s individual mandate to carry health insurance. All or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect our business.
The ACA contained a number of provisions expected to impact our business and operations, some of which in ways we cannot currently predict, including those governing enrollment in state and U.S. federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state and U.S. federal health care programs and will result in the development of new programs.
The expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us and lower reimbursement by payers for our tests, any of which may have a material adverse impact on our business, financial condition, results of operations or cash flows.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2029 unless additional legislative action is taken.
We anticipate there will continue to be proposals by legislators at both the federal and state levels, and by regulators and commercial payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests, and the coverage of or the amounts of reimbursement available for our tests from payers, including commercial payers and government payers.
96
Government Regulation of Our e-Commerce Food Services Business
Legal compliance is important to our operations food service operations. We are required to comply, and it is our policy to comply, with all applicable laws in the jurisdictions in which we do business.
As a marketer and distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (the “FDA”). The FDA regulates food safety and quality through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point requirements for certain foods, and the food and color additive approval process. The agency also specifies the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the USDA to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program. The USDA reviews and approves the labeling of these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.
The recently published and pending rules under the Food Safety Modernization Act (“FSMA”) will significantly expand food safety requirements, including those of HF Group. Among other things, FDA regulations implementing the FSMA require us to establish and maintain comprehensive, prevention-based controls across the food supply chain that are both verified and validated. The FSMA also imposes new requirements for food products imported into the U.S. and provides the FDA with mandatory recall authority.
We are also subject to state and local regulation through such measures as the licensing of our facilities; enforcement by state and local health agencies of state and local standards for our products; and regulation of our trade practices in connection with the sale of our products. Our facilities are subject to regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor. These regulations require us to comply with certain manufacturing, health and safety standards to protect employees from accidents and to establish hazard communication programs to transmit information on the hazards of certain chemicals which may be present in products that we distribute.
Our distribution facilities must be registered with the FDA biennially and are subject to periodic government agency inspections by the FDA and USDA. Our facilities are generally inspected at least annually by federal and/or state authorities. Further, we are required to establish communication programs to transmit information about the hazards of certain chemicals present in some of the products we distribute.
Our business and employment practices are also subject to regulation by numerous federal, state and local regulatory agencies, including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. Department of Transportation, as well as its agencies, the Surface Transportation Board, the Federal Highway Administration, the Federal Motor Carrier Safety Administration, and the National Highway Traffic Safety Administration, which collectively regulate our trucking business through the regulation of operations, safety, insurance and hazardous materials. We must comply with the safety and fitness regulations promulgated by the Federal Motor Carrier Safety Administration, including those relating to drug and alcohol testing and hours-of service. Such matters as weight and dimension of equipment also fall under federal and state regulations. We also are subject to federal and state immigration laws, regulations and programs that regulate our ability to hire or retain foreign employees. In addition, we are subject to the U.S. False Claims Act, and similar state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments.
97
Our operations are also subject to a broad range of U.S. federal, state, and local environmental laws and regulations, as well as zoning and building regulations. Environmental laws and regulations cover a variety of procedures, including appropriately managing wastewater and stormwater; complying with clean air laws, including those governing vehicle emissions; proper handling and disposal of solid and hazardous wastes; protecting against and appropriately investigating and remediating spills and releases; and monitoring and maintaining underground and above ground storage tanks for diesel fuel and other petroleum products. For the year ended December 31, 2022, the costs of managing our compliance with environmental laws and regulations was nominal.
The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits bribery of public officials to obtain or retain business in foreign jurisdictions. The FCPA also requires us to keep accurate books and records and to maintain internal accounting controls to detect and prevent bribery and to ensure that transactions are properly authorized. We have implemented appropriate policy and will continue to maintain a robust anti-corruption compliance program applicable to our operations.
Holding Foreign Companies Accountable Act
In December 2021, the SEC adopted rules (the “Final Rules”) to implement the Holding Foreign Companies Accountable Act (the “HFCAA”). The HFCAA includes requirements for the SEC to identify issuers who file annual reports with audit reports issued by independent registered public accounting firms located in foreign jurisdictions that the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of a position taken by a non-U.S. authority in the accounting firm’s jurisdiction (“Commission-Identified Issuers”). The HFCAA also requires that, to the extent that the PCAOB has been unable to inspect an issuer’s independent registered public accounting firm for three consecutive years since 2021, the SEC shall prohibit the issuer’s securities registered in the United States from being traded on any national securities exchange or over-the-counter markets in the United States. In December 2022, the Accelerating Holding Foreign Companies Accountable Act amended the HFCAA to shorten the three-year period to two years.
Under the Final Rules, the SEC adopted submission and disclosure requirements by amending Form 10-K and other annual reporting forms and established procedures to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA. Specifically, the Final Rules require each Commission-Identified Issuer to submit documentation to the SEC annually on or before its annual report due date that establishes that it is not owned or controlled by a government entity in its public accounting firm’s foreign jurisdiction and require additional specified disclosures by “foreign issuers” as defined in Rule 3b-4 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SEC identifies an issuer as a Commission-Identified Issuer after the issuer files its annual report and on a rolling basis and will impose an initial trading prohibition on an issuer as soon as practicable after it has been conclusively identified as a Commission-Identified Issuer for two consecutive years. To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements that include an audit report signed by such a registered public accounting firm.
In August 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations from September to November 2022, and in December 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition under the HFCAA.
Given that Marcum Asia CPAs LLP, a New York-based independent accounting firm, serves as the principal accountant to audit our consolidated financial statements to be filed with the SEC, and Friedman LLP, a New York-based independent accounting firm, served as the principal accountant to audit our consolidated financials as of and for the two years ended December 31, 2020 and 2021, we believe we are compliant with the HFCAA, which should preclude a finding by the SEC that we are a Commission-Identified Issuer and therefore the delisting of our Common Stock from the Nasdaq Capital Market. For a detailed description of risks related to our doing business in China and status under the HFCAA, see “Item 3. Key Information - Risk Factors - Risks Related to Our Doing Business in the China”.
98
C. Organizational Structure
The following diagram illustrates our corporate structure, including our principal subsidiaries, as of the date of this annual report.
D. Property, Plants and Equipment
Our China headquarters are located in the Bihu Industrial Park in Lishui, Zhejiang Province. Our facilities for manufacturing our CDA device for our performance of commercial CDA-based tests, our principle licensed clinical laboratory to conduct commercial CDA-based tests, as well as our warehouse are all in our headquarters in Lishui. We own the premises of our Lishui headquarters, which have an aggregate floor area of approximately 5,126 square meters. We also own an additional approximately 203 square meters in Lishui and 157 square meters of office space in Yangzhou, Jiangsu Province.
We currently lease several properties with an aggregate floor area of approximately 1,200 square meters in Shanghai, where we operate our primary research and development facilities. We also lease approximately 142 square meters of properties in Haikou, Hainan Province, primarily to operate our government-approved clinical laboratory. Our leases for these properties vary in duration from one to three years.
99
In the United States, we currently lease approximately 6,700 square feet of office space in Montgomery County, Pennsylvania as the premises for our new CLIA-registered laboratory and U.S. headquarters, which we moved into in the second quarter of 2020. This lease has a term of approximately ten years and we are entitled to early terminate the lease in approximately five years subject to certain conditions. We also lease several office spaces and warehouse spaces in New York.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the historical consolidated financial statements of our company for the years ended December 31, 2020, 2021 and 2022, and related notes included elsewhere in this annual report on Form 20-F. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this annual report.
A Operating Results
Key Factors Affecting Our Results of Operations
Our business and operating results are influenced by certain general factors that affect China’s early cancer screening and detection market, including the increasing prevalence of cancer in China, growth of total healthcare expenditures, and technological trends in cancer diagnosis, treatment and management. Unfavorable changes in these general factors could adversely affect the results of our operations. In addition to these general trends, we believe that our results of operations are more directly affected by certain company-specific factors, including:
Going Concern Uncertainties
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As reflected in the accompanying consolidated financial statements, for the years ended December 31, 2020, 2021 and 2022, we incurred net losses of approximately RMB80.6 million, RMB 120.1 million, and RMB 103.6 million (US$15.0 million) , respectively. For the years ended December 31, 2020, 2021 and 2022, net cash used in operating activities of RMB59.0 million, RMB71.7 million and RMB55.1 million (US$8.0 million), respectively. As of December 31, 2022, we had an accumulated deficit of RMB577.5 million (US$83.7 million). Management believes these factors raise substantial doubt about our ability to continue as a going concern for the next twelve months. The continuation of our company as a going concern through the next twelve months is dependent upon (1) the continued financial support from our shareholders or external financing. While we believe in the viability of our strategy to enter the e-commerce food distribution business will allow us to reduce our losses and improve our ability to raise additional funds, there can be no assurance to that effect, nor that our company will be successful in securing sufficient funds to sustain the operations.
These conditions raise substantial doubt about our company’s ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for our company to continue as a going concern.
100
COVID-19
Beginning in late 2019, an outbreak of a novel strain of coronavirus (COVID-19) first emerged in China and has spread globally. In March 2020, the World Health Organization (“WHO”) declared COVID-19 as a pandemic. Governments in affected countries imposed travel bans, quarantines and other emergency public health measures, which caused material disruption to businesses globally resulting in an economic slowdown.
A new COVID-19 subvariant (Omicron) outbreak hit China in March 2022, spreading more quickly and easily than previous strains. As a result, a new round of lockdowns, quarantines, and travel restrictions were imposed upon different provinces or cities in China by the relevant local government authorities. The Company temporarily closed its Shanghai office and suspended offline marketing activities on April 1, 2022, as well. As required by the local authorities in Shanghai, employees located in Shanghai worked remotely. Beginning June 1, 2022, the Company reopened its Shanghai office and resumed offline marketing activities. For the year ended December 31, 2022, the COVID-19 pandemic had an adverse impact on the Company’s financial positions and operating results. For the year ended December 31, 2022, the Company’s revenue decreased to RMB12.0 million (US$1.7 million) from RMB18.0 million for the year ended December 31, 2021.
Starting in December 2022, China announced an easing of its COVID-19 restriction policy. Authorities downgraded the management of COVID-19 from category A to category B and lifted the restriction measures related to the COVID-19 pandemic, such as the reduction in travel and tourists, conventions and business events, closures and restrictions on business operations. The reopening of China’s economy from the stringent COVID-19 restrictions is expected to boost economic growth in Asia and beyond, but management is unable at this time to determine the future impact of the COVID-19 pandemic on its future operations, financial condition, liquidity, and results of operations.
Although the impact of the COVID-19 pandemic declined during 2022. It still had an adverse impact to our operations in the US, due to the disruption of business operations because of employee absences caused by illness. In some cases, employees have required time off due to testing positive for the virus, leading to a delay in daily operations. Additionally, the pandemic caused in constraints on the ability of businesses to commercialize their products or services, including diagnostic tests, and conduct research studies in the United States.
Market Adoption of Our CDA-Based Tests
We derive substantially all of our revenues from the sale of our CDA-based tests in China. We expect our business prospects will depend significantly on our ability to increase market adoption of our CDA-based tests in China and elsewhere, as well as our ability to commercialize our CDA-based tests in the U.S.
China’s large, aging population, favorable government policies, and relatively low labor costs represent substantial commercial opportunities for our business and enable us to cost-effectively conduct our cancer screening and detection tests at a large scale. However, compared to conventional, more widely accepted cancer screening and detection technologies, we face additional challenges in raising recognition and adoption of our CDA technology by physicians, patients, hospitals, medical institutions, healthcare payers and others in China’s medical community.
We believe that our CDA technology addresses many limitations of current early cancer screening and detection methods, such as its ability to detect the risk of multiple cancers early, cost-effectively and with high accuracy. We have conducted numerous research studies in cooperation with hospitals and medical institutions in China to validate our CDA technology, and we have published the results of 15 completed research studies at the American Society of Clinical Oncology, or ASCO, annual meetings and other medical conferences and medical journal supplements. To increase market adoption of our CDA-based tests, we intend to continue conducting research studies on our CDA technology on more cancer types and its applications in additional oncological areas, including assistance in diagnosis, prognosis and recurrence, and to present our study results at ASCO annual meetings and other medical conferences and publish them in important medical journals. We are also seeking to cooperate with universities and academic medical centers, hospitals and medical institutions, CROs, managed care companies and other health organizations in the U.S. to conduct research studies on our CDA technology, with a view to commercializing our CDA-based tests in the U.S. market. We plan to initially market our CDA test as a laboratory developed test in the U.S. We expect to invest significantly in research studies.
101
Regulatory Approvals for Our CDA Device by the NMPA
We are currently licensed to manufacture our CDA device and use it to perform our CDA-based tests at our own laboratories in China. To enlarge our total addressable market in China, in December 2018, we applied to the NMPA for a Class III medical device registration certificate for us to use our CDA device to assist in multi-cancer diagnosis. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. With these licenses, we will be permitted to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnosis of specified multiple cancers. We expect our revenues to grow substantially after our CDA devices are approved to access the Chinese hospital segment. However, it takes at least three years with significant R&D spending and regulatory approvals to obtain a Class III medical device registration certificate and the process is subject to regulatory and other uncertainties.
Our CDA Customer Base and Customer Mix
Our business growth depends significantly on our ability to maintain relationships with our existing customers and attract new customers. Our existing customers in China consist primarily of life insurance companies and other corporations, which offer our CDA-based tests to their insured customers and/or employees. We also attract customers by offering our CDA-based tests as part of annual physical checkup packages and by engaging sales agents to market our tests. We plan to broaden our cancer screening and detection test offerings, including by expanding the range of genomics tests currently conducted at our Haikou laboratory, to attract more customers. If we are able to obtain the Class III medical device registration certificate and update our medical device manufacture license for our CDA device, we will seek to access the Chinese hospital market segment and provide our tests to more individual customers through Chinese hospitals. We expect our marketing expenses to continue to increase as we seek to increase market adoption of our technology and tests and build up our sales channels.
Since our business scale is currently relatively small and our customers are largely corporate, the availability and timing of large CDA-based test orders could cause our revenues to fluctuate significantly from period to period. This makes it difficult to compare our historical operating results or predict our future performance. Resurgence of COVID-19 and lock-down policies in some cities could cut the demand and revenue depending on length of lock-down. Starting March 27, 2022, the lockdown policy in Shanghai forced us to temporarily halt operations in our Shanghai office. Most of the CDA tests are performed in our subsidiary located in Lishui, Zhejiang, which was not impacted by the resurgence of COVID-19. However, the close of our Shanghai office caused delay in the issuance and delivery of test reports to our customers, which impacted our revenue.
Cost Structure
Our results of operations are significantly affected by our cost structure. The largest component of our operating costs and expenses is staff costs, primarily related to our management as well as research and development, sales and marketing personnel. We have also incurred significant share-based compensation expenses to incentivize our directors, officers, employees and consultants, which were RMB17.8 million, RMB34.2 million and RMB14.9 million (US$2.2 million) in 2020, 2021 and 2022, respectively. In addition, we have made substantial investments in customer acquisition, research and development, and patent applications to support our future growth and expansion. As we conduct research studies in the U.S., we expect our research and development expenses to significantly increase. In addition, we expect to incur significant costs in research and development and regulatory approvals to obtain a Class III medical device registration certificate in the PRC. Once we receive this approval, we will incur significant external supplier costs for the manufacture of the devices.
Acquisition
The Company incorporated a new subsidiary, Fresh2 Technology Inc. (“Fresh2”) on October 4, 2022. On February 7, 2023, the Company, through the newly incorporated subsidiary, Fresh2, entered into a Share Purchase Agreement (the “Ecommerce Agreement”) to acquire Fresh 2 Ecommerce Inc, a Delaware corporation (“Fresh2 Ecommerce”), from Mr. Haohan Xu, the Company’s Co-CEO and Co-Chairman of the board of directors. Fresh2 Ecommerce is a business-to-business e-commerce platform focused on connecting Asian food suppliers and supermarkets in the U.S. Fresh2 Ecommerce provides an online direct selling platform for food suppliers such as food companies, manufacturers, agents, importers, and wholesalers to supermarkets.
102
Funding for Our Operations
We have funded our operations primarily through capital contributions from our initial public offering, our shareholders, short-term non-bank borrowings, convertible loans and loans from related parties. With the continuing expansion of our business, we will require further funding, possibly through public or private equity financings, debt financings, or other business arrangements. The availability and costs of funding could significantly impact our results of operations and financial position. Furthermore, debt financings could require us to agree to restrictive financial covenants, which could make it more difficult for us to achieve our goals.
Key Operating Data
We regularly review a number of operating metrics, including those set forth below, to evaluate our business, measure our performance and identify trends affecting our business.
The following table sets forth our key operating data for the periods indicated:
| For the year ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| Number of commercial CDA-based tests (1) completed | 41,354 | 38,628 | 30,390 | |||||||||
| Number of CDA-based tests (1) for research purposes completed | 1,892 | 399 | 512 | |||||||||
Note:
| (1) | Including our CDA tests and combination tests. |
Key Components of Results of Operation
Revenues
We derive our revenues from the following sources: (i) revenue from sales of cancer screening and detection tests (predominantly commercial CDA-based tests), (ii) net revenue from sales of physical checkup packages, (iii) revenue from technology service and (ⅳ) retail revenue.
The table below presents our revenues by type in absolute amount and as a percentage of our total revenues for the periods indicated.
| Year ended December 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||||
| Cancer screening and detection tests | 18,445 | 89.9 | 14,947 | 83.1 | 8,078 | 1,171 | 67.0 | |||||||||||||||||||||
| Physical checkup packages | 2,064 | 10.1 | 1,654 | 9.2 | 1,574 | 228 | 13.1 | |||||||||||||||||||||
| Technology service | — | — | 1,284 | 7.1 | 2,186 | 317 | 18.2 | |||||||||||||||||||||
| Retail revenue | — | — | 101 | 0.6 | 206 | 30 | 1.7 | |||||||||||||||||||||
| Total revenues | 20,509 | 100.0 | 17,986 | 100.0 | 12,044 | 1,746 | 100.0 | |||||||||||||||||||||
103
Cancer Screening and Detection Tests
Our revenue from sales of cancer screening and detection tests consists predominantly of revenue from the sales of our commercial CDA-based tests. Our commercial CDA-based tests comprise our CDA tests and our combination tests, which combine our CDA test and, on an auxiliary basis, biomarker-based and ct-DNA-based cancer screening and detection tests performed either by us or by third-party clinical laboratories. We also recognize revenue from sales of commercial CDA-based tests that we provide as part of the physical checkup packages we sell.
Physical Checkup Packages
Our net revenue from physical checkup packages represents our gross billing amount from physical checkup packages that we sell to our customers and have performed during a specified period, less (i) the portion of fees for the commercial CDA-based tests contained in the packages (which are recognized as part of our revenue from sales of CDA-based tests) and (ii) our cost of physical checkup services (other than CDA-based tests) contained in the packages, which are payments we make to third-party physical checkup centers to which we outsource these services.
Technology services
The Group provides a series of technology services including but not limited to market research, designing, coding, developing, testing, etc. to a client for a contractual term of two years. The Company uses input methods to measure the progress toward complete satisfaction of the performance obligation. Input methods measure progress based on resources consumed or efforts expended relative to total resources expected to be consumed or total efforts expected to be expended. The completion percentage is determined by costs incurred/total costs estimated to be incurred.
Retail revenue
The Group started retail business of genetic testing kits and skin-care products in fiscal 2021. Customers pay upfront and the Group delivers the ordered products. Revenue is recognized at a point in time upon delivery.
Cost of Revenues
Our cost of revenues is related to our sales of cancer screening and detection tests, predominantly our commercial CDA-based tests and, to a lesser extent, our genomic immunology tests, technology service costs and costs of retail products. It mainly consists of staff costs, outsourced testing costs, blood sample taking costs, medical consumable costs, share-based compensation, and depreciation and amortization of our CDA devices. Staff costs mainly include salaries and employee benefit expenses of personnel engaged in laboratory testing functions. Outsourced testing cost represents our cost of engaging third-party clinical laboratories for their performance of auxiliary biomarker-based cancer screening and detection tests, which are included as part of our combination tests. Blood sample taking costs mainly include our cost of engaging third-party nursing service providers who collect blood samples on our behalf for our commercial CDA-based tests.
Gross Profit and Gross Margin
Our gross profit represents our revenue from sales of cancer screening and detection tests, technology services and retail products minus our cost of revenue, plus our net revenues from sales of physical checkup packages. Our gross profit margin is affected primarily by the mix and relative prices of the cancer screening and detection tests that we sell within a specified period, as well as changes in net revenues from sales of physical checkup packages as a percentage of our total revenues.
104
Operating Expenses
Our operating expenses include selling and marketing expenses, research and development expenses, and general and administrative expenses. The following table sets forth a breakdown of these expenses for the periods indicated.
| For the year ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 19,674 | 21,420 | 12,154 | 1,762 | ||||||||||||
| Research and development | 11,576 | 16,204 | 9,532 | 1,381 | ||||||||||||
| General and administrative | 74,757 | 80,676 | 70,788 | 10,263 | ||||||||||||
| Impairment of long-term investments | 1,430 | — | — | — | ||||||||||||
| Impairment of intangible assets | — | 3,828 | 7,911 | 1,147 | ||||||||||||
| Impairment of goodwill | — | 2,223 | 12,758 | 1,850 | ||||||||||||
| Total | 107,437 | 124,351 | 113,143 | 16,403 | ||||||||||||
Selling and Marketing Expenses
Our selling and marketing expenses primarily consist of staff costs for personnel engaged in sales, marketing and customer support functions, share-based compensation, marketing expenses, travel expenses and office expenses.
Research and Development Expenses
Our research and development expenses primarily consist of staff costs for personnel engaged in research and development functions, share-based compensation, travel expenses, rental costs, costs of consumables and accessories, and depreciation and amortization (mainly related to our clinical laboratory facilities and CDA devices used for research and development purposes). We expect to continue invest in research and development activities.
General and Administrative Expenses
Our general and administrative expenses primarily include staff costs for personnel engaged in general and administrative functions, share-based compensation, patent service fees, professional service fees, depreciation and amortization (mainly related to our land use rights for the land we acquired in Lishui, Zhejiang Province and the office facilities on that land), rental and property management fees and office expenses. We expect to reduce our general and administrative expenses and improve our operation efficiency.
Impairment of Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets acquired less liabilities assumed of an acquired business. The Group’s goodwill at December 31, 2020 arose from its business acquisition of Shiji (Hainan) Medical Technology Ltd. in fiscal 2017, the Group’s goodwill at December 31, 2021 arose from its business acquisition of Anpai Shanghai in 2021. Goodwill acquired in a business combination is not amortized, but instead tested for impairment at least annually, or more frequently if certain circumstances indicate a possible impairment may exist. No goodwill impairment loss was recognized for the year ended December 31, 2020. For the year ended December 31, 2021, the Group determined that the fair value of goodwill acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. in fiscal 2017 is Nil. Therefore, the Group fully impaired the goodwill resulted from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB2.2 million. For the year ended December 31, 2022, due to the slow development of Anpai Shanghai, the Group fully impaired the goodwill of RMB12.8 million (US$1.9 million) resulted from the acquisition of Anpai Shanghai in the year ended December 31, 2022.
105
Impairment of long-lived assets other than goodwill
Long-lived assets, including property and equipment and intangibles with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable.
The Group did not recognize any impairment loss in long-lived assets for the year ended December 31, 2020. For the year ended December 31, 2021, due to the slow development of Shiji (Hainan) Medical Technology Ltd., the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Shiji (Hainan) Medical Technology Ltd. was Nil. Therefore, the Group impaired the intangible assets acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB3.8 million. For the year ended December 31, 2022, due to the slow development of Anpai Shanghai, the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Anpai Shanghai was Nil. Therefore, the Group impaired the intangible assets acquired from the acquisition of Anpai Shanghai of RMB7.9 million (US$1.1 million).
Non-operating Income and Expenses
Other Income (Expense), Net
Our net other income in 2020 primarily included government grants. Our net other expense in 2021 primarily included change in fair value of convertible debt. Our net other expense in 2022 primarily included foreign exchange loss.
Taxation
BVI
Our Company is incorporated in the BVI, and we conduct our business operations primarily through our subsidiaries in China and the U.S.
All dividends, interest, rents, royalties, compensation and other amounts paid by our company to persons who are not resident in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of our company by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.
All instruments relating to transfers of property to or by our company and all instruments relating to transactions in respect of the shares, debt obligations or other securities of our company and all instruments relating to other transactions relating to the business of our company are exempt from payment of stamp duty in the BVI. This assumes that our company does not hold an interest in real estate in the BVI.
There are currently no withholding taxes or exchange control regulations in the BVI applicable to our company or its members.
China
Our subsidiaries in China are subject to the statutory enterprise income tax at a rate of 25%, in accordance with the EIT Law. Some of our PRC subsidiaries enjoy preferential enterprise income tax rates. Dividends, interest, rent or royalties payable by our PRC subsidiaries to their non-PRC resident enterprise investors, and proceeds from any such non-resident enterprise investor’s disposition of assets (after deducting the net value of such assets) will be subject to withholding tax at a rate of 10%, unless the jurisdiction of incorporation of the respective non-PRC resident enterprise investor has a tax treaty or arrangements with the PRC that provides for a reduced withholding tax rate or an exemption from withholding tax. If our BVI holding company were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would also be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—Risk Factors—Risks Relating to Doing Business in China—Under the PRC Enterprise Income Tax Law, we may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders, and have a material adverse effect on our results of operations and the value of your investment.” For the foreseeable future, we intend to invest all the undistributed earnings of our subsidiaries incorporated in the PRC and do not plan to have our PRC subsidiaries distribute any dividend. Therefore, no withholding tax is expected to be incurred.
United States
Our U.S. subsidiary, AnPac US, is subject to U.S. federal corporate income tax at a rate of 21% for the years ended December 31, 2020, 2021 and 2022. AnPac US is also subject to state income tax in California for the years ended December 31, 2020, 2021 and 2022. Fresh 2 Technology Inc is subject to the U.S. federal corporate income tax at a rate of 21% and state income tax in Delaware for the year ended December 31, 2022.
106
Results of Operations
The following table summarizes our results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| Year ended December 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||||||
| RMB | Revenues | RMB | Revenues | RMB | US$ | Revenues | ||||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||
| Cancer screening and detection tests | 18,445 | 89.9 | 14,947 | 83.1 | 8,078 | 1,171 | 67.0 | |||||||||||||||||||||
| Physical checkup packages, net | 2,064 | 10.1 | 1,654 | 9.2 | 1,574 | 228 | 13.1 | |||||||||||||||||||||
| Technology service | — | — | 1,284 | 7.1 | 2,186 | 317 | 18.2 | |||||||||||||||||||||
| Retail revenue | — | — | 101 | 0.6 | 206 | 30 | 1.7 | |||||||||||||||||||||
| Total revenues | 20,509 | 100.0 | 17,986 | 100.0 | 12,044 | 1,746 | 100.0 | |||||||||||||||||||||
| Cost of revenues, | (7,628 | ) | (37.2 | ) | (5,732 | ) | (31.9 | ) | (3,708 | ) | (538 | ) | (30.8 | ) | ||||||||||||||
| Gross profit | 12,881 | 62.8 | 12,254 | 68.1 | 8,336 | 1,208 | 69.2 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling and marketing | (19,674 | ) | (95.9 | ) | (21,420 | ) | (119.1 | ) | (12,154 | ) | (1,762 | ) | (100.9 | ) | ||||||||||||||
| Research and development | (11,576 | ) | (56.4 | ) | (16,204 | ) | (90.1 | ) | (9,532 | ) | (1,381 | ) | (79.1 | ) | ||||||||||||||
| General and administrative | (74,757 | ) | (364.5 | ) | (80,676 | ) | (448.5 | ) | (70,788 | ) | (10,263 | ) | (587.7 | ) | ||||||||||||||
| Impairment of long-term investments | (1,430 | ) | (7.0 | ) | — | — | — | — | — | |||||||||||||||||||
| Impairment of intangible assets | — | — | (3,828 | ) | (21.3 | ) | (7,911 | ) | (1,147 | ) | (65.7 | ) | ||||||||||||||||
| Impairment of goodwill | — | — | (2,223 | ) | (12.4 | ) | (12,758 | ) | (1,850 | ) | (105.9 | ) | ||||||||||||||||
| Loss from operations | (94,556 | ) | (461.0 | ) | (112,097 | ) | (623.3 | ) | (104,807 | ) | (15,195 | ) | (870.2 | ) | ||||||||||||||
| Non-operating income and expenses: | ||||||||||||||||||||||||||||
| Interest expense, net | (1,143 | ) | (5.6 | ) | (4,257 | ) | (23.7 | ) | (373 | ) | (54 | ) | (3.1 | ) | ||||||||||||||
| Foreign exchange loss, net | (667 | ) | (3.3 | ) | (202 | ) | (1.1 | ) | (787 | ) | (114 | ) | (6.5 | ) | ||||||||||||||
| Share of net gain (loss) in equity method investments | (13 | ) | (0.1 | ) | 132 | 0.7 | 156 | 23 | 1.3 | |||||||||||||||||||
| Other income (expense), net | 9,096 | 44.4 | 990 | 5.5 | (61 | ) | (9 | ) | (0.5 | ) | ||||||||||||||||||
| Gain from fair value change in equity investment | — | — | 3,240 | 18.0 | — | — | — | |||||||||||||||||||||
| Change in fair value of convertible debt and settlement gain | 6,630 | 32.3 | (9,073 | ) | (50.4 | ) | 144 | 21 | 1.2 | |||||||||||||||||||
| Loss before income taxes | (80,653 | ) | (393.3 | ) | (121,267 | ) | (674.3 | ) | (105,728 | ) | (15,328 | ) | (877.8 | ) | ||||||||||||||
| Income tax benefit | 88 | 0.4 | 1,180 | 6.6 | 2,130 | 309 | 17.7 | |||||||||||||||||||||
| Net loss | (80,565 | ) | (392.8 | ) | (120,087 | ) | (667.7 | ) | (103,598 | ) | (15,019 | ) | (860.2 | ) | ||||||||||||||
107
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenues
Our total revenues decreased by 33.0% to RMB12.0 million (US$1.7 million) for the year ended December 31, 2022 from RMB18.0 million for the year ended December 31, 2021, primarily due to a significant decrease in our revenue from sales of cancer screening and detection tests.
Our revenue generated from sales of cancer screening and detection tests decreased by 46.0% to RM8.1 million (US$1.2 million) for the year ended December 31, 2022 from RMB14.9 million for the year ended December 31, 2021, primarily due to the fact that more customers only performed basic CDA tests with lower pricing instead of comprehensive combined CDA tests in 2022 and a decrease in CDA-based tests. Our average individual CDA-based test price in 2022 was RMB266 (US$39), which decreased by 31.3% from RMB387 in 2021. We completed 30,390 CDA-based tests in 2022 compared to 38,628 CDA-based tests in 2021.
Our net revenue generated from sales of physical checkup packages decreased to RMB1.6 million (US$228,000) for the year ended December 31, 2022 from RMB1.7 million for the year ended December 31, 2021, primarily due to the drop in the volume of physical checkup packages that we completed in 2022.
We started to provide technology services in the year ended December 31, 2021, and related revenue amounted to RMB1.3 million and RMB2.2 million (US$317,000) for the years ended December 31, 2021 and 2022, respectively.
We started to sell retail products in the year ended December 31, 2021, and related revenue amounted to RMB101,000 and RMB206,000 (US$30,000) for the years ended December 31, 2021 and 2022, respectively.
Cost of Revenues
Our cost of revenues decreased by 30.8% to RMB3.7 million (US$538,000) for the year ended December 31, 2022 from RMB5.7 million for the year ended December 31, 2021, primarily attributable to a decrease of RMB2.3 million in cost of revenue from cancer screening and detection tests, which was in line with the decrease in our revenue from such tests. This was offset by the increased cost of revenues from technology services and retail products.
Our cost of revenues from sales of cancer screening and detection tests decreased to RMB3.0 million (US$436,000) for the year ended December 31, 2022 from RMB5.3 million for the year ended December 31, 2021, which was due to less cancer detection tests performed, decreased costs related to testing materials, outsourced biomarker-based tests, blood sample taking and medical consumables. The decrease was in line with the decrease in our revenue from sales of cancer screening and detection tests.
Our cost of revenues from technology services amounted to RMB353,000 and RMB601,000 (US$87,000) for the years ended December 31, 2021 and 2022, respectively.
Our cost of revenues from retail products amounted to RMB43,000 and RMB100,000 (US$14,000) for the years ended December 31, 2021 and 2022, respectively.
Gross Profit
Our gross profit decreased to RMB8.3 million (US$1.2 million) for the year ended December 31, 2022 from RMB12.3 million for the year ended December 31, 2021. Gross margin was 69.2% for the year ended December 31, 2022, representing an increase from 68.1% for the year ended December 31, 2021, primarily due to higher gross margin in technology services. The gross margin was 72.5% for the technology services, which is higher than the average gross margin for other revenue streams.
108
Operating Expenses
Selling and marketing expenses
Our selling and marketing expenses decreased by 43.3% to RMB12.2 million (US$1.8 million) for the year ended December 31, 2022 from RMB21.4 million for the year ended December 31, 2021, primarily due to less marketing activities caused by the COVID-19 shutdown in Shanghai.
Research and development expenses
Our research and development expenses decreased by 41.2% to RMB9.5 million (US$1.4 million) for the year ended December 31, 2022 from RMB16.2 million for the year ended December 31, 2021, primarily due to a decrease of RMB4.0 million in share based compensation and a decrease of RMB1.3 million in testing materials expense due to less research and development activities for the year ended December 31, 2022 compared to the year ended December 31, 2021.
General and administrative expenses
Our general and administrative expenses decreased by 12.3% to RMB70.8 million (US$10.3 million) for the year ended December 31, 2022 from RMB80.7 million for the year ended December 31, 2021, primarily due to the decrease of RMB15.7 million in share-based compensation and a decrease of RMB3.5 million in employee compensation, partially offset by an increase of RMB13.4 million in professional fee.
Impairment of Intangible assets
In the year ended December 31, 2021, due to the slow development of Shiji (Hainan) Medical Technology Ltd., the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Shiji (Hainan) Medical Technology Ltd. was Nil. Therefore, the Company wrote off the intangible assets acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB3.8 million.
On August 15, 2021, the Company completed a step acquisition of 60% equity interest in Anpai Shanghai, consisting of an acquisition of the 40% equity interest of Anpai Shanghai acquired from Dr. Yu. Due to the slow development of Anpai Shanghai, the Company evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Anpai Shanghai was Nil. Therefore, the Company impaired the intangible assets (customer relationships) acquired from the acquisition of Anpai Shanghai of RMB7.9 million (US$1.1 million) in the year ended December 31, 2022.
Impairment of goodwill
In the year ended December 31, 2021, the Company impaired the goodwill RMB2.2 million from the acquisition of Shiji (Hainan) Medical Technology Ltd., due to certain key management team departures from the Company.
In the year ended December 31, 2022, the Company wrote off RMB12.8 million (US$1.9 million) of goodwill from the acquisition of Anpai Shanghai, due to sluggish business operations and the continuous losses incurred.
109
Non-operating Income and Expenses
Interest expense, net
Our net interest expense decreased significantly to RMB373,000 (US$54,000) for the year ended December 31, 2022 from RMB4.3 million for the year ended December 31, 2021, primarily due to a decrease in our convertible debts in 2022.
Other income (expense), net
Net other expense amounted to RMB61,000 (US$9,000) for the year ended December 31, 2022, as compared to net income of RMB1.0 million for the year ended December 31, 2021, primarily due to a paycheck protection program loan of RMB905,000 that was forgiven in the year ended December 31, 2021.
Change in fair value of convertible debt
For the years ended December 31, 2021 and 2022, we recognized an unrealized loss of RMB9.1 million and unrealized income of RMB144,000 (US$21,000) from our convertible debts.
Gain from fair value change in equity investment
On August 15, 2021, the Group acquired 40% equity interest of Anpai Shanghai from Dr. Chang Yu. Total equity interest in Anpai Shanghai reached 60%. The Company recognized a gain from fair value change in equity investment of RMB3.2 million due to the previously held 20% equity interest in Anpai Shanghai was revaluated in the acquisition.
Net Loss
As a result of the foregoing, our loss was RMB103.6million (US$15.0 million) for 2022, compared to a loss of RMB120.1 million for 2021.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues
Our total revenues decreased by 12.3% to RMB18.0 million (US$2.8 million) for 2021 from RMB20.5 million for 2020, primarily due to a significant decrease in our revenue from sales of cancer screening and detection tests.
Our revenue generated from sales of cancer screening and detection tests decreased by 19.0% to RM14.9 million (US$2.3 million) for 2021 from RMB18.4 million for 2020, primarily due to lower test prices charged in 2021 and decrease in CDA-based tests. Our average individual CDA-based test price in 2021 was RMB387 (US$61), which decreased by 13.2% from RMB446 in 2020. We completed 38,628 CDA-based tests in 2021 compared to 41,354 CDA-based tests completed in 2020.
Our net revenue generated from sales of physical checkup packages decreased to RMB1.7 million (US$260,000) for 2021 from RMB2.1 million for 2020, primarily due to a decrease in the volume of physical checkup packages that we completed in 2021.
We started to provide technology services in 2021, and related revenue amounted to RMB1.3 million (US$201,000).
We started to sale retail products in 2021, and related revenue amounted to RMB101,000 (US$16,000).
110
Cost of Revenues
Our cost of revenues decreased by 24.9% to RMB5.7 million (US$899,000) for 2021 from RMB7.6 million for 2020, primarily attributable to a decrease of RMB2.3 million (US$332,000) in cost of revenue from cancer screening and detection tests due to less comprehensive multi-cancer detection tests performed, which resulted in decreased costs related to testing materials, outsourced biomarker-based tests, blood sample taking and medical consumables.
Our cost of revenues from sales of cancer screening and detection tests decreased to RMB5.3 million (US$837,000) for 2021 from RMB7.6 million for 2020, which was in line with the decrease in our revenue from sales of cancer screening and detection tests.
Our cost of revenues from technology services was RMB353,000 (US$55,000) for 2021, and no such cost incurred for 2020.
Our cost of revenues from retail products was RMB43,000 (US$7,000) for 2021, and no such cost incurred for 2020.
Gross Profit
Our gross profit decreased to RMB12.3 million (US$1.9 million) for 2021 from RMB12.9 million for 2020, which was in line with the decrease in our revenue from 2020 to 2021 primarily due to lower test prices we charged for the comprehensive CDA-based tests and physical checkup tests performed. Our gross margin increased to 68.1% for 2021 from 62.8% for 2020 mainly due to higher gross profit margin for technology services.
Operating Expenses
Selling and marketing expenses
Our selling and marketing expenses increased by 8.9% to RMB21.4 million (US$3.4 million) for 2021 from RMB19.7 million for 2020, primarily due to higher share-based compensation as we granted more options to our marketing and sales personnel.
Research and development expenses
Our research and development expenses increased by 40.0% to RMB16.2 million (US$2.5 million) for 2021 from RMB11.6 million for 2020, primarily because we conducted more research and development activities. This increase was also attributable to an increase in our research and development related materials and higher staff costs and share-based compensation for our research and development personnel.
General and administrative expenses
Our general and administrative expenses increased by 7.9% to RMB80.7 million (US$12.6 million) for 2021 from RMB74.8 million for 2020, primarily due to increase in share-based compensation.
Impairment of long-term investments
Our impairment of long-term investments was Nil and RMB1.4 million for 2021 and 2020 primarily because our investment in Jiangsu Anpac was fully impaired as of December 31, 2020.
Impairment of Intangible assets and goodwill
For the year ended December 31, 2021, due to the slow development of Shiji (Hainan) Medical Technology Ltd., the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Shiji (Hainan) Medical Technology Ltd. was Nil. Therefore, the Company wrote off the intangible assets acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB3.8 million (US$601,000) and goodwill of RMB2.2 million (US$349,000).
111
Non-operating Income and Expenses
Interest expense, net
Our net interest expense increased significantly to RMB4.3 million (US$668,000) for 2021 from RMB1.1million for 2020, primarily due to an increase in our convertible debts in 2021.
Other income (expense), net
We recognized net other income decreased significantly to RMB1.0 million (US$155,000) for 2021, from RMB9.1 million for 2020, primarily due to a significantly decrease from government subsidy in 2021.
Change in fair value of convertible debt and settlement gain
For the years ended December 2021, we recognized an unrealized loss of RMB9.1 million (US$1.4 million) from convertible debts. We elected to recognize the convertible debt at fair value. For the years ended December 31, 2019, we recognized an unrealized loss of RMB5.3 million, due to changes in fair value of our convertible debt borrowed from Zhijun, respectively. For the year ended December 31, 2020, we fully repaid the convertible debt with Zhijun and recognized a settlement gain of RMB7.2 million. In addition, we recognized an unrealized loss of RMB532,000 from new convertible debt borrowed from EMA Financial, LLC due to a change in its fair value in 2020.
Gain from fair value change in equity investment
On August 15, 2021, the Group completed an acquisition of 60% equity interest in Anpai Shanghai, consisting of an acquisition of 40% equity interest of Anpai Shanghai acquired from Dr. Chang Yu and a 20% equity investment in Anpai Shanghai which the Group held prior to August 15, 2021. The Company recognized a gain from fair value change in equity investment of RMB3.2 million (US$508,000)
Net Loss
As a result of the foregoing, our loss for the year was RMB120.1 million (US$18.8 million) for 2021 compared to a loss of RMB80.6 million for 2020.
Non-GAAP Financial Measure
In evaluating our business, we consider and use adjusted net loss, a non-GAAP measure, as a supplemental measure to review and assess our operating performance. The presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss adjusted to add back share-based compensation expenses.
We believe that adjusted net loss helps to identify underlying trends in our business that could otherwise be distorted by the effect of the expenses that we add back to net loss. We believe that adjusted net loss provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
The non-GAAP financial measure “adjusted net loss” is not defined under U.S. GAAP, is not presented in accordance with U.S. GAAP and has limitations as an analytical tool. One of the key limitations of using adjusted net loss is that it does not reflect all of the items of income and expense that affect our operations. Share-based compensation has been and may continue to be incurred in our business and is not reflected in the presentation of adjusted net loss. Further, the non-GAAP financial measure “adjusted net loss” may differ from the non-GAAP information used by other companies, including peer companies, and therefore their comparability may be limited.
112
We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. This non-GAAP financial measure should be viewed in addition to, and not as a substitute for, our reported results prepared in accordance with U.S. GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP that are included elsewhere in this annual report.
| Year ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net loss | (80,565 | ) | (120,087 | ) | (103,598 | ) | (15,019 | ) | ||||||||
| Add: | ||||||||||||||||
| Change in fair value of convertible debts | (6,630 | ) | 9,073 | (144 | ) | (21 | ) | |||||||||
| Share-based compensation expenses | 17,762 | 34,167 | 14,924 | 2,164 | ||||||||||||
| Adjusted net loss | (69,433 | ) | (76,847 | ) | (88,818 | ) | (12,876 | ) | ||||||||
Recent Accounting Pronouncements
A list of recent relevant accounting pronouncements is included in Note 2 “Summary of Principal Accounting Policies” of our Consolidated Financial Statements.
Inflation
Since our inception, inflation has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent change in the consumer price index was 0.3% for December 2020, 1.5% for December 2021 and 2.0% for December 2022. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.
B. Liquidity and Capital Resources
Our principal sources of liquidity have been cash generated from financing and operating activities. Management expects that we will require continuous capital financing through debt or equity issuance to support our working capital. As of December 31, 2022, we had RMB1.9 million (US$271,000) of cash and cash equivalents and a working capital deficit of RMB28.6 million (US$4.1 million). For the years ended December 31, 2020, 2021 and 2022, we incurred continuous losses of RMB80.6 million, RMB120.1 million and RMB103.6 million (US$15.0 million), respectively. For the years ended December 31, 2020, 2021 and 2022, net cash used in operating activities of RMB59.0 million, RMB71.7 million and RMB55.1 million (US$8.0 million), respectively. The recent resurgence of COVID-19 and lockdown policies in Shanghai, China also had a negative impact on the Group’s operation. The above-mentioned facts raise substantial doubt about the Group’s ability to continue as a going concern. In assessing its liquidity, management monitors and analyzes the Group’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. With respect to capital funding requirements, the Group budgeted capital spending based on ongoing assessments of needs to maintain adequate cash. The Group intends to finance its future working capital requirements and capital expenditures from financing activities until the Group’s operating activities generate positive cash flows, if ever. Management expects continuous capital financing through debt or equity issuances to support its working capital requirements.
Subsequently we have signed the following capital raising agreements:
In December 2022 and January 2023, the Company signed definitive investment agreements with several third-party investors. The investors agreed to purchase 33,171,421 newly issued Class A ordinary shares of the Company at a price of US$0.175 per ordinary share or, for a total purchase price of approximately US$5,805 (RMB40,038). The Company received approximately US$5.1 million (RMB35.3 million) by April 22, 2023.
113
In March 2023, the Company signed definitive investment agreements with several shareholders, whereby the investors agreed to purchase an aggregate of 16,666,665 Class A ordinary shares at a price of US$0.30 per ordinary share for a total purchase price of $5.0 million (RMB34.5 million). The Company has not received any proceeds from these agreements.
On April 6, 2023, the Company completed the sale to institutional investors of a total of 12,500,000 Class A ordinary shares, pre-funded warrants exercisable for 2,500,000 Class A ordinary shares and warrants exercisable for 750,000 ADSs. The purchase price of each pre-funded warrant is equal to the price per one ADS, minus $0.0001, and the exercise price of each pre-funded warrant will equal $0.0001 per share. The pre-funded warrants are immediately exercisable and may be exercised at any time until exercised in full. The warrants are immediately exercisable, will expire five (5) years from the original issuance date and will have an exercise price of $4.00 per ADS. The Company issued to Univest Securities, LLC (“Univest”), the sole placement agent for the Offering, warrants exercisable for 37,500 ADSs, with an exercise price of $4.80 per ADS (the “Placement Agent Warrants”), pursuant to a placement agency agreement (the “Placement Agency Agreement”) dated March 31, 2023 between the Company and Univest. Other than in respect of the exercise price, the Placement Agent Warrants have terms identical to the pre-funded warrants. The Company received of approximately US$3.0 million from this investment.
We can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to us, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfall, there would likely be a material adverse effect on us and our financial statements.
The consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.
Based on the above assessment, we are uncertain as to when we will be able to obtain the above financings to fund our working capital requirements during the next 12 months from date of this report. As a result, the substantial doubt about the Company’s ability to continue as a going concern remains as of the date of this report.
We intend to finance our future working capital requirements and capital expenditures from cash generated from funds raised from financing activities until operating activities generate positive cash flows, if ever. We may, however, also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet its requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts it needs or on terms acceptable to us, if at all. Issuance of additional equity securities or equity-linked securities, including convertible debt securities, would dilute its earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict its operations and its ability to pay dividends to our shareholders.
Substantially all of our revenues in the foreseeable future are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in U.S. dollars to us without prior SAFE approval by following these routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.
The following table sets forth selected cash flow statement information for the periods indicated:
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net cash used in operating activities | (58,967 | ) | (71,709 | ) | (55,060 | ) | (7,983 | ) | ||||||||
| Net cash used in investing activities | (2,482 | ) | (3,932 | ) | (1,592 | ) | (231 | ) | ||||||||
| Net cash provided by financing activities | 60,924 | 83,420 | 49,469 | 7,173 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,584 | ) | (1,544 | ) | (198 | ) | (29 | ) | ||||||||
| Net increase (decrease) in cash, cash equivalents | (3,109 | ) | 6,235 | (7,381 | ) | (1,070 | ) | |||||||||
| Cash and cash equivalents at the beginning of the year | 6,125 | 3,016 | 9,251 | 1,341 | ||||||||||||
| Cash and cash equivalents at the end of the year | 3,016 | 9,251 | 1,870 | 271 | ||||||||||||
114
Operating Activities
Net cash used in operating activities for 2022 was RMB55.1 million (US$8.0 million), which was primarily attributable to our net loss of RMB103.6 million (US$15.0 million) for the same year, as adjusted to add back share-based compensation of RMB14.9million (US$2.2 million), impairment of goodwill of RMB12.8 million (US$1.9 million) and impairment of intangible assets of RMB7.9 million (US$1.1 million). Our increase in net operating assets and liabilities of RMB8.7 million (US$1.3 million) was primarily due to (i) a RMB5.5 million (US$798,000) increase in accrued expenses and other current liabilities (ii) a decrease of RMB2.9 million (US$420,000) in account receivable and (iii) a decrease of RMB1.2 million (US$175,000) in advances to suppliers.
Net cash used in operating activities for 2021 was RMB71.7 million, which was primarily attributable to our net loss of RMB120.1 million for the same year, as adjusted to add back share-based compensation of RMB34.2 million and fair value loss on convertible loans of RMB9.1 million. Our decrease in net operating assets and liabilities of RMB2.4 million was primarily due to (i) a RMB1.9 million decrease in accrued expenses and other current liabilities (ii) a decrease of RMB1.2 million in deferred tax liability mainly due to impairment of intangible assets from acquisition of Hainan and (iii) an increase of RMB1.1 million in other current assets, partially offset by a RMB1.5 million decrease in account receivable in line with less revenue generated in 2021.
Net cash used in operating activities for 2020 was RMB59.0 million, which was primarily attributable to our net loss of RMB80.1 million for the same year, as adjusted to add back share-based compensation of RMB17.8 million and to deduct gain on settlement of convertible loan of RMB7.2 million. Our increase in net operating assets and liabilities of RMB2.0 million was primarily due to (i) an increase of RMB6.8 million in accrued expenses and other current liabilities as a result of the increased accrued service costs and consulting fees and (ii) an increase of RMB4.8 million in other current assets, partially offset by a RMB7.3 million decrease in accounts receivable and an RMB4.8 million increase in advance to suppliers in line with higher revenue generated in 2020.
Investing Activities
Net cash used in investing activities for 2022 was RMB1.6 million (US$231,000), which was primarily attributable to our purchase of property and equipment of RMB1.5 million (US$211,000).
Net cash used in investing activities for 2021 was RMB3.9 million), which was primarily attributable to our purchase of property and equipment of RMB3.9 million.
Net cash used in investing activities for 2020 was RMB2.5 million, which was primarily attributable to our purchase of property and equipment of RMB2.5 million.
Financing Activities
Net cash provided by financing activities for 2022 was RMB49.4 million (US$7.2 million), which was primarily attributable to (i) proceeds from private placement of RMB61.0 million (US$8.8 million), and (ii) proceeds from short-term borrowings of RMB5.0 million (US$725,000), partially offset by (iii) purchase treasury shares of RMB11.0 million (US$1.6 million), and (iv) payment for short-term borrowings of RMB5.9 million (US$855,000).
Net cash provided by financing activities for 2021 was RMB83.4 million, which was primarily attributable to (i) proceeds from private placement of RMB42.4 million, and (ii) proceeds from short-term borrowings of RMB38.2 million, partially offset by payment for short-term borrowings of RMB6.0 million.
Net cash provided by financing activities for 2020 was RMB60.9 million, which was primarily attributable to (i) proceeds from issuance of ordinary shares of RMB110.7 million, partially offset by our payment for IPO-related expenses of RMB25.6 million, and (ii) proceeds from short-term borrowings of RMB13.8 million, partially offset by payment for short-term borrowings of RMB20.0 million and repayment of convertible loans of RMB17.3 million.
Capital Expenditures
Our capital expenditures were RMB2.5 million, RMB4.0 million and RMB1.6 million (US$231,000) for the years ended December 31, 2020, 2021 and 2022, respectively. In these periods, these capital expenditures included the purchases of property and equipment and intangible assets. We will continue to make capital expenditures to meet the needs of our business’ expected growth.
C. Research and Development, Patents and Licenses, Etc.
See “Item 4. Information on the Company—B. Business Overview—Research and Development.” See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
115
D. Trend Information
Market Trends
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the fiscal year ended December 31, 2022 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.
E. Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Goodwill
The Group has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described below is required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired, and the Group is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Group must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
For the years ended December 31, 2020, the Group performed a qualitative assessment for the reporting unit. Based on the requirements of ASC 350-20, the Group evaluated all relevant qualitative and quantitative factors, weighed all factors in their entirety and concluded that it was not more-likely-than-not that the fair value of the reporting unit was less than its carrying amount. Therefore, no goodwill impairment was recognized as of December 31, 2020.
For the year ended December 31, 2021, the Group performed the quantitative impairment test and determined that the fair value of goodwill acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. in fiscal 2017 is Nil. Therefore, the Group impaired the goodwill acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB2.2 million for the year ended December 31, 2021.
For the year ended December 31, 2022, due to the slow development of Anpai Shanghai, the Group performed the quantitative impairment test for the reporting unit. In accordance with ASC 350-20, the Group recorded an impairment loss of RMB12.8 million ($1.9 million) for the year ended December 31 2022.
Impairment of Long-lived assets other than goodwill
The Group evaluates its long-lived assets, including property and equipment and intangibles with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Group evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Group did not perform such an evaluation for the years ended December 31, 2020. For the year ended December 31, 2021, due to the slow development of Shiji (Hainan) Medical Technology Ltd., the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Shiji (Hainan) Medical Technology Ltd. was Nil. Therefore, the Group impaired the intangible assets acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB3.8 million for the year ended December 31, 2021. For the year ended December 31, 2022, due to the slow development of Anpai Shanghai, theGroup evaluated the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined that the fair value of intangible assets of Anpai Shanghai was Nil. Therefore, the Group impaired the intangible assets acquired from the acquisition of Anpai Shanghai of RMB7.9 million (US$1.1million) for the year ended December 31, 2022.
116
Revenue Recognition
We derive its revenues principally from customers through the Group’s cancer screening and detection test and physical checkup package services. Revenue is recognized when the Group satisfies the performance obligations in an amount of consideration to which the Group expects to be entitled to in exchange for those services. The Group evaluates the presentation of revenue on a gross or net basis based on whether it controls the services provided to customers and is the principal (i.e., “gross”), or the Group arranges for other parties to provide the service to the customers and is an agent (i.e., “net”). The Group presents value-added taxes as a reduction from revenues.
Revenue from Cancer Screening and Detection Tests
Revenue from cancer screening and detection test are primarily generated through administration of the tests to the Group’s customer constituents, the Group’s cancer screening and detection tests based on CDA technology and other cancer screening and detection technologies, such as biomarker-based tests, to its customers (primarily corporations and life insurance companies). A contract exists when the master service agreement has been executed and the customer submitting a service request, which is a placed order. The Group’s contracts have a single performance obligation which is satisfied upon rendering of the cancer screening and detection tests and delivery of the cancer screening and detection test results to the customer or customer’s employee as well as individual policy holder. The Group acts as the principal as it controls the cancer screening and detection tests before it is transferred to the customer and records revenue on a gross basis at a point in time, when the cancer screening and detection test results are delivered to the customer. The Group accrues 5% of the revenue from cancer screening and detection tests as warranty liability which was included in accrued expenses and other current liabilities.
Revenue from Physical Checkup Packages
We facilitate corporations and life insurance companies to procure physical checkup package services for their employees and policy holders, respectively, from third-party physical checkup package service providers. The Group enters into contracts with corporations and life insurance companies and physical checkup service providers. The Group considers both the corporations and life insurance companies and the third-party physical checkup package service providers as its customers in this type of transaction. The Group’s performance obligation is to facilitate the corporations and life insurance companies and the third-party physical checkup package service providers to complete the purchase of physical checkup package services, which is not controlled by the Group prior to being transferred to the corporations and life insurance companies. The Group fulfills its performance obligation at a point in time when the employees and policy holders of corporations and life insurance companies, respectively, complete the physical checkups at which the Group records the net amount that it retains from such completed transaction as revenue.
Revenue from Technology services
We provide a series of technology services including but not limited to market research, designing, coding, developing, testing, etc. to a client for a contractual term of two years. As the series of services are an integral part of a project of which the goal is to enable the client to produce a cancer-treatment medical device, none of the mentioned services can be isolated and identified as a distinct performance obligation. Revenue from technology services is recognized over time. The Group concluded that the combined services in the contract constitutes a single performance obligation. The contract price is fully allocated to the single performance obligation.
The Group uses input methods to measure the progress toward complete satisfaction of the performance obligation. Input methods measure progress based on resources consumed or efforts expended relative to total resources expected to be consumed or total efforts expected to be expended. The completion percentage is determined by costs incurred/total costs estimated to be incurred.
Retail revenue
We started retail business of genetic testing kits and skin-care products in fiscal 2021. Customers pay upfront and we deliver the ordered products. Revenue was recognized at upon delivery.
We also enter into arrangements to deliver both CDA-based tests and physical checkup services. We are the principal for the CDA-based tests and the agent for the physical checkup services. Revenues for both services are recognized at the point in time when the performance obligation is satisfied upon delivery of the CDA-based test results to the end customers and completion of the physical checkup services, respectively. As we act as both the principal and agent in the arrangement, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis.
Contract balances
The payment terms and conditions within the Group’s contracts vary by the type of services and the customers.
Contract assets relate to the Group’s conditional right to consideration for completed performance obligations under the contract. Accounts receivable are recorded when the right to consideration becomes unconditional. The Group does not have contract assets for the years presented.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Group has determined that its contracts generally do not include a significant financing component.
117
PRC Value-Added Taxes and surcharges
The services of the Group are subject to 6% of Value-Added Taxes. Retail sales are subject to 3% or 13% of Value-Added Taxes. The Group is subject to education surtax and urban maintenance and construction tax, on the services provided in the PRC.
Research and Development Expenses
Research and development expenses primarily are comprised of costs incurred in performing research and development activities, including related personnel and consultant’s salaries, benefits, share-based compensation and related costs, raw materials and supplies for internally-developed product candidates, and external costs of outside vendors engaged to conduct clinical development activities and trials. We expense our research and development expenses as they are incurred.
Share-Based Compensation
We account for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or an equity award. All the Group’s share-based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.
We have elected to elected to recognize share-based compensation using the straight-line method for all share-based awards granted with graded vesting based on service conditions. The Group accounts for forfeitures as they occur in accordance with ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. The Black-Scholes Model were applied in determining the estimated fair value of the options granted to employees and non-employees.
Fair value of financial instruments
We apply ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Our financial instruments include cash and cash equivalents, accounts receivables, accounts payable, other receivables, other payables and short-term debt. The carrying values of these financial instruments approximate their fair values due to their short-term maturities.
We elected the fair value option to account for its convertible loans. The Group engaged an independent valuation firm to perform the valuation. The fair value of the convertible loans as of December 31, 2021 and 2022 was RMB27.9 million and RMB15,000 (US$2,000) calculated using the binomial tree model. The convertible loans are classified as level 3 instruments as the valuation was determined based on unobservable inputs which are supported by little or no market activity and reflect the Group’s own assumptions in measuring fair value. Significant estimates used in developing the fair value of the convertible loans include time to maturity, risk-free interest rate, straight debt discount rate, probability to convert and expected timing of conversion.
As the inputs used in developing the fair value for level 3 instruments are unobservable, and require significant management estimate, a change in these inputs could result in a significant change in the fair value measurement.
118
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Executive Officers
The following table sets forth information regarding our directors and executive as of the date of this annual report.
| Name | Age | Position/Title | ||
| Haohan Xu | 28 | Chairman of the Board and Co-Chief Executive Officer | ||
| Chris Chang Yu | 65 | Co-Chief Executive Officer | ||
| Xiaoyu Li | 35 | Director and Co-Chief Financial Officer | ||
| Jinqiu Tang | 40 | Co-Chief Financial Officer | ||
| Tianruo (Robert) Pu | 55 | Independent Director | ||
| Zhigang (Frank) Zhao | 63 | Independent director | ||
| Honggang (Harvey) Tian | 42 | Independent director |
Mr. Haohan Xu, age 28, has served as a director, the chairman of the board of directors (the “Board”), Co-Chief Executive Officer of the Company since October 3, 2022. Mr. Xu has been a serial entrepreneur in the technology industry and an active public figure in the digital asset industry. In January 2019, he founded Roxe, a global payment network that allows businesses, banks, cross-border remittance companies, and third-party payment platforms to interconnect with each other and can make instant, low cost, cross-border, cross platform payments, and has served as the chief executive officer since then. In January 2019, Mr. Xu founded Apifiny Group Inc, an institutional-grade digital asset trading platform that enables seamless connectivity with global digital asset exchanges and infrastructure providers, and has served as the chief executive officer since then Mr. Xu obtained his bachelor of science degree in operations research and computer science from Columbia University, School of Engineering and Applied Science, in 2019.
Dr. Chris Chang Yu, age 65, is a co-founder and co-Chief Executive Officer of the company. Dr. Yu served as chairman of the Board and CEO since our inception in January 2010 until April 6, 2022 and was re-appointed as co-chairman of the Board and co-CEO of the Company on May 7, 2022. He resigned as the co-chairman of the Board on October 03, 2022 but continued to serve as the co-CEO of the Company. As the first or principal inventor of more than 300 patent applications spanning semiconductor, materials and life science, Dr. Yu has innovated leading technologies and products during his long and successful career since 1990s. Dr. Yu and our team have developed the CDA technology for cancer screening and detection. He is a member of the ASCO. Prior to founding our company, he co-founded Anji Microelectronics (Shanghai) Co., Ltd. (688019.SH) in 2004, and that company recently completed its IPO in China’s science and technology innovation board market in July 2019. Dr. Yu served as a technical director at Semiconductor Manufacturing International Corporation (NYSE: SMI and SEHK: 981) from 2002 to 2004. Dr. Yu served as a vice president of the research and development team of Cabot Microelectronics Corporation, or Cabot, from 1996 to 2002. While working at Cabot, Dr. Yu took a multi-disciplinary approach to developing a new mechanism for a key integrated circuit material. Dr. Yu also worked at three U.S. Fortune 500 companies, including serving as a group leader in the research and development division at Rockwell Co., Ltd. from 1994 to 1995, engineer at Motorola Co., Ltd. from 1992 to 1994, and senior engineer at Micron Technology Co., Ltd. from 1989 to 1992. He has also authored more than 80 papers, some of which are relevant to cancer detection. Dr. Yu received his bachelor and master’s degrees in physics from the University of Missouri Kansas-City Campus in 1983 and 1984, respectively. He received his doctoral degree in physics from the Pennsylvania State University in 1990. His master’s and doctoral dissertations both addressed innovative detection techniques.
Mr. Jinqiu Tang, age 40, has served as our Co-Chief Financial Officers since October 3, 2022. Before that, he served as our Chief Financial Officer from June 2020 to October 3, 2022, and prior to that, as corporate controller beginning from October 2019. Prior to joining our company, Mr. Tang served as a global internal auditor at Natuzzi S.p.A (Italy) from 2016 to 2019. Previously, he worked for Beijing Dongshen CPAs from 2013 to 2016 and Shanghai De’an CPAs from 2011 to 2013, where he provided external audit, finance and tax advisory services across different industries and sectors. He has been a Certified Public Accountant in Australia since 2019 and a Forensic Certified Public Accountant in the U.S. since 2020. Mr. Tang received his bachelor’s degree in accounting from Charles Sturt University in Australia in 2007, MBA from Charles Sturt University in Australia in 2009 and his bachelor’s degree in law from Southwest University of Science and Technology in China in 2017.
119
Ms. Xiaoyu Li, age 35, has served as the Company’s director and Chief Financial Officer since October 2022. Prior to joining the Company, Ms. Li served as Senior Manager of Corporate Development, responsible for strategic M&As, at Apifiny from 2019 to 2022. Previously between 2013 and 2019, she served as an Investment Manager in Beijing, where she focused on investment on TMT companies. From 2012 and 2013, she worked at the Investor Relationship department at WOWO. Ms. Li received her Master’s degree in Finance from University of Illinois at Urbana-Champaign and a Bachelor’s degree in Economics from University of Minnesota, Twin Cities.
Mr. Tianruo (Robert) Pu, age 55, has served as a director, chairperson of the audit committee and member of the compensation committee as well as nominating and corporate governance committee since October 3, 2022. Mr. Pu has served as an independent director and chairman of the audit committee of One Connect Financial Technology (NYSE: OCFT) since 2019, a financial technology company He also serves as an independent director of Autohome Inc. (HKSE: 2518; NYSE: ATHM) since December 2016, an automotive service platform company. Mr. Pu also serves as independent director and chairman of the audit committee of 3SBio Inc. (HKSE:1530) since June 2015, a bio-pharmaceutical company. Mr. Pu has more than twenty years of work experience in finance and accounting in both the United States and China. Previously, Mr. Pu served as the chief financial officer of several companies including Zhaopin Limited (formerly NYSE: ZPIN) 2016 to 2018, UTStarcom (NASDAQ: UTSI) 2012 to 2014 and Nuokang Bio-Pharmaceutical (formerly Nasdaq: NKBP) 2008 to 2012. Mr. Pu received an MBA degree from Northwestern University Kellogg School of Management, a master of science degree in accounting from the University of Illinois, and a bachelor's degree in English Language from China Foreign Affairs University.
Mr. Zhigang (Frank) Zhao, age 63, has served as a director, chairperson of the compensation committee and member of the audit committee as well as nominating and corporate governance committee since October 3, 2022. Mr. Zhao has over two decades of experience in financial and accounting management with auditing firms and public companies. He has served as Chief Executive Officer of Uni-bioscience since January 2019. Previously, he served as the Chief Financial Officer of Wowo Limited from June 2014 to January 2019 and as the Chief Financial Officer of Borqs International Limited from 2012 to 2014. Mr. Zhao was the Chief Financial Officer of Simcere Pharmaceutical Group from 2006 to 2011. From 2005 to 2006 Mr. Zhao worked as the Chief Financial Officer of Sun New Media Inc. From 2003 to 2005 Mr. Zhao worked at FARO Technologies Inc. as a financial controller. Mr. Zhao received his bachelor degree in economics from Peking University and a MBA degree from University of Hartford. Mr. Zhao is a U.S. certified public accountant since 1993.
Mr. Honggang (Harvey) Tian, age 42, has served as a director of the Board, chairperson of the nominating and corporate governance committee and member of the audit committee as well as compensation committee since October 3, 2022. Mr. Tian is an experienced investment professional, with particular focus in Internet and high-tech industries. Mr. Tian served as a Partner of PAUVEY Capital Ltd. from September 2016 to September 2022. He holds a master's degree in engineering from Wuhan University.
None of our directors and executive officers have any family relationships up to the fourth civil degree either by consanguinity or affinity, except that Mr. Haohan Xu and Ms. Xiaoyu Li are cousins who have the same grandparents.
B. Compensation
For the year ended December 31, 2022, we paid an aggregate of approximately RMB2.6 million (US$0.4 million) in cash to our executive officers and directors. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice, for certain acts of the executive officer, such as being investigated for criminal liability, committing serious dereliction of duty, jobbery or malpractice to our detriment, or seriously violating our work discipline, rules and regulations. The executive officer may resign at any time for cause with a one-month advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to disclose, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our or our affiliates’ confidential information or trade secrets. The executive officers have also agreed that during the term of employment, all patents, copyrights and other intellectual property rights arising from our work achievement belong to us, and the executive officers have no right to use them for commercial purpose.
120
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for two years following the last date of employment. Specifically, each executive officer has agreed not to (i) approach directly or indirectly our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services directly or indirectly to any of our competitors; (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination; or (iv) engage in any business activity, technology development, or sales and marketing related to bio-medical detection devices, targeted therapies or other specified technologies.
We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
2023 Share Incentive Plan
On January 6, 2023, the Company’s Board approved and adopted the 2023 Share Incentive Plan (the “2023 Plan”) providing for the grant of options to purchase 4,000,000 Class A ordinary shares. On March 10, 2023, the Board and the Compensation Committee of the Board approved the Amended and Restated 2023 Plan increasing the number of Class A ordinary shares subject to the 2023 Plan to 13,000,000 shares. These options are to be granted to employees and professionals. The following paragraphs describe the principal terms of the 2023 Plan:
Type of Awards. The 2023 Plan permits the awards of options and other awards (such as restricted shares and restricted share units) that the plan administrator decides.
Plan Administration. Compensation Committee shall have the power to grant Awards. The Committee, in its discretion, may delegate its authority to grant Awards to an officer or committee of officers of the Company, subject to reasonable limits and guidelines established by the Committee at the time of such delegation and subject to applicable laws.
Award Agreement. Awards granted under the 2023 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to directors, service provider, advisor, employees and consultants of our company or any of our subsidiaries.
Vesting Conditions. In general, the plan administrator determines the vesting conditions, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement and shall be no less than the fair market value of a share on the date of an award grant. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is ten years from the date of a grant.
Transfer Restrictions. Each Option granted to a Participant shall be exercisable only by such Participant, provided that a Participant may assign or transfer his or her rights with respect to any or all of an Award to (i) a trust that was established solely for tax planning purposes and not for purposes of profit or commercial activity, or (ii) to one or more “family members” (as such term is defined in SEC Rule 701 promulgated under the Securities Act of 1933, as amended) by gift or pursuant to a qualified domestic relations order, or (iii) to such Participant’s beneficiaries or estate upon the death of the Participant (by will, by the laws of descent and distribution or otherwise) (each, a “Permitted Transferee”). In no event will transfers to a Person that the Committee determines is a competitor of the Company or any of its subsidiaries or provides services or financial or other support, directly or indirectly, to a competitor of the Company or its subsidiaries, be permitted.
Termination and Amendment. Unless terminated earlier, the 2023 Plan has a term of ten years. The plan administrator has the authority to amend or terminate the 2023 Plan. However, no such action may adversely affect in any material way any awards previously granted without written consent of the recipient, unless the plan administrator expressly reserved the right to make such amendment at the time the relevant awards were granted.
2022 Share Incentive Plan
On April 4, our board of directors and shareholders approved our 2022 Share Incentive Plan (the “2022 Plan”), to encourage our employees, officers, directors and consultants to continue contributing to our success. The maximum number of ordinary shares that may be issued under the 2022 Plan is 2,800,000 ordinary shares. On August 28, 2022, our board approved an increase of 1,900,000 ordinary shares to be available for grant under the 2022 Plan. The maximum number of ordinary shares that may be issued under the 2022 Plan was increased to 4,700,000 ordinary shares, As of the date of this annual report, options and restricted share units to purchase 2,933,406 Class A ordinary shares, par value $0.01 each, of our company had been granted and were outstanding under this 2022 Plan, excluding awards that had been exercised, forfeited or cancelled after the relevant grant dates. The following paragraphs describe the principal terms of the 2022 Plan:
Type of Awards. The 2022 Plan permits the awards of options and other awards (such as restricted shares and restricted share units) that the plan administrator decides.
121
Plan Administration. Compensation Committee shall have the power to grant Awards. The Committee, in its discretion, may delegate its authority to grant Awards to an officer or committee of officers of the Company, subject to reasonable limits and guidelines established by the Committee at the time of such delegation and subject to applicable laws.
Award Agreement. Awards granted under the 2022 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to directors, service provider, advisor, employees and consultants of our company or any of our subsidiaries.
Vesting Conditions. In general, the plan administrator determines the vesting conditions, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement and shall be no less than the fair market value of a share on the date of an award grant. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is ten years from the date of a grant.
Transfer Restrictions. Each Option granted to a Participant shall be exercisable only by such Participant, provided that a Participant may assign or transfer his or her rights with respect to any or all of an Award to (i) a trust that was established solely for tax planning purposes and not for purposes of profit or commercial activity, or (ii) to one or more “family members” (as such term is defined in SEC Rule 701 promulgated under the Securities Act of 1933, as amended) by gift or pursuant to a qualified domestic relations order, or (iii) to such Participant’s beneficiaries or estate upon the death of the Participant (by will, by the laws of descent and distribution or otherwise) (each, a “Permitted Transferee”). In no event will transfers to a Person that the Committee determines is a competitor of the Company or any of its subsidiaries or provides services or financial or other support, directly or indirectly, to a competitor of the Company or its subsidiaries, be permitted.
Termination and Amendment. Unless terminated earlier, the 2022 Plan has a term of ten years. The plan administrator has the authority to amend or terminate the 2022 Plan. However, no such action may adversely affect in any material way any awards previously granted without written consent of the recipient, unless the plan administrator expressly reserved the right to make such amendment at the time the relevant awards were granted.
2019 Share Incentive Plan
On October 31, 2019, our board of directors and shareholders approved our 2019 Share Incentive Plan, to encourage our employees, officers, directors and consultants to continue contributing to our success. On July 5, 2021, the Board approved the Amended and Restated 2019 Share Incentive Plan to amend the 2019 Share Incentive Plan (together the “2019 Plan). The maximum number of ordinary shares that may be issued under the 2019 Plan is 1,885,300 ordinary shares. As of the date of this annual report, options and restricted share units to purchase 77,900 Class A ordinary shares, par value $0.01 each, of our company had been granted and were outstanding under this 2019 Plan, excluding awards that had been exercised, forfeited or cancelled after the relevant grant dates. The following paragraphs describe the principal terms of the 2019 Plan:
Type of Awards. The 2019 Plan permits the awards of options and other awards (such as restricted shares and restricted share units) that the plan administrator decides.
Plan Administration. Our compensation committee or such other committee as appointed by our Board from time to time will administer the 2019 Plan. The committee, as applicable, will determine the participants to receive awards, the time, type and number of awards to be granted to each participant, and the terms and conditions of each award grant.
122
Award Agreement. Awards granted under the 2019 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to directors, service provider, advisor, employees and consultants of our company or any of our subsidiaries.
Vesting Conditions. In general, the plan administrator determines the vesting conditions, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement and shall be no less than the fair market value of a share on the date of an award grant. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is ten years from the date of a grant.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than (i) by trust that was established solely for tax planning purpose; (ii) by gift or pursuant to a qualified domestic relations order to one or more family member; or (iii) by will or the laws of descent and distribution, except as otherwise provided by the plan administrator.
Termination and Amendment. Unless terminated earlier, the 2019 Plan has a term of ten years. The plan administrator has the authority to amend or terminate the 2019 Plan. However, no such action may adversely affect in any material way any awards previously granted without written consent of the recipient, unless the plan administrator expressly reserved the right to make such amendment at the time the relevant awards were granted.
2010 Share Incentive Plan
On February 1, 2010, our shareholders and board of directors authorized the chairman of the board to grant options under a share incentive plan, or the 2010 Plan, to our eligible employees, directors, officers and consultants to purchase not exceeding 1,190,000 ordinary shares of our company by July 1, 2017. On October 19, 2015, our shareholders and board of directors resolved to increase the authorized number of shares underlying the options under the 2010 Plan to 1,866,600 ordinary shares of our company by July 1, 2017. On July 1, 2017, in order to provide additional incentives to attract and retain key employees, directors, officers and consultants of outstanding ability and to motivate them to exert their best efforts, our shareholders and board of directors further resolved to grant additional options under the 2010 Plan, resulting in a total of options to purchase up to 2,726,600 shares of our company by December 31, 2019. As of the date of this annual report, options to purchase 1,513,200 Class A ordinary shares, par value $0.01 each, of our company had been granted and were outstanding under this 2010 Plan, excluding options that had been exercised, forfeited or cancelled after the relevant grant dates. The following paragraphs describe the principal terms of this plan:
Type of Awards. The 2010 Plan only permits the awards of options.
Plan Administration. Our shareholders have authorized the chairman of our board of directors to administer the 2010 Plan. The chairman of the board may determine the grant date, number of options to be granted, participants of the 2010 Plan, vesting conditions, exercise price and other terms and conditions of the options.
Award Agreement. Options granted under the 2010 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each option award.
Eligibility. Persons eligible to participate in this plan include our employees, directors, officers and consultants.
Vesting Schedule. The plan administrator determines the vesting schedule. Subject to the terms of the relevant award agreements, the options will vest each year in a four-year schedule for our employees, directors and officers, or based on milestones of performance of the consultants.
Term and termination. The term of each option shall be ten years from the date of grant of the option. Notwithstanding the foregoing, we may forfeit all or part the options granted to a participant under the certain circumstances.
123
The following table summarizes, as of the date of this annual report, the awards granted to our directors and executive officers and other individuals as authorized by our board of directors under our 2010 Plan, 2019 Plan, 2022 Plan and 2023 Plan, excluding awards that were forfeited or canceled after the relevant grant dates and retrospectively reflecting the effectiveness of a share subdivision of each ordinary share of par value of US$1.00 into 100 ordinary shares of par value of US$0.01 each, which became effective on November 12, 2019.
| Name | Number of Shares* | Exercise Price ($/Share) | Date of Grant | Date of Expiration | ||||||
| Chris Chang Yu | 250,000 | * | US$3.77 | February 1, 2021 | February 1, 2031 | |||||
| Xiaoyu Li | 943,390 | * | zero | April 13, 2023 | April 13, 2033 | |||||
| Zhigang Zhao | 100,000 | * | zero | March 10, 2023 | March 10, 2033 | |||||
| Tianruo Pu | 100,000 | * | zero | March 10, 2023 | March 10, 2033 | |||||
| Jinqiu Tang | 275,000 | * | US$0.05 to US$7.55 | August 31, 2022 | August 31, 2022 | |||||
| Honggng Tian | 100,000 | * | Zero | March 10, 2023 | March 10, 2033 | |||||
| * | Less than 1% of our total outstanding ordinary shares. |
C. Board Practices
Composition of Board of Directors
Our board of directors consists of five directors. Unless so fixed by our company in a general meeting, a director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or transaction in which he is interested, and if he does so, his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided that the nature of the interest of such director shall be disclosed by such director at or prior to its consideration and any vote thereon. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Pursuant to Nasdaq Stock Market Marketplace Rule 5615(a)(3), the Company intended to follow its home country practice rules in lieu of certain requirements as set forth in the following rules:
| 1. | Rule 5600 Series of Nasdaq Stock Market Marketplace Rules requires compliance with certain corporate governance requirements as set out therein; and |
| 2. | Rule 5250(b)93) of Nasdaq Stock Market Marketplace Rules requires the disclosure of third party director and nominee compensations;. and |
| 3. | Rule 5250(d) of Nasdaq Stock Market Marketplace Rules requires the distribution of annual and interim reports. |
124
Audit Committee. Our audit committee consists of Mr. Tianruo Pu, Mr. Zhigang Zhao and Mr. Honggang Tian. Mr. Tianruo Pu is the chairman of our audit committee. We have determined that Mr. Tianruo Pu, Mr. Zhigang Zhao and Mr. Honggang Tian satisfy the “independence” requirements of Rule 5605(c)(2) of the Listing Rules of The NASDAQ Stock Market and Rule 10A-3 under the Exchange Act, as amended. We have determined that Mr. Tianruo Pu qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| ● | appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
| ● | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
| ● | discussing the annual audited financial statements with management and the independent auditors; |
| ● | reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; |
| ● | reviewing and approving all proposed related party transactions; |
| ● | meeting separately and periodically with management and the independent auditors; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Compensation Committee. Our compensation committee consists of Mr. Zhigang Zhao, Mr. Tianruo Pu and Mr. Honggang Tian. Mr. Zhigang Zhao is the chairman of our compensation committee. We have determined that Messrs. Zhao, Pu and Tian satisfy the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of The NASDAQ Stock Market. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
| ● | reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; |
| ● | reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; |
| ● | reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and |
| ● | selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. |
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Honggang Tian, Mr. Zhigang Zhao and Mr. Tianruo Pu. Mr. Honggang Tian is the chairman of our nominating and corporate governance committee. We have determined that Messrs. Zhao, Pu and Tian satisfy the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of The NASDAQ Stock Market. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
| ● | selecting and recommending to the board nominees for election by the shareholders or appointment by the board; |
| ● | reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; |
125
| ● | making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and |
| ● | advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. |
Duties of Directors
Under BVI law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our M&A, as amended and restated from time to time, the BVI Act and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances have the right to seek damages in our name if a duty owed by the directors is breached.
Our Board of Directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our Board include, among others:
| ● | convening shareholders’ general meetings; |
| ● | declaring dividends and distributions; |
| ● | appointing officers and determining the term of office of the officers; |
| ● | exercising the borrowing powers of our company and mortgaging the property of our company; and |
| ● | approving the transfer of shares in our company, including the registration of such shares in our share register. |
Terms of Directors and Officers
Our directors may be elected by a resolution of our board of directors, or by a resolution of our shareholders either to appoint any person as a director to fill a casual vacancy on our board or as an addition to the existing board. Our company may by resolution of our shareholders remove any director, notwithstanding any provision in our M&A or in any agreement between such director and us.
D. Employees
As of December 31, 2022, we had 75 full-time employees, including 15 in the United States and the remainder in China. The following table sets forth the numbers of our employees categorized by function as of December 31, 2022.
| Function | Number of Employees | |
| Research and development | 17 | |
| Laboratory technicians and manufacturing personnel | 14 | |
| Sales and marketing | 11 | |
| Logistics and customer support and service | 9 | |
| General and administration | 24 | |
| Total | 75 |
126
As of December 31, 2021, we had 89 full-time employees, including seven in the United States and the remainder in China. The following table sets forth the numbers of our employees categorized by function as of December 31, 2021.
| Function | Number of Employees | |||
| Research and development | 21 | |||
| Laboratory technicians and manufacturing personnel | 16 | |||
| Sales and marketing | 14 | |||
| Logistics and customer support and service | 6 | |||
| General and administration | 32 | |||
| Total | 89 | |||
As of December 31, 2020, we had 86 full-time employees, including seven in the United States and the remainder in China. The following table sets forth the numbers of our employees categorized by function as of December 31, 2020.
| Function | Number of Employees | |||
| Research and development | 20 | |||
| Laboratory technicians and manufacturing personnel | 16 | |||
| Sales and marketing | 15 | |||
| Logistics and customer support and service | 5 | |||
| General and administration | 30 | |||
| Total | 86 | |||
We plan to hire additional employees for sales and marketing, customer support and service and manufacturing functions as we grow our business. None of our employees are represented by a labor union with respect to his or her employment with us. We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes.
In accordance with applicable regulations in the PRC, we participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance, work-related injury insurance, employment injury insurance, maternity insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
E. Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of March 31, 2023 by:
| ● | each of our directors and executive officers; and |
| ● | each person known to us to own beneficially more than 5% of our total outstanding ordinary shares. |
The calculations in the table below are based on 111,641,540 ordinary shares (including 108,068,440 Class A ordinary shares and 3,573,100 Class B ordinary shares) outstanding as of March 31, 2023, excluding 1,322,853 Class A ordinary shares reserved for potential conversion of convertible debentures.
127
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
| % of total | ||||||||||||||||
| ordinary shares | ||||||||||||||||
| Class A | Class B | on an as- | % of aggregate | |||||||||||||
| Ordinary Shares | Ordinary Shares | converted basis*** | voting power† | |||||||||||||
| Directors and Executive Officers**: | ||||||||||||||||
| Chris Chang Yu(1) | 6,702 | 2,973,900 | 2.66 | % | 20.68 | % | ||||||||||
| Haohan XU | 5,440,420 | 4.87 | % | 3.78 | % | |||||||||||
| Xiaoyu Li | — | — | — | — | ||||||||||||
| Jinqiu Tang | * | — | * | * | ||||||||||||
| Tianruo Pu | * | — | * | * | ||||||||||||
| Zhigang Zhao | — | — | — | — | ||||||||||||
| Honggang Tian | — | — | — | — | ||||||||||||
| All Directors and Executive Officers as a Group | 5447122 | 2973900 | 7.53 | % | 24.46 | % | ||||||||||
| Principal Shareholders: | ||||||||||||||||
| CRS Holdings Inc.(2) | 6,702 | 2,973,900 | 2.66 | % | 20.68 | % | ||||||||||
| Chen Haowei | 10,729,613 | — | 9.61 | % | 7.46 | % | ||||||||||
| Spring Investments Holding II LP | 5,714,285 | - | 5.12 | % | 3.97 | % | ||||||||||
| ST. FORTUNE GROUP LLC | 14,214,285 | - | 12.73 | % | 9.88 | % | ||||||||||
Notes:
| * | Less than 1% of our total outstanding ordinary shares. |
| ** | Except as indicated otherwise below, the business address of our directors and executive officers is 1411 Broadway FL16 New York NY |
| *** | For each person or group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the total number of shares outstanding and the number of shares such person or group has the right to acquire upon exercise of an option, restricted share unit or other right within 60 days after March 31, 2022. |
| † | For each person or group included in this column, percentage of total voting power represents voting power based on both Class A and Class B ordinary shares held by such person or group with respect to all outstanding shares of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one (1) vote per share. Each holder of our Class B ordinary shares is entitled to ten (10) votes per share. Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a one-for-one basis. |
| (1) | Represents (i) 2,973,900 Class B ordinary shares and 6,702 Class A ordinary shares held by CRS Holdings Inc., a British Virgin Islands company, which is wholly owned by Dr. Chris Chang Yu and (ii) 15,000 Class A ordinary shares issuable upon exercise of options held by the spouse of Dr. Chris Chang Yu. The registered address of CRS Holdings Inc. is Trinity Chambers, P. O. Box 4301, Road Town, Tortola, British Virgin Islands. |
128
| (2) | Represents 6,702 Class A ordinary shares and 2,973,900 Class B ordinary shares held by CRS Holdings Inc. CRS Holdings Inc., a British Virgin Islands company, is wholly owned by Dr. Chris Chang Yu, and its registered address is Trinity Chambers, P. O. Box 4301, Road Town, Tortola, British Virgin Islands. |
As of the date of this annual report, to our knowledge, 22,032,002 Class A ordinary shares (including 1,322,853 Class A ordinary shares reserved for potential conversion of convertible debentures) were held by one record holder, which is the depositary of our ADS program. In addition, we have fifteen record holders in the United States of Class A our ordinary shares, who held approximately 37% of our total outstanding ordinary shares as of March 31, 2023. As of March 31, 2023, none of our Class B ordinary shares were held by U.S. record holders. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
Significant Changes in the Ownership of Major Shareholders
As of March 31, 2021, our major shareholders were CRS Holdings Inc., beneficially owning 402,100 Class A ordinary shares and 2,263,900 Class B ordinary shares (approximately 21.1% ownership in aggregate), He Yu, beneficially owning 1,212,700 Class A ordinary shares (approximately 9.6% ownership), Zhangjiang GU KE Company Limited, beneficially owning 859,200 Class A ordinary shares and 351,300 Class B ordinary shares (approximately 9.6% ownership in aggregate) and Zhijun Sihang Holdings Limited, beneficially owning 606,700 Class A ordinary shares and 247,900 Class B ordinary shares (approximately 6.8% ownership in aggregate).
As of March 31, 2022, our major shareholders were CRS Holdings Inc., beneficially owning 380,961 Class A ordinary shares and 2,173,900 Class B ordinary shares (approximately 10.4% ownership in aggregate) and He Yu, beneficially owning 1,212,700 Class A ordinary shares (approximately 5.0% ownership).
As of March 31, 2023, our major shareholders were ST. FORTUNE GROUP LLC. beneficially owning 14,214,285 Class A ordinary shares (approximately 12.7% ownership), Chen Haowei, beneficially owning 10,729,613 Class A ordinary shares (approximately 9.6% ownership) and Spring Investments Holding II LP, beneficially owning 5,714,285 Class A ordinary shares (approximately 5.1% ownership).
B. Related Party Transactions
Shareholders Agreements
According to shareholders agreements dated June 30, 2017 and August 17, 2017, respectively, that we entered into with certain of our shareholders (the “Investors”), which provide for certain rights, including the right in respect of board composition, right of information and inspection, right of first refusal, co-sale right, anti-dilution protection and registration rights. These rights, except the registration rights, have automatically terminated upon the completion of our initial public offering.
Registration Rights
Upon the demand of any of the Investors, we and certain of our principal shareholders shall procure a company within our group that is conducting a public offering to grant (to the Investors’ satisfaction) the Investors: (i) rights to register their respective shares in the company with the United States Securities and Exchanges Commission, including, but not limited to, three times of demand registration, unlimited times of piggyback registration, and unlimited times of registration under Form F-3/S-3 (or any subsequent registration statements under the U.S. Securities Act of 1933, as amended), or (ii) equivalent or similar registration rights in respect of any issuances of the company’s shares in any other jurisdiction where it commits to a public offering or listing of its shares in a recognized stock exchange.
Subsequent acquisition
On February 7, 2023, the Company, through a newly incorporated subsidiary, Fresh2 Technology Inc. (“Fresh2”), entered into a Share Purchase Agreement (the “Ecommerce Agreement”) to acquire Fresh 2 Ecommerce Inc, a Delaware corporation (“Fresh2 Ecommerce”), from Mr. Haohan Xu, the Company’s Co-CEO and Co-Chairman of the board of directors. Fresh2 Ecommerce is a business-to-business e-commerce platform focused on connecting Asian food suppliers and supermarkets in the U.S. Fresh2 Ecommerce provides an online direct selling platform for food suppliers such as food companies, manufacturers, agents, importers, and wholesalers to supermarkets. Pursuant to the Agreement, the Company purchased all the issued and outstanding equity interests in Fresh2 Ecommerce in consideration of US$2,100, payable in the form of 5,440,420 Class A ordinary shares of the Company, which was fully issued in February 2023.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements and Indemnification Agreements.”
Share Incentive Plans
See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
129
Repayment to CRS Holdings Inc.
In the years ended December 31, 2022 and 2021, we repaid RMB2,071,000 (US$300,267) and RMB2,803,000 of loans to CRS Holdings Inc., wholly owned by our founder, Dr. Chris Chang Yu.
Loan from CRS Holdings Inc.
In the year ended December 31, 2022, we obtained a loan of RMB1,498,000 (US$ 217,190) as working capital loan from CRS Holdings Inc.
Sales Agreements and Consultancy Agreement with Investee Companies
We have in the ordinary course of our business engaged certain of our investee companies, including AnPac Beijing Health Management Co., Ltd., Jiangsu Anpac and Anpai (Shanghai) Health Management Consulting Co., Ltd., as sales agents for our CDA-based tests. In 2021 and 2022, we incurred a consultancy fee of RMB2,190,000 and RMB2,739,000 (US$397,000) to AnPac Beijing Health Management Co., Ltd. for its marketing services to us. In 2021 and 2022, we recognized service revenue from Annadi Life Therapeutics Co., Ltd. of RMB 1,284,000 and RMB 2,186,000 (US$317,000). In 2021 and 2022, we recognized rendered from Jiangsu Anpac of RMB121,000 and RMB 9,000(US$1,000). In 2021 and 2022, we recognized a rent from Shanghai Muqing Industrial of RMB411,000 and rent reimbursement of RMB32,000 (RMB5,000). In 2021, we incurred a consultancy fee of RMB129,000 to Anpai (Shanghai) Health Management Consulting Co., Ltd.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
On September 2, 2022, three investors (the “Plaintiffs") in the Company’s May 2022 private placements filed an action against the Company in the State of Delaware Court of Chancery, Chen Wenge, et al. v. Fresh2 Group Limited, C.A. No. 2022-0779-PAF (the “Action”). The Plaintiffs sued the Company for breaches of the investment agreements of May 2022. The Plaintiffs claimed that the entry into certain investment agreements and a merger agreement breached or would breach the terms of the plaintiffs’ (and several other investors’) securities purchase agreements, including a right of first refusal and a prohibition against certain acquisitions and changes of business. The Court issued a temporary restraining order concerning enforcement of the private placements on September 3, 2022, amended the temporary restraining order on September 9, 2022, and further amended the temporary restraining order on September 23, 2022 (“TRO”). In order to settle the Action, on October 15, 2022, the Company entered into Stock Repurchase Agreement with the Plaintiffs and all other investors in the May 2022 private placements with the original investment of $3 million, who beneficially owned an aggregate of 12,492,283 ordinary shares (“Shares”) of the Company and warrants to purchase a total of 2,475,000 ordinary shares at various exercise prices (the “Warrants,” together with the Shares, the “Securities”), for total consideration of $1.5 million. The Company fully settled the Action by October 27, 2022. In connection with the settlement, by November 7, 2022, Yuyang Cui and Jiawen Kang resigned from the Board of Directors and Yuyang Cui resigned as co-CEO of the Company. The related warrants bought back were fully canceled and the ordinary shares bought back become the Company’s treasury shares.
We may be subject to legal proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential outcomes, their existence alone may have an adverse material impact on us because of diversion of management time and attention as well as the financial costs related to resolving such disputes. Neither we nor any of our directors or executive officers are currently a party to, nor is any of our properties the subject of, any material legal or arbitration proceedings.
Dividend Policy
Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under British Virgin Islands law, namely that our company may only pay dividends if our directors are satisfied on reasonable grounds that we are solvent immediately after the dividend payment in the sense that we will be able to pay our debts as they become due in the ordinary course of business, and the value of assets of our company will exceed our total liabilities. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
130
We have never declared or paid dividends and do not have any plan to pay any cash dividends on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the British Virgin Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”
If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the underlying Class A ordinary shares represented by our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the underlying Class A ordinary shares represented by the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offering and Listing Details
Our ADSs, each representing one Class A ordinary share, have been listed on the NASDAQ Global Market since January 30, 2020 and trade under the symbol “ANPC.”
On September 24, 2021, the Nasdaq Listing Qualifications Staff (the “Staff”) notified the Company that the market value of its listed securities had been below the minimum $50,000,000 required for continued listing as set forth in Listing Rule 5450(b)(2)(A) for the previous 30 consecutive trading days. On January 19, 2022, Staff notified the Company that its American Depositary Shares did not comply with the minimum market value of publicly held shares (“MVPHS”) of $15,000,000. The Company received 180 calendar days or until July 18, 2022, to regain compliance with the MVPHS requirement. On March 8, 2022, Staff notified the Company that its American Depositary Shares did not comply with the minimum bid price of $1.00 over the previous 30 consecutive business days. The Company received 180 calendar days, or until September 5, 2022, to regain compliance.
On March 24, 2022, the Company was notified that because it had not regained compliance with Nasdaq listing requirements, its securities would be delisted from The Nasdaq Global Market unless it requested a hearing. On March 31, 2022, the Company requested a hearing, which was held on April 28, 2022. The Company requested that it be phased down to The Nasdaq Capital Market and that an exception to demonstrate compliance be granted through May 31, 2022.
On May 4, 2022, the Company received a letter from The Nasdaq Stock Market LLC stating that the Nasdaq Hearing Panel granted the request of the Company to transfer the Company’s American Depositary Shares from The Nasdaq Global Market to The Nasdaq Capital Market, effective at the open of trading on May 6, 2022, and to continue its listing on The Nasdaq Stock Market.
131
On June 9, 2022, the Company received the determination from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company has regained compliance with the requirements to remain listed in The Nasdaq Capital Market subject to a one-year Mandatory Panel Monitor of the Company’s ongoing compliance with such requirements as set force in Listing Rule 5815(d)(4)(B).
On September 9, 2022, the Company received a letter from The Nasdaq Stock Market LLC, notifying the Company of the Staff’s determination to delist the Company’s securities from The Nasdaq Capital Market because of the Company’s failure to regain compliance with the $1 per share bid price requirement of Listed Securities required for continued listing as set forth in Listing Rule 5450(a)(1), following the 180 calendar day compliance period set forth in Listing Rule 5810(c)(3)(A) (the "$1 Bid Rule”). On September 16, 2022, the Company received a letter from Nasdaq granting the appeal and scheduling the Nasdaq Hearings Panel for October 20, 2022. During the hearing held on October 20, 2022, the Company presented its plan (including share reverse split) to regain compliance with $1 Bid Rule, and the Company’s request for continued listing on The Nasdaq Capital Market has been granted on the condition that before November 23, 2022, the Company shall demonstrate compliance with Listing Rule 5550(a)(2), the $1 Bid Price Rule. On November 30, the Company announced that it was notified by the Office of the General Counsel of The Nasdaq Stock Market LLC that the Company has regained compliance with the $1 per share bid price requirement of Listed Securities required for continued listing as set forth in Listing Rule 5450(a)(1). The Company will remain under the Mandatory Panel Monitor until June 9, 2023, imposed by a previous Hearings Panel’s decision on June 9, 2022.
On January 13, 2023, the Company received a Staff determination letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying the Company of the Staff’s determination to delist the Company’s securities from The Nasdaq Capital Market due to the Company’s failure to comply with the minimum $2.5 million stockholders’ equity requirement for continued listing on The Nasdaq Capital Market, unless the Company timely requests a hearing before a Nasdaq Hearings Panel. The Company timely requested a hearing, which stayed any delisting or suspension action relating to the Company’s American Depositary Shares through the hearing, which took place in March. On March 22, 2023, the Company was notified by the Nasdaq Hearings that the Company’s request for continued listing on The Nasdaq Capital Market has been granted, subject to the requirement that the Company demonstrate on or before July 12, 2023, its compliance with the shareholder equity requirement, as outlined in Listing Rule 5550(b)(1) (the “Equity Rule”). The Panel advised that July 12, 2023, represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant.
B. Plan of Distribution
Not applicable.
C. Markets
See “—A. Offering and Listing Details.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
132
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are a BVI business company limited by shares and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and the BVI Business Companies Act (As Revised) (the “BVI Act”). The following are summaries of material provisions of our Fifth Amended and Restated Memorandum and Articles of Association (“M&A”) in effect as of the date of this annual report insofar as they relate to the material terms of our ordinary shares. This description is only a summary, does not purport to be complete and is qualified by reference to the full text of the Fifth Amended and Restated Memorandum and Articles of Association, which are incorporated by reference as exhibits to this annual report.
Memorandum and Articles of Association
Objects and Purposes, Register, and Shareholders. Subject to the BVI Act, the objects for which we are established are unrestricted. Our register of members will be maintained by our share registrar, Maples Fund Services (Cayman) Limited. Under the BVI Act, a BVI company may treat the registered holder of a share as the only person entitled to (a) exercise any voting rights attaching to the share, (b) receive notices, (c) receive a distribution in respect of the share and (d) exercise other rights and powers attaching to the share. Consequently, as a matter of BVI law, where a shareholder’s shares are registered in the name of a nominee, the nominee is entitled to receive notices, receive distributions and exercise rights in respect of any such shares registered in its name. The beneficial owners of the shares registered in a nominee’s name will therefore be reliant on their contractual arrangements with the nominee in order to receive notices and dividends and ensure the nominee exercises voting and other rights in respect of the shares in accordance with their directions.
Directors’ Powers. Under the BVI Act, subject to any modifications or limitations in a company’s M&A, a company’s business and affairs are managed by, or under the direction or supervision of, its directors; and directors generally have all powers necessary to manage a company. A director must disclose any interest he has on any proposal, arrangement or contract not entered into in the ordinary course of business and on usual terms and conditions. An interested director may (subject to the M&A) vote on a transaction in which he has an interest. In accordance with, and subject to, our M&A, the directors may by resolution of directors exercise all the powers of the company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the company or of any third party.
Rights, Preferences and Restrictions of Ordinary Shares. Subject to the restrictions described under the section titled “Dividend Policy” above, our directors may (subject to the M&A) authorize dividends at such time and in such amount as they determine. In the event of a liquidation or dissolution of the company, the holders of ordinary shares are (subject to the M&A) entitled to share ratably in all surplus assets remaining available for distribution to them after payment and discharge of all claims, debts, liabilities and obligations of the company and after provision is made for each class of shares (if any) having preference over the ordinary shares if any at that time. There are no sinking fund provisions applicable to our ordinary shares. Holders of our ordinary shares have no pre-emptive rights. Subject to the provisions of the BVI Act, we may, (subject to the M&A) with board or shareholders’ consent, repurchase our ordinary shares provided always that the company will, immediately after the repurchase, satisfy the solvency test. The company will satisfy the solvency test, if (i) the value of the company’s assets exceeds its liabilities; and (ii) the company is able to pay its debts as they fall due.
133
In accordance with the BVI Act:
| (i) | the company may purchase, redeem or otherwise acquire its own shares in accordance with either (a) Sections 60, 61 and 62 of the BVI Act (save to the extent that those Sections are negated, modified or inconsistent with provisions for the purchase, redemption or acquisition of its own shares specified in the company’s M&A); or (b) such other provisions for the purchase, redemption or acquisition of its own shares as may be specified in the company’s M&A. The company’s M&A provide that such Sections 60, 61 and 62 of the BVI Act do not apply to the company; and |
| (ii) | where a company may purchase, redeem or otherwise acquire its own shares otherwise than in accordance with Sections 60, 61 and 62 of the BVI Act, it may not purchase, redeem or otherwise acquire the shares without the consent of the member whose shares are to be purchased, redeemed or otherwise acquired, unless the company is permitted by the M&A to purchase, redeem or otherwise acquire the shares without that consent; and |
| (iii) | unless the shares are held as treasury shares in accordance with Section 64 of the BVI Act, any shares acquired by the company are deemed to be canceled immediately on purchase, redemption or other acquisition. |
Variation of the Rights of Shareholders. As permitted by the BVI Act and our M&A, whenever the capital of our company is divided into different classes, the rights attached to any such class may only be materially adversely varied with the consent in writing of the holders of not less than two-thirds (2/3rds) of the issued shares of that class or with the sanction of a resolution of our shareholders passed at a separate meeting of the holders of the shares of that class by the holders of not less than two-thirds (2/3rds) of the issued shares of that class.
Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Our ordinary shares are issued in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the BVI may freely hold and vote their shares.
Conversion. Each Class B ordinary share is convertible into one (1) Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder thereof to any person other than holders of Class B ordinary shares or their affiliates, or upon a change of ultimate beneficial ownership of the holder of any Class B ordinary share to any person or entity who is not an affiliate of the holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares.
Voting Rights. In respect of all matters subject to a shareholders’ vote, each Class A ordinary share shall, on a poll, entitle the holder thereof to one (1) vote per share and each Class B ordinary share shall entitle the holder to ten (10) votes per share on all matters subject to vote at our general meetings. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Voting at any shareholders’ meeting is by show of hands unless a poll is (before or on the declaration of the result of the show of hands) demanded. A poll may be demanded by the chairman of such meeting or any shareholder present in person or by proxy.
Shareholder Meetings. In accordance with, and subject to, our M&A, (a) the chairman of our board of directors, or a majority of our directors (acting by a resolution of the board), may call general meetings of our shareholders; and (b) upon the written request of shareholders entitled to exercise thirty per cent (30%) or more of the voting rights in respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders. Under BVI law, the M&A may be amended to decrease but not increase the required percentage to call a meeting above thirty per cent (30%). In accordance with, and subject to, our M&A, (a) the director convening a meeting shall give not less than ten (10) days’ notice of a meeting of shareholders to those shareholders entitled to vote at the meeting; (b) an annual general meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least ninety-five per cent (95%) of the total votes attaching to all shares in issue and entitled to attend and vote at such annual general meeting have agreed to waive notice of the meeting; and an extraordinary general meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding no less than two-thirds of total votes attaching to all shares in issue and entitled to attend and vote at such extraordinary general meeting have agreed to waive notice of the meeting; (c) a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy one or more shareholders holding shares which carry in aggregate not less than a majority of all votes attaching to all shares in issue and entitled to vote at such meeting, and (d) if within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved.
134
Dividends. Subject to the BVI Act and our M&A, our directors may, by resolution, declare dividends at a time and amount as they think fit if they are satisfied, based on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due. There is no further BVI law restriction on the amount of funds which may be distributed by us by dividend, including all amounts paid by way of the subscription price for ordinary shares regardless of whether such amounts may be wholly or partially treated as share capital or share premium under certain accounting principles. Shareholder approval is not (except as otherwise provided in our M&A) required to pay dividends under BVI law. In accordance with, and subject to, our M&A, no dividend shall bear interest as against the company (except as otherwise provided in our M&A).
Disclosure of the SEC’s Position on Indemnification for Securities Act Liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer of Shares. Subject to any applicable restrictions or limitations arising pursuant to (i) our M&A; or (ii) the BVI Act, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve (such instrument of transfer being signed by the transferor and containing the name and address of the transferee). Our directors may decline to register any transfer of shares which is not fully paid up or on which our company has a lien. In addition, our directors may also decline to register any transfer of any shares unless (i) the instrument of transfer is lodged with our company, accompanied by the relevant share certificate, (ii) the instrument of transfer is in respect of only one class of shares, (iii) the instrument of transfer is properly stamped, if required, (iv) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four, and (v) a fee of such maximum sum as The NASDAQ Capital Market may determine to be payable, or such lesser sum as our board of directors may require, is paid to our company in respect thereof.
Differences in Corporate Law
The BVI Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers, Consolidations and Similar Arrangements
The BVI Act provides for mergers as that expression is understood under US corporate law. Common law mergers are also permitted outside of the scope of the BVI Act. Under the BVI Act, two or more companies may either merge into one of such existing companies, or the surviving company, or consolidate with both existing companies ceasing to exist and forming a new company, or the consolidated company. The procedure for a merger or consolidation between our company and another company (which need not be a BVI company) is set out in the BVI Act. The directors of the BVI company or BVI companies which are to merge or consolidate must approve a written plan of merger or consolidation which must also be authorized by a resolution of members (and the outstanding shares of every class of shares that are entitled to vote on the merger or consolidation as a class if the memorandum or articles of association so provide or if the plan of merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as a class) of the shareholders of the BVI company or BVI companies which are to merge. A foreign company which is able under the laws of its foreign jurisdiction to participate in the merger or consolidation is required by the BVI Act to comply with the laws of that foreign jurisdiction in relation to the merger or consolidation. The BVI company must then execute articles of merger or consolidation, containing certain prescribed details. The plan and articles of merger or consolidation are then filed with the Registrar of Corporate Affairs in the BVI, or the Registrar. If the surviving company or the consolidated company is to be incorporated under the laws of a jurisdiction outside BVI, it shall file the additional instruments required under Section 174(2)(b) of the BVI Act. The Registrar then (if he or she is satisfied that the requirements of the BVI Act have been complied with) registers, in the case of a merger, the articles of merger or consolidation and any amendment to the M&A of the surviving company and, in the case of a consolidation, the M&A of the new consolidated company and issues a certificate of merger or consolidation (which is conclusive evidence of compliance with all requirements of the BVI Act in respect of the merger or consolidation). The merger or consolidation is effective on the date that the articles of merger or consolidation are registered by the Registrar or on such subsequent date, not exceeding thirty days, as is stated in the articles of merger or consolidation but if the surviving company or the consolidated company is a company incorporated under the laws of a jurisdiction outside the BVI, the merger or consolidation is effective as provided by the laws of that other jurisdiction.
135
As soon as a merger or consolidation becomes effective (among other things), (a) the surviving company or consolidated company (so far as is consistent with its amended memorandum and articles of association, as amended or established by the articles of merger or consolidation) has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies; (b) the memorandum and articles of association of any surviving company are automatically amended to the extent, if any, that changes to its amended memorandum and articles of association are contained in the articles of merger; (c) assets of every description, including choses-in-action and the business of each of the constituent companies, immediately vest in the surviving company or consolidated company; (d) the surviving company or consolidated company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against any shareholder, director, officer or agent thereof, is released or impaired by the merger or consolidation; and (f) no proceedings, whether civil or criminal, pending at the time of a merger or consolidation by or against a constituent company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by the merger or consolidation, but: (i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or consolidated company or against the shareholder, director, officer or agent thereof, as the case may be or (ii) the surviving company or consolidated company may be substituted in the proceedings for a constituent company but if the surviving company or the consolidated company is incorporated under the laws of a jurisdiction outside the BVI, the effect of the merger or consolidation is the same as noted foregoing except in so far as the laws of the other jurisdiction otherwise provide.
The Registrar shall strike off the register of companies each constituent company that is not the surviving company in the case of a merger and all constituent companies in the case of a consolidation (save that this shall not apply to a foreign company).
If the directors determine it to be in the best interests of us, it is also possible for a merger to be approved as a court approved plan of arrangement or as a scheme of arrangement in accordance with (in each such case) the BVI Act. The convening of any necessary shareholders meetings and subsequently the arrangement must be authorized by the BVI court. A scheme of arrangement requires the approval of 75% of the votes of the shareholders or class of shareholders, as the case may be. If the effect of the scheme is different in relation to different shareholders, it may be necessary for them to vote separately in relation to the scheme, with it being required to secure the requisite approval level of each separate voting group. Under a plan of arrangement, a BVI court may determine what shareholder approvals are required and the manner of obtaining the approval.
Shareholders’ Suits
Under the provisions of the BVI Act, the memorandum and articles of association of a company are binding as between the company and its members and between the members. In general, members are bound by the decision of the majority or special majorities as set out in the articles of association or in the BVI Act. As for voting, the usual rule is that with respect to normal commercial matters members may act from self-interest when exercising the right to vote attached to their shares.
If the majority members have infringed a minority member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action. A derivative action concerns the infringement of the company’s rights where the wrongdoers are in control of the company and are preventing it from taking action, whereas a personal action concerns the infringement of a right that is personal to the particular member concerned.
136
The BVI Act provides for a series of remedies available to members. Where a company incorporated under the BVI Act conducts some activity which breaches the BVI Act or the company’s memorandum and articles of association, the BVI High Court can issue a restraining or compliance order. Members can now also bring derivative, personal and Representative Actions under certain circumstances.
The traditional English basis for members’ remedies have also been incorporated into the BVI Act: where a member of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminating or unfairly prejudicial to him, he may apply to the BVI High Court for an order on such conduct.
Any member of a company may apply to the BVI High Court for the appointment of a liquidator for the company and the Court may appoint a liquidator for the company if it is of the opinion that it is just and equitable to do so.
The BVI Act provides that any member of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following:
| (a) | a merger; |
| (b) | a consolidation; |
| (c) | any sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter; (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their respective interest within one year after the date of disposition; or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; |
| (d) | a redemption of 10 per cent, or fewer, of the issued shares of the company required by the holders of 90 percent, or more, of the shares of the company pursuant to the terms of the BVI Act; and |
| (e) | an arrangement, if permitted by the BVI High Court. |
Generally any other claims against a company by its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights as members as established by the company’s memorandum and articles of association.
The BVI Act provides that if a company or a director of a company engages in, proposes to engage in or has engaged in, conduct that contravenes the BVI Act or the memorandum or articles of association of the company, the BVI High Court may, on the application of a member or a director of the company, make an order directing the company or director to comply with, or restraining the company or director from engaging in conduct that contravenes the BVI Act or the memorandum or articles of association.
Indemnification of Directors and Executive Officers and Limitation of Liability
BVI law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the BVI High Court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of committing a crime). An indemnity will be void and of no effect and will not apply to a person unless the person acted honestly and in good faith and in what he believed to be in the best interests of the company and, in the case of criminal proceedings, the person had no reasonable cause to believe that his conduct was unlawful. Our M&A provide that every director and officer of our company shall be indemnified against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such indemnified person, other than by reason of such indemnified person’s own dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such indemnified person in defending (whether successfully or otherwise) any civil proceedings concerning our company or its affairs in any court whether in the British Virgin Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our M&A.
137
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of BVI law, directors must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests. This means that, strictly speaking, a director should not participate in a decision in circumstances where he has a potential conflict. That is, he should declare his interest and abstain. The BVI Act provides that a director “shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company”. The failure of a director to so disclose an interest does not affect the validity of a transaction entered into by the director or the company, provided that the director’s interest was disclosed to the board prior to the company’s entry into the transaction or was not required to be disclosed (for example where the transaction is between the company and the director himself or is otherwise in the ordinary course of business and on usual terms and conditions). Typically a company’s memorandum and articles of association will allow a director interested in a particular transaction to vote on it, attend meetings at which it is considered, and sign documents on behalf of the company which relate to the transaction.
Under the laws of the BVI, a transaction entered into by the company in respect of which a director is interested will not be voidable by the company where the members have approved or ratified the transaction in knowledge of the material facts of the interest of the director in the transaction, or if the company received fair value for the transaction.
138
Broadly speaking, the duties that a director owes to a company may be divided into two categories. The first category encompasses fiduciary duties, that is, the duties of loyalty, honesty and good faith. The second category encompasses duties of skill and care. Each is considered in turn below.
A director’s fiduciary duties can be summarized as follows:
| (a) | Bona Fides: The directors must act bona fide in what they consider is in the best interests of the company (or, if permitted as above, that company’s parent company). |
| (b) | Proper Purpose: The directors must exercise the powers that are vested in them for the purpose for which they were conferred and not for a collateral purpose. |
| (c) | Unfettered Discretion: Since the powers of the directors are to be exercised by them in trust for the company, they should not improperly fetter the exercise of future discretion. |
| (d) | Conflict of Duty and Interest: as per the above. |
In addition to their fiduciary duties a director has the duties of care, diligence and skill which are owed to the company itself and not, for example, to individual members (subject to the limited exceptions as to enforcement on behalf of the company).
Shareholder Action by Written Consent
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. As permitted by BVI law, our M&A provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
BVI law and our M&A provide that upon the written request of shareholders entitled to exercise thirty per cent (30%) or more of the voting rights in respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders. As a BVI company, we are not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of investors on a board of directors since it permits the investor to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the British Virgin Islands but our M&A does not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
139
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our M&A, a director may be removed from office, by a resolution of shareholders passed at a meeting of shareholders or by a written resolution passed by a least fifty per cent (50%) of the votes of all shareholders of the company entitled to vote, notwithstanding any provision in the M&A or in any agreement between such director and us.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
British Virgin Islands law has no comparable statute. As a result, we are not afforded the same statutory protections in the British Virgin Islands as we would be offered by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the investors. See also “Shareholders’ Suits” above. We have adopted a code of business conduct and ethics which requires employees to fully disclose any situations that could reasonably be expected to give rise to a conflict of interest, and sets forth relevant restrictions and procedures when a conflict of interest arises to ensure the best interest of the company.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
The liquidation of a BVI company may be a voluntary solvent liquidation or a liquidation under the Insolvency Act. Where a company has been struck off the Register of Companies under the BVI Act continuously for a period of seven years it is dissolved with effect from the last day of that period.
Voluntary Liquidation
If the liquidation is a solvent liquidation, the provisions of the BVI Act governs the liquidation. A company may only be liquidated under the BVI Act as a solvent liquidation if it has no liabilities or it is able to pay its debts as they fall due and the value of its assets exceeds its liabilities. Subject to the memorandum and articles of association of a company, a liquidator may be appointed by a resolution of directors or resolution of members but if the directors have commenced liquidation by a resolution of directors the members must approve the liquidation plan by a resolution of members save in limited circumstances.
A sole liquidator appointed after 1 January 2023 must be resident in the BVI. An individual resident outside the BVI may be appointed to act as liquidator jointly with a BVI resident liquidator.
140
A liquidator is appointed for the purpose of collecting in and realizing the assets of a company and distributing proceeds to creditors.
Liquidation under the Insolvency Act
The Insolvency Act governs an insolvent liquidation. Pursuant to the Insolvency Act, a company is insolvent if: (a) it fails to comply with the requirements of a statutory demand that has not be set aside pursuant to the Insolvency Act, or (b) execution or other process issued on a judgment, decree or order of court in favor of a creditor of the company is returned wholly or partly unsatisfied, or (c) either the value of the company’s liabilities exceeds its assets, or (d) the company is unable to pay its debts as they fall due. The liquidator must be either the Official Receiver in BVI or a BVI licensed insolvency practitioner. An individual resident outside the BVI may be appointed to act as liquidator jointly with a BVI licensed insolvency practitioner or the Official Receiver. The members of the company may appoint an insolvency practitioner as liquidator of the company or the court may appoint an Official Receiver or an eligible insolvency practitioner. The application to the court can be made by one or more of the following: (i) the company, (ii) a creditor, (iii) a member, or (iv) the supervisor of a creditors’ arrangement in respect of the company, the Financial Services Commission and the Attorney General in the BVI.
The court may appoint a liquidator if:
| (a) | the company is insolvent; |
| (b) | the court is of the opinion that it is just and equitable that a liquidator should be appointed; or |
| (c) | the court is of the opinion that it is in the public interest for a liquidator to be appointed. |
An application under (a) above by a member may only be made with leave of the court, which shall not be granted unless the court is satisfied that there is prima facie case that the company is insolvent. An application under (c) above may only be made by the Financial Services Commission or the Attorney General and they may only make an application under (c) above if the company concerned is, or at any time has been, a regulated person (i.e. a person that holds a prescribed financial services license) or the company is carrying on, or at any time has carried on, unlicensed financial services business.
Order of Preferential Payments upon Liquidation
Upon the insolvent liquidation of a company, the assets of a company shall be applied in accordance with the following priorities: (a) in paying, in priority to all other claims, the costs and expenses properly incurred in the liquidation in accordance with the prescribed priority; (b) after payment of the costs and expenses of the liquidation, in paying the preferential claims admitted by the liquidator (wages and salary, amounts to the BVI Social Security Board, pension contributions, government taxes) — preferential claims rank equally between themselves and, if the assets of the company are insufficient to meet the claims in full, they shall be paid ratably; (c) after the payment of preferential claims, in paying all other claims admitted by the liquidator, including those of non-secured creditors — the claims of non-secured creditors of the company shall rank equally among themselves and if the assets of the company are insufficient to meet the claims in full, such non-secured creditors shall be paid ratably; (d) after paying all admitted claims, paying any interest payable under the BVI Insolvency Act; and finally (e) any surplus assets remaining after payment of the costs, expenses and claims above shall be distributed to the members in accordance with their rights and interests in the company. Part VIII of the Insolvency Act provides for various applications which may be made by a liquidator to set aside transactions which have unfairly diminished the assets which are available to creditors.
The appointment of a liquidator over the assets of a company does not affect the right of a secured creditor to take possession of and realize or otherwise deal with assets of the company over which that creditor has a security interest. Accordingly, a secured creditor may enforce its security directly without recourse to the liquidator, in priority to the order of payments described in the preceding paragraph. However, so far as the assets of a company in liquidation available for payment of the claims of unsecured creditors are insufficient to pay the costs and expenses of the liquidation and the preferential creditors, those costs, expenses and claims have priority over the claims of charges in respect of assets that are subject to a floating charge created by a company and shall be paid accordingly out of those assets.
141
The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the BVI Act and our articles of association, our company may be dissolved, liquidated or wound up by a resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under British Virgin Islands law and our articles of association, if our share capital is divided into more than one class of shares, the rights attached to any class may only be materially adversely varied with the consent in writing of the holders of not less than two-thirds (2/3rds) of the issued shares of that class or with the sanction of a resolution of our shareholders passed at a separate meeting of the holders of the shares of that class by the holders of not less than two-thirds (2/3rds) of the issued shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, subject to any rights or restrictions for the time being attached to the shares of that class, be deemed to be materially adversely varied by, inter alia, the creation, allotment or issue of further shares ranking pari passu with or subsequent to them or the redemption or purchase of any shares of any class by the company. The rights of the holders of shares shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred or other rights including, without limitation, the creation of shares with enhanced or weighted voting rights.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, our M&A may be amended by a resolution of shareholders or by a resolution of directors, save that no amendment may be made by a resolution of directors: (i) to restrict the rights or powers of the shareholders to amend the memorandum or articles; (ii) to change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum or articles; (iii) in circumstances where the memorandum or articles cannot be amended by the shareholders; or (iv) to certain specified clauses of the articles of association.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our M&A on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our M&A governing the ownership threshold above which shareholder ownership must be disclosed.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company—B. Business Overview”, “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual report.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Other Significant PRC Regulations Affecting Our Business Activities in China—Regulations Relating to Foreign Exchange.”
142
E. Taxation
The following summary of the material BVI, PRC and United States federal income tax consequences of an investment in our Class A ordinary shares or ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this registration statement, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our Class A ordinary shares or ADSs, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the BVI, the People’s Republic of China and the United States.
BVI Taxation
Our company and all dividends, interest, rents, royalties, compensation and other amounts paid by our company to persons who are not resident in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of our company by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt obligation or other securities of our company.
All instruments relating to transfers of property to or by our company and all instruments relating to transactions in respect of the shares, debt obligations or other securities of our company and all instruments relating to other transactions relating to the business of our company are exempt from payment of stamp duty in the BVI. This assumes that our company does not hold an interest in real estate in the BVI.
There are currently no withholding taxes or exchange control regulations in the BVI applicable to our company or its members.
People’s Republic of China Taxation
Under the PRC EIT Law and its implementation rules, an enterprise established outside the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, production, personnel, accounts and properties of an enterprise. In April 2009, the SAT issued the Circular of the SAT 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 the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in the PRC only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We do not believe that Fresh 2 Group meets all of the conditions above. Fresh 2 Group is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of the PRC are not PRC resident enterprises, either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with ours.
143
If the PRC tax authorities determine that Fresh2 Group is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or Class A ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of Fresh 2 Group would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that Fresh 2 Group is treated as a PRC resident enterprise.
Provided that our BVI holding company, Fresh2 Group, is not deemed to be a PRC resident enterprise, holders of our ADSs and Class A ordinary shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. However, under SAT Public Notice 7 and SAT Public Notice 37, where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, 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 owned such 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 rate of 10% for the transfer of equity interests in a PRC resident enterprise. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Public Notice 7 and SAT Public Notice 37, and we may be required to expend valuable resources to comply with SAT Public Notice 7 and SAT Public Notice 37, or to establish that we should not be taxed under these circulars. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.”
United States Federal Income Tax Considerations
The following is a summary of material U.S. federal income tax considerations that are likely to be relevant to the purchase, ownership and disposition of our Class A ordinary shares or ADSs by a U.S. Holder (as defined below).
This summary is based on provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial interpretations thereof, in force as of the date hereof. Those authorities may be changed at any time, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those summarized below.
This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to a particular investor’s decision to purchase, hold, or dispose of Class A ordinary shares or ADSs. In particular, this summary is directed only to U.S. Holders that hold Class A ordinary shares or ADSs as capital assets, and does not address particular tax consequences that may be applicable to U.S. Holders who may be subject to special tax rules, such as banks, brokers or dealers in securities or currencies, traders in securities electing to mark to market, financial institutions, life insurance companies, tax-exempt entities, regulated investment companies, entities or arrangements that are treated as partnerships for U.S. federal income tax purposes (or partners therein), holders that own or are treated as owning 10% or more of our stock by vote or value, persons holding Class A ordinary shares or ADSs as part of a hedging or conversion transaction or a straddle, or persons whose functional currency is not the U.S. dollar. Moreover, this summary does not address state, local or non-U.S. taxes, the U.S. federal estate and gift taxes, the Medicare contribution tax applicable to net investment income of certain non-corporate U.S. Holders, or alternative minimum tax consequences of acquiring, holding or disposing of Class A ordinary shares or ADSs.
144
For purposes of this summary, a “U.S. Holder” is a beneficial owner of Class A ordinary shares or ADSs that is a citizen or resident of the United States or a U.S. domestic corporation or that otherwise is subject to U.S. federal income taxation on a net income basis in respect of such Class A ordinary shares or ADSs.
You should consult your own tax advisors about the consequences of the acquisition, ownership and disposition of the Class A ordinary shares or ADSs, including the relevance to your particular situation of the considerations discussed below and any consequences arising under non-U.S., state, local or other tax laws.
ADSs
In general, if you are a U.S. Holder of ADSs, you will be treated, for U.S. federal income tax purposes, as the beneficial owner of the underlying Class A ordinary shares that are represented by those ADSs. References to “shares” below apply to both Class A ordinary shares and ADSs, unless the context indicates otherwise.
Taxation of Dividends
Subject to the discussion below under “Passive Foreign Investment Company Status,” the gross amount of any distribution of cash or property with respect to our shares (including amounts, if any, withheld in respect of PRC taxes) that is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will generally be includible in your taxable income as ordinary dividend income on the day on which you receive the dividend, in the case of Class A ordinary shares, or the date the depositary receives the dividends, in the case of ADSs, and will not be eligible for the dividends-received deduction allowed to U.S. corporations under the Code.
We do not expect to maintain calculations of our earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders therefore should expect that distributions generally will be treated as dividends for U.S. federal income tax purposes.
Subject to certain exceptions for short-term and hedged positions, the dividends received by a non-corporate U.S. Holder with respect to the shares will be subject to taxation at a preferential rate if the dividends are “qualified dividends.” Dividends paid on the shares will be treated as qualified dividends if:
| ● | the shares are readily tradable on an established securities market in the United States or we are eligible for the benefits of a comprehensive tax treaty with the United States that the U.S. Treasury determines is satisfactory for purposes of this provision and that includes an exchange of information program; and |
| ● | we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC. |
The ADSs are listed on the NASDAQ Capital Market, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements, the manner in which we conduct our business, and relevant market and shareholder data, we do not believe we were a PFIC for U.S. federal income tax purposes with respect to our prior taxable year. In addition, based on our audited financial statements, the manner in which we conduct our business, relevant market and shareholder data and our current expectations regarding the value and nature of our assets, and the sources and nature of our income, we do not anticipate becoming a PFIC for our current taxable year or in the foreseeable future. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.
Because the Class A ordinary shares are not themselves listed on a U.S. exchange, dividends received with respect to Class A ordinary shares that are not represented by ADSs may not be treated as qualified dividends. U.S. Holders should consult their own tax advisors regarding the potential availability of the reduced dividend tax rate in respect of the Class A ordinary shares.
145
In the event that we are deemed to be a PRC resident enterprise under the PRC EIT Law (see “Taxation—People’s Republic of China Taxation”), a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our shares. In that case, we may, however, be eligible for the benefits of the Agreement Between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “Treaty”). If we are eligible for such benefits, dividends we pay on our shares would be eligible for the reduced rates of taxation described above (assuming we are not a PFIC in the year the dividend is paid or the prior year). Dividend distributions with respect to our shares generally will be treated as “passive category” income from sources outside the United States for purposes of determining a U.S. Holder’s U.S. foreign tax credit limitation. Subject to the limitations and conditions provided in the Code and the applicable U.S. Treasury Regulations, a U.S. Holder may be able to claim a foreign tax credit against its U.S. federal income tax liability in respect of any PRC income taxes withheld at the appropriate rate applicable to the U.S. Holder from a dividend paid to such U.S. Holder. Alternatively, the U.S. Holder may deduct such PRC income taxes from its U.S. federal taxable income, provided that the U.S. Holder elects to deduct rather than credit all foreign income taxes for the relevant taxable year. The rules with respect to foreign tax credits are complex and involve the application of rules that depend on a U.S. Holder’s particular circumstances. Accordingly, U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit or the deductibility of foreign taxes under their particular circumstances.
U.S. Holders that receive distributions of additional shares or rights to subscribe for shares as part of a pro rata distribution to all our shareholders generally will not be subject to U.S. federal income tax in respect of the distributions, unless the U.S. Holder has the right to receive cash or property, in which case the U.S. Holder will be treated as if it received cash equal to the fair market value of the distribution.
Taxation of Dispositions of Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” upon a sale, exchange or other taxable disposition of the shares, U.S. Holders will realize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the disposition and the U.S. Holder’s adjusted tax basis in the shares. Such gain or loss will be capital gain or loss, and will generally be long-term capital gain or loss if the shares have been held for more than one year. Long-term capital gain realized by a U.S. Holder that is an individual generally is subject to taxation at a preferential rate. The deductibility of capital losses is subject to limitations.
Gain, if any, realized by a U.S. Holder on the sale or other disposition of the shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, if a PRC tax is imposed on the sale or other disposition of the shares, a U.S. Holder who does not receive significant foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of such PRC tax. However, in the event that gain from the disposition of the shares is subject to tax in the PRC, and a U.S. Holder is eligible for the benefits of the Treaty, such U.S. Holder may elect to treat such gain as PRC source gain under the Treaty. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of, the shares.
Deposits and withdrawals of Class A ordinary shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Passive Foreign Investment Company Status
Special U.S. tax rules apply to companies that are considered to be PFICs. We will be classified as a PFIC in a particular taxable year if, taking into account our proportionate share of the income and assets of our subsidiaries under applicable “look-through” rules, either
| ● | 75 percent or more of our gross income for the taxable year is passive income; or |
| ● | the average percentage of the value of our assets that produce or are held for the production of passive income is, based on the average of four quarterly testing dates, at least 50 percent (the “asset test”). |
146
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, for purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The asset test is generally applied using the fair market values of a non-U.S. corporation’s assets but is applied using adjusted tax bases of the assets if the non-U.S. corporation is a CFC and is not publicly traded for the year. We have been publicly traded since our initial public offering completed on February 3, 2020 and expect that we will be treated as publicly traded for all years after 2021. Accordingly, we believe that the PFIC asset test should be applied using the fair market values of our assets. U.S. Holders should consult their own tax advisors regarding the application of these rules and the appropriate valuation of our assets for purposes of the PFIC asset test, as well as the desirability of making a mark-to-market election (discussed below).
Based on our audited financial statements, the manner in which we conduct our business, relevant market and shareholder data and our current expectations regarding the value and nature of our assets and the sources and nature of our income, we do not believe that we were a PFIC in our taxable year ending December 31, 2022, and we do not anticipate becoming a PFIC for our current taxable year or in the foreseeable future. However, because the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets may change, it is possible that we may become a PFIC in the current or a future year. In particular, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years.
In the event that we are classified as a PFIC in any year during which a U.S. Holder holds our shares and such U.S. Holder does not make a mark-to-market election, as described in the following paragraph, the U.S. Holder will be subject to a special tax at ordinary income tax rates on “excess distributions,” including certain distributions by us (generally, distributions that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the shares) and gain that the U.S. Holder recognizes on the sale or other disposition of our shares. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period that the U.S. Holder holds its shares. Further, if we are a PFIC for any year during which a U.S. Holder holds our shares, we generally will continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our shares unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621. Classification as a PFIC may also have other adverse tax consequences, including, in the case of individuals, the denial of a step-up in the basis of his or her shares at death.
A U.S. Holder may be able to avoid the unfavorable rules described in the preceding paragraph by electing to mark its ADSs to market, provided the ADSs are treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded” on a “qualified exchange or other market” (which includes the NASDAQ Capital Market). It should also be noted that it is not currently intended that the Class A ordinary shares will be listed on any stock exchange. Consequently, a U.S. Holder that holds Class A ordinary shares that are not represented by ADSs may not be eligible to make a mark-to-market election. If the U.S. Holder makes a mark-to-market election, (i) the U.S. Holder will be required in any year in which we are a PFIC to include as ordinary income the excess of the fair market value of its ADSs at year-end over the U.S. Holder’s basis in those ADSs and (ii) the U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess of the U.S. Holder’s basis in its ADSs over their fair market value at year-end, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s adjusted tax basis in its ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. In addition, any gain the U.S. Holder recognizes upon the sale of the U.S. Holder’s ADSs in a year in which we are PFIC will be taxed as ordinary income in the year of sale, and any loss the U.S. Holder recognizes upon the sale will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-mark election.
A U.S. Holder that owns an equity interest in a PFIC must annually file IRS Form 8621. A failure to file one or more of these forms as required may toll the running of the statute of limitations in respect of each of the U.S. Holder’s taxable years for which such form is required to be filed. As a result, the taxable years with respect to which the U.S. Holder fails to file the form may remain open to assessment by the IRS indefinitely, until the form is filed.
If we are a PFIC for any taxable year during which a U.S. Holder holds our shares and any of our non-U.S. subsidiaries is also a PFIC, such U.S. Holder will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. U.S. Holders should consult their own tax advisors about the possible application of the PFIC rules to any of our subsidiaries.
U.S. Holders should consult their own tax advisors regarding the U.S. federal income tax considerations discussed above and the desirability of making a mark-to-market election.
147
Foreign Financial Asset Reporting
Certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or $75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. The understatement of income attributable to “specified foreign financial assets” in excess of U.S.$5,000 extends the statute of limitations with respect to the tax return to six years after the return was filed. U.S. Holders who fail to report the required information could be subject to substantial penalties. Prospective investors are encouraged to consult their own tax advisors regarding the possible application of these rules to their investment, including the application of the rules to their particular circumstances.
Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale or other disposition of, the shares that are paid to a U.S. Holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS in a timely manner.
A holder that is not a U.S. Holder may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of documents, upon payment of a duplicating fee, by writing to the SEC.
As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated combined financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, if we so request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
J. Annual Report to Security Holders
Not applicable.
148
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures:
Commodity Price Risk: Our business is subject to commodity price risk related to the prices of food ingredients and supplies, which can fluctuate due to various factors such as weather, supply and demand, and geopolitical tensions. We estimate that a 10% increase in commodity prices could result in a 5% decrease in our gross profit margin.
Foreign Exchange Risk: Our business is subject to foreign exchange risk related to our exposure to fluctuations in foreign currency exchange rates, particularly for transactions denominated in currencies other than our local currency. We estimate that a 10% change in foreign currency exchange rates could result in a 3% change in our operating income.
Qualitative Disclosures:
Competitive Market Risk: Our business operates in a highly competitive market, which poses a risk to our market share, pricing, and profitability. We continually monitor market conditions, consumer trends, and competitor activities to adjust our strategies and pricing.
Regulatory Risk: Our business is subject to various food safety and regulatory requirements, which can change frequently and can
Concentration of credit risk
Financial instruments may subject us to significant concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts receivables. As of December 31, 2020, 2021 and 2022, the aggregate amount of cash and cash equivalents of RMB2.4 million, RMB4.2 million and RMB1.6 million (US$0.2 million), respectively, was held at major financial institutions located in the PRC, and RMB650,000, RMB5.0 million and RMB0.2 million (US$0.04 million), respectively, was deposited with major financial institutions located outside the PRC. Our management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which we have deposits has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since the bank is unlikely to be classified as a secured creditor based on PRC laws.
Accounts receivables, unsecured and denominated in Renminbi, derived from sales on our cancer screening and detection tests and physical checkup packages, are exposed to credit risk. As of December 31, 2020, 2021 and 2022, we had two customers, two customers and three customers, respectively, each with a receivable balance exceeding 10% of the total accounts receivable balance. The risk is mitigated by credit evaluations that we perform on our corporate customers.
149
Equity price risk
We are exposed to equity price risk primarily with respect to convertible loans issued by us accounted for under fair value option. Our investment in Jiangsu Anpac, which is equity securities without readily determinable fair values, is held for strategic purposes. It is accounted for under measurement alternative and not subject to equity price risk.
Currency convertibility risk
A significant portion of our expenses, assets and liabilities are denominated in Renminbi. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the Renminbi may be readily convertible into U.S. dollar or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with relevant documents.
Additionally, the value of the Renminbi is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
Foreign currency exchange rate risk
From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For U.S. dollar against RMB, there was depreciation of 6.3%, appreciation of 2.3% and depreciation of 8.2% in the years ended December 31, 2020, 2021 and 2022, respectively. It is difficult to predict how market forces or PRC or the U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
The functional currency of our company and AnPac US is the U.S. dollar and the functional currency of our PRC subsidiaries and our reporting currency is Renminbi. Most of our revenues and costs are denominated in RMB, while a portion of cash and cash equivalents and convertible loans are denominated in U.S. dollars. It is difficult to predict how market forces or the PRC or U.S. government policy may impact the exchange rate between the Renminbi and the US$ in the future. Any significant fluctuation of the valuation of RMB may materially affect our cash flows, revenues, earnings and financial position, and the value of any dividends payable on the ADS in US$.
Liquidity risks
As of December 31, 2022, we had RMB1.9 million (US$0.3 million) of cash and cash equivalents and RMB28.6 million (US$4.1 million) of working capital deficit. For the year ended December 31, 2022, we incurred RMB55.1 million (US$8.0 million) of negative cash flows from operations and RMB1.6 million (US$0.2 million) of capital expenditures. From January 1, 2023 through April 28, 2023 we raised approximately $8.1 million in private placements of our securities and in a registered direct offering. We believe that our cash and cash equivalents on hand, borrowings and future operating cash flows will be adequate to meet our obligations as they come due for the 12 months after the date of this annual report. Going forward, we expect to need additional fundraising if our cash flows generated from operations do not increase substantially.
150
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges
As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement:
| Services: | Fees: | |
| Issuance of ADSs (e.g., an issuance of ADS upon a deposit of Class A ordinary shares, upon a change in the ADS(s)-to Class A ordinary shares ratio, or for any other reason), excluding ADS issuances as a result of distributions of Class A ordinary shares) | Up to U.S. 5¢ per ADS issued | |
| Cancellation of ADSs (e.g., a cancellation of ADSs for delivery of deposited property, upon a change in the ADS(s)-to-Class A ordinary shares ratio, or for any other reason) | Up to U.S. 5¢ per ADS cancelled | |
| Distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements) | Up to U.S. 5¢ per ADS held | |
| Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs | Up to U.S. 5¢ per ADS held | |
| Distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., upon a spin-off) | Up to U.S. 5¢ per ADS held | |
| ADS Services | Up to U.S. 5¢ per ADS held on the applicable record date(s) established by the depositary | |
| Registration of ADS transfers (e.g., upon a registration of the transfer of registered ownership of ADSs, upon a transfer of ADSs into DTC and vice versa, or for any other reason) | Up to U.S. 5¢ per ADS (or fraction thereof) transferred | |
| Conversion of ADSs of one series for ADSs of another series (e.g., upon conversion of Partial Entitlement ADSs for Full Entitlement ADSs, or upon conversion of Restricted ADSs (each as defined in the Deposit Agreement) into freely transferable ADSs, and vice versa) | Up to U.S. 5¢ per ADS (or fraction thereof) converted |
As an ADS holder you will also be responsible to pay certain charges such as:
| ● | taxes (including applicable interest and penalties) and other governmental charges; |
151
| ● | the registration fees as may from time to time be in effect for the registration of Class A ordinary shares on the share register and applicable to transfers of Class A ordinary shares to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively; |
| ● | certain cable, telex and facsimile transmission and delivery expenses; |
| ● | the fees, expenses, spreads, taxes and other charges of the depositary and/or service providers (which may be a division, branch or affiliate of the depositary) in the conversion of foreign currency; |
| ● | the reasonable and customary out-of-pocket expenses incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Class A ordinary shares, ADSs and ADRs; and |
| ● | the fees, charges, costs and expenses incurred by the depositary, the custodian, or any nominee in connection with the ADR program. |
ADS fees and charges for (i) the issuance of ADSs, and (ii) the cancellation of ADSs are charged to the person for whom the ADSs are issued (in the case of ADS issuances) and to the person for whom ADSs are cancelled (in the case of ADS cancellations). In the case of ADSs issued by the depositary into DTC, the ADS issuance and cancellation fees and charges may be deducted from distributions made through DTC, and may be charged to the DTC participant(s) receiving the ADSs being issued or the DTC participant(s) holding the ADSs being cancelled, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are charged to the holders as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and charges is deducted from the funds being distributed. In the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS record date will be invoiced for the amount of the ADS fees and charges and such ADS fees and charges may be deducted from distributions made to holders of ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash and the ADS service fee may be deducted from distributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices prescribed by DTC and the DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs. In the case of (i) registration of ADS transfers, the ADS transfer fee will be payable by the ADS Holder whose ADSs are being transferred or by the person to whom the ADSs are transferred, and (ii) conversion of ADSs of one series for ADSs of another series, the ADS conversion fee will be payable by the Holder whose ADSs are converted or by the person to whom the converted ADSs are delivered.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder. Certain depositary fees and charges (such as the ADS services fee) may become payable shortly after the closing of the ADS offering. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes. The depositary may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary agree from time to time.
Fees and Other Payments Made by the Depositary to Us
The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. For the year ended December 31, 2022, the reimbursement we received from the depositary was nil net of applicable withholding taxes.
152
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information—B. Memorandum and Articles of Association” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-234408) in relation to our initial public offering, which was declared effective by the SEC on January 28, 2020. We made our initial public offering on January 29, 2020 and completed the offering on February 3, 2020. In this offering, we issued and sold an aggregate of 1,333,360 ADSs, representing 1,333,360 Class A ordinary shares, at an initial offering price of US$12.00 per ADS.
The total expenses incurred for our company’s account in connection with our initial public offering were approximately US$5.0 million, which included US$1.4 million in underwriting discounts and commissions for the initial public offering and approximately US$3.6 million in other costs and expenses for our initial public offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. We have used all of the net proceeds from our initial public offering.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2022, our disclosure controls and procedures were ineffective. We have started to undertake steps to remediate the material weakness in our disclosure controls and procedures as set forth below under “Internal Control over Financial Reporting.”
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15 (f) under the Exchange Act. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2022 because of the material weaknesses we identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
153
In connection with the preparation and audit of our consolidated financial statements as of and for the year ended December 31, 2022, our management identified the following three material weaknesses in our internal control over financial reporting: (i) lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) lack of financial reporting policies and procedures to establish formal risk assessment process and internal control framework; and (iii) deficiencies noted in (a) IT policy; (b) risk and vulnerability assessment. (c) program change and security patch management; (d) backup and recovery management; (e) audit trail and separation of duty management; (f) password management.
After identifying the material weaknesses, we started to implement measures designed to improve our financial control over financial reporting through: (i) hiring additional qualified accounting and financial reporting personnel with U.S. GAAP and SEC reporting experience, (ii) obtaining advisory services from professional consultants with experience in the requirements of the Sarbanes Oxley Act of 2002 and internal audit guidance on SEC reporting, (iii) expanding the capabilities of our existing accounting and financial reporting personnel through continuous training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (iv) developing, communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for our recurring transactions and period-end closing processes, and (v) establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our company’s consolidated financial statements and related disclosures.
Because such remediation measures were not fully implemented, our management has concluded that the material weaknesses still existed as of December 31, 2022. We expect to complete the measures discussed above and also to take actions to (i) continue to recruit experienced personnel with relevant past experience working on U.S. GAAP and SEC reporting, (ii) improve monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of financial reporting and (iii) engage external experts to assist in non-recurring and complex transactions by the end of 2022 and will continue to implement measures to remediate our internal control deficiencies.
We are fully committed to continue to implement measures to remediate our material weakness, significant deficiency and other control deficiencies in our internal control over financial reporting. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting.
The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Material weaknesses in our internal control over financial reporting have been identified, and if we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”
Attestation report of the registered public accounting firm
Since we are an “emerging growth company” as defined under the JOBS Act, we are exempt from the requirement to comply with the auditor attestation requirements that our independent registered public accounting firm attest to and report on the effectiveness of our internal control structure and procedures for financial reporting.
Changes in Internal Control over Financial Reporting
In connection with the preparation and external audit of our consolidated financial statements as of and for the year ended December 31, 2021, we and our independent registered public accounting firm identified a material weakness in internal control over financial reporting which is the lack of proper accounts receivable aging policy and review of the allowance for doubtful accounts.
Following the identification of the above-mentioned material weakness, we have taken measures to remediate the material weakness including but not limited to updating our accounts receivable aging policy and performing periodical review of outstanding accounts receivable and evaluating adequacy of the allowance for doubtful accounts against relevant evidence. During the year ended December 31, 2022, our management completed the design, implementation and testing of the newly designed and enhanced controls and determined that, as of December 31, 2022, these controls were appropriately designed and operating effectively. Management concluded that the prior material weakness regarding to lack of proper accounts receivable aging policy and review of the allowance for doubtful accounts identified in 2021 has been remediated.
Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
154
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Tianruo Pu, an independent director (under the standards set forth in Rule 5605(c)(2) of the NASDAQ and Rule 10A-3 under the Exchange Act), and the chairman of our Audit Committee, is our Audit Committee financial expert.
ITEM 16B. CODE OF ETHICS
Our Board of Directors has adopted a code of business conduct and ethics that applies to our all directors, officers and employees in October 2019. We have posted a copy of our code of business conduct and ethics on our website at https://www.anpacbio.com/wp-content/uploads/2022/01/Code-of-Business-Conduct-and-Ethics.pdf, and https://fresh2.co/wp-content/uploads/2023/03/Code-of-Business-Conduct-and-Ethics.pdf, where you can obtain a copy without charge.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company was notified by Friedman LLP (“Friedman”), the Company’s then independent registered public accounting firm, that effective September 1, 2022, Friedman combined with Marcum LLP and continued to operate as an independent registered public accounting firm. Friedman continued to serve as the Company’s independent registered public accounting firm through January 11, 2023. On January 12, 2023, the audit committee of the board of directors of the Company approved the engagement of Marcum Asia CPAs LLP (“Marcum Asia”) to serve as the independent registered public accounting firm of the Company. The services previously provided by Friedman are now provided by Marcum Asia.
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young Hua Ming LLP (“Ernst & Young”), Friedman and Marcum Asia, our principal external auditors, for the periods indicated.
| Years Ended December 31, | ||||||||||||||||
| 2021 | 2022 | |||||||||||||||
| RMB | US$ | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Audit fees(1) | ||||||||||||||||
| Ernst & Young | 800 | 126 | - | - | ||||||||||||
| Friedman | 2,716 | 393 | - | - | ||||||||||||
| Marcum Asia | - | - | 2,343 | 340 | ||||||||||||
| (1) | Audit fees include the aggregate fees billed in each of the fiscal period listed for professional services rendered by our independent public accountant in relation to the audit of our annual financial statements and services related to our initial public offering. |
The policy of our audit committee is to pre-approve all audit services provided by our independent registered public accounting firms, other than those for de minimis services which are approved by the audit committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
The Company was notified by Friedman LLP (“Friedman”), the Company’s then independent registered public accounting firm, that effective September 1, 2022, Friedman combined with Marcum LLP and continued to operate as an independent registered public accounting firm. Friedman continued to serve as the Company’s independent registered public accounting firm through January 11, 2023. On January 12, 2023, the audit committee of the board of directors of the Company approved the engagement of Marcum Asia CPAs LLP (“Marcum Asia”) to serve as the independent registered public accounting firm of the Company. The services previously provided by Friedman are now provided by Marcum Asia.
155
ITEM 16G. CORPORATE GOVERNANCE
We are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs are listed on the NASDAQ Capital Market. The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of the corporate governance requirements of the NASDAQ Stock Market LLC, subject to certain exceptions and requirements and except to the extent that such exemptions would be contrary to U.S. federal securities laws and regulations. The significant differences between our corporate governance practices and those followed by domestic companies under the NASDAQ rules are summarized as follows:
| ● | shareholder approval for certain events, including the establishment or amendment of equity-based compensation plans and arrangements and transactions involving issuances of 20% or more interest in our company; |
| ● | a majority of independent directors on our board of directors; |
| ● | a compensation committee and a nominating/corporate governance committee composed entirely of independent directors; |
| ● | an audit committee with a minimum of three members; and |
| ● | regularly scheduled executive sessions of independent directors. |
Other than the above, we have followed and intend to continue to follow the applicable corporate governance standards under the NASDAQ rules.
As a result of our reliance on the corporate governance exemptions available to foreign private issuers, holders of our ADSs will not have the same protection afforded to shareholders of companies that are subject to all of NASDAQ Capital Market corporate governance requirements.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICATION THAT PREVENT INSPECTIONS
In December 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition under the HFCAA.
156
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to “Item 18. Financial Statements.”
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements are included at the end of this annual report.
ITEM 19. EXHIBITS
157
| * | Filed with this annual report on Form 20-F |
| ** | Furnished with this annual report on Form 20-F |
158
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| FRESH2 GROUP LIMITED | ||
| By: | /s/ Haohan Xu | |
| Name: | Haohan Xu | |
| Title: | Co-Chief Executive Officer | |
| Date: May 16, 2023 | ||
159
FRESH2 GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Fresh2 Group Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Fresh2 Group Limited (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, shareholders’ deficit and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant recurring losses from operations and negative cash flows from operating activities and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2019 (such date takes into account the acquisition of certain assets of Friedman LLP by Marcum Asia CPAs LLP effective September 1, 2022)
May 16, 2023
NEW YORK OFFICE • 7 Penn Plaza • Suite 830 • New York, New York • 10001
Phone 646.442.4845 • Fax 646.349.5200 • www.marcumasia.com
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of
Directors of Fresh2 Group Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fresh2 Group Limited and Subsidiaries (collectively, the “Company”) as of 2021, and the related consolidated statements of operations and comprehensive loss, shareholders’ deficit and cash flows for each of the years in the two-year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Consideration of the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a significant working capital deficit, has had recurring losses from operations and an accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. These financial statements do not include any adjustments that might result from the outcome of these uncertainties. If the Company is unable to successfully obtain the necessary additional financial support, as specified in Note 2, there could be a material adverse effect on the Company.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board ( United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also include evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor from 2020 to 2022.
May 16, 2022
F-3
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Prepayment | ||||||||||||
| Accounts receivable, net | ||||||||||||
| Amounts due from related parties, net | ||||||||||||
| Inventories, net | ||||||||||||
| Other current assets, net | ||||||||||||
| Total current assets | ||||||||||||
| Property and equipment, net | ||||||||||||
| Land use rights, net | ||||||||||||
| Intangible assets, net | ||||||||||||
| Goodwill | ||||||||||||
| Right of use assets | — | |||||||||||
| Long-term investments, net | ||||||||||||
| TOTAL ASSETS. | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT) | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term debts | ||||||||||||
| Accounts payable | ||||||||||||
| Advance from customers | ||||||||||||
| Amounts due to related parties | ||||||||||||
| Lease liability-current | — | |||||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| Deferred tax liabilities | ||||||||||||
| Lease liability-non-current | — | |||||||||||
| Other long-term liabilities | ||||||||||||
| TOTAL LIABILITIES. | ||||||||||||
| Commitments and contingencies | ||||||||||||
| Shareholders’ equity (deficit): | ||||||||||||
| Class A Ordinary shares ((US$ | ||||||||||||
| Class B Ordinary shares ((US$ | ||||||||||||
| Treasury stock(1) | ( | ) | ( | ) | ||||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Total Fresh2 Group Limited shareholders’ deficit | ( | ) | ( | ) | ( | ) | ||||||
| Non-controlling interest | ||||||||||||
| Total shareholders’ equity (deficit) | ( | ) | ( | ) | ||||||||
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | ||||||||||||
| (1): | |
The accompanying notes are an integral part of these consolidated financial statements
F-4
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
| Years Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenues-third parties | ||||||||||||||||
| Revenues-related parties | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross Profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of long-term investments | ( | ) | ||||||||||||||
| Impairment of intangible assets | ( | ) | ( | ) | ( | ) | ||||||||||
| Impairment of goodwill | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-operating income and expenses: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange loss, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Share of net gain (loss) in equity method investments | ( | ) | ||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Gain from a step acquisition | ||||||||||||||||
| Change in fair value of convertible debt | ( | ) | ||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to ordinary shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss per share | ||||||||||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Weighted average shares outstanding used in calculating basic and diluted loss per share | ||||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||
| Fair value change relating to Company’s own credit risk on convertible loan | ( | ) | ||||||||||||||
| Foreign currency translation differences | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive loss attributable to ordinary shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
| Additional | Accumulated | Total
Fresh2 Group Limited | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Class A Ordinary Shares | Class B Ordinary Shares | Treasury shares | Paid-in | Accumulated | Other | Shareholders’ | Non-controlling | Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Loss) Income | Equity (Deficit) | interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon initial public offering, net | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance shares for exercise of stock option | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance shares reserved for convertible loan | — | — | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance shares for service | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Fair value change relating to Company’s own credit risk on convertible loan | — | — | — | — | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation differences | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interest holders | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Acquisition of Anpai | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of shares in private placements, net of offering costs | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance shares for exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance shares reserved for convertible loan | — | — | — | — | ( | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Conversion of convertible loans | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Transfer Class B shares to Class A shares | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation differences | — | — | — | — | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of shares in private placements, net of offering costs | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance shares for exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance shares reserved for convertible loan | — | — | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible loans | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Treasury stocks | — | — | — | — | ( | ) | ( | ) | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||
| Share based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from non-controlling interest holders | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation differences | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 (US$) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
| Years Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Operating activities: | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Share of net loss (gain) in equity method investments | ( | ) | ( | ) | ( | ) | ||||||||||
| Bad debt expenses, net | ||||||||||||||||
| Losses on disposal of land use rights and property and equipment | ||||||||||||||||
| Gain from fair value change in Anpai equity investment | ( | ) | ||||||||||||||
| Issuance shares for service | ||||||||||||||||
| Share-based compensation | ||||||||||||||||
| Gain on settlement of convertible loan | ( | ) | ||||||||||||||
| Fair value loss on convertible loan | ( | ) | ( | ) | ||||||||||||
| Inventory provision | ||||||||||||||||
| Impairment of long-term investment | ||||||||||||||||
| Deferred tax benefits | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of intangible assets | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Amortization of right of use assets | ||||||||||||||||
| Forgiveness of PPP loan | ( | ) | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Prepayment | ( | ) | ||||||||||||||
| Accounts receivable | ( | ) | ||||||||||||||
| Inventories | ( | ) | ( | ) | ||||||||||||
| Amounts due from related parties | ( | ) | ( | ) | ( | ) | ||||||||||
| Other current assets | ( | ) | ( | ) | ( | ) | ||||||||||
| Other assets | ||||||||||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||||||
| Amounts due to related parties | ( | ) | ( | ) | ( | ) | ||||||||||
| Advance from customers | ||||||||||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||||||||||
| Other long-term liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred tax liabilities | ( | ) | ||||||||||||||
| Lease liabilities | ( | ) | ( | ) | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investing activities: | ||||||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Purchases of intangible assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Proceeds from property and equipment | ||||||||||||||||
| Cash acquired from business combination | ||||||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Financing activities: | ||||||||||||||||
| Proceeds from short-term borrowings | ||||||||||||||||
| Payment for short-term borrowings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Proceeds from related party | ||||||||||||||||
| Repayment of related party | ( | ) | ( | ) | ( | ) | ||||||||||
| Proceeds from stock options exercised | ||||||||||||||||
| Purchase of treasury stocks | ( | ) | ( | ) | ||||||||||||
| Capital contribution from noncontrolling interest holders | — | |||||||||||||||
| Proceeds from private placement | ||||||||||||||||
| Payment for convertible loans | ( | ) | ||||||||||||||
| Proceeds from issuance of ordinary shares | ||||||||||||||||
| Payment for initial public offering costs | ( | ) | ||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ( | ) | ||||||||||
| Cash and cash equivalents at beginning of year | ||||||||||||||||
| Cash and cash equivalents at end of year | ||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Interest paid | ||||||||||||||||
| Supplemental disclosure of non-cash activities: | ||||||||||||||||
| Issuance shares for stock option exercised by Dr. Chris Chang Yu | ||||||||||||||||
| Issuance shares for related party loan to Dr. Chris Chang Yu | ||||||||||||||||
| Non-controlling interest recognized from a step acquisition | ||||||||||||||||
| Reclassification of other payable to convertible loan | ||||||||||||||||
| Conversion of convertible loans | ||||||||||||||||
| Right of use assets obtained in exchange for lease liabilities | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Fresh2 Group Limited (Formerly AnPac Bio-Medical Science Co., Ltd., the “Company”) was incorporated in the British Virgin Islands (“the BVI”) in January 2010. The Company and its subsidiaries (collectively, the “Group”) are engaged in one business segment, marketing and selling a multi-cancer screening and detection test that uses innovative, patented cancer differentiation analysis (the “CDA”) technology and proprietary cancer-detection devices, primarily in the People’s Republic of China (the “PRC” or “China”). The Company incorporated a new subsidiary, Fresh2 Technology Inc. (“Fresh2”) on October 4, 2022 and acquired Fresh 2 Ecommerce Inc. (“Fresh2 Ecommerce”) on February 7, 2023. Fresh2 Ecommerce is a business-to-business e-commerce platform focused on connecting Asian food suppliers and supermarkets in the U.S. For the year ended December 31, 2022, the Company did not generate any revenue from this new operation.
As of December 31, 2022, the details of the Group’s principal subsidiaries are as follows:
| Percentage of | Date of | Place of Incorporation/ |
|||||||
| Major subsidiaries | Ownership | Incorporation | Acquisition | Major Operation | |||||
| Changhe Bio-Medical Technology (Yangzhou) Co., Ltd. | % | ||||||||
| Changwei System Technology (Shanghai) Co., Ltd.** | % | ||||||||
| AnPac Bio-Medical Technology (Lishui) Co., Ltd. (“AnPac Lishui”) | % | ||||||||
| AnPac Bio-Medical Technology (Shanghai) Co., Ltd. | % | ||||||||
| AnPac Technology USA Co., Ltd. (“AnPac US”) | % | ||||||||
| Lishui AnPac Medical Laboratory Co., Ltd. | % | ||||||||
| Shiji (Hainan) Medical Technology Ltd. | % | ||||||||
| Shanghai Muqing AnPac Health Technology Co., Ltd. (“AnPac Muqing”)* | % | ||||||||
| Anpai (Shanghai) Healthcare Management and Consulting Co., Ltd. | % | ||||||||
| Fresh 2 Technology Inc. (“Fresh2”) | % |
| * | AnPac Muqing closed business in March 2023 subsequently. |
| ** | On August 2, 2022, the Company’s board passed a preliminary plan
to divest Changwei System Technology (Shanghai) Co., Ltd., a subsidiary focusing on research and development. On September 1, 2022, the
Company entered into an agreement pursuant to which it agreed to sell its |
2. LIQUIDITY AND GOING CONCERN UNCERTAINTIES
The Group’s principal sources of liquidity
have been cash generated from financing and operating activities. As of December 31, 2022, the Group had RMB
In December 2022 and January 2023, the Company signed definitive investment
agreements with several third-party investors. The investors agreed to purchase
In March 2023, the Company signed definitive
investment agreements with several shareholders, whereby the investors agreed to purchase an aggregate of
F-8
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. LIQUIDITY AND GOING CONCERN UNCERTAINTIES (CONTINUED)
On April 6, 2023, the Company sold to institutional investors a total
of
The Group can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to the Group, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfall, there would likely be a material adverse effect on the Group and its financial statements.
The consolidated financial statements have been prepared assuming that the Group will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of presentation
The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
(b) Principles of consolidation
The accompanying consolidated financial statements include the financial statements of the Group. All inter-company transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power, has the power to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of the board of directors, or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
(c) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Areas where management uses subjective judgement include, but are not limited to allowance for doubtful accounts, share-based compensation, deferred tax and uncertain tax position, valuation of convertible loans, useful lives of intangible assets and property and equipment, and impairment of long-lived assets, goodwill and long-term investments. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences could be material to the consolidated financial statements.
F-9
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) Foreign currency
The functional currency of the Company and AnPac US is the United States dollar and its reporting currency is Renminbi (“RMB”). The functional currency of the Company’s PRC subsidiaries is the RMB as determined based on the criteria of Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters.
The financial statements of the Company and AnPac US are translated from the functional currency to the reporting currency, RMB. Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are re-measured at the exchange rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical costs in foreign currency are re-measured using the exchange rates at the dates of the initial transactions. Exchange gains and losses are included in the consolidated statements of operations and comprehensive loss.
The Group uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income, a component of shareholders’ deficit.
(e) Convenience translation
Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB6.8972 on December 31, 2022, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be converted, realized or settled into US$ at such rate or at any other rate.
(f) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and demand deposits placed with banks which are unrestricted as to withdrawal or use and have original maturities less than three months. All highly liquid investments with a stated maturity of 90 days or less from the date of purchase are classified as cash equivalents.
(g) Accounts receivable, net of allowance for doubtful accounts
Accounts receivable are recorded at their invoiced amounts, net of allowances for doubtful accounts. An allowance for doubtful accounts is recorded when the collection of the full amount is no longer probable. In evaluating the collectability of receivable balances, the Group considers specific evidence, including aging of the receivable, the customer’s payment history, its current creditworthiness and current economic trends. Accounts receivable are written off after all collection efforts have ceased. The Group regularly reviews the adequacy and appropriateness of the allowance for doubtful accounts.
F-10
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(h) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost of inventories are determined using the first in first out method. The Group records inventory reserves for obsolete and slow-moving inventory.
(i) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and any recorded impairment. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
| Category | Estimated useful life | |
| Leasehold improvements | ||
| Buildings | ||
| Furniture, fixtures and equipment | ||
| Motor vehicles |
Repair and maintenance costs are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property and equipment are capitalized as additions to the related assets. Retirements, sale and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations and comprehensive loss.
Direct costs that are related to the construction of property and equipment and incurred in connection with bringing the assets to their intended use are capitalized as construction in progress. Construction in progress is transferred to specific property and equipment, and the depreciation of these assets commences when the assets are ready for their intended use.
F-11
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(j) Long-term investments
The Group’s long-term investments include equity method investments and equity investments without readily determinable fair values.
Investments in entities in which the Group can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323, Investments-Equity Method and Joint Ventures (“ASC 323”). Under the equity method, the Group initially records its investment at cost and the difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is accounted for as if the investee were a consolidated subsidiary. The share of earnings or losses of the investee are recognized in the consolidated statements of operations and comprehensive loss. Equity method adjustments include the Group’s proportionate share of investee income or loss, adjustments to recognize certain differences between the Group’s carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. The Group assesses its equity investment for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the general market conditions in the investee’s industry or geographic area, factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and cash burn rate and other company-specific information.
Investments in equity securities without readily determinable fair values are measured at cost minus impairment adjusted by observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These investments are measured at fair value on a nonrecurring basis when there are events or changes in circumstances that may have a significant adverse effect. An impairment loss is recognized in the consolidated statements of operations and comprehensive loss equal to the amount by which the carrying value exceeds the fair value of the investment.
For the year ended December 31, 2020, 2021
and 2022, the Group recognized an impairment on its equity investment in Jiangsu Anpac Health Management Co., Ltd. of RMB
(k) Business combinations
The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of the cost of the acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the identifiable net assets of the acquiree, the difference is recognized directly in earnings.
The determination and allocation of fair values to the identifiable net assets acquired, liabilities assumed and noncontrolling interest is based on various assumptions and valuation methodologies requiring considerable judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the acquiree’s current business model and industry comparisons. Although the Group believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from forecasted amounts and the differences could be material.
F-12
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(l) Intangible assets
Intangible assets with finite lives are carried at cost less accumulated amortization. All intangible assets with finite lives are amortized using the straight-line method over the estimated useful lives.
Intangible assets have estimated useful lives from the date of purchase as follows:
| Category | Estimated useful life | |
| Software | ||
| Medical license | ||
| Customer relationship |
(m) Land use right, net
All land in the PRC is owned by the PRC government. The PRC government may sell land use rights for a specified period of time. Land use rights represent lease prepayments to the PRC government and are carried at cost less accumulated amortization. Land use rights are amortized on a straight-line basis over the terms of the land use right of 50 years.
(n) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets acquired less liabilities assumed of an acquired business. The Group’s goodwill at December 31, 2021 arose from its business acquisition of Anpai Shanghai in 2021. Goodwill acquired in a business combination is not amortized, but instead tested for impairment at least annually, or more frequently if certain circumstances indicate a possible impairment may exist.
In accordance with ASC 350-20, Intangibles-Goodwill and Other, Goodwill, (“ASC 350-20”) the Group has assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. The Group has determined that it has one reporting unit for the year ended December 31, 2022. The Group has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described below is required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired, and the Group is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Group must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
For the year ended December 31, 2020, the Group performed a qualitative assessment for the reporting unit. Based on the requirements of ASC 350-20, the Group evaluated all relevant qualitative and quantitative factors, weighed all factors in their entirety and concluded that it was not more-likely-than-not that the fair value of the reporting unit was less than its carrying amount. Therefore, no goodwill impairment was recognized as of December 31, 2020.
F-13
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(n) Goodwill (continued)
For the year ended December 31, 2021, the Group
performed the quantitative impairment test and determined that the fair value of goodwill acquired from the acquisition of Shiji (Hainan)
Medical Technology Ltd. in fiscal 2017 is Nil. Therefore, the Group impaired the goodwill acquired from the acquisition of Shiji (Hainan)
Medical Technology Ltd. of RMB
For the year ended December 31, 2022, due to the
slow development of Anpai Shanghai, the Group performed the quantitative impairment test for the reporting unit. In accordance with ASC
350-20, the Group recorded an impairment loss of RMB
(o) Impairment of Long-lived assets other than goodwill
The Group evaluates its long-lived assets, including property and equipment and intangibles with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Group evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Group did not perform such an evaluation for the years ended December 31, 2020.
For the year ended December 31, 2021, due to the
slow development of Shiji (Hainan) Medical Technology Ltd., the Group evaluated the recoverability of long-lived assets by comparing the
carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition
and determined that the fair value of intangible assets of Shiji (Hainan) Medical Technology Ltd. was . Therefore, the Group impaired
the intangible assets acquired from the acquisition of Shiji (Hainan) Medical Technology Ltd. of RMB
For the year ended December 31, 2022, due to the
slow development of Anpai Shanghai, the Group evaluated the recoverability of long-lived assets by comparing the carrying amount of the
assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition and determined
that the fair value of intangible assets of Anpai Shanghai was . Therefore, the Group impaired the intangible assets acquired
from the acquisition of Anpai Shanghai of RMB
(p) Fair value of financial instruments
The Group applies ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
F-14
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Fair value of financial instruments (continued)
The Group’s financial instruments include cash and cash equivalents, accounts receivables, accounts payable, other receivables, other payables and short-term debt. The carrying values of these financial instruments approximate their fair values due to their short-term maturities.
The Group elected the fair value option to account for its convertible
loans. The Group engaged an independent valuation firm to perform the valuation. The fair value of the convertible loans as of December
31, 2021 and 2022 was RMB
As the inputs used in developing the fair value for level 3 instruments are unobservable, and require significant management estimate, a change in these inputs could result in a significant change in the fair value measurement.
The following is a reconciliation of the beginning and ending balances for convertible loans measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2022:
| For the years ended December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Opening balance | ||||||||||||
| New convertible loans issued | ||||||||||||
| Conversion of other payable to convertible loan | ||||||||||||
| Conversion of convertible loans | ( | ) | ( | ) | ( | ) | ||||||
| Loss (gain) on change in fair value of convertible loan | ( | ) | ( | ) | ||||||||
| Other comprehensive income -foreign exchange translations | ( | ) | ||||||||||
| Total | ||||||||||||
(q) Treasury share
The Company accounts for treasury share using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account on the consolidated balance sheets. At retirement of the treasury shares, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid in capital (up to the amount credited to the additional paid in capital upon original issuance of the shares) and retained earnings.
(r) Revenue recognition
The Group derives its revenues principally from customers through the Group’s cancer screening and detection test and physical checkup package services. Revenue is recognized when the Group satisfies the performance obligations in an amount of consideration to which the Group expects to be entitled to in exchange for those services. The Group evaluates the presentation of revenue on a gross or net basis based on whether it controls the services provided to customers and is the principal (i.e., “gross”), or the Group arranges for other parties to provide the service to the customers and is an agent (i.e., “net”). The Group presents value-added taxes as a reduction from revenues.
Revenue from cancer screening and detection tests
Revenue from cancer screening and detection
test are primarily generated through administration of the tests to the Group’s customer constituents, the Group’s
cancer screening and detection tests based on CDA technology and other cancer screening and detection technologies, such as
biomarker-based tests, to its customers (primarily corporations and life insurance companies). A contract exists when the master
service agreement has been executed and the customer submitting a service request, which is a placed order. The Group’s
contracts have a single performance obligation which is satisfied upon rendering the cancer screening and detection tests and
delivery of the cancer screening and detection test results to the customer or the customer’s employees as well as individual
policy holders. The Group acts as the principal as it controls the cancer screening and detection tests before it is transferred to
the customer and records revenue on a gross basis at a point in time, when the cancer screening and detection test results are
delivered to the customer. The Group accrues
F-15
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(r) Revenue recognition (continued)
Revenue from physical checkup packages
The Group facilitates the procurement of physical checkup package services by corporations and life insurance companies for their employees and policy holders, respectively, from third-party physical checkup package service providers. The Group enters into contracts with corporations and life insurance companies and physical checkup service providers. The Group considers both the corporations and life insurance companies and the third-party physical checkup package service providers as its customers in this type of transaction. The Group’s performance obligation is to facilitate the corporations and life insurance companies and the third-party physical checkup package service providers to complete the purchase of physical checkup package services, which is not controlled by the Group prior to being transferred to the corporations and life insurance companies. The Group fulfills its performance obligation at a point in time when the employees and policy holders of corporations and life insurance companies, respectively, complete the physical checkups at which the Group records the net amount that it retains from such completed transaction as revenue.
The Group also enters into arrangements to deliver both cancer screening and detection tests and physical checkup package services. The Group is the principal for the cancer screening and detection tests and the agent for physical checkup package services. Revenues for cancer screening and detection tests and physical checkup are both recognized at a point in time when the performance obligation is satisfied upon delivery of the cancer screening and detection test results to the end customers and completion of physical checkup respectively. As the Group acts as both the principal and agent in the arrangement, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis.
Revenue from Technology services
The Group provides a series of technology services including but not limited to market research, designing, coding, developing, testing, etc. to a client for a contractual term of two years. As the series of services are an integral part of a project of which the goal is to enable the client to produce a cancer-treatment medical device, none of the mentioned services can be isolated and identified as a distinct performance obligation. The Group concluded that the combined services in the contract constitutes a single performance obligation. The contract price is fully allocated to the single performance obligation. Revenue from technology services is recognized over time. The Group uses input methods to measure the progress toward complete satisfaction of the performance obligation. Input methods measure progress based on resources consumed or efforts expended relative to total resources expected to be consumed or total efforts expected to be expended. The completion percentage is determined by costs incurred/total costs estimated to be incurred.
Retail revenue
The Group started its retail business of selling genetic testing kits and skin-care products in fiscal 2021. Customers pay upfront and the Group delivers the ordered products. Revenue is recognized at a point in time upon delivery.
All retail revenues are generated in the PRC.
Contract balances
The payment terms and conditions within the Group’s contracts vary by the type of services and customer.
F-16
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(r) Revenue recognition (continued)
Contract assets relate to the Group’s conditional right to consideration for completed performance obligations under the contract. Accounts receivable are recorded when the right to consideration becomes unconditional. The Group does not have contract assets for the periods presented.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Group has determined that its contracts generally do not include a significant financing component.
Contract liabilities represent considerations received from corporations,
life insurance companies and technology services clients in advance of satisfying the Group’s performance obligations under the
contract, which are presented in “advance from customers” in the consolidated balance sheets. The Group classifies contract
liabilities as current based on the timing of when we expect to recognize revenue, which typically occurs within one year. Revenue recognized that was included in contract liabilities at the
beginning of the period was RMB
PRC Value-Added Taxes (“VAT”) and surcharges
The services of the Group are subject to value-added
taxes of
Practical expedients
The Group has applied the following practical expedients:
| (i) | The transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied has not been disclosed, as substantially all of the Group’s contracts have a duration of one year or less. |
| (ii) | The Group recognizes incremental costs to obtain a contract as expenses when incurred because the amortization period would be one year or less. These costs are recorded within sales and marketing expenses. |
Disaggregation of revenue
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Cancer screening and detection tests | ||||||||||||||||
| Physical checkup packages | ||||||||||||||||
| Technology service | ||||||||||||||||
| Retail revenue | ||||||||||||||||
| Total revenues | ||||||||||||||||
(s) Costs of revenues
Costs of revenues consists of staff costs, outsourced testing costs, blood sample taking costs, medical consumable costs, share-based compensation, depreciation of CDA equipment, purchase cost of retail products.
(t) Advertising expenditures
Advertising expenditures are expensed as incurred
and such expenses were minimal for the periods presented. Advertising expenditures have been included as part of selling and marketing
expenses. For the years ended December 31, 2020, 2021 and 2022, the advertising expense amounted to RMB
F-17
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(u) Research and development expenses
Research and development expenses primarily are comprised of costs incurred in performing research and development activities, including related personnel and consultant’s salaries, benefits, share-based compensation and related costs, raw materials and supplies for internally-developed product candidates and external costs of outside vendors engaged to conduct clinical development activities and trials. The Group expenses research and development expenses as they are incurred.
(v) Government grants
Government grants include financial incentives
in the form of cash subsidies that involve no conditions or continuing performance obligations of the Group. Government grants are recognized
as other non-operating income upon receipt. For government grants related to assets in the form of land use rights, the government
grants are recorded as deferred income when received. The deferred income is then recognized in other income, net in the consolidated
statement of operations and comprehensive loss on a systematic basis over the useful life of the related asset. Government grants recognized
in other income for the years ended December 31, 2020, 2021 and 2022 were RMB
(w) Leases
The Company adopted ASU No. 2016-02—Leases (Topic 842) as of January 1, 2022, using a modified retrospective transition method permitted under ASU No. 2018-11. This transition approach provides a method for recording existing leases only at the date of adoption and does not require previously reported balances to be adjusted. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities on the consolidated balance sheets. The standard did not materially impact our consolidated net earnings and cash flows.
Right-of-use (“ROU”) assets represent the Group’s rights to use underlying assets for the lease term and lease liabilities represent the Group’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, reduced by lease incentives received, plus any initial direct costs, using the discount rate for the lease at the commencement date. As the implicit rate in lease is not readily determinable for the Group’s operating leases, the Group generally use the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The Group’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Group will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Group accounts for lease and non-lease components separately. the Group has no finance leases for any of the periods presented.
Prior to the adoption of ASU No. 2016-02, leases
were classified at the inception date as either a capital lease or an operating lease. The Group assesses a lease to be a capital lease
if any of the following conditions exist:
F-18
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(x) Employee benefit expenses
As stipulated by the regulations of the PRC,
full-time employees of the Group are entitled to various government statutory employee benefit plans, including medical insurance, maternity
insurance, workplace injury insurance, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined
contribution plan. The Group is required to make contributions to the plan and accrues for these benefits based on certain percentages
of the qualified employees’ salaries. The total expenses the Group incurred for the plan were RMB
(y) Share-based compensation
The Group accounts for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or an equity award. All the Group’s share-based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.
The Group has elected to recognize share-based compensation using the straight-line method for all share-based awards granted with graded vesting based on service conditions. The Group accounts for forfeitures as they occur in accordance with ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. The Black-Scholes Model were applied in determining the estimated fair value of the options granted to employees and non-employees.
(z) Income taxes
The Group follows the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
The Group accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties related to unrecognized tax benefit recognized in accordance with ASC 740 are classified in the consolidated statements of operations and comprehensive loss as income tax expenses.
For the years ended December 31, 2022, 2021 and 2020, the Company did not have any significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefits. The Company does not believe that its uncertain tax benefits position will materially change over the next twelve months.
(aa) Comprehensive loss
Comprehensive loss is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220, Comprehensive Income, requires that all items that are required to be recognized under current accounting standards as components of comprehensive loss be reported in a financial statement that is displayed with the same prominence as other financial statements. For each of the periods presented, the Group’s comprehensive loss includes net loss and foreign currency translation differences, and is presented in the consolidated statements of operations and comprehensive loss.
F-19
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(bb) Segment reporting
The Group’s Chief Executive Officers are the chief operating decision-makers that review the consolidated financial results when making decisions about allocating resources and assessing the performance of the Group as a whole and hence, the Group has only one reportable segment for the year ended December 31, 2022 in accordance with ASC 280, Segment Reporting. The Group operates and manages its business as a single segment. As the Group’s long-lived assets are substantially all located in the PRC and all the Group revenues are derived from within the PRC, no geographical segments are presented.
(cc) Loss per share
Loss per share is calculated in accordance with ASC 260, Earnings per Share. Basic loss per ordinary share is computed by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted loss per share is calculated by dividing net loss attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the share options, using the treasury stock method. Ordinary share equivalents are excluded from the computation of diluted loss per share if their effects would be anti-dilutive. Basic and diluted loss per ordinary share is presented in the Group’s consolidated statements of operations and comprehensive loss.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B ordinary shares are identical, except with respect to voting. Each Class A ordinary share is entitled to one vote; and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. For the years ended December 31, 2020, 2021 and 2022, the net loss per share amounts are the same for Class A and Class B common ordinary shares because the holders of each class are entitled to equal per share dividends or distributions in liquidation.
The Group did not include share options, convertible debt and warrants in the computation of diluted earnings per share for the years ended December 31, 2020, 2021 and 2022, because those were anti-dilutive for loss per share.
(dd) Risks, Uncertainties and Concentrations
COVID-19
Beginning in late 2019, an outbreak of a novel strain of coronavirus (COVID-19) first emerged in China and has spread globally. In March 2020, the World Health Organization (“WHO”) declared COVID-19 as a pandemic. Governments in affected countries imposed travel bans, quarantines and other emergency public health measures, which caused material disruption to businesses globally resulting in an economic slowdown.
A new COVID-19 subvariant (Omicron) outbreak
hit China in March 2022, spreading more quickly and easily than previous strains. As a result, a new round of lockdowns, quarantines,
and travel restrictions were imposed upon different provinces or cities in China by the relevant local government authorities. The Company
temporarily closed its Shanghai office and suspended offline marketing activities on April 1, 2022 as well. As required by the local
authorities in Shanghai, employees located in Shanghai worked remotely. Beginning June 1, 2022, the Company reopened its Shanghai office
and resumed offline marketing activities. For the year ended December 31, 2022, the COVID-19 pandemic had an adverse impact on the Company’s
financial positions and operating results. For the year ended December 31, 2022, the Company’s revenue decreased to RMB
Starting in December 2022, China announced an easing of its COVID-19 restriction policy. Authorities downgraded the management of COVID-19 from category A to category B and lifted the restriction measures related to the COVID-19 pandemic, such as the reduction in travel and tourists, conventions and business events, closures and restrictions on business operations. The reopening of China’s economy from the stringent COVID-19 restrictions is expected to boost economic growth in Asia and beyond, but management is unable at this time to determine the future impact of the COVID-19 pandemic on its future operations, financial condition, liquidity, and results of operations.
F-20
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(dd) Risks, Uncertainties and Concentrations (continued)
Concentration of credit risk
Financial instruments that potentially subject the Group to significant
concentration of credit risk consist primarily of cash and cash equivalents and accounts receivables. As of December 31, 2021 and 2022,
the aggregate amounts of cash and cash equivalents of RMB
Accounts receivables, unsecured and denominated
in RMB, are exposed to credit risk. As of December 31, 2021, two customers accounted for
Business, customer, supplier, political and economic risks
The Group is in the early stages of development of its e-commerce food-related business and has a limited operating history. The recently acquired operations are subject to all of the risks inherent in the initial expenses, challenges, complications, and delays frequently encountered in connection with the formation of any new business.
The Group participates in a dynamic industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in industry standards; changes in certain strategic relationships or customer relationships; regulatory considerations; intellectual property considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth. The Group’s operations could be also adversely affected by significant political, economic and social uncertainties in the PRC. The Group is also reliant on contract manufacturers that manufacture key components of its CDA device used in its diagnostic testing.
For the year ended December 31, 2020, the Group
had two customers that accounted for
For the year ended December 31, 2020, the Group had four suppliers
that accounted for
As of December 31, 2021, four suppliers accounted
for
F-21
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(dd) Risks, Uncertainties and Concentrations (continued)
Currency convertibility risk
A significant portion of the Group’s expenses, assets and liabilities are denominated in RMB. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into U.S. dollar or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with relevant documents.
Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
Foreign currency exchange rate risk
From July 21, 2005, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For U.S. dollar against RMB, there was
depreciation of
The functional currency and the reporting currency of the Company and AnPac US are the US$ and the RMB, respectively. Most of the revenues and costs of the Group are denominated in RMB, while a portion of cash and cash equivalents and convertible loans (“CL”) are denominated in US$. It is difficult to predict how market forces or PRC or the U.S. government policy may impact the exchange rate between the Renminbi and the US$ in the future. Any significant fluctuation of the valuation of RMB may materially affect the Group’s cash flows, revenues, earnings and financial position, and the value of any dividends payable on the ADS in US$.
(ff) Recent accounting pronouncements
The Group is an emerging growth company (“EGC”) as defined by the Jumpstart Our Business Startups Act (“JOBS Act”). The JOBS Act provides that an EGC can take advantage of extended transition periods for complying with new or revised accounting standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. The Group elected to take advantage of the extended transition periods. However, this election will not apply should the Group cease to be classified as an EGC.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments — Credit Losses,” “ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses,” “Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” and “ASU No. 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief,” which provided additional implementation guidance on the previously issued ASU. The ASU is effective for fiscal years beginning after Dec. 15, 2019 for public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2022. The Company adopted this update on January 1, 2023. The adoption has no material impact to the Company’s consolidated financial statements.
F-22
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(ff) Recent accounting pronouncements (continued)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. The guidance in this ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public entities, the amendments in this Update are effective for fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendment is permitted. The Company adopted this guidance effective January 1, 2022. The adoption of the new guidance did not have a significant impact on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for our company. Early adoption is permitted. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements,” this ASU affects a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early application of the amendments is permitted for and varies based on the entity. The amendments should be applied retrospectively and at the beginning of the period that includes the adoption date. The Company adopted this update on January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, “‘Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for the Company beginning after December 15, 2023, and are applied prospectively to business combinations that occur after the effective date. The Company does not expect the adoption of ASU 2021-04 will have a material effect on the consolidated financial statements.
In November 2021, the FASB issued Accounting Standards Update No 2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). ASU 2021-10 requires additional disclosures regarding the nature of government assistance, the related accounting policy used to account for assistance, the affected line items and applicable amounts within the consolidated financial position and results of operations, and significant terms and conditions related to the assistance. Government assistance within the scope of ASC 832 includes assistance that is administered by domestic, foreign, local, state, national governments, as well as departments, independent agencies and intergovernmental organizations. The updated guidance increases transparency of government assistance including, 1) the type of assistance, 2) the entity’s accounting for assistance, and 3) the effect of assistance on the entity’s financial statements. The new standard is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-10 effective January 1, 2022. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
F-23
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
4. ACQUISITION
On August 15, 2021, the Group completed a step
acquisition of
On September 22, 2021, Dr. Chris Chang Yu executed
an Offset Agreement, pursuant to which the exercise price associated with Dr. Chris Chang Yu’s
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed for the acquired entities at the acquisition date, which represents the net purchase price allocation at the date of the acquisition based on a valuation performed by an independent valuation firm engaged by the Group:
| Amount | ||||||||
| RMB | USD | |||||||
| Cash acquired | ||||||||
| Other receivables | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | ||||||||
| Current liabilities | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Previous held | ||||||||
| Total consideration of | ||||||||
Goodwill is mainly attributable to the excess
of the consideration paid over the fair value of the net assets acquired that cannot be recognized separately as identifiable assets,
and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting
from the acquisition. None of the goodwill is expected to be deductible for income tax purposes. The intangible assets are mainly attributable
to customer relationship acquired through the acquisition, which are amortized over
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable as of December 31, 2021 and 2022 were as follows:
| As of December 31, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| Accounts receivable | ||||||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ( | ) | ||||||
| Balance at end of year | ||||||||||||
F-24
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
5. ACCOUNTS RECEIVABLE, NET (CONTINUED)
Movement in the allowances for doubtful accounts were as follows:
| Years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Balance at beginning of year | ||||||||||||||||
| Additional provision | ||||||||||||||||
| Write-offs | ( | ) | ||||||||||||||
| Balance at end of year | ||||||||||||||||
6. OTHER CURRENT ASSETS, NET
Other current assets consist of the following:
| As of December 31, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| Tax recoverable | ||||||||||||
| Deposits and others | ||||||||||||
| Provision against deposits and others | ( | ) | ( | ) | ( | ) | ||||||
| Total | ||||||||||||
Movement in the provision against deposits and others were as follows:
| Years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Balance at beginning of year | ||||||||||||||||
| Additional provision | ( | ) | ( | ) | ||||||||||||
| Exchange difference | ||||||||||||||||
| Balance at end of year | ||||||||||||||||
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
| As of December 31, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| Buildings | ||||||||||||
| Leasehold improvements | ||||||||||||
| Furniture, fixtures and equipment | ||||||||||||
| Motor vehicles | ||||||||||||
| Total | ||||||||||||
| Less: | ||||||||||||
| Accumulated depreciation | ( | ) | ( | ) | ( | ) | ||||||
| Construction in progress | ||||||||||||
| Property and equipment, net | ||||||||||||
Construction in progress represents the renovation of an office building and spare parts for medical equipment which the Group will use to assemble new equipment in house.
Depreciation expense was RMB
F-25
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
8. LAND USE RIGHTS, NET
Land use rights, net consists of the following:
| As of December 31, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| Land use rights, cost | ||||||||||||
| Less: | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||
| Land use rights, net | ||||||||||||
Amortization expense of the land use rights for
the years ended December 31, 2020, 2021and 2022 was RMB
9. INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
| As of December 31, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| Software | ||||||||||||
| Customer relationship | ||||||||||||
| Medical license | ||||||||||||
| Total | ||||||||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||
| Less: Impairment | ( | ) | ( | ) | ( | ) | ||||||
| Intangible assets, net | ||||||||||||
Amortization expense for the years ended
December 31, 2020, 2021 and 2022 amounted to RMB
| Year ending December 31, | RMB | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | |||||
F-26
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
10. LONG-TERM INVESTMENTS, NET
Long-term investments, net consisted of the following:
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Equity method investments | ||||||||||||
| Anpac Beijing Health Management Co., Ltd (“Anpac Beijing”). | ||||||||||||
| Equity securities without readily determinable fair values | ||||||||||||
| Jiangsu Anpac Health Management Co., Ltd. (“Jiangsu Anpac”) | ||||||||||||
| Less: | ||||||||||||
| Impairment | ( | ) | ( | ) | ( | ) | ||||||
| Total | ||||||||||||
Equity method investments
On October 19, 2017, the Group and other third
parties established Anpac Beijing, of which the Group initially owned
On May 15, 2021, the Group and other third parties
established Advanced Life Therapeutics Co., Ltd. (“Advanced Life”), of which the Group owned
Equity securities without readily determinable fair values
In January 2016, the Group and other
third parties established Jiangsu Anpac, of which the Group owned
F-27
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
11. SHORT-TERM DEBTS
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Short-term bank and other borrowings (i) | ||||||||||||
| Convertible loan (“CL”) (ii) | ||||||||||||
| Total | ||||||||||||
(i) The short-term borrowing as of December 31, 2022 consisted of a
RMB
(ii) On July 30, 2020, the Group issued convertible
loans with an aggregate principal amount of RMB
On February 5, 2021, the Group issued convertible loans with an aggregate
principal amount of RMB
On May 31, 2021, the Company issued a convertible note in the principal
amount of RMB
On July 22, 2021, the Company issued convertible debentures (the “Convertible
Debentures”) to certain investors in a registered direct offering in an aggregate principal amount of US$
For the years ended December
31, 2020, 2021 and 2022, due to change in fair value of the convertible loans, the Group recognized unrealized income of RMB
The weighted average interest
rate for the years ended December 31, 2020, 2021 and 2022 were
F-28
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
12. LEASES
The Group has several operating leases for offices. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Effective on January 1, 2022, the Group adopted the new lease accounting standard using a modified retrospective transition method which allowed the Group not to recast comparative periods presented in its consolidated financial statements. In addition, the Group elected the package of practical expedients, which allowed the Group to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Group has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Group combines the lease and non-lease components in determining the ROU assets and related lease obligation. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities as disclosed below and had no impact on accumulated deficit as of January 1, 2022. ROU assets and related lease obligations are recognized at commencement date based on the present value of remaining lease payments over the lease term.
Supplemental balance sheet information related to operating leases was as follows:
| As of December 31, 2022, | ||||||||
| 2022 | 2022 | |||||||
| RMB | US$ | |||||||
| Right-of-use assets, net | ||||||||
| Operating lease liabilities - current | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Total operating lease liabilities | ||||||||
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2022:
Remaining lease term and discount rate:
| Weighted average remaining lease term (years) | ||||
| Weighted average discount rate | % |
The following is a schedule of maturities of lease liabilities are as follows:
| Twelve months ending December 31, | RMB | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total future minimum lease payments | ||||
| Less: imputed interest | ||||
| Total | ||||
F-29
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Salary and welfare payable | ||||||||||||
| Payable for acquisition of noncontrolling interests | ||||||||||||
| Accrued rental | ||||||||||||
| Accrued expenses(1) | ||||||||||||
| Value added tax and other taxes payable | ||||||||||||
| Payable for property and equipment | ||||||||||||
| Accrued utilities | ||||||||||||
| Other payables | ||||||||||||
| Total | ||||||||||||
| (1): | the accrued expenses mainly consists of accrued professional fees. |
14. SHAREHOLDERS’ EQUITY
Ordinary Shares
On October 14, 2022, the Company amended and
restated its memorandum and articles of association to authorize the maximum number of shares to
On February 14, 2023, the Company amended
and restated its memorandum and articles of association to change the maximum number of shares that the Company is authorized to
issue from
As of December 31, 2021 and 2022,
Completion of IPO
On January 30, 2020, the Company completed
its IPO on the Nasdaq Stock Exchange. The Company offered
Conversion of convertible loans
On February 17, 2021, the Company issued
F-30
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
14. SHAREHOLDERS’ EQUITY (CONTINUED)
Conversion of convertible loans (continued)
On March 16, 2022, the Company issued
On April 27, 2022, the Company issued
Shares issued for service
On July 28, 2020, the Company entered into a
service agreement with a public relation firm (“PR”) for its public relations services. Pursuant to the service agreement,
the Group was required to issue
On June 1, 2022, the Company entered into a service
agreement with a PR firm. Pursuant to the service agreement, the Group was required to pay US$
On September 27, 2021, the Board of directors
approved an award to Dr. Chris Chang Yu of
On August 31, 2022, the Company granted
Shares issued for reserve
On July 30, 2020, the Company deposited
Private placements
On February 20, 2021, the Company entered into
a share purchase agreement with Dr. Chris Chang Yu, under which Dr. Yu purchased
On February 21, 2021, the Company entered into
a share subscription agreement with a third-party Chinese investor, under which the Company issued
F-31
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
14. SHAREHOLDERS’ EQUITY (CONTINUED)
Private placements (continued)
On May 12, 2021, the Company entered into a share
subscription agreement with a third-party investor, under which the Company issued
On June 22, 2021, the Company entered into a
share subscription agreement with a third-party investor, pursuant to which the Company issued
On September 22, 2021, Dr. Yu executed an Offset
Agreement with the Company, pursuant to which the payment associated with Dr. Yu’s exercise of options to purchase
On November 15, 2021, the Company closed a private
placement of
On March 16, 2022, the Company entered into a
share subscription agreement with a third-party investor, pursuant to which the Company issued
On March 29, 2022, the Company entered into a
share subscription agreement with a third-party Chinese investor, pursuant to which the Company issued
On May 27, 2022, the Company entered into investment
agreements with nine third-party investors. The investors agreed to invest up to RMB
F-32
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
14. SHAREHOLDERS’ EQUITY (CONTINUED)
Private placements (continued)
On September 2, 2022, the Company entered into
investment agreements with three third-party investors (the “September 2, 2022 private placement”). The investors agreed
to invest up to RMB
On September 26, 2022, the Company signed investment
agreements with nine third-party investors, pursuant to which the Company issued
Warrants
As of December 31, 2022, there were
A summary of warrants activity for the year ended December 31, 2020, 2021 and 2022 was as follows:
| Number of warrants | Weighted average exercise price per share | Weighted average life | Expiration dates | |||||||||||||
| US$ per share | Years | |||||||||||||||
| Balance of warrants outstanding as of December 31, 2020 and 2021 | ||||||||||||||||
| - warrants issued in connection with the March 16, 2022 private placement | Unlimited | |||||||||||||||
| - warrants issued in connection with the September 2, 2022 private placement | ||||||||||||||||
| - warrants issued to 3rd party service providers | ||||||||||||||||
| Balance of warrants outstanding and exercisable as of December 31, 2022 | to unlimited | |||||||||||||||
Transfer of Class B ordinary shares to Class A ordinary shares
For the year ended December 31, 2021,
F-33
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
15. SHARE BASED COMPENSATION
On October 31, 2019, the Board and the Company’s
shareholders approved the 2019 Share Incentive Plan (“2019 Plan”) which authorized the compensation committee or such other
committee to grant share options to purchase
On January 6, 2023, the Company’s Board
approved and adopted the 2023 Share Incentive Plan (the “2023 Plan”) providing for the grant of options to purchase
During the year ended December 31, 2020, the
Company issued options to purchase
During the year ended December 31, 2021, the
Company issued options to purchase
During the year ended December 31, 2022, the
Company issued options to purchase 329,686 Class ordinary shares under the 2019 Plan and options to purchase
F-34
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
15. SHARE BASED COMPENSATION (CONTINUED)
Employees
The options granted to employees are measured based on the grant date fair value of the equity instrument. They are accounted for as equity awards and contain only service vesting conditions. The following table summarized the Group’s employee share option activities:
| Weighted | ||||||||||||||||||||
| Weighted | Weighted | Average | ||||||||||||||||||
| Average | Average | Remaining | Aggregate | |||||||||||||||||
| Number of | Exercise | Grant date | Contractual | Intrinsic | ||||||||||||||||
| Options | Price | Fair Value | Term | Value | ||||||||||||||||
| US$ per | US$ per | |||||||||||||||||||
| option | option | Years | US$ | |||||||||||||||||
| Share options outstanding at December 31, 2019 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Forfeited | ( | ) | — | — | ||||||||||||||||
| Share options outstanding at December 31, 2020 | ||||||||||||||||||||
| Granted | — | — | ||||||||||||||||||
| Exercised | ( | ) | — | — | — | — | ||||||||||||||
| Share options outstanding at December 31, 2021 | ||||||||||||||||||||
| Granted | — | — | ||||||||||||||||||
| Exercised | ( | ) | — | — | — | — | ||||||||||||||
| Share options outstanding at December 31, 2022 | ||||||||||||||||||||
| Vested and exercisable at December 31, 2022 | ||||||||||||||||||||
The aggregate intrinsic value in the table above represents the difference between the exercise price of the awards and the fair value of the underlying ordinary shares at each reporting date for those awards that had exercise price below the estimated fair value of the relevant Class A ordinary shares.
For the years ended December 31, 2020, 2021 and
2022, the total fair value of the equity awards vested were RMB
F-35
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
15. SHARE BASED COMPENSATION (CONTINUED)
Nonemployees
The options granted to nonemployees are measured based on the grant date fair value of the equity instrument. They are accounted for as equity awards with service and/or performance vesting conditions. The following table summarized the Group’s nonemployee share option activity:
| Weighted | ||||||||||||||||||||
| Weighted | Weighted | Average | ||||||||||||||||||
| Average | Average | Remaining | Aggregate | |||||||||||||||||
| Number of | Exercise | Grant date | Contractual | Intrinsic | ||||||||||||||||
| Options | Price | Fair Value | Term | Value | ||||||||||||||||
| US$ per | US$ per | |||||||||||||||||||
| option | option | Years | US$ | |||||||||||||||||
| Share options outstanding at December 31, 2019 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Share options outstanding at December 31, 2020 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Share options outstanding at December 31, 2021 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Share options outstanding at December 31, 2022 | ||||||||||||||||||||
| Vested and exercisable at December 31, 2022 | ||||||||||||||||||||
The aggregate intrinsic value in the table above represents the difference between the exercise price of the awards and the fair value of the underlying ordinary shares at each reporting date, for those awards that had exercise price below the estimated fair value of the relevant Class A ordinary shares.
The total fair value of the equity awards vested
during the years ended December 31, 2020, 2021 and 2022 were RMB
F-36
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
15. SHARE BASED COMPENSATION (CONTINUED)
Fair value of options
Prior to January 1, 2021, the Group used binomial models for the stock option valuation. Starting from January 1, 2021, the Group used Black-Scholes simplified method instead of binomial model for valuation of new options issued during the years ended December 31, 2021 and 2022. The assumptions used to value the share options granted to employees and nonemployee were as follows:
| For the year ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Expected volatility range | % | % | % | |||||||||
| Fair market value per ordinary share as at grant dates | US$ | US$ | US$ | |||||||||
The estimated fair value of the Group’s options at their respective grant dates was determined with the assistance of an independent third-party valuation firm for the year ended 2020. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected volatility is estimated based on the historical volatility ordinary shares of several comparable companies in the same industry. The expected exercise multiple is based on management’s estimation, which the Group believes is representative of the future.
The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Cost of revenues | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total share-based compensation expenses | ||||||||||||||||
F-37
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. INCOME TAXES
BVI
The Company is incorporated in the BVI and conducts its primary business operations through the subsidiaries in the PRC and the U.S. Under the current laws of the BVI, the Company is not subject to tax on income or capital gains. Additionally, upon payments of dividends by the Company to its shareholders, no BVI withholding tax will be imposed.
PRC
The Group’s subsidiaries in the PRC are
subject to the statutory rate of
Dividends, interests, rent and royalties payable
by the Group’s PRC subsidiaries, to non-PRC resident enterprises, and proceeds from any such non-resident enterprise
investor’s disposition of assets (after deducting the net value of such assets) shall be subject to
United States
AnPac US is subject to the U.S. federal corporate income tax at a rate
of
The Group’s Chinese subsidiaries tax returns filed with Chinese governments for the years after 2019 remain open for statutory examination by PRC tax authorities. The Group’s US subsidiaries tax returns filed with governments remain open for statutory examination by tax authorities in the future.
The Group’s loss before income taxes consisted of:
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Non-PRC | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PRC | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
F-38
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. INCOME TAXES (CONTINUED)
The current and deferred components of income tax benefit appearing in the consolidated statements of comprehensive income are as follows:
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Current tax expense | — | ( | ) | ( | ) | |||||||||||
| Deferred tax benefit | ||||||||||||||||
| Total | ||||||||||||||||
The reconciliation of tax computed by applying
the statutory income tax rate of
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit computed at the statutory income tax rate at | ||||||||||||||||
| Non-deductible expenses* | ( | ) | ( | ) | ( | ) | ||||||||||
| International rate differences | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferential tax rate differences | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Effect of change in tax rate | — | ( | ) | — | — | |||||||||||
| Effect of impairment of goodwill | — | — | ( | ) | ( | ) | ||||||||||
| Effect of true up of net loss carryforward | — | — | ( | ) | ( | ) | ||||||||||
| Change in valuation allowance | ( | ) | ( | ) | ||||||||||||
| Income tax benefit | ||||||||||||||||
| * | Non-deductible expense includes tax effect of expired net operating losses. |
Deferred Taxes
The significant components of deferred taxes were as follows:
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Deferred tax assets: | ||||||||||||
| Net loss carryforward | ||||||||||||
| Accrued expenses | ||||||||||||
| Provision for doubtful accounts | ||||||||||||
| Valuation allowance | ( | ) | ( | ) | ( | ) | ||||||
| Total deferred tax assets. | ||||||||||||
| Deferred tax liabilities: | ||||||||||||
| Long-lived assets arising from acquisitions | ( | ) | ||||||||||
| Total deferred tax liabilities. | ( | ) | ||||||||||
The Group operates through several subsidiaries. Valuation allowance is considered for each of the entities.
F-39
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. INCOME TAXES (CONTINUED)
Realization of the net deferred tax assets is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing deductible temporary differences and tax loss carry forwards. The Group evaluates the potential realization of deferred tax assets on an entity-by-entity basis. As of December 31, 2021 and 2022, the Company and all of its subsidiaries were in cumulative loss position, valuation allowances were provided against deferred tax assets in entities where it was determined it was more likely than not that the benefits of the deferred tax assets will not be realized.
As of December 31, 2022, the Group had PRC net operating losses of
RMB
17. RELATED PARTY TRANSACTIONS AND BALANCES
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. The related parties that had transactions or balances with the Company in 2020, 2021 and 2022 consisted of:
| Related Party | Nature of the party | Relationship with the Group | ||
| Dr. Chris Chang Yu | ||||
| Anpai (Shanghai) Healthcare Management and Consulting Co., Ltd. (“Anpai”) | ||||
| Anpac Beijing | ||||
| Jiaxing Zhijun Sihang Investment Partnership Enterprises (limited partnership) (“Jiaxing Zhijun”) | ||||
| Jiaxing Zhijun Investment Management Co., Ltd. (“Zhijun”) | ||||
| CRS Holdings Inc. | ||||
| Jiangsu Anpac | ||||
| Shanghai Yulin Information Technology Co., Ltd. (“Shanghai Yulin”) | ||||
| Xuedong Du | ||||
| Rouou Ying | ||||
| Shanghai Muqing Industrial Co., Ltd. (“Shanghai Muqing Industrial”) | ||||
| Shanghai Muqing Jiahe Healthcare Management Co., Ltd. (Shanghai Muqing Jiahe) | ||||
| Advanced Life | ||||
| Annadi Life Therapeutics Co., Ltd (“Annadi”) | ||||
| Jinqiu Tang | ||||
| He Yu |
| * | Dr. Yu resigned from his position as the Chief Executive Officer (“CEO”) of the Company and Chairman of the Board on April 6, 2022 and was appointed as Co-Chairman and Co-CEO in May 2022. |
F-40
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
17. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
Related party balances
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Due from related parties: | ||||||||||||
| Shanghai Yulin | ||||||||||||
| Shanghai Muqing Jiahe | ||||||||||||
| Anpac Beijing | ||||||||||||
| Xuedong Du | — | — | ||||||||||
| Annadi | ||||||||||||
| Total | ||||||||||||
| Allowance | ( | ) | ( | ) | ( | ) | ||||||
| Due from related parties, net | ||||||||||||
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Due to related parties: | ||||||||||||
| CRS Holdings Inc. | ||||||||||||
| Zhijun | ||||||||||||
| Jiaxing Zhijun | ||||||||||||
| Beijing Anpac. | ||||||||||||
| Jiangsu Anpac | ||||||||||||
| Weidong Dai | — | |||||||||||
| Rouou Ying | — | |||||||||||
| Shanghai Muqing Industrial | ||||||||||||
| Advanced Life | ||||||||||||
| Annadi | ||||||||||||
| Jinqiu Tang | — | |||||||||||
| Xuedong Du | — | |||||||||||
| He Yu | — | |||||||||||
| Total | ||||||||||||
F-41
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
17. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
Related party transactions
During the years ended December 31, 2020, 2021 and 2022, related party transactions consisted of the following:
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Revenue rendered to Anpac Beijing | — | |||||||||||||||
| Revenue rendered to Jiangsu Anpac | ||||||||||||||||
| Revenue rendered to Anpai | — | — | — | |||||||||||||
| Revenue serviced to Annadi | ||||||||||||||||
| Consulting service received from Anpac Beijing | ||||||||||||||||
| Consulting service received from Jiangsu Anpac | — | |||||||||||||||
| Consulting service received from Anpai | — | — | ||||||||||||||
| Rent expense incurred with Shanghai Muqing industrial | ( | ) | ( | ) | ||||||||||||
| Repayment of loan to Jiaxing Zhijun | ( | ) | — | — | — | |||||||||||
| Interest expense to Jiaxing Zhijun | — | |||||||||||||||
| Loan from CRS Holdings Inc. | — | — | — | |||||||||||||
| Repayment of loan to CRS Holdings Inc. | ( | ) | ( | ) | — | |||||||||||
| Issuance shares for stock option exercised by Dr. Chris Chang Yu (See Note 14) | — | |||||||||||||||
| Issuance shares for settlement off related party loan from Dr. Chris Chang Yu (See Note 14) | — | — | — | |||||||||||||
| Share based compensation to Dr. Chris Chang Yu and bonus | — | — | — | |||||||||||||
| Repayment to Jiangsu Anpac | — | ( | ) | — | — | |||||||||||
| Loan from Jinqiu Tang | — | — | ||||||||||||||
| Loan from Rouou Ying | — | — | ||||||||||||||
| Loan from Xudong Du | — | — | ||||||||||||||
Guarantor
The Group’s short-term borrowings of RMB
F-42
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
18. RESTRICTED NET ASSETS
In accordance with the PRC Regulations on Enterprises
with Foreign Investment, an enterprise established in the PRC with foreign investment is required to make appropriations to certain statutory
reserves, namely a general reserve fund, an enterprise expansion fund, a staff welfare fund and a bonus fund, all of which are appropriated
from net profit as reported in its PRC statutory accounts. A foreign invested enterprise is required to allocate at least
In addition, under PRC laws and regulations,
the Company’s PRC subsidiaries are restricted in their ability to transfer their net assets to the Company in the form of dividend
payments, loans or advances. As of December 31, 2021 and 2022, restricted net assets of the Company’s PRC subsidiaries were RMB
Furthermore, cash transfers from the Group’s PRC subsidiaries to the Group’s subsidiaries outside of the PRC are subject to the PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the Group’s PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.
19. COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. The Group accrues the liability when the loss is probable and reasonably estimable. On October 14, 2020, Cao Wang (a former employee) filed a lawsuit against Dr. Chis Chang Yu and the Company for a debt dispute of approximately RMB890. As of December 31, 2021, the Group has recorded a liability of RMB890 based on the best estimate of the management and the Company’s legal counsel as of December 31, 2021, which was included in accrued expenses and other current liabilities. On June 29, 2022, Cao Wang withdrew the lawsuit. As of December 31, 2022, there was no contingent liability accrued relating to legal or administrative proceedings.
20. SUBSEQUENT EVENTS
Nasdaq notice
On January 13, 2023, the Company received a Staff
determination letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying the Company of the Staff’s
determination to delist the Company’s securities from The Nasdaq Capital Market due to the Company’s failure to comply with
the minimum US$
On March 22, 2023, the Company has been notified by the Nasdaq Hearings Panel (“Panel”) of the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) that the Company’s request for continued listing on the Nasdaq Capital Market has been granted, subject to the requirement that the Company demonstrate on or before July 12, 2023, its compliance with the shareholder equity requirement, as outlined in Listing Rule 5550(b)(1) (the “Equity Rule”). The Panel advised that July 12, 2023, represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant.
F-43
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
20. SUBSEQUENT EVENTS (CONTINUED)
Acquisition
On February 7, 2023, the Company, through a newly
incorporated subsidiary, Fresh2 Technology Inc. (“Fresh2”), entered into a Share Purchase Agreement (the “Ecommerce
Agreement”) to acquire Fresh 2 Ecommerce Inc, a Delaware corporation (“Fresh2 Ecommerce”), from Mr. Haohan Xu, the
Company’s Co-CEO and Co-Chairman of the board of directors. Fresh2 Ecommerce is a business-to-business e-commerce platform focused
on connecting Asian food suppliers and supermarkets in the U.S. Fresh2 Ecommerce provides an online direct selling platform for food
suppliers such as food companies, manufacturers, agents, importers, and wholesalers to supermarkets. Pursuant to the Agreement, the Company
purchased all the issued and outstanding equity interests in Fresh2 Ecommerce in consideration of US$
(2) On February 15, 2023, the Company closed
the acquisition of GISN (HK) LIMITED (“GISN”), a technical solution and outsourcing consulting services provider focused
on the digital, internet and Web 3 business transformation for start-ups and traditional enterprises. This acquisition is a critical
initiative for the Company to improve the efficiency of its e-commerce operations. The Company agreed to purchase
On March 31, 2023, the Company entered into an
asset purchase agreement (the “Agreement”) with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce company
in the foodservice industry, through which the Company will acquire certain fixed assets of Easy Hundred and Easy Hundred’s intellectual
property relating to ez100, 2Supply and 100WAY. The intellectual property includes a full set of e-commerce platform source codes, covering
websites, apps, and management systems. Pursuant to the Agreement, the Company agreed to purchase the intellectual property relating
to ez100, 2Supply and 100WAY and certain fixed assets for the consideration of $
Equity financing activities
In December 2022 and January 2023, the Company signed definitive investment
agreements with several third-party investors to sell
In March 2023, the Company signed definitive
investment agreements with several shareholders, whereby the investors agreed to purchase an aggregate of
F-44
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
20. SUBSEQUENT EVENTS (CONTINUED)
On April 6, 2023,
Name Change
On May 9, 2023, the Company changed its name from AnPac Bio-Medical Science Co., Ltd. to Fresh2 Group Limited.
F-45
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
21. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed balance sheets
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Advances to suppliers | ||||||||||||
| Amounts due from affiliates and subsidiaries | ||||||||||||
| Other current assets | — | — | ||||||||||
| Total current assets | ||||||||||||
| Non-current assets: | ||||||||||||
| Investments in subsidiaries | ( | ) | ( | ) | ( | ) | ||||||
| TOTAL ASSETS | ( | ) | ( | ) | ||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term debts | ||||||||||||
| Amounts due to related parties | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Shareholders’ (deficit) equity: | ||||||||||||
| Class A Ordinary shares (US$ | ||||||||||||
| Class B Ordinary shares (US$ | ||||||||||||
| Treasury shares | — | ( | ) | ( | ) | |||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Total shareholders’ deficit | ( | ) | ( | ) | ( | ) | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | ( | ) | ( | ) | ||||||||
F-46
FRESH2 GROUP LIMITED
(FORMERLY ANPAC BIO-MEDICAL SCIENCE CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
21. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
Condensed statements of operations and comprehensive loss
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Operating loss: | ||||||||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of convertible debt | ( | ) | ||||||||||||||
| Share of losses of subsidiaries | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes and net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive income, net of tax | ||||||||||||||||
| — Fair value change relating to Company’s own credit risk on convertible loan | ( | ) | ||||||||||||||
| — Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Condensed statements of cash flows
| For the years ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ( | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||||||||||
| Cash and cash equivalents at beginning of year | ||||||||||||||||
| Cash and cash equivalents at end of year | ||||||||||||||||
F-47