Table of Contents

As filed with the Securities and Exchange Commission on November 15, 2019

Registration No. 333-234408

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AnPac Bio-Medical Science Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

British Virgin Islands   8071   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

801 Bixing Street, Bihu County

Lishui, Zhejiang Province 323006

People’s Republic of China

+86-578-2051-6666

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

 

 

AnPac Technology USA Co., Ltd.

Suite 127, 2260 Clove Drive

San Jose, CA 95128

+1-267-810-6776

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

 

 

Copies to:

 

Shuang Zhao, Esq.

Cleary, Gottlieb, Steen & Hamilton LLP

c/o 37th Floor, Hysan Place

500 Hennessy Road

Causeway Bay, Hong Kong

+852-2521-4122

 

Richard A. Friedman, Esq.

Stephen A. Cohen, Esq.

Sheppard Mullin Richter & Hampton LLP

30 Rockefeller Plaza, 39th Floor

New York, NY

1-212-653-8700

 

 

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

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

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

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

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

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

Emerging growth company  ☒

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
 

Amount to
be registered(2)(3)

 

Proposed

maximum
offering
price per share(3)

 

Proposed

maximum
aggregate
offering price(2)(3)

  Amount of
registration fee(4)

Class A ordinary shares, par value US$0.01 per share(1)

  1,916,705   US$14.00   US$26,833,870   US$3,483.04

Underwriter Warrants(4)

       

Class A ordinary shares underlying Underwriter Warrants(5)

 

141,670

  US$16.80   US$2,380,056   US$308.93

Total

 

2,058,375

    US$29,213,926   US$3,791.97

 

(1)

American depositary shares issuable upon deposit of Class A ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-234548). Each American depositary share represents one Class A ordinary share.

(2)

Includes Class A ordinary shares that are issuable upon the exercise of the underwriters’ over-allotment option. Also includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.

(4)

The Registrant previously paid US$2,817 of the total registration fee in connection with the initial filing of the Registration Statement on October 31, 2019.

(5)

We have agreed to issue, on the closing date of this offering, warrants to the representatives of the underwriters in an amount up to 8.5% of the aggregate number of Class A ordinary shares that we sell in this offering, exclusive of the shares issuable upon exercise of the underwriters’ over-allotment option (the “Underwriter Warrants”). The exercise price of the Underwriter Warrants is equal to 120% of the price of the Class A ordinary shares offered hereby.

 

 

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

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued November 15, 2019

1,666,700 American Depositary Shares

 

LOGO

AnPac Bio-Medical Science Co., Ltd.

Representing 1,666,700 Class A Ordinary Shares

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of AnPac Bio-Medical Science Co., Ltd.

We are offering 1,666,700 ADSs. Each ADS represents one of our Class A ordinary shares, par value US$0.01 per share. We anticipate the initial public offering price per ADS will be between US$12.00 and US$14.00.

Prior to this offering, there has been no public market for the ADSs or our shares. We have applied to list the ADSs on The NASDAQ Global Market, under the symbol “ANPC.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, have elected to comply with certain reduced public company reporting requirements.

We have and will maintain a dual-class share structure. Our outstanding ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one (1) vote, and each Class B ordinary share is entitled to ten (10) votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder 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.

Our founder and chairman, Dr. Chris Chang Yu, together with Zhangjiang GU KE Company Limited and Zhijun Sihang Holdings Limited with respect to a portion of their ordinary shares, beneficially own all of our issued Class B ordinary shares. All Class B ordinary shares account for approximately 24.8% of our total outstanding shares immediately after the completion of this offering and 76.8% of the aggregate voting power of our total outstanding shares immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Jiaxing Zhijun Investment Management Co., Ltd. of its convertible loans to us. See “Principal Shareholders.”

An individual investor has indicated to us his interest in subscribing up to a total of US$1.75 million worth of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$13.00 per ADS, which is the mid-point of the estimated offering price range, the number of ADSs to be purchased by that investor would be up to 134,615 ADSs, or approximately 8.1% of the ADSs being offered in this offering. This indication of interest is not a binding agreement or commitment to purchase, and we and the underwriters are under no obligation to sell ADSs to that investor.

Investing in ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying the ADSs.

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

PRICE US$            PER ADS

 

     Price to
Public
     Underwriting
Discounts and
Commissions(1)
     Proceeds to
Us
 

Per ADS

   US$                    US$                    US$                

Total

   US$                    US$                    US$                

 

(1)

For additional information on underwriting compensation, see “Underwriting.”

The underwriters have a 30-day option to purchase up to an aggregate of 250,005 additional ADSs from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the ADSs against payment in New York, New York on            , 2019.

Joint Book-Running Managers

 

WestPark Capital, Inc.   Univest Securities, LLC

Prospectus dated             , 2019


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     13  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     56  

USE OF PROCEEDS

     58  

DIVIDEND POLICY

     59  

CAPITALIZATION

     60  

DILUTION

     61  

ENFORCEABILITY OF CIVIL LIABILITIES

     63  

CORPORATE HISTORY AND STRUCTURE

     65  

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     67  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     70  

INDUSTRY

     89  

BUSINESS

     94  

REGULATIONS

     120  

MANAGEMENT

     139  

PRINCIPAL SHAREHOLDERS

     147  

RELATED PARTY TRANSACTIONS

     149  

DESCRIPTION OF SHARE CAPITAL

     151  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     163  

SHARES ELIGIBLE FOR FUTURE SALE

     175  

TAXATION

     177  

UNDERWRITING

     184  

EXPENSES RELATED TO THIS OFFERING

     191  

LEGAL MATTERS

     191  

EXPERTS

     191  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     192  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

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

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

 

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PROSPECTUS SUMMARY

The following summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., or Frost & Sullivan, an independent market research firm, to provide information on the cancer screening and detection market and our market position in this industry.

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 cancer differentiation analysis, or CDA, technology and our proprietary cancer-detection device, or 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 cancer screening and detection test using our CDA technology, or 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. In addition, we also offer tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies, such as biomarker-based tests, using our proprietary algorithm, which we refer to as combination tests. When we refer to our technology or tests as a “cancer screening and detection” technology or test in this prospectus, 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 protein tumor factor, or PTF value, and the cell tumor factor, or 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 circulating tumor cell, or CTC, circulating tumor DNA, or ct-DNA, exosome, messenger RNA, or 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 September 30, 2019, 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.



 

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We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the PRC National Medical Products Administration, or the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. 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 have a clinical laboratory located in San Jose, California for which we obtained a Certificate of Registration under the U.S. Clinical Laboratory Improvement Amendments of 1988, or CLIA, in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. 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, contract research organizations, or CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology in this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among these, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 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. Our patent portfolio is one of the world’s largest for early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

We performed our first commercial CDA-based test in China in 2015. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in nine months ended September 30, 2018 to RMB8.1 million (US$1.1 million) in the same period of 2019. In the United States, we plan to commence marketing our CDA-based test as a laboratory-developed test, or LDT, sometime in 2020 through our CLIA-registered laboratory in San Jose.



 

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Our Strengths

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

 

   

novel patented early multi-cancer screening and detection technology;

 

   

expansive patent portfolio and proprietary test database;

 

   

fully commercialized operations in China—rolling out our China experience to the U.S.; and

 

   

an experienced management team with proven track records of success.

Our Strategies

The key elements of our strategy to grow our business include:

 

   

enlarge our total addressable market in China by obtaining additional regulatory approvals for our CDA device;

 

   

grow our customer base in China;

 

   

strengthen technological advantages with focused research and development; and

 

   

bring our tests to the U.S. market.

Risks Associated with Our Business

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

 

   

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 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 and maintain profitability;

 

   

our success depends heavily on the success of our CDA technology and related cancer screening and detection test;

 

   

our ability to grow our China business is substantially dependent on our ability to penetrate the Chinese hospital market;

 

   

our plans to enter the U.S. market may not be successful;

 

   

our industry 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;

 

   

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 have recorded net current liabilities and negative cash flows from operating activities historically and may continue to do so; and

 

   

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.



 

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Corporate History and Structure

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. AnPac Bio was established primarily as a holding company and has established operating subsidiaries in China and the United States.

The chart below summarizes our corporate structure and identifies our principal subsidiaries as of the date of this prospectus. For more information regarding our principal subsidiaries, see “Corporate History and Structure.”

 

 

LOGO

Corporate Information

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 +86-578-2051-6666. 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.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.anpacbio.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is AnPac Technology USA Co., Ltd., or AnPac US, located at Suite 127, 2260 Clove Drive, San Jose, CA 95128.

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements



 

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compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting, or ICFR. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of the extended transition period.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires in this prospectus:

 

   

“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 the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus 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, 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 “AnPac Bio” refers to AnPac Bio-Medical Science Co., Ltd. and its subsidiaries.

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



 

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Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at RMB7.1477 to US$1.00, the noon buying rate on September 30, 2019 set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On November 8, 2019, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.9954 to US$1.00.



 

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The Offering

 

Public offering price

We currently estimate that the initial public offering price will be between US$12.00 and US$14.00 per ADS.

 

ADSs offered by us

1,666,700 ADSs (or 1,916,705 ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

1,666,700 ADSs (or 1,916,705 ADSs if the underwriters exercise their over-allotment option in full) excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Jiaxing Zhijun Investment Management Co., Ltd., or Zhijun, of our convertible loans from it.

 

Ordinary shares outstanding immediately after this offering

A total of 8,668,000 Class A ordinary shares and 2,863,100 Class B ordinary shares (or 8,918,005 Class A ordinary shares and 2,863,100 Class B ordinary shares if the underwriters exercise their over-allotment option in full to purchase additional 250,005 Class A ordinary shares), excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of our convertible loans from it. Class B ordinary shares issued and outstanding immediately after the completion of this offering will represent 24.8% of our total issued and outstanding shares and 76.8% of the then total voting power (or 24.3% of our total issued and outstanding shares and 76.2% of the then total voting power if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ADS represents one Class A ordinary share of par value US$0.01 per share.

 

  The depositary or its nominee will hold Class A ordinary shares represented by your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and all holders and beneficial owners of ADSs issued thereunder.

 

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

 

  Subject to the terms of the deposit agreement, you may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

 

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



 

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deposit agreement, you agree to be bound by the deposit agreement as amended.

 

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

 

Ordinary shares

We will issue 1,666,700 Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs). Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one (1) vote, and each Class B ordinary share is entitled to ten (10) votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder 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. See “Description of Share Capital.”

 

Over-allotment option

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 250,005 additional ADSs.

 

Indication of interest

An individual investor has indicated to us his interest in subscribing up to a total of US$1.75 million worth of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$13.00 per ADS, which is the mid-point of the estimated offering price range, the number of ADSs to be purchased by that investor would be up to 134,615 ADSs, or approximately 8.1% of the ADSs being offered in this offering. This indication of interest is not a binding agreement or commitment to purchase, and we and the underwriters are under no obligation to sell ADSs to that investor.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$16.9 million from this offering, or approximately US$19.9 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of US$13.00 per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

We plan to use the net proceeds of this offering primarily for research studies in China and the U.S. and the development of new cancer



 

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screening and detection tests, the expansion of our marketing and sales channels in China, clinical laboratory expansion in the U.S. and China, and general corporate purposes. See “Use of Proceeds” for more information.

 

Lock-up

We, each of our executive officers and directors and certain of our shareholders owning 1% or more of our ordinary shares issued and outstanding immediately prior to this offering have agreed with the representatives of the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Listing

We have applied to have the ADSs listed on the NASDAQ Global Market under the symbol “ANPC.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on                     , 2019.

 

Depositary

Citibank, N.A.

 

Risk Factors

See the section headed “Risk Factors” and other information included in this prospectus for a discussion of the factors you should carefully consider before deciding to invest in the ADSs.

Except as otherwise indicated, all information in this prospectus:

 

   

reflects the increase in the maximum number of authorized shares and 1-for-100 share subdivision of our ordinary shares, which became effective on November 12, 2019;

 

   

assumes the registration and effectiveness of our third amended and restated memorandum and articles of association, which will occur prior to the completion of this offering;

 

   

assumes no exercise by the underwriters of their over-allotment option to purchase up to an additional 250,005 ADSs representing 250,005 Class A ordinary shares from us; and

 

   

assumes no exercise of unexercised options or the warrants that we have agreed to grant to the representatives of the underwriters, nor conversion by Zhijun of the convertible loans that we borrowed from it.



 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of comprehensive loss data and summary consolidated cash flow data for the years ended December 31, 2017 and 2018 and summary consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary unaudited interim condensed consolidated statements of comprehensive loss data and summary unaudited interim condensed consolidated cash flow data for the nine months ended September 30, 2018 and 2019 and the summary unaudited interim condensed consolidated balance sheet data as of September 30, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table sets forth our summary consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended December 31,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands, except for number of shares and per share data)  

Summary Consolidated Statements of Comprehensive Loss Data:

            

Revenues:

            

Cancer screening and detection tests

     5,203       9,557       1,337       6,106       7,677       1,074  

Physical checkup packages

     483       693       97       525       436       61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     5,686       10,250       1,434       6,631       8,113       1,135  

Cost of revenues(1)

     (3,954     (5,672     (794     (3,634     (4,266     (597
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,732       4,578       640       2,997       3,847       538  

Operating expenses:

            

Selling and marketing expenses(1)

     (6,490     (9,827     (1,375     (7,202     (10,730     (1,501

Research and development expenses(1)

     (11,405     (10,106     (1,414     (7,746     (7,138     (999

General and administrative expenses(1)

     (24,938     (28,847     (4,036     (18,773     (40,439     (5,658

Other operating income

     178       593       84       475       138       19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (40,923     (43,609     (6,101     (30,249     (54,322     (7,601

Non-operating income and expenses:

            

Interest expense, net

     (338     (925     (129     (677     (1,897     (265

Foreign exchange gain (loss), net

     644       (2,776     (388     (1,970     (1,937     (270

Share of net loss (gain) in equity method investments

     (3     (441     (62     (224     442       62  

Other income, net

     1,309       5,256       735       484       (1,130     (158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss before income taxes

     (39,311     (42,495     (5,945     (32,636     (58,844     (8,232

Income tax (expense) benefit

     (9     199       28       177       (113     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

     (39,320     (42,296     (5,917     (32,459     (58,957     (8,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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     For the year ended December 31,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands, except for number of shares and per share data)  

Net loss attributable to non-controlling interests

     (244     (233     (32     (233     (194     (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

     (39,076     (42,063     (5,885     (32,226     (58,763     (8,221
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

            

Ordinary shares-basic and diluted

     (4.92     (4.93     (0.69     (3.78     (6.75     (0.94

Weighted average number of ordinary shares used in loss per share computation:

            

Ordinary shares-basic and diluted

     7,937,300       8,524,100       8,524,100       8,523,300       8,708,900       8,708,900  

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        11,067        1,548  


 

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The following table sets forth our summary consolidated balance sheet data as of December 31, 2017 and 2018 and September 30, 2019:

 

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

Summary Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     11,412        12,887        1,803        23,975        3,354  

Total current assets

     17,949        20,852        2,917        38,416        5,374  

Total assets

     60,148        52,762        7,382        72,017        10,075  

Current liabilities:

              

Short-term debt

     12,500        25,961        3,632        29,655        4,149  

Amounts due to related parties

     3,077        28,687        4,013        29,692        4,154  

Total current liabilities

     35,349        71,438        9,995        108,928        15,239  

Total liabilities

     50,651        75,155        10,515        111,975        15,666  

Total shareholders’ equity (deficit)

     9,497        (22,393      (3,133      (39,958      (5,591

The following table sets forth our summary consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended December 31,      For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Summary Consolidated Statements of Cash Flow Data:

                 

Net cash used in operating activities

     (21,641      (31,147      (4,358      (23,031      (32,616      (4,561

Net cash used in investing activities

     (8,017      (2,680      (375      (7,890      (2,829      (396

Net cash generated from financing activities

     39,807        36,271        5,074        36,271        47,539        6,650  

Effect of exchange rate changes on cash and cash equivalents

     (2,893      (969      (136      (828      (1,006      (142
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

     7,256        1,475        206        4,522        11,088        1,551  

Cash and cash equivalents at beginning of year

     4,156        11,412        1,597        11,412        12,887        1,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     11,412        12,887        1,803        15,934        23,975        3,354  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Summary Operating Data

The following table sets forth our summary operating data for the periods indicated:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

CDA-based tests, when used in this prospectus, refer to our CDA tests and our combination tests.



 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operation. In that case, the trading price of our ADSs could decline, and you may lose your entire investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends.

Risks Relating to Our Business and Industry

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 cancer screening and detection tests), as well as genomics 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;

 

   

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.

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 and maintain profitability.

Although our revenue grew rapidly in recent years, we have incurred losses each year since our inception. For the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019, we incurred

 

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net losses of RMB39.3 million, RMB42.3 million (US$5.9 million) and RMB59.0 million (US$8.2 million), respectively. As of September 30, 2019, we had an accumulated deficit of RMB233.1 million (US$32.6 million). To date, we have financed our operations primarily with capital contributions from our shareholders, short-term non-bank 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.

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 or future cancer screening and detection tests, which will depend on a number of factors, including:

 

   

our ability to further validate 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 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 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 successfully to 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.

Our ability to grow our China 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

 

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medical device dealers. But 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. The timing for us to obtain this certificate or license is uncertain, but we expect it to take at least three years. 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 may not be successful.

Currently, we conduct commercial operations only in China, and the substantial majority of our business, assets, management and employees are located in China. We have only recently started our efforts to enter the U.S. market. We obtained a California state license and a CLIA Certificate of Registration for our laboratory in San Jose, California in March 2019. We are seeking voluntary accreditation of our San Jose laboratory by the College of American Pathologists, or CAP. Our U.S. operations are currently focused on collaborating with U.S. health organizations to conduct research tests of our CDA technology. We plan to open a new laboratory in Philadelphia, Pennsylvania in 2020, and we will seek to obtain CLIA certification, a Pennsylvania state license, and accreditation from CAP for this laboratory. Although our strategy is to expand our U.S. operations and eventually commence commercial sales of our CDA-based 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 test in the U.S. market;

 

   

U.S. federal and state regulatory risks, including our ability to commence marketing of our CDA test as an LDT, without premarket clearance, market authorization or approval from the United States Food and Drug Administration, or the FDA, and our ability to comply with all applicable FDA 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.

Our industry 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

 

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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.

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;

 

   

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, such as scientific, quality control and marketing personnel;

 

   

develop, acquire and improve operational, financial and management information systems, including personnel to support our product development and help us comply with our obligations as a public company;

 

   

add equipment and physical infrastructure to support our research and development programs; and

 

   

finance general and administrative expenses.

We plan to use the net proceeds of this offering primarily to fund our research studies in China and the U.S., the development of new cancer screening and detection tests and technologies, the expansion of our marketing and sales channels in China and our clinical laboratory expansion in the U.S. The net proceeds of this offering and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings or other sources. 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. In addition, if we raise funds by issuing debt securities or incurring additional borrowings, the terms of the debt securities issued or borrowings could impose significant restrictions on our operations, and we may be unable to repay the indebtedness when due. If we raise funds by issuing equity securities, your investment in our company could be diluted.

 

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As of September 30, 2019, we had short-term debt of RMB29.7 million (US$4.1 million), including a short-term loan borrowed by our PRC subsidiary, AnPac Bio-Medical Technology (Shanghai) Co., Ltd., or AnPac Shanghai, from a third-party micro-loan company and our convertible loans from our related party, Zhijun. We believe that our cash and cash equivalents on hand, anticipated equity contributions of our shareholders, borrowings, our anticipated cash flows generated from our operating activities and financial support from our founder and chairman, Dr. Chris Chang Yu, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. 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. 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 product candidates;

 

   

the costs of expanding our laboratory operations and offerings, including our sales and marketing efforts;

 

   

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 and any additional cancer screening and detection 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.

We have recorded net current liabilities and negative cash flows from operating activities and may continue to do so.

We had net current liabilities of RMB17.4 million, RMB50.6 million (US$7.1 million) and RMB70.5 million (US$9.9 million) as of December 31, 2017 and 2018 and September 30, 2019, respectively. We cannot assure you that we will not continue to have net current liabilities positions in the future, which would expose us to liquidity risk. Our future liquidity and ability to make the additional capital investments necessary for our operations and business expansion will depend primarily on our ability to maintain sufficient cash generated from operating activities and to obtain adequate external financing. There can be no assurance that we will have such cash from operating activities or that we will be able to renew existing loan facilities or obtain other sources of financing.

We have experienced significant cash outflow from operating activities since our inception. We had net cash used in operating activities of RMB21.6 million, RMB31.1 million (US$4.4 million) and RMB32.6 million (US$4.6 million) in 2017, 2018 and the nine months ended September 30, 2019, respectively. Our cost of continuing operations could further reduce our cash position, and an increase in our net cash outflow from operating activities could adversely affect our operations by reducing the amount of cash we have available to meet the cash needs for operating our business and to fund our investments in our business expansion.

 

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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;

 

   

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;

 

   

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 additional tests, devices and technologies;

 

   

coverage and reimbursement policies with respect to our cancer screening and detection tests and tests that compete with our test;

 

   

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.

If our cancer screening and detection 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. 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 test 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 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,

 

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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 CDA-based tests, we also provide annual physical checkup packages to our customers. We typically outsource the physical checkup services in these packages (other than CDA-based 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.

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 2017 and 2018. We are gradually phasing out this outsourcing arrangement and plan to perform our combination tests entirely in-house in the near future. We also rely on contract

 

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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 and chief executive officer, and Dr. He Yu, our co-founder and chief medical officer. Dr. Chris Yu, Dr. He Yu and each of our key management and scientific personnel may terminate his or her employment with us. 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.

Our future success depends on our ability to promote our brand and protect our reputation.

We believe that enhancing and maintaining awareness of our “AnPac” brand is critical to achieving widespread acceptance of our cancer screening and detection tests, gaining trust for our testing services and attracting new customers. Successful promotion of our brand depends largely on the quality of the services we offer and the effectiveness of our branding and marketing efforts. Currently, we rely primarily on our own sales and marketing team to promote our brand and our cancer screening and detection tests, and we also engage sales agents, including companies we invested in. We expect our branding and marketing efforts will require us to incur significant expenses and devote substantial resources. We cannot guarantee that our marketing efforts will be successful. Brand promotion activities may not yield increased revenue in the near term, and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. Our failure to establish and promote our brand and any damage to our reputation will hinder our growth.

In addition, some companies that we established in China together with third parties—over which we do not have effective control—share with us the “AnPac” trading name and its Chinese characters that we use, and they at times act as sales agents for our CDA test. Given this shared use, any negative publicity related to these companies as well as their products and services, whether with merit or not and whether or not related to us, could adversely impact our brand and reputation. Furthermore, negative publicity about other market players or isolated incidents such as fraudulent behaviors, whether or not factually correct, may result in negative perception of the early cancer screening and detection industry as a whole and undermine the credibility we have established, which may negatively affect our business and results of operations.

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

 

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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.

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

 

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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.

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.

 

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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.

 

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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 plan to market our CDA test initially as an LDT, and we intend to perform all our research and commercial tests in our own laboratory in San Jose, as well as in our proposed new laboratory in Philadelphia after it is established. 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 not purchased any property insurance or 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 business.

We depend on third parties for different aspects of our business, including suppling 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

 

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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 in China, 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.

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, 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.

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.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our ICFR. However, in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2017 and 2018 and, we and our independent registered public accounting firm identified two “material weaknesses” in our ICFR and other control deficiencies. As defined in standards established by the United States Public Company Accounting Oversight Board, or the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses and other control deficiencies identified were

 

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our company’s lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and the Securities and Exchange Commission, or SEC, rules, and a lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements. Following the identification of the material weaknesses and other control deficiencies, we have taken measures and plan to continue to take measures to remediate timely these deficiencies. For details about remediation, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting” for more details. However, the implementation of these measures may not fully address the material weakness and deficiencies in our ICFR, and we may be unable to conclude that they have been remediated. Our failure to correct the material weakness and control deficiencies or our failure to discover and address any other material weakness or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Additionally, ineffective ICFR could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

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

In documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our ICFR. In addition, if we fail to maintain the adequacy of our ICFR, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective ICFR in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.

Our business may suffer if we are unable to collect payments from our corporate customers on a timely basis.

We typically offer credit terms of one to three months to our sales agents and other corporate customers. Any downturn in the businesses of our sales agents and other corporate customers could reduce their willingness or ability to pay us. The failure of any of our sales agents or other corporate customers to make timely payments could require us to recognize an allowance for doubtful accounts, For example, we had allowance for doubtful accounts receivable of RMB18,000, RMB198,000 (US$29,000) and RMB177,000 (US$25,000) as of December 31, 2017 and 2018 and September 30, 2019, respectively. We cannot guarantee that we will be able to collect these doubtful accounts. As a result, our results of operations and financial condition may be adversely affected.

 

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We have granted, and may continue to grant, stock incentive awards, which may result in increased share-based compensation expenses.

We have adopted our 2019 share incentive plan, or 2019 Plan, so that we can grant share-based compensation awards to our directors, officers, employees and consultants to incentivize their performance and align their interests with ours. The maximum number of Class A ordinary shares that may be issued pursuant to all awards under our 2019 Plan is 1,105,300. We have also separately issued options to our directors, officers, employees and consultants outside of our 2019 Plan. As of the date of this prospectus, options to purchase 1,163,500 Class A ordinary shares have been granted and are outstanding.

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 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.

Risks Relating to Government Regulations

PRC

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

 

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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.

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. 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 May 2017, 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 as promulgated by the NMPA’s predecessor, the China Food and Drug Administration, or the CFDA, in November 2017 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 believe it will likely take at least three years for us to obtain this license from the NMPA. 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.

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

 

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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 “Regulations—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 “Regulations—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.

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

 

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specific regulations, and to date, no such regulations have been adopted. 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.

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. Chinese regulations governing the collection and use of personal data are still under development. 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.

United States

We conduct our business in a heavily regulated industry, 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, U.S. 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 U.S. Department of Health and Human Services, or HHS, Office of the Inspector General, enforcing those laws and regulations;

 

   

medical device and in vitro diagnostic, or IVD, clearance, marketing authorization or approval;

 

   

FDA’s 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;

 

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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 enforcement discretion for 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 a policy of enforcement discretion with respect to LDTs, whereby the FDA does not actively enforce its medical device regulatory requirements for these tests. However, in July 2014, the FDA notified Congress of its intent to modify, in a risk-based manner, its policy of enforcement discretion with respect to LDTs. 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 on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution. However, it is unclear if Congress or the FDA will modify the current approach to the regulation of LDTs in a way that would subject our CDA test to the enforcement of FDA regulatory requirements. The 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, pending legislative proposals, if enacted, such as the Verifying Accurate, Leading-edge IVCT Development Act of 2018, or VALID Act, 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

 

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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.

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.

Offering our proprietary cancer screening and detection test from more than one laboratory 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, it has narrowly defined an LDT as a test that is designed, manufactured and used within a single laboratory. However, the FDA has not historically taken enforcement action against laboratories with multiple facilities that offer the same test. If we offer our CDA test from more than one of our laboratories, the FDA could conclude that our test no longer qualifies as an LDT because it is not used within a single laboratory. If the FDA were to conclude that our cancer screening and detection test is not an LDT, that could prevent us from being able to offer our test until we receive appropriate FDA clearance, authorization or approval. Even if we submit for clearance, authorization or approval, the FDA may not ultimately 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 our CDA test 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 U.S. federal healthcare programs, as well as commercial payers, for our tests. We have obtained a CLIA Certificate of Registration for our laboratory in San Jose, California. We are seeking voluntary accreditation of our San Jose laboratory by CAP, and are awaiting CAP inspection to receive CAP accreditation and a CLIA Certificate of Accreditation for this laboratory. We also plan to open a new laboratory in Philadelphia, Pennsylvania in 2020 and will seek to obtain CLIA certification and CAP 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 California clinical laboratory license for our San Jose laboratory to conduct testing. We will be required to maintain a Pennsylvania clinical laboratory license in order for our to-be-established Philadelphia laboratory to conduct testing. In addition, some other states may require our California and Philadelphia laboratories 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 every two years.

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 certificate and/or state licenses, imposition of a directed plan of corrective

 

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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 certificate, 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 San Jose, California. 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 enforcement 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.

In addition, 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.

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 FDA 510(k) clearance, de novo marketing authorization, or PMA approval. We have not yet applied for clearance, marketing authorization, or approval from the FDA, and need to complete additional validations before we are ready to apply. We believe it would likely take two years or more to conduct the clinical studies and trials necessary to obtain clearance, marketing authorization, or approval from the FDA to commercially launch our tests outside of our clinical laboratory. Once we apply, we may not receive the FDA clearance, marketing authorization, or approval for the commercial use of our 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;

 

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the FDA may identify deficiencies in our marketing application, and in our or our collaborators’ 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.

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 the FDA 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 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 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, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration 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.

 

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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, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, or report financial information or data accurately or 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 regulations, we could face substantial enforcement actions, including civil and criminal penalties and our business, operations and financial condition could be adversely affected.

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

 

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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, U.S. 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 FTC 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 foreign, 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.

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 $57,051 per violation, not to exceed $1.71 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 $1.71 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.

 

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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

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. 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.

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

 

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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.

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. Amid these tensions, the U.S. government has imposed and may impose additional measures on entities in China, including sanctions. 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, increased protectionism and the risk of global trade war, which result in weaker global trade and lower levels of economic activity, could reduce the demand for our tests and adversely affect our business.

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.

Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, which may impose new burdens on us.

The PRC Foreign Investment Law, or the FIL, was enacted by the National People’s Congress of the PRC on March 15, 2019 and will become effective on January 1, 2020, which will replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. This law will become the legal foundation for foreign investment in the PRC. The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, uncertainties exist with respect to interpretation and implementation of the FIL, which may adversely impact our corporate governance practice and increase our compliance costs. For instance, we might be required by governmental interpretations or

 

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implementing rules of the FIL to adjust the corporate governance of certain of our PRC subsidiaries in a five-year transition period. In addition, the FIL imposes information reporting requirements on foreign investors or foreign invested enterprises. Failure to take timely and appropriate measures to cope with any of these or other regulatory compliance requirements under the FIL may lead to rectification obligations, penalties, or other regulatory sanctions on us.

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

We are an offshore holding company conducting our operations in China through our PRC subsidiaries. We may make loans to our PRC subsidiaries 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 this offering 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 this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

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.

As a holding company, we conduct most of our business through our subsidiaries incorporated in China. We may rely on dividends paid by these PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability

 

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to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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 grant and subsidies we recognized for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019 was RMB1.4 million, RMB5.9 million (US$825,000) and RMB2.6 million (US$367,000), 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

 

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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.

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.

 

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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 this offering 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.

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.

 

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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.

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.

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

 

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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 will be subject to these regulations upon the completion of this offering. 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.

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

Starting in 2011 five China-based accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies

 

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operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against five China-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain China-based companies that are publicly traded in the U.S. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms, including our independent registered public accounting firm, from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms’ ability to continue to serve all their respective customers is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted.

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

In December 2018, the SEC and the PCAOB issued a joint statement on regulatory access to audit and other information internationally that cites the ongoing challenges faced by them in overseeing the financial reporting of companies listed in the United States with operations in China, the absence of satisfactory progress in discussions on these issues with Chinese authorities and the potential for remedial action if significant information barriers persist.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as Nasdaq of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs

 

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from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

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

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

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

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

Risks Relating to the ADSs and This Offering

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

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

The trading price 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

 

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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.

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.

Immediately after the completion of this offering, our ordinary shares will consist of 8,668,000 Class A ordinary shares and 2,863,100 Class B ordinary shares, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. 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 transfer of Class B ordinary shares by a holder 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 will sell Class A ordinary shares represented by our ADSs in this offering.

All of the 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 own 63.6%, 12.3% and 8.7%, respectively, of the aggregate voting power of our company as of the date of this prospectus, and will beneficially own approximately 60.7%, 11.7% and 8.3%, respectively, of the aggregate voting power of our company immediately

 

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after the completion of this offering, due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. 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.

After this offering, share ownership will remain concentrated in the hands of our principal shareholders and management, who will continue to be able to exercise a direct or indirect controlling influence on us.

We anticipate that our directors, officers and current five percent or greater shareholders and affiliated entities will together beneficially own approximately 86.5% of the voting power of our ordinary shares issued and outstanding after this offering, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. As a result, these shareholders, acting together, will 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, including those who purchase ADSs in this offering, 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.

Substantial future sales or perceived potential sales of ADSs or ordinary shares, including upon the exercise of vested options, in the public market could cause the price of ADSs to decline.

Sales of substantial amounts of our ADSs or ordinary shares, including upon the exercise of vested options, in our company in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 11,531,100 ordinary shares (including 1,666,700 Class A ordinary shares represented by ADSs) outstanding immediately after this offering, assuming the representatives of the underwriters do not exercise their over-allotment option or the warrants we have agreed to grant to the representatives of the underwriters and excluding shares issuable upon the exercise of unexercised options or upon conversion by Zhijun of its convertible loans to us. In connection with this offering, we, our directors, executive officers, and our shareholders holding 1% or more of our ordinary shares outstanding prior to the

 

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effective date of this offering have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, at the request of the parties subject to the lock-up restriction, the representatives of the underwriters may exercise their discretion to release the lock-up restriction prior to the expiration of the lock-up period, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. Also, there may be perception that the parties subject to the lock-up restriction will sell the shares after the lock-up period. Sales of substantial amounts of ADSs in the public market, or the perception that these sales 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 (the “M&A”) 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 after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

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

 

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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 will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving 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 memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be 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.

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.

 

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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 in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not 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.

We are a 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. In addition, certain of our

 

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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. For more information regarding the relevant laws of the British Virgin Islands and China, see “Enforceability of Civil Liabilities.”

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 “Description of Share Capital—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. For more information, see “Enforceability of Civil Liabilities.” 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 “Description of Share Capital—Differences in Corporate Law—Shareholders’ Suits.”

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.

 

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

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

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 now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq, 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 will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.

The Nasdaq listing rules require listed companies to have, among other things, a majority of their board members be independent. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the BVI, does not require a majority of our board to consist of independent directors. Since a majority of our board of directors will not consist of independent directors, fewer board members may be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members each of whom must be an independent director (unless any exception under the Nasdaq listing rules applies). We, as a foreign private issuer, are not subject to these requirements, except for

 

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the aforesaid independence requirement for audit committee members (unless any exception under the Nasdaq listing rules applies). The Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of the Nasdaq listing rules in determining whether shareholder approval is required on such matters and to appoint a compensation committee and a nominating and corporate governance committee. However, we intend to follow home country practice to not have all members of our compensation committee and nomination and corporate governance committee composed entirely of independent directors. In addition, we may consider following home country practice in lieu of the requirements under the Nasdaq listing rules with respect to certain other corporate governance standards which may afford less protection to investors.

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.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis 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.

The asset test is generally applied using the fair market values of a non-U.S. corporation’s assets. The asset test is applied using adjusted tax bases of the assets, however, if the non-U.S. corporation is a controlled foreign corporation (“CFC”) and is not publicly traded for the year. We are likely to be a CFC following the transition to a dual class structure and will become publicly traded as a result of the offering. It is not entirely clear under current law how the asset test should be applied when a non-U.S. corporation is either a CFC or is not publicly traded for only part of the year. We believe, however, that it is reasonable for shareholders to apply the asset test using fair market values of our assets for each quarter that we either are not a CFC or are publicly traded, although the Internal Revenue Service (“IRS”) could take a different position.

 

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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 “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Status” for more details regarding the foregoing.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. 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 “may,” “will,” “would,” “could,” “should,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “seek,” “goal,” “objective,” “anticipate,” “assume,” “contemplate,” “predict,” “potential,” “continue,” “positioned” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements relating to:

 

   

the implementation of our business model and growth strategies;

 

   

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;

 

   

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 NMPA, the FDA and the relevant U.S. states and have our laboratories certified or accredited by authorities including the CLIA;

 

   

our future business development, financial condition and results of operations and our ability to obtain financing cost-effectively;

 

   

potential changes of government regulations;

 

   

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.

You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors that could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, 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.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This prospectus contains statistical data and information estimates that we obtained from various government and private publications, including industry data and information from Frost & Sullivan. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this prospectus involves a number of assumptions, estimates and limitations. The cancer screening and detection market may not grow at the rates projected by market data, or at all. The failure of this

 

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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 turns out 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 prospectus. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$16.9 million, or approximately US$19.9 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$13.00 per ADS, the midpoint of the price range shown on the front cover page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$13.00 per ADS would increase (decrease) the net proceeds to us from this offering by US$1.57 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees and obtain additional capital. We plan to use the net proceeds of this offering primarily for the following purposes:

 

   

approximately 30% of the net proceeds for research studies in China and the U.S. and the development of new cancer screening and detection tests and technologies;

 

   

approximately 30% of the net proceeds for the expansion of our marketing and sales channels in China and our clinical laboratory expansion in the U.S.; and

 

   

the balance for general corporate purposes.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Relating to the ADSs and This Offering—You must rely on the judgment of our management as to the use of the proceeds from this offering, and such use may not produce income or increase our ADS price.”

In using the proceeds of this offering, under PRC laws and regulations as an offshore holding company we are only permitted to provide funding to our subsidiaries in China through loans or capital contributions, subject to the approval of government authorities and limits on the amount of loans. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of the offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” We expect that a portion of the net proceeds from this offering will be used in the PRC in the form of RMB and mainly by funding our wholly foreign-owned subsidiaries through capital contributions.

 

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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.

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 and after this offering. 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 “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 Class A ordinary shares underlying 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 Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the re-designation of 100,000 authorized ordinary shares to 71,369 Class A ordinary shares and 28,631 Class B ordinary shares pursuant to the resolutions of our board of directors and shareholders on October 29, 2019; and

 

   

on a pro forma as adjusted basis to reflect (i) the re-designation of 100,000 authorized ordinary shares to 71,369 Class A ordinary shares and 28,631 Class B ordinary shares pursuant to the resolutions of our board of directors and shareholders on October 29, 2019, and (ii) the sale of 1,666,700 Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$13.00 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

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

 

     As of September 30, 2019  
     Actual     Pro forma     Pro forma as
adjusted(1)
 
     RMB     US$     RMB     US$     RMB     US$  
     (in thousands)  

Shareholders’ deficit:

            

Ordinary shares

     495       69       —         —         —         —    

Class A ordinary shares

     —         —         319       44       438       61  

Class B ordinary shares

     —         —         176       25       176       25  

Additional paid-in capital(2)

     191,780       26,831       191,780       26,831       319,022       44,634  

Accumulated deficits

     (233,116     (32,614     (233,116     (32,614     (233,116     (32,614

Accumulated other comprehensive income

     767       107       767       107       767       107  

Noncontrolling interest

     116       16       116       16       116       16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (39,958     (5,591     (39,958     (5,591     87,403       12,229  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

The pro forma as adjusted information discussed above is illustrative only. Our total shareholders’ deficits following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

A US$1.00 increase (decrease) in the assumed initial public offering price of US$13.00 per share, which is the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ deficit, and total capitalization by US$1.57 million.

 

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DILUTION

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

Our net tangible book value as of September 30, 2019 was approximately (US$6.6 million), or (US$0.88) per ordinary share and (US$0.88) per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets, goodwill and total consolidated liabilities.

Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the assumed initial public offering price of US$13.00 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after September 30, 2019, other than to give effect to our sale of the ADSs offered in this offering at the assumed initial public offering price of US$13.00 per ADS, the midpoint of the estimated range of the initial public offering price, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2019 would have been US$11.2 million, or US$1.21 per ordinary share and US$1.21 per ADS. This represents an immediate increase in net tangible book value of US$2.09 per ordinary share and US$2.09 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$11.79 per ordinary share and US$11.79 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per ordinary share     Per ADS  

Assumed initial public offering price

   US$ 13.00     US$ 13.00  

Net tangible book value as of September 30, 2019

   US$ (0.88   US$ (0.88

Pro forma net tangible book value after giving effect to this offering

   US$ 1.21     US$ 1.21  

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

   US$ 11.79     US$ 11.79  

A US$1.00 increase (decrease) in the assumed initial public offering price of US$13.00 per ADS would increase (decrease) our pro forma net tangible book value after giving effect to this offering by US$1.6 million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.17 per ordinary share and US$0.17 per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.83 per ordinary share and US$0.83 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses payable by us.

 

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

 

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

Existing shareholders

     7,547,400        82   US$ 20,535,179        49   US$ 2.72      US$ 2.72  

New investors

     1,666,700        18   US$ 21,667,100        51   US$ 13.00      US$ 13.00  

Total

     9,214,100        100   US$ 42,202,279        100     

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 1,163,500 ordinary shares issuable upon the exercise of outstanding share options, and there are 1,105,300 ordinary shares available for future issuance upon exercise of future grants under our 2019 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the BVI in order to enjoy the following benefits:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

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

 

   

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

 

   

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

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

Substantially all of our current operations are conducted in the PRC, and substantially all of our assets are located in the PRC. Certain of our current directors and officers are nationals and residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to bring an action against us or them in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed AnPac US, located at Suite 127, 2260 Clove Drive, San Jose, CA 95128, as our agent to receive service of process with respect to any action brought against us in the courts of the State of Delaware under the federal securities laws of the United States or under the securities laws of the State of Delaware.

Maples and Calder (Hong Kong) LLP, our counsel as to BVI law, have advised us that the courts of the BVI will not necessarily enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. Additionally, there is no statutory enforcement in the BVI of judgments obtained in the United States, however, 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 provided that:

 

  (a)

the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;

 

  (b)

the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;

 

  (c)

in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the U.S. court;

 

  (d)

recognition or enforcement of the judgment in the BVI would not be contrary to public policy; and

 

  (e)

the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

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Zhong Lun Law Firm, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of China would:

 

   

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

 

   

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

Zhong Lun Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the BVI or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of the BVI or the United States. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the BVI and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or our ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

We began our operations by incorporating AnPac Bio in January 2010 as a BVI business company limited by shares under the BVI Act. AnPac Bio was established primarily as a holding company and has established our operating subsidiaries in China and the United States. Below is a list of our operating subsidiaries:

 

   

Changhe Bio-Medical Technology (Yangzhou) Co., Ltd., or AnPac Yangzhou: our wholly foreign owned subsidiary established in the PRC in March 2010 to market and sell our cancer screening and detection tests and conduct biology related research and development activities.

 

   

Changwei System Technology (Shanghai) Co., Ltd., or AnPac Changwei: our wholly foreign owned subsidiary established in the PRC in March 2011 as our global research and development center.

 

   

AnPac Bio-Medical Technology (Lishui) Co., Ltd. or AnPac Lishui: our wholly foreign owned subsidiary established in the PRC in October 2012 as our headquarters and to manufacture our CDA devices.

 

   

Shanghai Xinshenpai Technology Co., Ltd., or Shanghai Xinshenpai: our wholly owned subsidiary established in the PRC in October 2013 to market and sell our cancer screening and detection tests.

 

   

AnPac Shanghai: our wholly owned subsidiary established in the PRC in April 2014 to market and sell our cancer screening and detection tests.

 

   

AnPac US: our wholly owned subsidiary established in the United States in September 2015 to conduct research studies and clinical studies for our research on cancer screening and detection tests.

 

   

Lishui AnPac Medical Laboratory Co., Ltd., or Lishui Laboratory: our wholly owned subsidiary established in the PRC in July 2016 to conduct cancer screening and detection tests.

 

   

Shiji (Hainan) Medical Technology Limited, or Shiji Hainan: our wholly owned subsidiary established in the PRC, which we acquired from third parties in November 2017 to conduct cancer screening and detection tests.

 

   

Penghui Health Management (Shanghai) Co., Ltd., or Penghui Health Management: our wholly owned subsidiary established in the PRC in May 2018 to market and sell our cancer screening and detection tests.

 

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The chart below summarizes our corporate structure and identifies our principal subsidiaries as of the date of this prospectus:

 

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive loss data and selected consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and selected consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected unaudited interim condensed consolidated statements of comprehensive loss data and selected unaudited interim condensed consolidated cash flow data for the nine months ended September 30, 2018 and 2019 and the selected unaudited interim condensed consolidated balance sheet data as of September 30, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table presents our selected consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

    For the year ended December 31,     For the nine months
ended September 30,
 
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for number of shares and per share data)  

Selected Consolidated Statements of Comprehensive Loss Data:

           

Revenues:

           

Cancer screening and detection tests

    5,203       9,557       1,337       6,106       7,677       1,074  

Physical checkup packages

    483       693       97       525       436       61  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    5,686       10,250       1,434       6,631       8,113       1,135  

Cost of revenues(1)

    (3,954     (5,672     (794     (3,634     (4,266     (597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,732       4,578       640       2,997       3,847       538  

Operating expenses:

           

Selling and marketing expenses(1)

    (6,490     (9,827     (1,375     (7,202     (10,730     (1,501

Research and development expenses(1)

    (11,405     (10,106     (1,414     (7,746     (7,138     (999

General and administrative expenses(1)

    (24,938     (28,847     (4,036     (18,773     (40,439     (5,658

Other operating income

    178       593       84       475       138       19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (40,923     (43,609     (6,101     (30,249     (54,322     (7,601

Non-operating income and expenses:

           

Interest expense, net

    (338     (925     (129     (677     (1,897     (265

Foreign exchange gain (loss), net

    644       (2,776     (388     (1,970     (1,937     (270

Share of net loss (gain) in equity method investments

    (3     (441     (62     (224     442       62  

Other income, net

    1,309       5,256       735       484       (1,130     (158
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (39,311     (42,495     (5,945     (32,636     (58,844     (8,232

Income tax (expense) benefit

    (9     199       28       177       (113     (16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (39,320     (42,296     (5,917     (32,459     (58,957     (8,248
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to non-controlling interests

    (244     (233     (32     (233     (194     (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (39,076     (42,063     (5,885     (32,226     (58,763     (8,221
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the year ended December 31,     For the nine months
ended September 30,
 
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for number of shares and per share data)  

Loss per share:

           

Ordinary shares-basic and diluted

    (4.92     (4.93     (0.69     (3.78     (6.75     (0.94

Weighted average number of ordinary shares used in loss per share computation:

           

Ordinary shares-basic and diluted

    7,937,300       8,524,100       8,524,100       8,523,300       8,708,900       8,708,900  

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        11,067        1,548  

The following table presents our selected consolidated balance sheet data as of December 31, 2017 and 2018 and September 30, 2019:

 

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

Selected Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     11,412        12,887        1,803        23,975        3,354  

Total current assets

     17,949        20,852        2,917        38,416        5,374  

Total assets

     60,148        52,762        7,382        72,017        10,075  

Current liabilities:

              

Short-term debt

     12,500        25,961        3,632        29,655        4,149  

Amounts due to related parties

     3,077        28,687        4,013        29,692        4,154  

Total current liabilities

     35,349        71,438        9,995        108,928        15,239  

Total liabilities

     50,651        75,155        10,515        111,975        15,666  

Total shareholders’ equity (deficit)

     9,497        (22,393      (3,133      (39,958      (5,591

 

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The following table presents our selected consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Selected Consolidated Statements of Cash Flow Data:

                 

Net cash used in operating activities

     (21,641      (31,147      (4,358      (23,031      (32,616      (4,561

Net cash used in investing activities

     (8,017      (2,680      (375      (7,890      (2,829      (396

Net cash generated from financing activities

     39,807        36,271        5,074        36,271        47,539        6,650  

Effect of exchange rate changes on cash and cash equivalents

     (2,893      (969      (136      (828      (1,006      (142
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

     7,256        1,475        206        4,522        11,088        1,551  

Cash and cash equivalents at beginning of year

     4,156        11,412        1,597        11,412        12,887        1,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     11,412        12,887        1,803        15,934        23,975        3,354  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Selected Operating Data

The following table sets forth our selected operating data for the periods indicated:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

CDA-based tests, when used in this prospectus, refer to our CDA tests and our combination tests.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

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. We also offer combination tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies, such as biomarker-based tests, to detect the risk of specific cancer types.

Our CDA technology provides a highly accurate, early-stage risk assessment of the occurrence of cancer. As of September 30, 2019, 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.

We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. 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 have a clinical laboratory located in San Jose, California for which we obtained a CLIA Certificate of Registration in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. 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

 

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conduct research studies on our CDA technology at this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among them, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 countries and regions. Our patent applications broadly cover apparatuses and methods for detecting diseases at early stages, and they strategically encompass important, specific embodiments of these apparatuses and methods. Our patent portfolio is one of the world’s largest in early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

In 2015, we performed our first commercial CDA-based test in China. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of our cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in the nine months ended September 30, 2018 to RMB8.1 million (US$1.1 million) in the same period of 2019. In the United States, we plan to commence marketing our CDA test as an LDT sometime in 2020 at our CLIA-registered laboratory in San Jose.

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:

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 to depend significantly on our ability to increase market adoption of our CDA-based tests in China, as well as our ability to commercialize our CDA-based tests in the U.S.

According to Frost & Sullivan, the market potential in China for early cancer screening and detection technologies increased at a CAGR of 20.7% from US$27.7 billion in 2014 to US$58.8 billion in 2018, and is expected to reach US$115.1 billion in 2023, representing a CAGR of 14.4% over this period. 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

 

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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 an LDT in the U.S. We expect to invest significantly in research studies.

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 to obtain a Class III medical device registration certificate and the process is subject to regulatory and other uncertainties.

Our 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 corporates, 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.

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 RMB10.8 million, RMB7.9 million (US$1.1 million) and RMB18.4 million (US$2.6 million) in 2017, 2018 and the nine months ended September 30, 2019, 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 begin to conduct research studies in the U.S., we expect our research and development expenses to significantly increase.

 

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Funding for Our Operations

We have funded our operations primarily through capital contributions from our shareholders, short-term non-bank borrowings 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,      For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

Including our CDA tests and combination tests.

Key Components of Results of Operations

Revenues

We drive our revenues from two sources: (i) revenue from sales of cancer screening and detection tests (predominantly commercial CDA-based tests) and (ii) net revenue from sales of physical checkup packages.

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,     For the nine months ended
September 30,
 
     2017      2018     2018     2019  
     RMB      %      RMB      US$      %     RMB     %     RMB     US$     %  
     (in thousands, except %)  

Cancer screening and detection tests

     5,203        91.5        9,557        1,337        93.2       6,106       92.1       7,677       1,074       94.6  

Physical checkup packages

     483        8.5        693        97        6.8       525       7.9       436       61       5.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     5,686        100.0        10,250        1,434        100.0       6,631       100.0       8,113       1,135       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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; we also generated an insignificant amount of revenue from our commercial genomics 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 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. We expect that

 

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our revenue generated from our commercial CDA-based tests will increase as our business grows, including by providing additional tailored CDA-based tests to meet customer demand and exploring other sources of revenue related to our CDA test. We also expect to recognize additional revenue from commercial genomics tests as we devote more resources to marketing and sales of these tests.

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. We believe that selling annual physical checkup packages can expand our customer base for commercial CDA-based tests, and we intend to devote more resources to selling physical checkup packages and expect our net revenue from these packages to continue increasing.

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 genomics tests. 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. We expect our cost of revenues to continue to grow as we increase the volume of our commercial CDA-based tests.

Gross Profit and Gross Margin

Our gross profit represents our revenue from sales of cancer screening and detection tests 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.

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.

 

    Year ended December 31,     For the nine months ended September 30,  
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Operating expenses:

           

Selling and marketing expenses

    6,490       9,827       1,375       7,202       10,730       1,501  

Research and development expenses

    11,405       10,106       1,414       7,746       7,138       999  

General and administrative expenses

    24,938       28,847       4,036       18,773       40,439       5,658  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    42,833       48,780       6,825       33,721       58,307       8,158  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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. We expect that our selling and marketing expenses will increase as we continue to build out our sales and marketing teams and engage more sales agents and other channel partners to increase our market penetration.

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 that our research and development expenses will increase significantly in the near future, because we not only have multiple on-going research studies in China, but have also 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 at our CLIA-registered laboratory in San Jose, California.

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 our general and administrative expenses to continue increasing to support our business growth, but we expect that they will eventually decrease as a percentage of our revenues once our business scale increases.

Other income, net

Our net other income primarily includes government grants we received, including for 2018 the price that the government in Lishui, Zhejiang Province of China paid us for repurchase of a portion of a parcel of land that we did not utilize.

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.

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.

 

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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 be subject to enterprise income tax on its worldwide income at a rate of 25%. See “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 nine months ended September 30, 2019, 21% for the year ended December 31, 2018 and 35% for the year ended December 31, 2017. AnPac US is also subject to state income tax in California for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019.

 

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Results of Operations

The following table summarizes our results of operations for the periods indicated:

 

    Year ended December 31,     For the nine months ended September 30,  
    2017     2018     2018     2019  
    RMB     % of
Revenues
    RMB     US$     % of
Revenues
    RMB     % of
Revenues
    RMB     US$     % of
Revenues
 
    (in thousands, except %)  

Revenues:

           

Cancer screening and detection tests

    5,203       91.5       9,557       1,337       93.2       6,106       92.1       7,677       1,074       94.6  

Physical checkup packages

    483       8.5       693       97       6.8       525       7.9       436       61       5.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    5,686       100.0       10,250       1,434       100.0       6,631       100.0       8,113       1,135       100.0  

Cost of revenues

    (3,954     (69.5     (5,672     (794     (55.3     (3,634     (54.8     (4,266     (597     (52.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,732       30.5       4,578       640       44.7       2,997       45.2       3,847       538       47.4  

Operating expenses:

                   

Selling and marketing expenses

    (6,490     (114.1     (9,827     (1,375     (95.9     (7,202     (108.6     (10,730     (1,501     (132.3

Research and development expenses

    (11,405     (200.6     (10,106     (1,414     (98.6     (7,746     (116.8     (7,138     (999     (88.0

General and administrative expenses

    (24,938     (438.6     (28,847     (4,036     (281.4     (18,773     (283.1     (40,439     (5,658     (498.4

Other operating income

    178       3.1       593       84       5.8       475       7.2       138       19       1.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (40,923     (719.7     (43,609     (6,101     (425.5     (30,249     (456.2     (54,322     (7,601     (669.6

Non-operating income and expenses:

                   

Interest expense, net

    (338     (5.9     (925     (129     (9.0     (677     (10.2     (1,897     (265     (23.4

Foreign exchange gain (loss), net

    644       11.3       (2,776     (388     (27.1     (1,970     (29.7     (1,937     (270     (23.9

Share of net loss (gain) in equity method investments

    (3     (0.1     (441     (62     (4.3     (224     (3.4     442       62       (5.4

Other income, net

    1,309       23.0       5,256       735       51.3       484       7.3       (1,130     (158     (13.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (39,311     (691.4     (42,495     (5,945 )      (414.6     (32,636     (492.2     (58,844     (8,232     (725.3

Income tax (expense) benefit

    (9     (0.2     199       28       1.9       177       2.7       (113     (16     (1.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (39,320     (691.5     (42,296     (5,917 )      (412.6     (32,459     (489.5     (58,957     (8,248     (726.7

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenues

Our revenues increased by 22.3% to RMB8.1 million (US$1.1 million) for the nine months ended September 30, 2019 from RMB6.6 million for the same period of 2018, due to an increase in our revenue from

 

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sales of cancer screening and detection tests, partially offset by a decrease in our net revenue from sales of physical checkup packages.

Our revenue generated from sales of cancer screening and detection tests increased by 25.7% to RMB7.7 million (US$1.1 million) for the nine months ended September 30, 2019 from RMB6.1 million for the same period of 2018, due to an increase in the sales volume of our CDA-based tests, which was partially offset by a decrease in the average selling price of our CDA-based tests as we offered greater discounts to certain customers as a marketing strategy.

Our net revenue generated from sales of physical checkup packages decreased by 17.0% to RMB436,000 (US$61,000) for the nine months ended September 30, 2019 from RMB525,000 for the same period of 2018, primarily due to a substantial increase in the volume of physical checkup packages that we sold to a sales agent at prices lower than our costs as part of our customer acquisition strategy.

Cost of Revenues

Our cost of revenues increased by 17.4% to RMB4.3 million (US$597,000) for the nine months ended September 30, 2019 from RMB3.6 million for the same period of 2018. The increase was primarily attributable to our increased sales volume of CDA-based tests, which resulted in an increase in the testing cost for outsourced biomarker-based tests as well as increases in blood sample taking costs and medical consumables costs. The increase in our cost of revenues was also attributable to an increase in depreciation expense, as we put more CDA devices into use to meet the increased demand for our CDA-based tests.

Gross Profit

Our gross profit increased by 28.4% to RMB3.8 million (US$538,000) for the nine months ended September 30, 2019 from RMB3.0 million for the same period of 2018. Our gross margin increased to 47.4% for the nine months ended September 30, 2019 from 45.2% for the same period of 2018, primarily as a result of economies of scale.

Operating Expenses

Selling and marketing expenses

Our selling and marketing expenses increased by 49.0% to RMB10.7 million (US$1.5 million) for the nine months ended September 30, 2019 from RMB7.2 million for the same period of 2018, primarily due to (i) higher share-based compensation as we granted more options to our marketing and sales personnel, and (ii) higher marketing expenses as we increased our marketing efforts.

Research and development expenses

Our research and development expenses decreased by 7.8% to RMB7.1 million (US$1.0 million) for the nine months ended September 30, 2019 from RMB7.7 million for the same period the year before, primarily because we conducted less research and development activities under one of our research projects, as we came closer to the completion of the project, in the nine months ended September 30, 2019 compared to the same period of 2018. The decrease in our research and development expenses was also attributable to a decrease in our research and development related traveling expenses. These factors were partially offset by higher staff costs and share-based compensation for our research and development personnel.

General and administrative expenses

Our general and administrative expenses increased significantly to RMB40.4 million (US$5.7 million) for the nine months ended September 30, 2019 from RMB18.8 million for the same period of 2018, primarily due to (i) higher professional service fees, primarily related to this offering, and (ii) higher share-based compensation to personnel engaged in general and administrative functions.

 

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Interest Expenses

Our interest expense increased significantly to RMB1.9 million (US$265,000) for the nine months ended September 30, 2019 from RMB677,000 for the same period of 2018, primarily due to an increase in average borrowings.

Other Income, Net

We recognized net other income of RMB484,000 for the nine months ended September 30, 2018, which turned into net other loss of RMB1.1 million (US$158,000) for the same period of 2019, primarily due to an increase in fair value loss as a result of the increase in value of the convertible loans that we borrowed from Zhijun.

Net Loss

As a result of the foregoing, our loss for the year increased by 81.6% to RMB59.0 million (US$8.2 million) for the nine months ended September 30, 2019 from RMB32.5 million for the same period the year before.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenues

Our revenues increased by 80.3% to RMB10.3 million (US$1.4 million) for 2018 from RMB5.7 million for 2017, primarily due to an increase in our revenue from sales of cancer screening and detection tests.

Our revenue generated from sales of cancer screening and detection tests increased by 83.7% to RMB9.6 million (US$1.3 million) for 2018 from RMB5.2 million for 2017, primarily due to a substantial increase in the sales volume of our CDA-based tests, offset in part by more favorable prices at which we offered our CDA-based tests to certain large customers in 2018.

Our net revenue generated from sales of physical checkup packages increased significantly to RMB693,000 (US$97,000) for 2018 from RMB483,000 for 2017, primarily due to a significant increase in the volume of our physical checkup packages sold.

Cost of Revenues

Our cost of revenues increased by 43.4% to RMB5.7 million (US$794,000) for 2018 from RMB4.0 million for 2017. The increase was primarily attributable to our increased sales volume of CDA-based tests, which resulted in an increase in the testing cost for outsourced biomarker-based tests as well as increases in blood sample taking costs and medical consumables costs. The increase in our cost of revenues was also attributable to our share-based compensation of RMB317,000 (US$44,000) in 2018, while we did not recognize any share-based compensation in 2017.

Gross Profit

Our gross profit increased significantly to RMB4.6 million (US$640,000) for 2018 from RMB1.7 million for 2017. Our gross margin increased to 44.7% for 2018 from 30.5% for 2017, primarily because our revenue from sales of cancer screening and detection tests increased at a greater rate than our fixed costs, such as staff costs, as a result of economies of scale. This increase in gross margin is also because our net revenue from sales of physical checkup packages increased as a percentage of our total revenues.

 

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Operating Expenses

Selling and marketing expenses

Our selling and marketing expenses increased by 51.4% to RMB9.8 million (US$1.4 million) for 2018 from RMB6.5 million for 2017, primarily due to (i) higher marketing expenses as we increased our marketing efforts, (ii) higher staff costs as we increased our marketing and sales headcount, and (iii) higher share-based compensation as we granted more options to our marketing and sales personnel.

Research and development expenses

Our research and development expenses decreased by 11.4% to RMB10.1 million (US$1.4 million) for 2018 from RMB11.4 million for 2017, primarily because we granted fewer options to our research and development personnel. These factors were partially offset by higher staff costs as we expanded our research and development team.

General and administrative expenses

Our general and administrative expenses increased by 15.7% to RMB28.8 million (US$4.0 million) for 2018 from RMB24.9 million for 2017, primarily due to higher professional service fees, higher depreciation and amortization of property and equipment, higher staff costs (primarily due to an increase in headcount), higher patent service expenses, and higher rental costs. These factors were partially offset by a decrease in our share-based compensation, as we granted fewer options to personnel engaged in general and administrative functions.

Interest Expenses

Our interest expense increased to RMB925,000 (US$129,000) for 2018 from RMB338,000 for 2017, primarily due to an increase in average borrowings.

Other Income, Net

Our net other income increased significantly to RMB5.3 million (US$735,000) for 2018 from RMB1.3 million for 2017, primarily due to the price that the government in Lishui, Zhejiang Province of China paid us in 2018 for repurchase of a portion of a parcel of land that we did not utilize.

Net Loss

As a result of the foregoing, our loss for the year increased by 7.6% to RMB42.3 million (US$5.9 million) for 2018 from RMB39.3 million for the prior year.

Liquidity and Capital Resources

Our principal sources of liquidity have been capital contributions from our shareholders, short-term non-bank borrowings and loans and advances from our related parties. As of September 30, 2019, we had cash and cash equivalents of RMB24.0 million (US$3.4 million), consisting of cash on hand and demand deposits placed with banks. As of September 30, 2019, we had an advance of RMB25.0 million (US$3.5 million) that Jiaxing Zhijun Sihang Investment Partnership Enterprises (Limited Partnership), or Zhijun Sihang, provided to one of our PRC subsidiaries in 2018 (Zhijun Sihang is in the process of making equity contribution of these funds in our company). As of September 30, 2019, our short-term debt included (i) convertible loans of RMB21.7 million (US$3.0 million) that we borrowed from Zhijun in 2018, which have been extended to April 30, 2020, and (ii) a short-term non-bank borrowing of RMB8.0 million (US$1.1 million), the maturity of which has been extended to June 12, 2020.

 

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We believe that our cash and cash equivalents on hand, anticipated equity contributions of our shareholders, borrowings, our anticipated cash flows generated from our operating activities and financial support from our founder and chairman, Dr. Chris Chang Yu will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. After this offering, we may decide to expand our business through additional equity and debt financing. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions or loans to our PRC subsidiaries. However, most of these uses are subject to PRC regulations.

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,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net cash used in operating activities

     (21,641     (31,147     (4,358     (23,031     (32,616     (4,561

Net cash used in investing activities

     (8,017     (2,680     (375     (7,890     (2,829     (396

Net cash generated from financing activities

     39,807       36,271       5,074       36,271       47,539       6,650  

Effects of exchange rate changes on cash and cash equivalents

     (2,893     (969     (136     (828     (1,006     (142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     7,256       1,475       206       4,522       11,088       1,551  

Cash and cash equivalents at beginning of year

     4,156       11,412       1,597       11,412       12,887       1,803  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     11,412       12,887       1,803       15,934       23,975       3,354  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2019 was RMB32.6 million (US$4.6 million), which was primarily attributable to our net loss of RMB59.0 million (US$8.2 million) for the same period, as adjusted to add back share-based compensation of RMB18.4 million (US$2.6 million), foreign exchange loss of RMB3.3 million (US$463,000), and fair value loss on convertible loans of RMB3.1 million (US$436,000) before changes in operating assets and liabilities. Our decrease in net operating liabilities of RMB65,000 (US$9,000) was primarily due to an RMB5.9 million (US$822,000) increase in accrued expenses and other current liabilities, an RMB2.4 million (US$340,000) decrease in advances to suppliers and an RMB2.3 million (US$325,000) increase in accounts payable. These factors were partially offset by an RMB5.4 million (US$750,000) increase in accounts receivable as we sold a relatively large amount of CDA tests on credit in the

 

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third quarter of 2019, an RMB3.2 million (US$444,000) increase in other current assets and an RMB1.6 million (US$224,000) decrease in advances from customers, primarily related to our CDA-based tests.

Net cash used in operating activities for 2018 was RMB31.1 million (US$4.4 million), which was primarily attributable to our net loss of RMB42.3 million (US$5.9 million) for the same period, as adjusted to deduct gains on disposal of land use right of RMB5.0 million (US$693,000) and a foreign exchange loss of RMB2.5 million (US$346,000) and to add back share-based compensation of RMB7.9 million (US$1.1 million) and depreciation and amortization of RMB3.1 million (US$440,000) before changes in operating assets and liabilities. Our increase in net operating liabilities of RMB874,000 (US$121,000) was primarily due to an RMB2.3 million (US$326,000) increase in advances from customers, primarily related to our CDA-based tests, and an RMB1.4 million (US$195,000) increase in accrued expenses and other current liabilities. These factors were partially offset by an RMB1.6 million (US$230,000) increase in advances to suppliers, and an RMB1.1 million (US$153,000) increase in accounts receivable.

Net cash used in operating activities for 2017 was RMB21.6 million, which was primarily attributable to our net loss of RMB39.3 million for the same period, as adjusted to add back share-based compensation of RMB10.8 million and depreciation and amortization of RMB2.3 million and to deduct a foreign exchange gain of RMB1.8 million before changes in operating assets and liabilities. Our increase in net operating liabilities of RMB6.2 million was primarily due to an RMB5.5 million increase in accrued expenses and other current liabilities, an RMB1.1 million increase in advance from customers. These factors were offset in part by an RMB1.3 million increase in accounts receivable and an RMB1.0 million decrease in amounts due to related parties.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2019 was RMB2.8 million (US$396,000), which was primarily attributable to purchases of property and equipment of RMB2.6 million (US$367,000) and purchases of intangible assets of RMB206,000 (US$29,000).

Net cash used in investing activities for 2018 was RMB2.7 million (US$375,000), which was primarily attributable to payments (net of cash received) for our acquisition of our subsidiary, Shiji Hainan, of RMB3.5 million (US$495,000), purchases of property and equipment of RMB2.4 million (US$338,000), and purchases of long-term investments in certain investee companies of RMB1.6 million (US$217,000), partially offset by proceeds from disposal of land use rights of RMB5.3 million (US$735,000).

Net cash used in investing activities for 2017 was RMB8.0 million, which was primarily attributable to payments (net of cash received) for our acquisition of our subsidiary, Shiji Hainan, of RMB3.3 million, purchase payments for property and equipment of RMB2.6 million, and purchases of long-term investments in certain investee companies of RMB2.1 million.

Financing Activities

Net cash generated from financing activities for the nine months ended September 30, 2019 was RMB47.5 million (US$6.7 million), which was primarily attributable to (i) advances from investors of RMB26.4 million (US$3.7 million), and (ii) proceeds from issuances of ordinary shares of RMB21.0 million (US$2.9 million).

Net cash generated from financing activities for 2018 was RMB36.3 million (US$5.1 million), which was primarily attributable to (i) advances from Zhijun Sihang of RMB25.0 million (US$3.5 million) to one of our PRC subsidiaries in 2018, which constituted a step in the process of Zhijun Sihang making equity contributions of these funds in our company, and (ii) proceeds from short-term borrowings from Zhijun and a non-bank institution of RMB26.6 million (US$3.7 million), partially offset by payment for short-term borrowings from a non-bank institution of RMB14.7 million (US$2.1 million).

 

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Net cash generated from financing activities for 2017 was RMB39.8 million, which was primarily attributable to proceeds from equity contributions of investors of RMB40.2 million.

Capital Expenditures

Our capital expenditures were RMB2.6 million, RMB2.8 million (US$398,000) and RMB2.8 million (US$396,000) for 2017 and 2018 and the nine months ended September 30, 2019, 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.

Contractual Obligations

Our contractual obligations include our operating lease commitments related to our business premises. The table below sets forth our contractual obligations as of September 30, 2019:

 

     Total      For the year ending December 31,  
     2019      2020      2021      2022  
     (RMB in thousands)  

Operating lease commitments

     2,220        498        1,236        474        12  

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources to address our internal controls and procedures. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2018, we and our independent registered public accounting firm identified two material weaknesses in our ICFR. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, a “material weakness” is a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified are our company’s lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC rules, and our lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements.

We are in the process of implementing a number of measures to address these material weaknesses identified, 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

 

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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.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s ICFR. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions. However, pursuant to Section 404 and the related rules adopted by the SEC, we, as a public company after being listed, are required to maintain adequate ICFR and include our management’s assessment of the effectiveness of our company’s ICFR in our annual report.

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 1.8% for December 2017, 1.9% for December 2018 and 3.0% for September 2019. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.

Qualitative and Quantitative Disclosures about Market Risk

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, 2017 and 2018 and September 30, 2019, the aggregate amount of cash and cash equivalents of RMB8.9 million, RMB7.0 million (US$982,000) and RMB9.4 million (US$1.3 million), respectively, was held at major financial institutions located in the PRC, and RMB2.5 million, RMB5.9 million (US$821,000) and RMB14.6 million (US$2.0 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.

 

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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, 2017 and 2018 and September 30, 2019, we had three customers, one customer 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.

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

Since July 21, 2005, Renminbi has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The U.S. dollar depreciated against Renminbi by approximately 6.3% in 2017 and appreciated against Renminbi by approximately 5.7% in 2018. As the trade war between the U.S. and China has escalated, the U.S. dollar has appreciated against Renminbi to be 1:6.9954 as of November 8, 2019. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar.

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 September 30, 2019, we had RMB24.0 million (US$3.4 million) of cash and cash equivalents and RMB70.5 million (US$9.9 million) of working capital deficit. For the nine months ended September 30, 2019, we incurred RMB32.6 million (US$4.6 million) of negative cash flows from operations and RMB2.8 million (US$396,000) of capital expenditures. We believe that our current liquidity resources, future operating cash flows generated and subsequent committed financing will be adequate to meet our obligations as they come due for a period of at least one year from September 20, 2019, the date at which the consolidated financial statements were available to be issued. In the event of any unexpected adverse change in our business, we have the ability and intent to obtain additional equity or debt financing and we have received financial support from our founder and chairman, Dr. Chris Chang Yu.

Critical Accounting Polices, Judgments and Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting

 

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estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our consolidated financial statements in conformity with U.S. GAAP. 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 revenue and expenses during the reporting period. 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.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of these policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Revenue Recognition

Effective from January 1, 2017, we early adopted ASC 606, Revenue from Contracts with Customers and subsequent amendments to the initial guidance or implementation guidance issued between August 2015 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”).

We derive our revenues principally from customers through our cancer screening and detection tests and physical checkup services. Revenue is recognized when we satisfy the performance obligations in an amount of consideration to which we expect to be entitled in exchange for those services. We evaluate the presentation of revenue on a gross or net basis based on whether we control the services provided to customers and are the principal (namely, on a gross basis), or we arrange for other parties to provide the service to the customers and are the agent (namely, on a net basis). We present value-added taxes as a reduction from revenues.

Revenue from Cancer Screening and Detection Tests

Our revenue from cancer screening and detection tests is primarily generated through the sales of the our proprietary CDA tests and our combination tests, which combines our CDA test and, on an auxiliary basis, tests based on other cancer screening and detection technologies, such as biomarker-based tests, to our customers including corporations and life insurance companies. A contract exists when the master service agreement has been executed and the customer submits a service request, which is a placed order. Our contracts have a single performance obligation which is satisfied upon provision of the CDA-based test(s) and delivery of the CDA-based test result to the customer. We act as the principal as we control the CDA-based test(s) before it is transferred to the customer and record revenue on a gross basis at the point in time when the CDA-based test(s) result is delivered to the customer. In particular, we record revenue generated from our combination tests on a gross basis, including the portion of revenue which we subsequently pay to third parties as consideration for their performance of outsourced auxiliary biomarker-based tests.

Revenue from Physical Checkup Packages

We facilitate corporations and life insurance companies to procure physical checkup services from third-party physical checkup service providers for their respective employees and policy holders. We enter into contracts with corporations and life insurance companies and physical checkup service providers. We consider both the corporations and life insurance companies and the third-party physical checkup service providers as our customers in this type of transaction. Our performance obligation is to facilitate the corporations and life insurance companies and the third-party physical checkup service providers to complete the purchase of physical

 

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checkup services, which is not controlled by us before the services are transferred to the corporations and life insurance companies. Therefore, we fulfill our performance obligation at the point in time when the employees of corporations and policy holders of life insurance companies complete the physical checkups and we record the net amount that we retain from these completed transactions as revenue.

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.

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, we determine whether an award should be classified and accounted for as a liability award or an equity award. All of our share-based awards were classified as equity awards and were recognized in the consolidated financial statements based on their grant date fair values.

In accordance with ASC 718, we recognize share-based compensation cost for equity awards to employees and non-employees with a performance condition based on the probable outcome of that performance condition—compensation cost is recognized if it is probable that the performance condition will be achieved and shall not be recognized if it is not probable that the performance condition will be achieved.

We have elected to recognize share-based compensation using the straight-line method for all share-based awards granted with graded vesting based on service conditions. We use the accelerated method for all awards granted with graded vesting based on performance conditions. We account for forfeitures as they occur in accordance with ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. With the assistance of an independent third party valuation firm, we determined the fair value of the stock options granted to employees.

Fair value of options

We use the binomial tree option pricing model to estimate the fair value of share options with the assistance of an independent third-party valuation firm. The assumptions used to value the share options granted to employees and nonemployee were as follows:

 

     2017      2018      Nine months ended
September 30, 2019
 

Risk-free interest rate

     2.20%-2.46%        2.46%-3.11%        1.58%-2.50%  

Expected volatility range

     58.59%-65.18%        62.14%-63.61%        60.37%-64.25%  

Exercise multiple

     2.5        2.5        2.5  

Fair market value per ordinary share as at grant dates (US$)

     938.30-946.18        946.18-960.98        980.42  

 

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The estimated fair value of our ordinary shares at their respective grant dates was determined with the assistance of an independent third-party valuation firm. 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 of ordinary shares of several comparable companies in the same industry. The expected exercise multiple is based on management’s estimation, which we believe 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 year ended December 31,      For the nine months ended September 30,  
     2017      2018      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        11,067        1,548  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expenses.

     10,758        7,936        1,110        6,435        18,365        2,569  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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INDUSTRY

All information and data presented in this section have been derived from an industry report commissioned by us and prepared by Frost & Sullivan, or the Frost & Sullivan Report, unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion includes projections for future growth, which may not occur at the rates that are projected or at all.

Overview

Cancer is a leading cause of mortality and morbidity around the world. There were approximately 18.0 million new cases of cancer worldwide in 2018, and this number is projected to be 20.4 million in 2023. At the same time, China’s population is aging rapidly. The number of people in China over 65 grew at a CAGR of 4.9% from 137.6 million in 2014 to 166.6 million in 2018, and it is expected to grow at a CAGR of 5.2% from 2018 to reach 215.1 million in 2023. This demographic shift offers immense opportunities for China’s cancer screening and detection market, as elderly people generally have a greater risk of suffering from cancers.

Early Cancer Screening and Detection Saves Lives and Reduces Costs

Because early cancer screening and detection potentially shifts cancer diagnosis and treatment to earlier stages of the disease, it can improve patients’ treatment outcomes. Cancer researchers frequently refer to the five-year relative survival rate, which is the probability of being alive five years after cancer diagnosis, compared with the experience of the general population. The five-year relative survival rate of patients at the advanced stages of a cancer, namely stage III and stage IV, generally declines significantly compared with those diagnosed at the early stages, namely stage zero, stage I and stage II. For esophageal, colorectal, cervical and breast cancers, the five-year relative survival rates at the early stages are over 80%, emphasizing the importance of early cancer screening and detection.

Driven by the increasing effectiveness of oncology drugs, especially emerging targeted therapies, the total direct medical cost for cancers (including expenditures for treatment, as well as the cost of care and rehabilitation related to the illness) in China is estimated to increase at a CAGR of 13.1% from RMB411.5 billion in 2018 to RMB761.5 billion in 2023. Typically, the cost of treating cancer is lower when the disease is caught at an earlier stage. This is because if a cancer patient can be diagnosed earlier, that patient may be able to rely on surgical resection rather than drug therapies, or use standard, frontline drugs rather than aggressive experimental regimens. These early stage treatment regimens typically significantly reduce the patient’s lifetime direct medical cost for cancers. For example, the estimated lifetime cost of treatment for a cancer diagnosed at an advanced stage is roughly twice that of a cancer diagnosed at an early stage.

 

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Options for Early Cancer Screening and Detection

Overview

Because of its advantages, early cancer screening and detection represents huge market potential in both China and the United States. However, early cancer screening and detection remains one of the most challenging tasks in the medical field, due to the difficulties in finding cancers early, accurately and cost-effectively. Cancer screening is the use of a test among individuals with a population risk for, or higher probability of, cancer to detect the cancer sooner or prevent its complications. Major options for early cancer screening and detection currently include the following:

 

   

Tumor Markers. The two principal methods for tumor marker detection are immunoassays and molecular testing.

Immunoassays

Immunoassays are tests that detect the presence of a specific antibody or antigen in the body. Tumor markers used in immunoassays are proteins or other biomarkers produced by malignant cells and/or other cells of an organism in response to the onset of cancer. Because tumor markers can be observed in cancer-free subjects, immunoassays that are designed to detect tumor markers need to be used in combination with other tests to confirm cancer diagnoses. Immunoassays for tumor marker detection can be used for various purposes, including screening for cancer, assistance in cancer diagnosis, staging of disease, monitoring the effectiveness of therapy (or prognosis), providing evidence of cancer recurrence. Only a few tumor markers are useful for screening, while most can be used for prognosis or to provide evidence of cancer recurrence. Common tumor markers used in immunoassays include prostate-specific antigen, or PSA, for prostate cancer, cancer antigen 125, or CA-125, for ovarian cancer, and alpha-fetoprotein, or AFP, for hepatocellular carcinoma. Currently, there is no clinically validated tumor marker for esophageal cancer or brain cancer.

Molecular testing

Molecular testing analyzes biological markers associated with cancers in the genome. Two novel techniques of molecular testing are ct-DNA test, which detects circulating tumor DNA in the bloodstream, and CTC test, which detects cells in the bloodstream that have been shed from primary tumors. Neither of these techniques has been used in routine clinical practice. CTC tests can be used in the management of cancer by isolating tumor cells, which allows for morphologic identification and molecular characterization, while ct-DNA tests are currently limited to mutation detection.

 

   

Imaging. Screening for cancer using radiographic imaging, such as mammograms, X-rays and CT scans, has been available for decades, and numerous clinical studies have demonstrated its efficacy in specific instances. Breast cancer and lung cancer are the two cancers that benefit the most from early cancer screening and detection using imaging.

 

   

Biophysical-property based technologies. Biophysical-property based technologies, such as our CDA technology, focus on biophysical properties that exist in human blood and that regulate cell-surface differentiations and intercellular communications. These biophysical properties can signal risks of pre-cancer states and cancers, and they change over time as cancer occurs, progresses or regresses. According to Frost & Sullivan, we are one of the first biotechnology companies worldwide to focus on the detection and measurement of cancers’ biophysical properties.

 

   

Endoscopic exams. Endoscopy has a major role in the detection and characterization of neoplastic lesions along the digestive tract in all screening strategies. Typical endoscopic exams include cystoscopy, colonoscopy, endoscopic retrograde cholangiopancreatography, or ERCP, esophagogastroduodenoscopy, or EGD, and sigmoidoscopy, among others.

 

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In addition to the classifications of cancer screening and detection technologies above, our CDA technology, as well as CTCs, ct-DNAs, exosome, mRNAs and other emerging technologies, are also classified as “next-generation” cancer screening and detection technologies in our industry and related research fields.

Limitations of Current Options for Early Cancer Screening and Detection

Currently available early cancer screening and detection options have significant weaknesses that hinder their use, including:

 

   

Imperfect sensitivity and specificity for early-stage cancer screening and detection. There are currently no sufficiently sensitive tests to detect most cancers in their early stages. For example, there are no clinically validated tumor markers for esophageal or brain cancer, and the current tumor marker test for liver cancer, AFP, has low sensitivity when detecting liver cancer in early stages. Current screening options may also lead to high false positive rates. For example, over the course of ten years of annual mammography, more than 50% of women in the U.S. would experience a false positive mammogram. False positives can result in unnecessary interventions, increased costs and psychological burdens.

 

   

Invasiveness and side effects. Many established tests, such as colonoscopies and pap smears, are invasive. These tests can also result in negative health impacts, such as the risk of perforation with colonoscopies and the radiation exposure risk with mammograms.

 

   

Multiple screening modalities required across cancer types. Currently, there are often multiple detection options for a single type of cancer. Multiple screening modalities are generally required for detection of multiple cancer types, and the complex screening regimens required are difficult for both patients and providers to sustain.

 

   

Equipment for current screening options usually require significant capital expenditures, making screening difficult in resource-limited geographies. Hospitals and clinics must purchase expensive equipment, such as CT scanners, mammogram machines and gene sequencing machines, to perform many common cancer screening and detection tests. Many early cancer screening and detection tests, particularly ct-DNA- and CTC-based tests, are therefore quite expensive.

Market Opportunity

While early detection of cancers greatly improves clinical outcomes by providing clinical care and medical intervention at early stages, China’s early cancer screening and detection industry is still at the starting stage. Based on China’s large population, the market potential in China for early cancer screening and detection technologies increased at a CAGR of 20.7% from US$27.7 billion in 2014 to US$58.8 billion in 2018, and is expected to reach US$115.1 billion in 2023, representing a CAGR of 14.4% over this period. According to Frost & Sullivan, the percentage of people that conducted physical checkups in China in 2018 was estimated to be 31.2%, far below that of 77.0% in the U.S. for the same year. We believe that our CDA technology can address many of the limitations of current early cancer screening and detection methods, and that we are well-positioned to benefit from the expected rapid growth in China’s early cancer screening and detection market.

We believe that the advantages of our CDA technology summarized below can help us seize the tremendous market opportunity:

 

   

Numerous research studies have demonstrated our CDA technology’s ability to detect early-stage cancers with high sensitivity and specificity rates, including those cancers generally considered difficult for liquid-based technologies to test with high accuracy, such as lung and esophageal cancers.

 

   

Our CDA technology is liquid-based, and our tests require only a standard blood sample from a tested individual, which minimizes the invasive procedure required, making our tests side effect-free.

 

   

Retrospective validation studies have shown that our CDA technology, combined with our CDA device, can detect the risk of up to 26 types of cancer using a single blood test.

 

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We developed our CDA technology and our patented CDA device entirely in-house. Our CDA device is much less costly to manufacture than gene sequencing machines used by ct-DNA-based technologies and micro-electrical mechanical devices used by CTC-based technologies. The lower cost of our device substantially reduces our capital expenditure investment and operational costs compared to these other technologies. As a result, our CDA tests are much less expensive than a typical ct-DNA- or CTC-based test.

Early Cancer Screening and Detection Market in China and the United States

China

In China, early cancer screening and detection technologies are typically used in four segments of the market: hospitals, physical checkup centers, independent clinical laboratories and non-medical entities, such as general commercial enterprises and insurance companies.

 

   

Hospitals are the traditional segment of China’s early cancer screening and detection market and are still the market’s largest segment. However, to access the Chinese hospital segment, service providers must obtain the medical device registration certificates issued by the NMPA, which form a high barrier to entry.

 

   

Physical checkup centers are a less regulated market segment, and these centers are supplemental to hospitals in offering cancer screening and detection services to the public. Early cancer screening and detection service providers face intensified competition in this segment, resulting in low bargaining power for them.

 

   

Independent clinical laboratories also provide cancer screening and detection services to customers. However, unlike physical checkup centers, which typically provide immunoassay-based tests, independent clinical laboratories typically offer their customers more advanced technologies, such as ct-DNA- and CTC-based technologies. These laboratories are under strict supervision of the NHC and may require certificates, such as certificates for the compliance with the ISO standards and those issued by China National Accreditation Service for Conformity Assessment, or CNAS, to conduct their business. As a result, their laboratories typically place high demands on early cancer screening and detection service providers that they cooperate with, which moderates competition in this market segment.

 

   

Certain non-medical entities, such as general commercial enterprises and insurance companies, constitute a rapidly developing market segment with high growth potential, as they seek to provide cancer screening services to their employees or insured individuals. These entities may cooperate with early cancer screening and detection companies directly in developing related services. However, because this market segment is relatively disperse, cancer screening and detection service providers must spend more on marketing efforts to address this market segment.

The United States

In the United States, the market for early cancer screening and detection technologies primarily includes four segments: healthcare service providers, insurance companies, retail and enterprises.

 

   

Healthcare service providers include hospitals and independent physicians and clinics; they constitute a highly regulated market segment, like their counterparts in China.

 

   

There are many commercial insurance companies in the United States that purchase early cancer screening and detection services, resulting in a large market segment. For these companies, cost/price is often their principal criterion when selecting early cancer screening and detection services, which forms a barrier to entry into this market.

 

   

Individual consumers can also order cancer screening and detection kits directly from the relevant service providers’ websites. This retail model provides the most convenient way for many consumers to take cancer screening and detection tests.

 

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Similar to the situation in China, general commercial enterprises are also a rapidly developing market segment in the United States; the geographic dispersion of these purchasers requires companies attempting to serve them to expend substantial marketing efforts.

Competitive Landscape

According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies, in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as at June 30, 2019, which represented the historical aggregate of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of the volume of commercial cancer screening and detection tests provided and fifth in terms of revenue from commercial cancer screening and detection tests. We also ranked fourth, among companies that provide next-generation early cancer screening and detection technologies, in terms of the number of patents for inventions related to early cancer screening and detection issued in greater China and fifth in the U.S., both as of June 30, 2019.

 

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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, such as biomarker-based tests, to detect the risk of specific cancer types. When we refer to our technology or tests as a “cancer screening and detection” technology or test in this prospectus, 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-DNAs, 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 September 30, 2019, 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.

We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. Our principal laboratory is a licensed biomedical clinical laboratory located in Lishui, Zhejiang Province, China,

 

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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 have a clinical laboratory located in San Jose, California for which we obtained a CLIA Certificate of Registration in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. 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 at this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among these, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 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. Our patent portfolio is one of the world’s largest for early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

We performed our first commercial CDA-based test in China in 2015. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in the nine months ended September 30, 2018 to RMB8.1 million (US$1.2 million) in the same period of 2019. In the United States, we currently plan to commence marketing our CDA test as an LDT sometime in 2020 through our CLIA-registered laboratory in San Jose.

Our Competitive Strengths

Novel Patented Early Multi-Cancer Screening and Detection Technology

Our CDA technology is a liquid-based technology. It 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, and they 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). In contrast, many other liquid-based cancer screening and detection technologies focus on biochemical signals (such as conventional biomarkers), genomic signals (such as ct-DNAs) and CTCs. These other liquid-based technologies typically can only determine whether or not cancer has occurred at a static point in time. In addition, conventional biomarkers have relatively low sensitivity and specificity rates and they are prone to be triggered by non-cancerous diseases.

 

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Some cancer types, such as esophageal cancer and brain cancer, do not have corresponding biomarkers. On the other hand, ct-DNAs and CTCs are only detectable after a tumor has formed, and as such, their physical expressions of information, or signals, are typically weak during the early stages of a cancer as their concentrations in the blood are relatively low. Moreover, ct-DNA- and CTC-based technologies typically require complex and expensive gene sequencing machines and micro-electrical mechanical devices, respectively, to amplify relatively weak signals for cancer screening and detection purposes.

We believe that our CDA technology has the following advantages compared to other cancer screening and detection technologies:

 

   

Ability to detect the risk of cancer with high accuracy. The accuracy of cancer screening and detection technologies can be measured by two key performance metrics—sensitivity and specificity. Sensitivity indicates the ability of a test to correctly identify those who have cancer among the population with cancer, whereas specificity indicates the ability of the test to correctly identify those who do not have cancer among the population without cancer. These two metrics are critical for effective treatment selection based on the results of liquid-based testing. Numerous retrospective validation studies have shown that our CDA technology can successfully detect the risk of cancers with high sensitivity and specificity rates. For example, as of September 30, 2019, in completed research studies our CDA technology had successfully detected the risk of (i) lung cancer in 2,277 cases, with the meta-analysis sensitivity of 82.4% and specificity of 83.0%; and (ii) esophageal cancer in 2,253 cases, with the meta-analysis sensitivity of 85.8% and specificity of 93.0%. According to Frost & Sullivan, these high sensitivity and specificity rates are generally considered difficult for liquid-based cancer screening and detection technologies to achieve for lung and esophageal cancers, and they represent a leading position in terms of testing accuracy in the early cancer screening and detection industry.

 

   

Ability to detect the risk of multiple cancers using one blood test. Our retrospective validation studies have shown that our CDA technology, combined with our CDA device, can detect the risk of 26 types of cancers in a single blood test. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. While our CDA test alone does not indicate precisely which specific type(s) of cancer an individual may have, if it indicates a medium or high risk of cancer, the tested individual can use concurrent combinations of tests, or follow-up screening tests, performed by us or at hospitals or physical checkup centers, to determine the specific cancer type(s) that may exist or the location(s)of the cancer(s). For example, we offer our cancer-positioning services using a combination of our CDA technology and, on an auxiliary basis, biomarkers to indicate the risk of specific cancer type(s) in one blood test. This advantage of our CDA technology, as well as our CDA test’s ability to work in combination with other auxiliary tests using our proprietary algorithm, enable us to maintain a comprehensive and flexible test menu to meet different customers’ needs.

 

   

Proprietary technology supporting low-priced testing. We developed our patented CDA technology and our proprietary CDA device entirely in-house. Our CDA device is less costly to manufacture than the equipment used by many of our competitors, such as gene sequencing machines used by ct-DNA-based technologies and micro-electrical mechanical devices used by CTC-based technologies. In addition, we conduct cancer risk assessments using our proprietary algorithm. Furthermore, we do not rely on third-party licenses of intellectual property in developing our CDA technology and CDA device. These advantages reduce our operating costs, enabling us to offer our CDA tests at prices significantly lower than many of our competitors, such as typical ct-DNA- and CTC-based tests.

 

   

Minimally invasive, side effect-free and automated. Compared to conventional approaches to cancer screening and detection such as imaging technology and tissue biopsy, our CDA technology is liquid-based and requires only a standard blood sample from a tested individual. This minimizes the invasiveness of our tests and means they do not result in harmful side effects. In addition, our CDA device is highly automated, requiring minimal human involvement.

 

   

Potential for assistance in diagnosis, prognosis and recurrence. Our CDA technology can be used to track variations in cancer-related biophysical properties as a disease progresses, regresses or recurs.

 

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Our CDA technology can assist physicians in their cancer diagnosis by providing input complementary to pathologic information drawn from a tissue biopsy, which helps oncologists ensure that their cancer diagnoses are comprehensive and unbiased. Given these qualities, in addition to early cancer screening and detection, our CDA technology has demonstrated potential for assisting in diagnosis, prognosis and recurrence.

Expansive Patent Portfolio and Proprietary Test Database

According to Frost & Sullivan, we are one of the first biotechnology companies worldwide focusing on the detection and measurement of cancers’ biophysical properties. We have an expansive patent portfolio based on our technological innovations and substantial research studies, which is one of the world’s largest in early cancer screening and detection using next-generation technologies, according to Frost & Sullivan. As of September 30, 2019, we had filed 210 patent applications globally; among them, 121 patents had been granted, including 16 in the United States and 55 in greater China (including seven in Taiwan), and 89 patent applications were pending in China, the United States and nearly 20 countries and regions, including populous countries such as India and Brazil. Our patent applications broadly cover apparatus and methods for detecting diseases at early stages, and they strategically encompass important specific embodiments of these apparatus and methods. We believe that our expansive patent portfolio helps us to maintain and strengthen our technological advantages and market position. It also allows us to develop our patented CDA technology entirely in-house—without reliance on licenses of third-party technologies. Because we do not have to pay technology license fees, or purchase expensive testing equipment, the cost of our CDA test is significantly lower than that of many of our competitors; this cost advantage expands the total addressable market of our CDA test.

We have also established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. This database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, based on approximately 35,000 clinical samples, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies, in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019; and we ranked first in terms of the number of commercial cancer screening and detection tests conducted in 2018 among companies that offer next-generation early cancer screening and detection technologies in China. Our test database helps us to continuously refine our algorithm and provide high accuracy tests. Substantially all of the blood samples in our database were collected and tested in China. We have cooperated with a number of Chinese hospitals and medical institutions to conduct retrospective validation studies on our CDA technology for single or multiple cancers. Leveraging our relationships with these research partners, we anticipate having a relatively stable supply of blood samples to support our future research and further expand our test database in China. 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 at this laboratory.

Fully Commercialized Operations in China—Rolling Out Our China Experience to the U.S.

China’s large, aging population, favorable government policies, and relatively low labor costs represent substantial commercial opportunities for our business that enable us to cost-effectively conduct our cancer screening and detection tests at a large scale. As a result, while many of our competitors that operate only in the United States are still working to make their first breakthrough in product development, we have commercialized our CDA-based tests in China and generated revenue for four consecutive years since selling our first commercial CDA-based test in 2015. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from our cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from

 

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RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019.

With several years of operations, our China-based team has accumulated valuable know-how with respect to the research and development and commercialization of our CDA technology and tests. We believe that this experience and know-how will be of significant value in implementing our plans to develop our business in the U.S. through research studies and the commercialization of our CDA tests.

An Experienced Management Team With Proven Track Records of Success

We have an experienced management team with multi-disciplinary backgrounds and expertise, who have demonstrated the ability to develop and commercialize innovative technologies and products. This strong team has paved the way for us to develop our CDA technology for early cancer screening and detection.

Dr. Chris Chang Yu, our co-founder and chairman, has over 20 years’ experience in the semiconductor, integrated circuit materials, life sciences and environmental protection industries. He is the first or principal inventor of over 300 patent applications, among which over 100 are related to cancer diagnostics. His knowledge in weak signal detection, semiconductor manufacturing and life sciences helped him identify biophysical properties in blood through proprietary on-chip multiplexed measurements. He used biophysical properties—rather than biochemical and genomic signals—in peripheral blood to develop our CDA technology to detect the risk of cancers, and participated in the design of our CDA device, which, collectively, constitute the solid foundation for our current business. Dr. Yu was also an integral member of the team that led the spin-off of Cabot Microelectronics (NASDAQ: CCMP) from Cabot Corporation (NYSE: CBT) in 2000; and he was a co-founder of Anji Microelectronics (688019.SH), which he co-founded in 2004 and which completed its initial public offering in China’s science and technology innovation board market in July 2019. Our business development and growth have substantially benefitted from Dr. Yu’s experience in managing start-up technology companies.

In addition, Dr. He Yu, our co-founder and chief medical officer, is a renowned expert in molecular epidemiology, with training in medicine, epidemiology and clinical biochemistry. Dr. He Yu has served as a professor and program director of cancer epidemiology at the University of Hawaii Cancer Center and an adjunct professor at Yale School of Public Health since 2012. Relying on his over 20 years’ experience in leading-edge cancer research, Dr. He Yu has contributed to the development of our CDA technology. We also benefited from the expertise, experience and resources of our other key management members. For example, Mr. Xuedong Du, our vice president in charge of research and development, is the first or principal inventor of more than 100 patent applications, primarily for medical devices. Mr. Du has also made significant contributions to our CDA technology product development. Mr. Weidong Dai, our China president, has rich cross-disciplinary experience covering medical sciences and enterprise management. He has served as an adjunct professor at Anhui College of Traditional Chinese Medicine since 2004 and an executive director at the Hainan Branch of China Science Tsing Research Institute of Science and Technology since 2018.

Our Strategies

Our objective is to become the leading provider of highly accurate and cost-effective cancer screening and detection tests and to expand the application of our tests to other oncological areas, such as assistance in diagnosis, prognosis and recurrence. To achieve this, we intend to:

Enlarge Our Total Addressable Market in China by Obtaining Additional Regulatory Approvals for Our CDA Device

We intend to enlarge our total addressable market in China by obtaining additional regulatory approvals for our CDA device. We obtained a Class II medical device manufacture license from the NMPA in 2013 (renewed

 

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in 2018) and a Class II medical device registration certificate from the NMPA in 2015. These licenses allow us to manufacture our CDA device and use it to perform our CDA-based tests in our own laboratories in China. 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. 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 able 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’ diagnoses of specified multiple cancers.

Grow Our Customer Base in China

Our existing customer base in China consists primarily of life insurance companies and other large corporations; we offer our CDA-based tests to their insurance customers and/or employees. We plan to acquire customers for our CDA-based tests through the annual physical checkup packages we offer; we largely outsource these physical checkups (other than CDA-based tests) to third-party physical checkup centers. 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. We will also seek to increase our market penetration by continuing to build out our sales and marketing teams and engaging more sales agents and other channel partners.

Strengthen Technological Advantages with Focused Research and Development

According to Frost & Sullivan, we are one of the first biotechnology companies worldwide focusing on the detection and measurement of cancers’ biophysical properties. We plan to strengthen our technological advantages through focused research and development. In particular, we plan to continuously make game-changing innovations by leveraging our management’s multi-disciplinary backgrounds and expertise. We have been collaborating with a number of hospitals and medical institutions in conducting research studies. Our collaborations allow us to validate the effectiveness and utility of our CDA tests in a clinical setting, explore new applications of our CDA technology, and provide us access to clinically well-characterized patient data. In the future, our research and development will continue to focus on:

 

   

exploring our CDA technology’s ability to dynamically monitor cancer progression, particularly for assistance in cancer diagnosis, prognosis and recurrence, and to improve our CDA technology’s ability to identify cancer types, our CDA technology’s signal-to-noise ratio and its testing throughput;

 

   

exploring our CDA technology’s ability to detect the risk of major non-cancerous diseases;

 

   

expanding our test offerings to include new genomics tests (such as those currently conducted in our Haikou laboratory), ct-DNA- and CTC-based tests, as well as new combination tests that combine our CDA test with other auxiliary cancer screening and detection technologies; and

 

   

expanding our CDA technology’s application to additional oncological areas.

Bring Our Tests to the U.S. Market

In the United States, we are currently permitted to conduct our CDA-based tests for research use. 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 U.S. We intend to commercialize our CDA-based tests for clinical purposes in the United States initially as an LDT performed at our laboratory in San Jose, California. As an LDT, under the FDA’s current enforcement discretion policy, we do not expect that our CDA-based test will require premarket clearance, market authorization, or approval from the FDA prior to marketing. Because

 

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we have received a CLIA Certificate of Registration for our San Jose laboratory, we may begin marketing our tests for clinical purposes as soon as we complete our validation studies and obtain any required state laboratory licenses or other required accreditations. Under CLIA, CAP and state licensing requirements, we are required to validate our CDA test with applicable analytical and clinical studies prior to marketing the test as an LDT. These studies are designed to demonstrate the performance of the test. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other health organizations, to conduct these studies.

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.

 

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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 15 research studies on which we collaborated with five Chinese hospitals and medical institutes on have been published at ASCO annual meetings 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. Since 2015, we have tested more than 140,000 blood samples collected from various age, sex and disease groups, including approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies.

 

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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 September 30, 2019 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 September 30, 2019:

 

Cancer Type

   Aggregate
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, 2019 (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

 

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Cancer Type

   Aggregate
Sample Size
     Sensitivity     Specificity    

Publication Information(1)

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   2019 Shenzhen New Horizons in Cancer Research

Ovarian Cancer

     474        90.5     90.1   2019 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 September 30, 2019, while “N/A” means that none of our completed research studies of that cancer type had been published up to September 30, 2019.

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.

 

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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.

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%.

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 October 25, 2019, we had contacted over 12,000 tested individuals, of whom 6,401 individuals gave us substantive feedback regarding their health conditions and disease development, and among them, 479 were previously tested as having high risk of cancer,

 

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5,452 with medium risk of cancer and the rest with low risk of cancer. Based on the feedback from these calls, 889 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 135 cases with cancers, 393 with pre-cancer diseases or benign tumors, and 361 with major non-cancerous diseases. All of these 889 individuals were previously tested as having medium or high risk of cancer, and none were previously tested as having low risk of cancer. Among those 479 and 5,452 individuals tested with high and medium risk of cancer, respectively, 172 (or 35.9%) and 717 (or 13.2%) 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 6,401 cases will likely increase over time.

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.

 

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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.

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.

 

 

LOGO

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.

 

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CDA in Long-Term Cancer Monitoring (Stage IIA with Surgery)

 

 

LOGO

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.

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).

 

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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.

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 of 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

 

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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 progresses, 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 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 and another three cubic centimeters of blood to perform the biomarker-based test. In the combination tests our CDA technology plays a dominant role in identifying the risk of cancer, while biomarkers provide auxiliary information on the types of cancer that may be involved. We integrate the results of these two 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.

Currently, we offer seven standardized 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.

 

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Representative Successful Case Studies

Leveraging our proprietary CDA technology, CDA device and algorithm, our CDA-based tests have helped numerous individuals identify their diseases timely, efficiently and accurately. The following are some representative examples selected from our successful case study pool in China.

Case Study #1

A 71-year-old man took our test in April 2017. The test results showed that he had a high risk of cancer, because his overall CDA value was high. In addition, his relevant itemized CDA value exceeded the normal value, indicating prostate cancer. The customer then visited a grade-A hospital for an MRI examination, which showed no abnormality. During this customer’s follow-up communication with us, our customer support and service personnel advised him to further conduct a tissue biopsy test. The tissue biopsy showed that he had early-stage prostate cancer.

Case Study #2

In 2017, a 51-year-old man was indicated by our test to have medium overall cancer risk. In 2018, he took our test again and this time, his overall cancer risk level had risen to “high risk.” The customer was not concerned about our test results until he was found having polyps—a common pre-cancer disease—during a colonoscopy examination. He then took a polyps removal surgery. During the surgery, the surgeons determined that he was actually inflicted by early-stage colorectal cancer.

Case Study #3

A 65-year-old man took our test in April 2017. The test results showed that he had a high risk of cancer, as his overall CDA value was high. In addition, his relevant itemized CDA value exceeded the normal value, indicating lung cancer. Around the same time, the customer conducted a physical examination, which corroborated our assessment and showed that an azygos lobe had formed in his right lung and the inferior lobes of both of his lungs had pulmonary shadows. The customer then visited a lung cancer hospital for further examination, where he was diagnosed with early-stage lung cancer.

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). 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 increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019.

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. As of September 30, 2019, we had completed total sales of approximately 130,000 physical checkup packages.

 

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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 clinical laboratory in San Jose, California and obtained a CLIA Certificate of Registration for this laboratory in March 2019. We currently are permitted to conduct our CDA test for research use in the United States. 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. To commercialize our CDA test in the United States, we intend to initially market it to U.S. customers as an LDT performed at our San Jose laboratory. As an LDT, pursuant to the FDA’s current LDT enforcement discretion policy, we do not expect that our CDA test will require premarket clearance, market authorization, or approval from the FDA prior to marketing. Because we have received a CLIA Certificate of Registration for our San Jose laboratory, we may begin marketing our test as soon as we complete our validation studies and obtain any state laboratory licenses or other accreditations that we are required to hold in order to offer our CDA test in the corresponding states. Under CLIA, CAP and state licensing requirements, we are required to validate our CDA test with applicable analytical and clinical studies prior to marketing the test as an LDT. These studies are designed to demonstrate the performance of the test. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other health organizations, to conduct these studies.

We have voluntarily elected to seek accreditation for our San Jose laboratory from the CAP. To receive CAP accreditation, we must demonstrate that the San Jose laboratory is in compliance with all applicable CAP program requirements and CLIA regulatory requirements by passing an inspection. Among other things, the CAP inspection will evaluate our laboratory’s processes and procedures, personnel qualifications and competency assessment, proficiency testing and quality assurance, and test method validation.

If our San Jose laboratory has received CAP accreditation and a CLIA Certificate of Accreditation, after we complete our validation studies for the CDA test, we will be able to market our CDA test following the completion of an administrative process to update our test menu with the CAP, CLIA, and those states in which we are required to hold state laboratory licenses (with the exception of New York State). Assuming that our CDA test falls within one of the disciplines for which our San Jose laboratory has already received accreditation and a CLIA Certificate of Accreditation, after we complete our validation studies for the CDA test, we will be able to update our test menu with the CAP electronically, and then immediately offer our CDA test in those states that do not require us to hold state laboratory licenses. In those states where we are required to hold state laboratory licenses, we will need to submit applications to update our test menu. The timeline for these updates is uncertain and will likely depend on the number of applications received by each state at any particular time. Upon completion of this process, we will be able to offer our CDA test throughout the U.S. with the exception of New York. For more information about the state laboratory license of the New York State and its application process, see “Regulations—U.S. Regulations—Federal and State Laboratory Licensing Requirements.”

 

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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 possesses industry-leading expertise in the early cancer screening and detection field. As of September 30, 2019, this team had 23 members, including four with M.D. degrees and three with a Ph.D. degree. 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 founder and chairman, 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 has published 15 articles on ASCO and other medical conferences and medical journal supplements to demonstrate our CDA technology’s clinical utility.

We have invested significantly in research and development since our inception. Our research and development expenses were RMB11.4 million, RMB10.1 million (US$1.4 million) and RMB7.1 million (US$1.0 million) in 2017 and 2018 and the nine months ended September 30, 2019, respectively.

 

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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.

 

Commencement Date

 

Research Partner

 

Cancer Type

  Estimated
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:

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

 

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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.

In addition, in August 2019, we and University of Pittsburgh Medical Center entered into two research agreements. Under the first of these agreements, we retained this university to perform a retrospective, blinded research study to validate our CDA technology for gynecologic cancer screening. This university is required to provide us with at least 20 samples from healthy women and at least 20 samples from ovarian cancer patients for the research study. Under the second agreement, we retained the university to conduct a single-blind research study to validate our CDA technology for esophageal cancer screening. This university is required to provide us with 50 samples for the control group and 50 samples from cancer patients for the research study.

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. These 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. This study, which initially ended in May 2018, has been extended to 2020 due to its promising preliminary results, including high CDA values for dogs with cancer and low to medium CDA values for healthy dogs. 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 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

 

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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.

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 September 30, 2019, we had 19 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 a 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.

 

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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.

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 to us. In addition, we outsourced substantially all of 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 are gradually phasing out this outsourcing arrangement and plan to perform our combination tests entirely in-house in the near future.

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-DNAs. Recent major advances in

 

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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. According to Frost & Sullivan, GRAIL, Guardant Health, and Exact Sciences have developed, or may develop, multi-cancer tests that compete with our CDA-based test, and BGI is developing services to evaluate the risk of various cancer types through ct-DNA tests.

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.

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 September 30, 2019, we had filed 210 patent applications globally; among them, 121 patents had been granted, including 16 patents granted in the United States, 55 in greater China (including seven in Taiwan), and 50 in nearly 20 other countries and regions. Our granted patents are expected to expire between 2031 and 2037. As of the same date, we also had 89 pending patent applications, consisting of 19 in the United States, 28 in greater China (including one in Taiwan), 38 in nearly 20 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). For example, as of October 31, 2019, one of our U.S. patents issued in 2018 had been cited 23 times in patent applications of globally well-known corporations including those based in the U.S. and China.

 

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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 September 30, 2019, we also had 27 granted trademarks and four pending trademark applications in greater China, and eight granted trademarks and four pending trademark applications in the U.S.

Honors and Awards

We have received awards and recognitions in respect of our technological innovations, market potential and social contributions, including the key awards and recognitions set forth in the table below:

 

Awards and Recognitions

   Year     

Issuing Authority

World Changing Ideas Honorable Mention

     2019      Fast Company Magazine

2018 BIG Innovation Award

     2018      Business Intelligence Group

Minority Health Products and Services Firm of the Year

     2018      The U.S. Department of Commerce, Minority Business Development Agency

Most Promising Early Cancer Screening Enterprise in China and the U.S.

     2017      China & U.S. Precision Medicine Forum

International Innovation Award in China’s Bio-Medical Industry

     2016      Nobel Prize Laureate Medical Summit

Outstanding Technology Innovation Award

     2016      Nobel Prize Laureate Medical Summit

Facilities

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 875 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. Furthermore, we lease approximately 517 square meters of properties in Yangzhou, where we operate a research and development facility. Our leases for these properties vary in duration from one to three years.

In the United States, we currently lease approximately 1,050 square feet of office space in San Jose as the premises for our CLIA-registered laboratory and U.S. headquarters. These leases vary in duration from approximately three years to five years. We also plan to open a new laboratory in Philadelphia in 2020 and will seek to obtain a CLIA certification and CAP accreditation for this laboratory.

 

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Employees

As of September 30, 2019, we had 101 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 September 30, 2019.

 

     As of September 30, 2019  

Research and development

     23  

Laboratory technicians and manufacturing personnel

     15  

Sales and marketing

     19  

Logistics and customer support and service

     9  

General and administration

     35  
  

 

 

 

Total

     101  
  

 

 

 

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 is 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.

Legal Proceedings

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.

 

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REGULATIONS

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.

Regulation on Medical Devices and Medical Institutions

Regulatory Authorities

In the PRC, the newly formed NMPA is the government authority under the State Administration for Market Regulation that monitors and supervises the administration of pharmaceutical products, medical devices, and cosmetics. The NMPA’s predecessor, the CFDA, was established in March 2013 and separated from the Ministry of Health of the PRC, or the MOH, as part of an institutional reform of the State Council. Predecessors of the NMPA also include the former State Food and Drug Administration, or the SFDA, that was established in March 2003 and the State Drug Administration, or the SDA, that was established in August 1998. The primary responsibilities of the NMPA include:

 

   

monitoring and supervising the administration of pharmaceutical products, medical devices, and cosmetics in the PRC;

 

   

formulating administrative rules and policies concerning the supervision and administration of the pharmaceutical, medical device, and cosmetics industry;

 

   

evaluating, registering and approving of new drugs, generic drugs, imported drugs and traditional Chinese medicine;

 

   

approving and issuing permits for the manufacture and export/import of pharmaceutical products, as well as medical devices, and approving the establishment of enterprises to be engaged in the manufacture and distribution of pharmaceutical products; and

 

   

examining and evaluating the safety of pharmaceutical products, medical devices, and cosmetics and handling significant accidents involving these products.

The National Health and Family Planning Commission, or the NHFPC, has been renamed as the NHC. The NHC is an authority at the ministerial level under the State Council and is primarily responsible for national public health. The NHC combines the responsibilities of the former NHFPC, the Leading Group Overseeing Medical and Healthcare Reform under the State Council, the China National Working Commission on Aging, partial responsibilities of the Ministry of Industry and Information Technology in relation to tobacco control, and partial responsibilities from the State Administration of Work Safety in relation to occupational safety. The predecessor of NHFPC is the MOH. Following the establishment of the SFDA in 2003, the MOH was put in charge of the overall administration of the national health in the PRC excluding the pharmaceutical industry.

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 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

 

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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, AnPac Lishui and Shiji Hainan, obtained their medical institution practice licenses in 2016 and 2015, respectively. We historically conducted a number of our CDA tests in premises other than our Lishui and Haikou laboratories, which could result in the relevant authorities confiscating the revenue we generated from these tests as well as other penalties on us. While we have rectified this practice and have not received any notice of relevant disciplinary governmental action, we cannot assure you that we will not be subject to this penalty.

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 is 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.

Medical Devices Administration Laws and Regulations

The Regulation on the Supervision and Administration of Medical Devices as amended by the State Council in May 2017, 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 take 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 promulgated by CFDA in November 2017, 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 promulgated by CFDA in November 2017, 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 2013 (renewed in 2018) and 2015.

 

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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.

We believe that we are in compliance with these regulations in all material respects.

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.

Other Significant PRC Regulations Affecting Our Business Activities in China

Regulation on Foreign Investment

Investment activities in the PRC by foreign investors are principally governed by the Catalog for the Guidance of Foreign Investment Industry, or the Catalog, which was promulgated and is amended from time to time by the MOFCOM, and the National Development and Reform Commission, or NDRC, and together with Existing FIE Laws and their respective implementation rules and ancillary regulations. The Catalog lays out the basic framework for foreign investment in China, classifying businesses into three categories with regard to foreign investment: “encouraged,” “restricted,” and “prohibited.” Industries not listed in the Catalog are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. In addition, on June 30, 2019 the MOFCOM and the NDRC jointly promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the 2019 Negative List, which became effective on July 30, 2019 to amend the Catalog 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 will come into effect on January 1, 2020 and upon then the FIL will replace the Existing FIE Laws. 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 FIL, by means of legislation, establishes the basic framework for the

 

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access, promotion, protection and administration of foreign investment in view of investment protection and fair competition.

The Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, or FIE Record-filing Interim Measures, was issued by MOFCOM in October 2016 and revised in July 2018. Pursuant to FIE Record-filing Interim Measures, the establishment and change of foreign-invested enterprises are subject to record-filing procedures, instead of prior approval requirements, provided that the establishment or change does not involve special entry administrative measures. If the establishment or change of FIE matters involve the special entry administrative measures, the approval of the MOFCOM or its local counterparts is still required.

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.

We believe that we are in compliance with these regulations in all material respects.

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 General Principles of the Civil Law of the PRC promulgated on April 12, 1986 and amended on August 27, 2009, a defective product which causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability for such damage or injury.

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

 

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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.

We are not aware of any material product liability related litigation or other legal proceedings against us arising from the cancer screening and detection tests that we provide to our customers.

PRC Tort Law

Under the Tort Law of the PRC, which became effective on July 1, 2010, if damages to persons are caused by defective products due to the fault of a third party, such as the parties providing transportation or warehousing, the producers and the sellers of the products have the right to recover their respective losses from such third parties. If defective products are identified after they have been put into circulation, the producers or the sellers must take remedial measures such as issuance of a warning or recall of products. in a timely manner. The producers or the sellers will be liable under tort if they fail to take remedial measures in a timely manner or have not made efforts to take remedial measures, thus causing damages. If the products are produced or sold with known defects, causing deaths or severe adverse health issues, the infringed party has the right to claim punitive damages in addition to compensatory damages.

We are not aware of any material torts related litigation or other legal proceedings against us arising from the cancer screening and detection tests that we provide to our customers.

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

Pursuant to the PRC Patent Law, most recently amended in December 2008, and its implementation rules, most recently amended in January 2010, patents in China fall into three categories: invention, utility model and design. An invention patent is granted to a new technical solution proposed in respect of a product or method or an improvement of a product or method. A utility model is granted to a new technical solution that is practicable for application and proposed in respect of the shape, structure or a combination of both of a product. A design patent is granted to the new design of a certain product in shape, pattern or a combination of both and in color, shape and pattern combinations aesthetically suitable for industrial application. Under the PRC Patent Law, the term of patent protection starts from the date of application. Patents relating to invention are effective for twenty years, and utility models and designs are effective for ten years from the date of application. The PRC Patent Law adopts the principle of “first-to-file” system, which provides that where more than one person files a patent application for the same invention, a patent will be granted to the person who first files the application.

Existing patents can become narrowed, invalidated or unenforceable due to a variety of grounds, including lack of novelty, creativity, and deficiencies in patent application. In China, a patent must have novelty, creativity and practical applicability. Under the PRC Patent Law, novelty means that before a patent application is filed, no identical invention or utility model has been publicly disclosed in any publication in China or overseas or has been publicly used or made known to the public by any other means, whether in or outside of China, nor has any other person filed with the patent authority an application that describes an identical invention or utility model and is recorded in patent application documents or patent documents published after the filing date. Creativity means that, compared with existing technology, an invention has prominent substantial features and represents notable progress, and a utility model has substantial features and represents any progress. Practical applicability means an invention or utility model can be manufactured or used and may produce positive results. Patents in China are filed with the State Intellectual Property Office, or SIPO. Normally, the SIPO publishes an application for an invention patent within 18 months after the filing date, which may be shortened at the request of applicant. The applicant must apply to the SIPO for a substantive examination within three years from the date of application.

 

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Article 20 of the PRC Patent Law provides that, for an invention or utility model completed in China, any applicant (not just Chinese companies and individuals), before filing a patent application outside of China, must first submit it to the SIPO for a confidential examination. Failure to comply with this requirement will result in the denial of any Chinese patent for the relevant invention. This added requirement of confidential examination by the SIPO has raised concerns by foreign companies who conduct research and development activities in China or outsource research and development activities to service providers in China.

Patent Enforcement

Unauthorized use of patents without consent from owners of patents, forgery of the patents belonging to other persons, or engagement in other patent infringement acts, will subject the infringers to infringement liability. Serious offenses such as forgery of patents may be subject to criminal penalties.

When a dispute arises out of infringement of the patent owner’s patent right, Chinese law requires that the parties first attempt to settle the dispute through mutual consultation. However, if the dispute cannot be settled through mutual consultation, the patent owner, or an interested party who believes the patent is being infringed, may either file a civil legal suit or file an administrative complaint with the relevant patent administration authority. A Chinese court may issue a preliminary injunction upon the patent owner’s or an interested party’s request before instituting any legal proceedings or during the proceedings. Damages for infringement are calculated as the loss suffered by the patent holder arising from the infringement, and if the loss suffered by the patent holder arising from the infringement cannot be determined, the damages for infringement are calculated as the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be determined using a reasonable multiple of the license fee under a contractual license. Statutory damages may be awarded in the circumstances where the damages cannot be determined by the calculation standards described above. The damage calculation methods will be applied in the order described above. Generally, the patent owner has the burden of proving that the patent is being infringed. However, if the owner of an invention patent for manufacturing process of a new product alleges infringement of its patent, the alleged infringer has the burden of proof.

Exemptions for Unlicensed Manufacture, Use, Sale or Import of Patented Products

The PRC Patent Law provides five exceptions for unauthorized manufacture, use, sale or import of patented products. None of following circumstances are deemed an infringement of the patent rights, and any person may manufacture, use, sell or import patented products without authorization granted by the patent owner as follows:

 

   

Any person who uses, promises to sell, sells or imports any patented product or product directly obtained in accordance with the patented methods after such product is sold by the patent owner or by its licensed entity or individual;

 

   

Any person who has manufactured an identical product, has used an identical method or has made necessary preparations for manufacture or use prior to the date of patent application and continues to manufacture such product or use such method only within the original scope;

 

   

Any foreign transportation facility that temporarily passes through the territory, territorial waters or territorial airspace of China and uses the relevant patents in its devices and installations for its own needs in accordance with any agreement concluded between China and that country to which the foreign transportation facility belongs, or any international treaty to which both countries are party, or on the basis of the principle of reciprocity;

 

   

Any person who uses the relevant patents solely for the purposes of scientific research and experimentation; or

 

   

Any person who manufactures, uses or imports patented drugs or patented medical devices for the purpose of providing information required for administrative approval, or manufactures, uses or imports patented drugs or patented medical devices for the abovementioned person.

 

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However, if patented drugs are utilized on the ground of exemptions for unauthorized manufacture, use, sale or import of patented drugs prescribed in PRC Patent Law, such patented drugs cannot be manufactured, used, sold or imported for any commercial purposes without authorization granted by the patent owner.

As of September 30, 2019, we had 55 granted patents (including seven in Taiwan) and 28 pending patent applications (including one in Taiwan) in greater China, and 66 granted patents and 61 pending patent applications outside greater China.

Trade Secrets

According to the PRC Anti-Unfair Competition Law, the term “trade secrets” refers to technical and business information that is unknown to the public, has utility and may create business interests or profits for its legal owners or holders, and is maintained as a secret by its legal owners or holders.

Under the PRC Anti-Unfair Competition Law, which was promulgated on September 2, 1993 and was amended on November 4, 2017, business persons are prohibited from infringing others’ trade secrets by: (1) obtaining the trade secrets from the legal owners or holders by any unfair methods such as theft, bribery, intimidation, solicitation or coercion; (2) disclosing, using or permitting others to use the trade secrets obtained illegally under item (1) above; or (3) disclosing, using or permitting others to use the trade secrets, in violation of any contractual agreements or any requirements of the legal owners or holders to keep such trade secrets in confidence. If a third party knows or should have known of the fact that an employee or former employee of the right owner of trade secrets or any other entity or individual conducts any of the illegal acts above mentioned, but still accepts, publishes, uses or allows any other to use such secrets, such practice shall be deemed as infringement of trade secrets. The parties whose trade secrets are being misappropriated may petition for administrative corrections, and regulatory authorities may stop any illegal activities and fine infringing parties in the amount of RMB100,000 to RMB500,000, where the circumstance is serious, the fine shall be between RMB500,000 to RMB3,000,000. Alternatively, persons whose trade secrets are being misappropriated may file lawsuits in a Chinese court for loss and damages incurred due to the misappropriation.

The measures to protect trade secrets include oral or written non-disclosure agreements or other reasonable measures to require the employees of, or persons in business contact with, legal owners or holders to keep trade secrets confidential. Once the legal owners or holders have asked others to keep trade secrets confidential and have adopted reasonable protection measures, the requested persons bear the responsibility for keeping the trade secrets confidential.

Trademarks and Domain Names

Trademark. The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Office of State Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration.

Domain Name. Domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the Ministry of Industry and Information Technology. The Ministry of Industry and Information Technology is the main regulatory body responsible for the administration of PRC internet domain names.

As of September 30, 2019, we had 27 granted trademarks and four pending trademark applications in greater China, and eight granted trademarks and four pending trademark applications in the U.S. In addition, as of the same date, we had 15 domain names.

 

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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.

To comply with these laws and regulations, we have required our customers and research partners to consent to, or obtain consent from the tested individuals to, our collecting and using their personal information for our cancer screening and detection tests. We have also established information security systems to protect the tested individuals’ privacy, including data access restrictions and monitoring, data storage, database encryption and backup.

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 and August 31, 2014, 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, 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

 

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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.

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 regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:

 

   

Company Law of the PRC (1993), as amended in 1999, 2004, 2005 and 2013;

 

   

Foreign Investment Enterprise Law of the PRC (1986), as amended in 2000 and 2016; and

 

   

Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014.

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

 

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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.

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 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.

 

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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.

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

 

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administration, quality, and proficiency testing, which are intended to ensure, among other things, that its clinical laboratory testing services are accurate, reliable and timely. The CLIA rules 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. We obtained a CLIA Certificate of Registration for our laboratory in San Jose, California in March 2019. We have voluntarily elected to participate in the accreditation program of the CAP and we are seeking CAP accreditation of the San Jose laboratory. 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. We are awaiting a CAP inspection of the San Jose laboratory. If the CAP inspection finds the laboratory to be in compliance with all applicable CAP and CLIA requirements, we will receive CAP accreditation and a CLIA Certificate of Accreditation, because a laboratory accredited by the CAP Laboratory Accreditation Program is deemed to also comply with CLIA. Because we have already obtained a CLIA Certificate of Registration, once we have completed our validation studies, we can offer our test from our San Jose laboratory and market it as an LDT to U.S. customers while we are awaiting the CAP inspection and accreditation and a CLIA Certificate of Accreditation. 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. Laboratories performing high-complexity testing are required to meet more stringent requirements than laboratories performing less complex tests.

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 more stringent 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.

As our current laboratory in the United States is located in the State of California, we are required to maintain a California state laboratory license pursuant to the relevant state laws. We may also need to maintain licenses in other states with such 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, or the Draft LDT Guidance, proposing a risk-based framework with respect to applying the FDA’s oversight over LDTs. The Draft LDT Guidance 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,

 

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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 LDT Guidance to allow for further public discussion on 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.

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 on enforcement discretion 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 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.

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 pre-market approval applications, or 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.

 

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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.

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.

 

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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 has agreed to review 55% of de novo submissions received in fiscal year 2019 in 150 calendar days during which a submission is under review at the Agency. 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 2020, the user fee for an original PMA is $340,995. 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.

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

 

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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;

 

   

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.

 

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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.

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

 

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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.

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. The privacy rule generally prohibits the use or disclosure of PHI except as permitted under the rule. The 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 Affordability 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, and the current presidential administration and U.S. Congress have taken action to roll back certain provisions of the ACA. For example, the Tax Cuts and Jobs Act, among other things, removes penalties for not complying with the ACA’s individual mandate to carry health insurance. The current presidential administration and the U.S. Congress may take further action regarding the ACA, including, but not limited to, repeal or replacement. Additionally, 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

 

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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. For instance, the ACA required each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices; this requirement began to apply to sales of taxable medical devices after December 31, 2012. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020.

The taxes imposed by the ACA and 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 2027 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.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth information regarding our directors and executive officers as of the date of this prospectus.

 

Directors and Executive Officers

   Age   

Position/Title

Chris Chang Yu    61    Founder, chairman of the board of directors and chief executive officer
Feng Guo    39    Director
Jiefeng Gu    36    Director
Lin Yu    60    Director
Pu Xing    51    Independent director
Ren Luo    62    Independent director
Sarah Yu    30    Director
Rain Yu Zhang    42    Chief financial officer
He Yu    63    Chief medical officer
Xuedong Du    40    Vice president in charge of R&D
Weidong Dai    59    China president

Dr. Chris Chang Yu is a co-founder of our company and has served as chairman of our board of directors and chief executive officer since our inception in January 2010. 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 Kansus-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. Feng Guo has served as our director since August 2018. He is a co-founder and the president of Jiaxing Zhijun Investment Management Co., Ltd. He is also a sponsor representative and a Chartered Financial Analyst. He has served as an executive director at the Investment Banking Division of Guo Xin Securities Co., Ltd. since 2004 and an executive director at the Investment Banking Division of Huajing Securities since 2017. He also served as a director at China Renaissance Capital from 2015 to 2017. Mr. Guo has approximately 16 years of experience in China’s capital markets and many years of experience in the fields of high-end manufacturing, technology, media and telecom (TMT), medical consumption and energy transportation. He has experience in leading the financial consultation, stock reform, IPO, refinancing, acquisition and capital reduction transactions for many domestic and foreign companies. Mr. Guo received his bachelor’s degree in economics from East China University of Political Science and Law in 2002 and his master’s degree in finance from Shanghai University of Finance and Economics in 2004.

Mr. Jiefeng Gu has served as our director since April 2016. Since 2016 Mr. Gu has been an investment director at Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd , where his investment focus

 

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included the medical, medical equipment and diagnostic reagents sectors. Mr. Gu was a senior investment manager at Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. from 2014 to 2016. He also served as a vice president in Entrepreneurial Accelerator Co., Ltd. from 2013 to 2014, an investment manager at Shanghai Pudong Venture Capital Co., Ltd. from 2010 to 2013, and. Mr. Gu received his bachelor’s degree in biological science from Fudan University in 2005 and master’s degree in genetics from Fudan University in 2008.

Ms. Lin Yu has served as our director since our inception in January 2010. Ms. Lin Yu served as legal representative at Shanghai Yu Lin Information Science Co., Ltd. from April 2016 to October 2018, a consultant for Yi Mai Fiber Co., Ltd. from 2016 to 2017, a business manager and operation manager from 2000 to 2006 and a technology controller from 2007 to 2015 for Shanghai Fenner Conveyor Belt Co., Ltd., a sales engineer and an operation manager for Trelleborg Sealing Solutions (China) Co., Ltd. (formerly Busak+Shamban Eastern China) from 1994 to 1999, and a sales engineer for Sinopec Shanghai Petrochemical Co., Ltd. from 1986 to 1993. Ms. Lin Yu received her college degree in chemistry from Shanghai University of Science and Technology, Jin Shan Campus, in 1986.

Mr. Pu Xing has served as our independent director since September 2019. Mr. Xing Pu served as a managing partner at Shanghai Jiu Investment Management Co., Ltd. from April 2017 to December 2018, executive vice president and CFO at BesTv New Media Co., Ltd. (a subsidiary of a Shanghai Stock Exchange listed company) from January 2014 to March 2017 and deputy director of the State-owned Assets Supervision and Administration Commission of Shanghai Pudong New Area from March 2013 to February 2014. He also served as vice president and deputy director of the board’s strategic decision-making and investment committee at Shanghai Shengrong Investment Co., Ltd. (now known as Shanghai Guosheng Group) from December 2008 to February 2013, vice general manager at Shanghai Guosheng Group Investment Co., Ltd. from December 2010 to January 2013, executive general manager and executive deputy director at Shanghai Corporate Pavilion from January 2008 to December 2010, special assistant to the president at Shanghai Shengrong Investment Co., Ltd. from July 2008 to November 2008, and vice chairman of SiTV from October 2005 to January 2008. In addition, he served as deputy chief economist from January 2002 to June 2008 and special assistant to the president from October 1999 to January 2002 at Shanghai Automotive Industry (Group) Corporation (a Shanghai Stock Exchange listed company). Previously, he served as an analyst at Lehman Brothers from January 1997 to September 1999 and financial manager at Northeimer Engineering from January 1994 to December 1996. He has been a Special Auditor of Shanghai Audit Bureau since January 2011. Mr. Xing received his bachelor’s degree in economics from Fudan University in 1990, MBA degree in economics and finance from West Chester University in 1993 and master’s degree in accounting from Widener University in 1996.

Mr. Ren Luo has served as our independent director since September 2019. Mr. Luo has served as a senior director and director in charge of industry and government relationships and business development at IQVIA Management Consulting (Shanghai) Co. Ltd. since 2018, and senior manager in charge of industry and government relationships at IMS Health Co. Ltd. since 2013. He also served as supplier services manager at IMS Health Co. Ltd. (a subsidiary of a U.S. listed company) from 2011 to 2013, senior manager and researcher at National Institute for Hospital Administration of the Ministry of Health from 2009 to 2011, senior manager for Greater China and a director at IMS Health Co. Ltd. from 2003 to 2008, general manager and a director of IMS Market Research Consulting (Shanghai) Co. Ltd. from 2002 to 2003, China chief representative of IMS ChinaMetrik Co., Ltd. and manager of China division of IMS Ltd. from 1998 to 2002, chief manager of Chinese projects of ChinaMetrik Ltd. from 1994 to 1998, and consultant of Chinese projects of ChinaMetrik Ltd. from 1991 to 1993. He was also a pharmaceutical chemist at George Washington University Medical Center from 1990 to 1993. He is a consultant to a number of Chinese social associations and a member of American Pharmaceutical Association, American Chemical Society, and Chinese American Pharmacists Association. He is currently a member of the editorial board of Chinese Annual Report of Cardiovascular Disease and was a vice editor-in-chief of China Pharmaceutical Practical Manual for the 2002 and 2003 Edition. Mr. Luo received his bachelor’s degree in medical chemistry from Shanghai Pharmacy College in 1981, and master’s degree in M.S. Medical Chemistry from University of Mary Hardin Baylor in 1990.

 

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Ms. Sarah Yu has served as our director since August 2018. Ms. Sarah Yu has served as a senior software engineer at LinkedIn since September 2016. She also served as a software engineer at KQED (California Public Broadcasting) from 2015 to 2016 and a new media producer at KTOO (Alaska Public Broadcasting) from 2013 to 2015. Ms. Sarah Yu received her bachelor’s degrees in biology and English from Dartmouth College in 2011 and her master’s degree in science writing from Massachusetts Institute of Technology in 2012.

Ms. Rain Yu Zhang has served as our CFO since March 2019. Prior to joining us, Ms. Zhang served as a general manager-operation at Buckman Laboratories (Asia) Pte. Ltd. (Singapore) (a subsidiary of Bulab Holdings, Inc., a U.S. company) from 2017 to 2018 and a finance director at Buckman Laboratories Shanghai Chemicals Co., Ltd. from 2005 to 2016. She became a Chartered Global Management Accountant (CGMA) in 2016 and a Certified Public Accountant in 2002. Ms. Zhang received her bachelor’s degree in accounting from Shanghai University of Finance and Economics in 1999 and master’s degree in business administration from AnTai College of Economics & Management, Shanghai Jiao Tong University in 2015.

Dr. He Yu is a co-founder of our company and has served as our chief medical officer since our inception in 2010. Dr. Yu has served as a professor and program director of cancer epidemiology at the University of Hawaii Cancer Center and an adjunct professor at Yale School of Public Health since 2012. He was a faculty member, from assistant professor to professor, at Yale University, School of Medicine from 2001 to 2011. Being trained in medicine, epidemiology and clinical biochemistry, Dr. Yu conducts various laboratory-based clinical and epidemiologic investigations and has extensive experience in cancer research. He has designed and been involved in many clinical research projects that assess the molecular and genetic features of tumor specimens in relation to cancer characteristics and survival outcomes of patients with various kinds of cancers. As a principal investigator and co-investigator, Dr. Yu has developed and participated in several large population-based epidemiologic studies that investigate gene-environment interactions in breast, endometrial, liver and pancreatic cancers. Biomarkers under his investigation include genetic polymorphisms in DNA repair genes, DNA methylation and methylator phenotype in tumor suppressor genes and detoxification genes, protein markers, peptide growth factors and various non-coding transcripts. Dr. Yu received his bachelor’s degree in medicine from Shanghai First Medical College in 1983. He also received a master of science degree in epidemiology and a PhD in clinical biochemistry from University of Toronto in 1990 and 1996, respectively.

Mr. Xuedong Du has served as our vice president in charge of research and development since April 2011. Prior to joining us, Mr. Du successively served as an engineer, senior engineer, chief engineer and manager at SMIC International IC Manufacturing (Shanghai) Co., Ltd. (a subsidiary of a U.S. listed company) from 2001 to 2010. He has extensive experience in product innovation and research and development. He has participated in more than ten provincial talent projects in relation to municipal science and technology. He is the first or principal inventor of more than 100 Chinese and international patent applications (primarily on medical devices), among which over 30 patents have been granted. He has published approximately 20 papers in professional journals and academic conferences. Mr. Du received his bachelor’s degree in physical electronics technology from Fudan University in 2001 and his master’s degree in electronics and communications engineering from Fudan University in 2009.

Mr. Weidong Dai has served as our China president since April 2015. Prior to joining us, Mr. Dai served as a general partner at Stirrfir Investment Management Co. Ltd. from 2008 to 2015, chairman of RTS Management (Shanghai) Co., Ltd. from 2004 to 2013, a managing director of Hong Kong Pro-Health Technology Co., Ltd. and Shanghai Pro-Health Medical Devices Co., Ltd. from 1998 to 2004, and the chief scientific officer at Wex International Inc. ( a subsidiary of a U.S. listed company) from 1994 to 1998. He has served as an adjunct professor at Anhui College of Traditional Chinese Medicine since 2004 and an executive director at the Hainan Branch of China Science Tsing Research Institute of Science and Technology since 2018. He has published a number of medical research papers and scientific articles in professional journals. A medical device that he led in research and development was awarded the Hong Kong Industrial Award in 1999. Mr. Dai received his bachelor’s degree in medicine from Anhui Medical University in 1982, master’s degree in medicine from Sun

 

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Yat-San University of Medicine in 1985, and an Advanced Certificate of the EMBA CEO Program from Fudan University, School of Economics in 2002.

None of our directors and executive officers have any family relationships up to the fourth civil degree either by consanguinity or affinity, except that Dr. Chris Chang Yu is Ms. Sarah Yu’s father and Ms. Lin Yu and Dr. He Yu’s first cousin; and Dr. He Yu and Ms. Lin Yu are siblings.

Board of Directors

Our board of directors will consist of seven directors upon the SEC’s declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part. 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 will establish three committees under the board of directors immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part: an audit committee, a compensation committee and a nominating and corporate governance committee. We will adopt a charter for each of the three committees. Each committee’s members and functions are described below.

Audit Committee. Our audit committee will consist of Mr. Pu Xing, Mr. Ren Luo and Mr. Feng Guo. Mr. Pu Xing will be the chairman of our audit committee. We have determined that Mr. Pu Xing and Mr. Ren Luo 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. Pu Xing qualifies as an “audit committee financial expert.” The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be 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 will consist of Mr. Ren Luo, Mr. Jiefeng Gu and Dr. Chris Chang Yu. Mr. Ren Luo will be the chairman of our compensation committee. We have determined that Mr. Ren Luo satisfies the “independence” requirements of Rule 5605(c)(2) of the Listing Rules of The NASDAQ Stock Market. The compensation committee will assist the board in reviewing and approving the

 

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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 will be 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 will consist of Dr. Chris Chang Yu, Mr. Feng Guo and Mr. Pu Xing. Dr. Chris Chang Yu will be the chairman of our nominating and corporate governance committee. We have determined that Mr. Pu Xing satisfies the “independence” requirements of Rule 5605(c)(2) of the Listing Rules of The NASDAQ Stock Market. The nominating and corporate governance committee will assist 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 will be 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;

 

   

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;

 

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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 with or without cause.

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.

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.

Compensation of Directors and Executive Officers

For the year ended December 31, 2018, we paid an aggregate of approximately RMB4.7 million (US$658,000) in cash to our executive officers, and we paid an aggregate of approximately RMB350,000 (US$49,000) in cash to our non-executive 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.

 

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2019 Share Incentive Plan

On October 31, 2019, our board of directors and shareholders approved our 2019 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 2019 Plan is 1,105,300 ordinary shares.

The following paragraphs describe the principal terms of the 2019 Plan:

Type of Awards. The 2019 Plan permits the awards of options 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.

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.

 

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Other Options

The following table summarizes, as of the date of this prospectus, the awards granted to our directors and executive officers and other individuals as authorized by our board of directors, other than under our 2019 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

   Ordinary Shares
Underlying
Options Awarded
     Exercise Price
(US$/Share)
     Date of Grant      Date of Expiration  

Ren Luo

     *        US$0.05        October 28, 2010        October 28, 2020  

Weidong Dai

     330,000       
Zero to
US$0.01
 
 
    
August 1, 2014 and
April 1, 2015
 
 
    
August 1, 2024 and
April 1, 2025
 
 

Xuedong Du

     488,600       
Zero to
US$0.05
 
 
    

September 6, 2010 -

January 1, 2018

 

 

    
September 6, 2020 -
January 1, 2028
 
 

Rain Yu Zhang

     *        US$0.05        July 15, 2019        July 5, 2029  

Other individuals as a group

     1,172,300       
Zero to
US$0.1
 
 
    
August 1, 2010-
September 1, 2019
 
 
    
August 1, 2020 -
September 1, 2029
 
 

 

*

Less than 1% of our total outstanding ordinary shares.

 

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PRINCIPAL SHAREHOLDERS

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 this prospectus 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 9,864,400 ordinary shares (including 7,001,300 Class A ordinary shares and 2,863,100 Class B ordinary shares) outstanding as of the date of this prospectus, and 11,531,100 ordinary shares (including 8,668,000 Class A ordinary shares and 2,863,100 Class B ordinary shares) outstanding immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option.

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.

An individual investor has indicated to us his interest in subscribing up to a total of US$1.75 million worth of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$13.00 per ADS, which is the mid-point of the estimated offering price range, the number of ADSs to be purchased by that investor would be up to 134,615 ADSs, or approximately 8.1% of the ADSs being offered in this offering. This indication of interest is not a binding agreement or commitment to purchase, and we and the underwriters are under no obligation to sell ADSs to that investor.

 

     Ordinary Shares Beneficially
Owned Prior to This Offering
     Ordinary Shares Beneficially Owned
Immediately After This Offering
 
     Class A
ordinary
shares
     Class B
ordinary
shares
     % of
total
ordinary
shares***
     % of
aggregate
voting
power†
     Class A
ordinary
shares
     Class B
ordinary
shares
     % of
total
ordinary
shares***
    % of
aggregate
voting
power†
 

Directors and Executive Officers**:

                      

Chris Chang Yu(1)

     6,000        2,263,900        23.0        63.6        6,000        2,263,900        19.7     60.7

Feng Guo

     —          —          —          —          —          —          —         —    

Jiefeng Gu

     —          —          —          —          —          —          —         —    

Lin Yu

     —          —          —          —          —          —          —         —    

Pu Xing

     *        —          *        *        *        —          *       *  

Ren Luo

     *        —          *        *        *        —          *       *  

Sarah Yu

     —          —          —          —          —          —          —         —    

Rain Yu Zhang

     *        —          *        *        *        —          *       *  

He Yu(2)

     1,212,700        —          12.3        3.4        1,212,700        —          10.5     3.3

Xuedong Du(3)

     438,400        —          4.3        1.2        438,400        —          3.7     1.2

Weidong Dai(4)

     430,100        —          4.3        1.2        430,100        —          3.7     1.2

All Directors and Executive Officers as a group

     2,176,100        2,263,900        43.6        69.6        2,176,100        2,263,900        37.4     66.5

 

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     Ordinary Shares Beneficially
Owned Prior to This Offering
     Ordinary Shares Beneficially Owned
Immediately After This Offering
 
     Class A
ordinary
shares
     Class B
ordinary
shares
     % of
total
ordinary
shares***
     % of
aggregate
voting
power†
     Class A
ordinary
shares
     Class B
ordinary
shares
     % of
total
ordinary
shares***
    % of
aggregate
voting
power†
 

Principal Shareholders:

                      

CRS Holdings Inc.(5)

     —          2,263,900        23.0        63.5        —          2,263,900        19.6     60.7

He Yu(2)

     1,212,700        —          12.3        3.4        1,212,700        —          10.5     3.3

Zhangjiang GU KE Company
Limited(6)

     859,200        351,300        12.3        12.3        859,200        351,300        10.5     11.7

Zhijun Sihang Holdings Limited(7)

     606,700        247,900        8.7        8.7        606,700        247,900        7.4     8.3

 

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 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China.

***

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, warrant or other right within 60 days after the date of this prospectus.

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) 2,263,900 Class B ordinary shares held by CRS Holdings Inc., a British Virgin Islands company, which is wholly owned by Dr. Chris Chang Yu and (ii) 6,000 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.

(2)

Represents 1,212,700 Class A ordinary shares held by Dr. He Yu.

(3)

Represents (i) 176,400 Class A ordinary shares held by YuLin Bio-medical Science Co., Ltd., and (ii) 262,000 Class A ordinary shares issuable upon exercise of options held by Mr. Xuedong Du. YuLin Bio-medical Science Co., Ltd. is owned by certain individuals, with none of them holding a controlling interest in YuLin Bio-medical Science Co., Ltd. The registered address of YuLin Bio-medical Science Co., Ltd. is Aequitas International Management Ltd., Grand Pavilion Commercial Centre, Suite 24, 802 West Bay Road, P.O. Box 10281, Grand Cayman KY1-1003, Cayman Islands.

(4)

Represents (i) 300,000 Class A ordinary shares held by Mr. Weidong Dai, (ii) 30,000 Class A ordinary shares issuable upon exercise of options held by Mr. Weidong Dai, and (iii) 100,100 Class A ordinary shares held by YuLin Bio-medical Science Co., Ltd. for the benefit of Mr. Weidong Dai’s spouse. YuLin Bio-medical Science Co., Ltd. is owned by certain individuals, with none of them holding a controlling interest in YuLin Bio-medical Science Co., Ltd. The registered address of YuLin Bio-medical Science Co., Ltd. is Aequitas International Management Ltd., Grand Pavilion Commercial Centre, Suite 24, 802 West Bay Road, P.O. Box 10281, Grand Cayman KY1-1003, Cayman Islands.

(5)

Represents 2,263,900 Class B ordinary shares. CRS Holdings Inc. 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.

(6)

Represents 859,200 Class A ordinary shares and 351,300 Class B ordinary shares held by Zhangjiang GU KE Company Limited, a British Virgin Islands company, which is 100% beneficially owned by Shanghai Pudong State-owned Assets Supervision and Administration Commission. The registered address of Zhangjiang GU KE Company Limited is Commence Chambers, P.O. Box 2208, Road Town, Tortola, British Virgin Islands.

(7)

Represents (i) 536,000 Class A ordinary shares and 247,900 Class B ordinary shares held by Zhijun Sihang Holding Limited, a British Virgin Islands company, which is wholly owned by Jiaxing Zhijun Sihang Investment Partnership Enterprises (Limited Partnership), and (ii) 70,700 Class A ordinary shares held by Mr. Lei Luo for the benefit of Zhijun Sihang Holdings Limited. The general partner of Jiaxing Zhijun Sihang Investment Partnership Enterprises (Limited Partnership) is Jiaxing Zhijun Investment Management Co., Ltd., which is controlled by Mr. Feng Guo. The registered address of Zhijun Sihang Holding Limited is 113-7, No.100, Zhuyuan Road, Nanhu District, Jiaxing, Zhejiang Province, P.R. China.

As of the date of this prospectus, to our knowledge, we have 15 record holders in the United States of our ordinary shares, who hold approximately 19.9% of our total outstanding ordinary shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

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RELATED PARTY TRANSACTIONS

Before the completion of this offering, we intend to adopt an audit committee charter, which will require the committee to review all related-party transactions on an ongoing basis and all such transactions be approved by the committee. Set forth below are material related-party transactions in the years ended December 31, 2017 and 2018 and nine months ended September 30, 2019.

Shareholders Agreements

See “Description of Share Capital—History of Securities Issuances—Shareholders Agreements.”

Employment Agreements and Indemnification Agreements

See “Management—Employment Agreements and Indemnification Agreements.”

Share Incentive Plans

See “Management—2019 Share Incentive Plan.”

Private Placements

Zhijun Sihang provided an advance of RMB25.0 million (US$3.5 million) to one of our PRC subsidiaries in 2018. Zhijun Sihang is in the process of making equity contribution of these funds in our company.

Our founder and chairman, Dr. Chris Chang Yu, has agreed to invest US$2.0 million in our company by the end of the second quarter of 2020, based on a price equal to our per-share valuation in our latest round of equity financing.

See also “Description of Share Capital—History of Securities Issuances.”

Convertible Loan Agreements

In 2018, we borrowed from Zhijun a total of US$2.5 million in one-year term loans convertible into our ordinary shares. These loans and the accrued interest expenses amounted to RMB18.0 million (US$2.5 million) and RMB824,000 (US$115,000), respectively, as of December 31, 2018. These loans and the accrued interest expenses amounted to RMB21.7 million (US$3.0 million) and RMB2.0 million (US$285,000), respectively, as of September 30, 2019. The parties subsequently agreed to extend the term of these convertible loans to April 30, 2020. These loans bear interest at 9% per annum. The conversion price will be determined based on the then outstanding principal amount of the loans and an RMB488 million assumed equity value of the Company before granting of the loans in 2018. The convertible loans are convertible into our Class A ordinary shares at the election of Zhijun in whole or in part prior to maturity subject to certain conditions. If by April 30, 2020 Zhijun does not convert the loans into our Class A ordinary shares, we will be required to repay the loans within six months or renegotiate an extension of the loans.

Loans From CRS Holdings Inc.

CRS Holdings Inc., wholly owned by our founder and chairman, Dr. Chris Chang Yu, provided loans of RMB1.2 million, RMB1.4 million (US$200,000) and RMB2.3 million (US$318,000) to us in 2017 and 2018 and the nine months ended September 30, 2019, respectively. We repaid to CRS Holdings Inc. RMB5.8 million, RMB1.1 million (US$160,000) and RMB1.3 million (US$175,000) in 2017 and 2018 and the nine months ended September 30, 2019, respectively. These loans were interest-free, unsecured and repayable on demand.

Loan From an Investee Company

Jiangsu AnPac, one of our investee companies, provided a loan of RMB800,000 to us in 2017. This loan was interest-free, unsecured and repayable on demand. We repaid RMB350,000 (US$49,000) to Jiangsu AnPac in 2018.

 

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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 2017, 2018 and the nine months ended September 30, 2019, we recognized an aggregate revenue of RMB590,000, RMB639,000 (US$89,000) and RMB505,000 (US$71,000), respectively, from sales to AnPac Beijing Health Management Co., Ltd., Jiangsu AnPac and Anpai (Shanghai) Health Management Consulting Co., Ltd.

In 2018 and the nine months ended September 30, 2019, we incurred a consultancy fee of RMB700,000 (US$98,000) and RMB1.1 million (US$151,000), respectively, to AnPac Beijing Health Management Co., Ltd. for their marketing services to us.

 

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DESCRIPTION OF SHARE CAPITAL

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 (the “BVI Act”).

Our shareholders have adopted a third amended and restated memorandum and articles of association, which will become effective and replace our current second amended and restated memorandum and articles of association, or our M&A, in its entirety prior to the completion of this offering. As of the date of this prospectus, we are authorized to issue 100,000,000 ordinary shares of par value US$0.01 each, divided into two classes, namely (a) 70,000,000 Class A ordinary shares, and (b) 30,000,000 Class B ordinary shares.

The following description of our authorized shares and our constitutional rules under our M&A is qualified in its entirety by reference to our M&A, which have been filed as an exhibit to the registration statement of which this prospectus is a part.

M&A

The following discussion describes our M&A:

Objects and Purposes, Register, and Shareholders. Subject to the BVI Act, our objects and purposes are unlimited. 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 shareholder 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.

 

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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, 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 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 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) a 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 voting

 

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rights on all the matters to be considered at the meeting have waived 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.

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 Global 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

 

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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.

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.

 

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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.

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.

 

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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 memorandum and articles of association 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, wilful 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 memorandum and articles of association.

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

 

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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.

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 articles of association 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

 

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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 articles of association do 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.

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 articles of association, a director may be removed from office with or without cause, by a resolution of shareholders passed at a meeting of shareholders called for the purposes of removing the director or for purposes including the removal of the director or by a written resolution passed by a least fifty per cent (50%) of the shareholders of the company entitled to vote.

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 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.

 

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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 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 it fails to comply with the requirements of a statutory demand that has not be set aside pursuant to the Insolvency Act, 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 either the value of the company’s liabilities exceeds its assets or 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

 

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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.

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.

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 memorandum and articles of association 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 memorandum and articles of association 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 memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

History of Securities Issuances

The following is a summary of our securities issuances in the past three years.

Increase of Maximum Number of Authorized Shares and Share Subdivision

On October 31, 2019, our board of directors and shareholders approved to increase our maximum number of authorized shares to 1,000,000 ordinary shares, comprising 700,000 Class A ordinary shares and 300,000 Class B

 

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ordinary Shares, and to effect a 1-for-100 share subdivision for each ordinary share. Such increase and sub-division became effective on November 12, 2019. Under the share subdivision, each of our authorized shares (whether issued or unissued), par value of US$1.0 each, has been divided into 100 ordinary shares, par value US$0.01 each. Following the share subdivision, all shareholders shall surrender their share certificates to our company and will thereafter be eligible to receive new share certificates to be issued by our company, which will reflect the post-share subdivision numbers of ordinary shares held by the relevant shareholders. Each of our outstanding ordinary shares and the ordinary shares issuable upon the exercise of the options we have granted will be subdivided into 100 ordinary shares pursuant to the resolutions of our board of directors and shareholders on October 31, 2019.

Ordinary Shares

The numbers of ordinary shares in the following paragraphs are presented giving retroactive effect to the 1-for-100 share subdivision of our ordinary shares.

On February 17, 2017, we issued 43,000 ordinary shares to an individual upon the individual’s exercise of options at zero consideration in recognition of the individual’s consultancy services to us.

On May 4, 2017, we issued 98,400 ordinary shares to an investor for consideration of US$0.8 million.

On May 4, 2017, we issued 8,400 ordinary shares to an investor for consideration of RMB0.7 million (US$0.1 million).

On May 4, 2017, we issued 48,000 ordinary shares to an individual in consideration for the individual’s consulting services to us.

On November 3, 2017, we issued 13,600 ordinary shares to an investor for consideration of RMB1.0 million (US$0.1 million).

On November 3, 2017, we issued 414,200 ordinary shares to Zhijun Sihang for total consideration of RMB28.0 million (US$3.9 million). These shares were repurchased and canceled by the Company on August 6, 2019 as part of Zhijun Sihang’s plan of restructuring its shareholding in the Company.

On November 3, 2017, we issued 88,700 ordinary shares to certain investors for total consideration of US$0.8 million.

On November 3, 2017, we issued 10,000 ordinary shares to an individual in consideration for the individual’s consulting services to us.

On November 3, 2017, we issued 100,000 ordinary shares to Mr. Weidong Dai upon his exercise of options at zero consideration in recognition of his services to us.

On August 2, 2018, we issued 11,700 ordinary shares to certain investors for total consideration of US$0.2 million.

On August 2, 2018, we issued 5,900 ordinary shares to a law firm in consideration for its legal services to us.

On December 24, 2018, we issued 76,100 ordinary shares to CRS Holdings Inc. for the benefit of an investor, for consideration of US$0.2 million.

On June 25, 2019, we issued 245,700 ordinary shares to certain investors for total consideration of US$2.4 million.

 

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On September 17, 2019, we issued 214,000 ordinary shares to our founder and chairman, CRS Holdings Inc. for consideration of US$0.7 million.

On October 21, 2019, we issued 393,900 ordinary shares to two investors for total consideration of US$3.1 million pursuant to share purchase agreements entered into in September 2019.

On October 25, 2019, we issued 54,800 ordinary shares to an investor for consideration of RMB4.5 million (US$0.6 million) pursuant to a share purchase agreement entered into in September 2019.

On October 25, 2019, we issued 769,000 ordinary shares to YuLin Bio-medical Science Co., Ltd. for consideration of US$7,690, as a result of certain PRC investors’ restructuring of their shareholding in the Company.

On October 25, 2019, we issued 783,900 ordinary shares to Zhijun Sihang Holdings Limited (controlled by Zhijun Sihang) for consideration of RMB53.0 million (US$7.4 million), as part of Zhijun Sihang’s plan of restructuring its shareholding in the Company.

An investor invested RMB0.3 million (US$42,000) in our company for 3,600 ordinary shares pursuant to a share purchase agreement dated November 6, 2019.

Option Grants

We have granted options to purchase our ordinary shares to certain of our directors, executive officers, employees and consultants. See “Management—2019 Share Incentive Plan” and “Management—Other Options.”

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, will automatically terminate upon the completion of a qualified initial public offering.

Registration Right

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.

 

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DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Citibank, N.A. has agreed to act as the depositary for the American Depositary Shares. Citibank’s depositary offices are located at 388 Greenwich Street, New York, New York 10013. American Depositary Shares are frequently referred to as “ADSs” and represent ownership interests in securities that are on deposit with the depositary. ADSs may be represented by certificates that are commonly known as “American Depositary Receipts” or “ADRs.” The depositary typically appoints a custodian to safekeep the securities on deposit. In this case, the custodian is Citibank, N.A.—Hong Kong, located at 9/F, Citi Tower, One Bay East, 83 Hon Hai Road, Kwun Tong, Kowloon, Hong Kong.

We have appointed Citibank as depositary pursuant to a deposit agreement. A copy of the deposit agreement is on file with the SEC under cover of a Registration Statement on Form F-6. You may obtain a copy of the deposit agreement from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and from the SEC’s website (www.sec.gov). Please refer to Registration Number 333-234548 when retrieving such copy.

We are providing you with a summary description of the material terms of the ADSs and of your material rights as an owner of ADSs. Please remember that summaries by their nature lack the precision of the information summarized and that the rights and obligations of an owner of ADSs will be determined by reference to the terms of the deposit agreement and not by this summary. We urge you to review the deposit agreement in its entirety. The portions of this summary description that are italicized describe matters that may be relevant to the ownership of ADSs but that may not be contained in the deposit agreement.

Each ADS represents the right to receive, and to exercise the beneficial ownership interests in, one (1) Class A ordinary shares that are on deposit with the depositary and/or custodian. An ADS also represents the right to receive, and to exercise the beneficial interests in, any other property received by the depositary or the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical considerations. We and the depositary may agree to change the ADS-to-Class A ordinary shares ratio by amending the deposit agreement. This amendment may give rise to, or change, the depositary fees payable by ADS owners. The custodian, the depositary and their respective nominees will hold all deposited property for the benefit of the holders and beneficial owners of ADSs. The deposited property does not constitute the proprietary assets of the depositary, the custodian or their nominees. Beneficial ownership in the deposited property will under the terms of the deposit agreement be vested in the beneficial owners of the ADSs. The depositary, the custodian and their respective nominees will be the record holders of the deposited property represented by the ADSs for the benefit of the holders and beneficial owners of the corresponding ADSs. A beneficial owner of ADSs may or may not be the holder of ADSs. Beneficial owners of ADSs will be able to receive, and to exercise beneficial ownership interests in, the deposited property only through the registered holders of the ADSs, the registered holders of the ADSs (on behalf of the applicable ADS owners) only through the depositary, and the depositary (on behalf of the owners of the corresponding ADSs) directly, or indirectly, through the custodian or their respective nominees, in each case upon the terms of the deposit agreement. 

If you become an owner of ADSs, you will become a party to the deposit agreement and therefore will be bound to its terms and to the terms of any ADR that represents your ADSs. The deposit agreement and the ADR specify our rights and obligations as well as your rights and obligations as owner of ADSs and those of the depositary. As an ADS holder you appoint the depositary to act on your behalf in certain circumstances. The deposit agreement and the ADRs are governed by New York law. However, our obligations to the holders of Class A ordinary shares will continue to be governed by the laws of the British Virgin Islands, which may be different from the laws in the United States.

In addition, applicable laws and regulations may require you to satisfy reporting requirements and obtain regulatory approvals in certain circumstances. You are solely responsible for complying with such reporting

 

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requirements and obtaining such approvals. Neither the depositary, the custodian, us or any of their or our respective agents or affiliates shall be required to take any actions whatsoever on your behalf to satisfy such reporting requirements or obtain such regulatory approvals under applicable laws and regulations.

As an owner of ADSs, we will not treat you as one of our shareholders and you will not have direct shareholder rights. The depositary will hold on your behalf the shareholder rights attached to the Class A ordinary shares underlying your ADSs. As an owner of ADSs you will be able to exercise the shareholders rights for the Class A ordinary shares represented by your ADSs through the depositary only to the extent contemplated in the deposit agreement. To exercise any shareholder rights not contemplated in the deposit agreement you will, as an ADS owner, need to arrange for the cancellation of your ADSs and become a direct shareholder.

The manner in which you own the ADSs (e.g., in a brokerage account vs. as registered holder, or as holder of certificated vs. uncertificated ADSs) may affect your rights and obligations, and the manner in which, and extent to which, the depositary’s services are made available to you. As an owner of ADSs, you may hold your ADSs either by means of an ADR registered in your name, through a brokerage or safekeeping account, or through an account established by the depositary in your name reflecting the registration of uncertificated ADSs directly on the books of the depositary (commonly referred to as the “direct registration system” or “DRS”). The direct registration system reflects the uncertificated (book-entry) registration of ownership of ADSs by the depositary. Under the direct registration system, ownership of ADSs is evidenced by periodic statements issued by the depositary to the holders of the ADSs. The direct registration system includes automated transfers between the depositary and The Depository Trust Company, or DTC, the central book-entry clearing and settlement system for equity securities in the United States. If you decide to hold your ADSs through your brokerage or safekeeping account, you must rely on the procedures of your broker or bank to assert your rights as ADS owner. Banks and brokers typically hold securities such as the ADSs through clearing and settlement systems such as DTC. The procedures of such clearing and settlement systems may limit your ability to exercise your rights as an owner of ADSs. Please consult with your broker or bank if you have any questions concerning these limitations and procedures. All ADSs held through DTC will be registered in the name of a nominee of DTC. This summary description assumes you have opted to own the ADSs directly by means of an ADS registered in your name and, as such, we will refer to you as the “holder.” When we refer to “you,” we assume the reader owns ADSs and will own ADSs at the relevant time.

The registration of the Class A ordinary shares in the name of the depositary or the custodian shall, to the maximum extent permitted by applicable law, vest in the depositary or the custodian the record ownership in the applicable Class A ordinary shares with the beneficial ownership rights and interests in such Class A ordinary shares being at all times vested with the beneficial owners of the ADSs representing the Class A ordinary shares. The depositary or the custodian shall at all times be entitled to exercise the beneficial ownership rights in all deposited property, in each case only on behalf of the holders and beneficial owners of the ADSs representing the deposited property.

Dividends and Distributions

As a holder of ADSs, you generally have the right to receive the distributions we make on the securities deposited with the custodian. Your receipt of these distributions may be limited, however, by practical considerations and legal limitations. Holders of ADSs will receive such distributions under the terms of the deposit agreement in proportion to the number of ADSs held as of the specified record date, after deduction of the applicable fees, taxes and expenses.

Distributions of Cash

Whenever we make a cash distribution for the securities on deposit with the custodian, we will deposit the funds with the custodian. Upon receipt of confirmation of the deposit of the requisite funds, the depositary will arrange for the funds received in a currency other than U.S. dollars to be converted into U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to the laws and regulations of the British Virgin Islands.

 

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The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The depositary will apply the same method for distributing the proceeds of the sale of any property (such as undistributed rights) held by the custodian in respect of securities on deposit.

The distribution of cash will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. The depositary will hold any cash amounts it is unable to distribute in a non-interest bearing account for the benefit of the applicable holders and beneficial owners of ADSs until the distribution can be effected or the funds that the depositary holds must be escheated as unclaimed property in accordance with the laws of the relevant states of the United States.

Distributions of Shares

Whenever we make a free distribution of Class A ordinary shares for the securities on deposit with the custodian, we will deposit the applicable number of Class A ordinary shares with the custodian. Upon receipt of confirmation of such deposit, the depositary will either distribute to holders new ADSs representing the Class A ordinary shares deposited or modify the ADS-to-Class A ordinary shares ratio, in which case each ADS you hold will represent rights and interests in the additional Class A ordinary shares so deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed as in the case of a cash distribution.

The distribution of new ADSs or the modification of the ADS-to-Class A ordinary shares ratio upon a distribution of Class A ordinary shares will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or governmental charges, the depositary may sell all or a portion of the new Class A ordinary shares so distributed.

No such distribution of new ADSs will be made if it would violate a law (e.g., the U.S. securities laws) or if it is not operationally practicable. If the depositary does not distribute new ADSs as described above, it may sell the Class A ordinary shares received upon the terms described in the deposit agreement and will distribute the proceeds of the sale as in the case of a distribution of cash.

Distributions of Rights

Whenever we intend to distribute rights to subscribe for additional Class A ordinary shares, we will give prior notice to the depositary and we will assist the depositary in determining whether it is lawful and reasonably practicable to distribute rights to subscribe for additional ADSs to holders.

The depositary will establish procedures to distribute rights to subscribe for additional ADSs to holders and to enable such holders to exercise such rights if it is lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the deposit agreement (such as opinions to address the lawfulness of the transaction). You may have to pay fees, expenses, taxes and other governmental charges to subscribe for the new ADSs upon the exercise of your rights. The depositary is not obligated to establish procedures to facilitate the distribution and exercise by holders of rights to subscribe for new Class A ordinary shares other than in the form of ADSs.

The depositary will not distribute the rights to you if:

 

   

We do not timely request that the rights be distributed to you or we request that the rights not be distributed to you; or

 

   

We fail to deliver satisfactory documents to the depositary; or

 

   

It is not reasonably practicable to distribute the rights.

 

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The depositary will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale will be distributed to holders as in the case of a cash distribution. If the depositary is unable to sell the rights, it will allow the rights to lapse.

Elective Distributions

Whenever we intend to distribute a dividend payable at the election of shareholders either in cash or in additional shares, we will give prior notice thereof to the depositary and will indicate whether we wish the elective distribution to be made available to you. In such case, we will assist the depositary in determining whether such distribution is lawful and reasonably practicable.

The depositary will make the election available to you only if it is reasonably practicable and if we have provided all of the documentation contemplated in the deposit agreement. In such case, the depositary will establish procedures to enable you to elect to receive either cash or additional ADSs, in each case as described in the deposit agreement.

If the election is not made available to you, you will receive either cash or additional ADSs, depending on what a shareholder in the British Virgin Islands would receive upon failing to make an election, as more fully described in the deposit agreement.

Other Distributions

Whenever we intend to distribute property other than cash, Class A ordinary shares or rights to subscribe for additional Class A ordinary shares, we will notify the depositary in advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary in determining whether such distribution to holders is lawful and reasonably practicable.

If it is reasonably practicable to distribute such property to you and if we provide to the depositary all of the documentation contemplated in the deposit agreement, the depositary will distribute the property to the holders in a manner it deems practicable.

The distribution will be made net of fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes and governmental charges, the depositary may sell all or a portion of the property received.

The depositary will not distribute the property to you and will sell the property if:

 

   

We do not request that the property be distributed to you or if we request that the property not be distributed to you; or

 

   

We do not deliver satisfactory documents to the depositary; or

 

   

The depositary determines that all or a portion of the distribution to you is not reasonably practicable.

The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.

Redemption

Whenever we decide to redeem any of the securities on deposit with the custodian, we will notify the depositary in advance. If it is practicable and if we provide all of the documentation contemplated in the deposit agreement, the depositary will provide notice of the redemption to the holders.

The custodian will be instructed to surrender the shares being redeemed against payment of the applicable redemption price. The depositary will convert into U.S. dollars upon the terms of the deposit agreement the

 

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redemption funds received in a currency other than U.S. dollars and will establish procedures to enable holders to receive the net proceeds from the redemption upon surrender of their ADSs to the depositary. You may have to pay fees, expenses, taxes and other governmental charges upon the redemption of your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as the depositary may determine.

Changes Affecting Class A Ordinary Shares

The Class A ordinary shares held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, split-up, cancellation, consolidation or any other reclassification of such Class A ordinary shares or a recapitalization, reorganization, merger, consolidation or sale of assets of the Company.

If any such change were to occur, your ADSs would, to the extent permitted by law and the deposit agreement, represent the right to receive the property received or exchanged in respect of the Class A ordinary shares held on deposit. The depositary may in such circumstances deliver new ADSs to you, amend the deposit agreement, the ADRs and the applicable Registration Statement(s) on Form F-6, call for the exchange of your existing ADSs for new ADSs and take any other actions that are appropriate to reflect as to the ADSs the change affecting the Shares. If the depositary may not lawfully distribute such property to you, the depositary may sell such property and distribute the net proceeds to you as in the case of a cash distribution.

Issuance of ADSs upon Deposit of Class A Ordinary Shares

Upon completion of the offering, the Class A ordinary shares being offered pursuant to the prospectus will be deposited by us with the custodian. Upon receipt of confirmation of such deposit, the depositary will issue ADSs to the underwriters named in the prospectus.

After the closing of the offering, the depositary may create ADSs on your behalf if you or your broker deposit Class A ordinary shares with the custodian. The depositary will deliver these ADSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the Class A ordinary shares to the custodian. Your ability to deposit Class A ordinary shares and receive ADSs may be limited by U.S. and British Virgin Islands legal considerations applicable at the time of deposit.

The issuance of ADSs may be delayed until the depositary or the custodian receives confirmation that all required approvals have been given and that the Class A ordinary shares have been duly transferred to the custodian. The depositary will only issue ADSs in whole numbers.

When you make a deposit of Class A ordinary shares, you will be responsible for transferring good and valid title to the depositary. As such, you will be deemed to represent and warrant that:

 

   

The Class A ordinary shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained.

 

   

All preemptive (and similar) rights, if any, with respect to such Class A ordinary shares have been validly waived or exercised.

 

   

You are duly authorized to deposit the Class A ordinary shares.

 

   

The Class A ordinary shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the ADSs issuable upon such deposit will not be, “restricted securities” (as defined in the deposit agreement).

 

   

The Class A ordinary shares presented for deposit have not been stripped of any rights or entitlements.

If any of the representations or warranties are incorrect in any way, we and the depositary may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentations.

 

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Transfer, Combination and Split Up of ADRs

As an ADR holder, you will be entitled to transfer, combine or split up your ADRs and the ADSs evidenced thereby. For transfers of ADRs, you will have to surrender the ADRs to be transferred to the depositary and also must:

 

   

ensure that the surrendered ADR is properly endorsed or otherwise in proper form for transfer;

 

   

provide such proof of identity and genuineness of signatures as the depositary deems appropriate;

 

   

provide any transfer stamps required by the State of New York or the United States; and

 

   

pay all applicable fees, charges, expenses, taxes and other government charges payable by ADR holders pursuant to the terms of the deposit agreement, upon the transfer of ADRs.

To have your ADRs either combined or split up, you must surrender the ADRs in question to the depositary with your request to have them combined or split up, and you must pay all applicable fees, charges and expenses payable by ADR holders, pursuant to the terms of the deposit agreement, upon a combination or split up of ADRs.

Withdrawal of Class A ordinary shares Upon Cancellation of ADSs

As a holder, you will be entitled to present your ADSs to the depositary for cancellation and then receive the corresponding number of underlying Class A ordinary shares at the custodian’s offices. Your ability to withdraw the Class A ordinary shares held in respect of the ADSs may be limited by U.S. and British Virgin Islands law considerations applicable at the time of withdrawal. In order to withdraw the Class A ordinary shares represented by your ADSs, you will be required to pay to the depositary the fees for cancellation of ADSs and any charges and taxes payable upon the transfer of the Class A ordinary shares. You assume the risk for delivery of all funds and securities upon withdrawal. Once canceled, the ADSs will not have any rights under the deposit agreement.

If you hold ADSs registered in your name, the depositary may ask you to provide proof of identity and genuineness of any signature and such other documents as the depositary may deem appropriate before it will cancel your ADSs. The withdrawal of the Class A ordinary shares represented by your ADSs may be delayed until the depositary receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the depositary will only accept ADSs for cancellation that represent a whole number of securities on deposit.

You will have the right to withdraw the securities represented by your ADSs at any time except for:

 

   

Temporary delays that may arise because (i) the transfer books for the Class A ordinary shares or ADSs are closed, or (ii) Class A ordinary shares are immobilized on account of a shareholders’ meeting or a payment of dividends.

 

   

Obligations to pay fees, taxes and similar charges.

 

   

Restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit.

The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with mandatory provisions of law.

Voting Rights

As a holder, you generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the Class A ordinary shares represented by your ADSs. The voting rights of holders of Class A ordinary shares are described in “Description of Share Capital.”

 

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At our request, the depositary will distribute to you any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary to exercise the voting rights of the securities represented by ADSs. In lieu of distributing such materials, the depositary may distribute to holders of ADSs instructions on how to retrieve such materials upon request.

If the depositary timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities (in person or by proxy) represented by the holder’s ADSs as follows:

 

   

In the event of voting by show of hands, the depositary will vote (or cause the custodian to vote) all Class A ordinary shares held on deposit at that time in accordance with the voting instructions received from a majority of holders of ADSs who provide timely voting instructions.

 

   

In the event of voting by poll, the depositary will vote (or cause the Custodian to vote) the Class A ordinary shares held on deposit in accordance with the voting instructions received from the holders of ADSs.

Securities for which no voting instructions have been received will not be voted (except (a) as set forth above in the case voting is by show of hands, (b) in the event of voting by poll, holders of ADSs in respect of which no timely voting instructions have been received shall be deemed to have instructed the depositary to give a discretionary proxy to a person designated by us to vote the Class A ordinary shares represented by such holders’ ADSs; provided, however, that no such discretionary proxy shall be given with respect to any matter to be voted upon as to which we inform the depositary that (i) we do not wish such proxy to be given, (ii) substantial opposition exists, or (iii) the rights of holders of Class A ordinary shares may be adversely affected, and (c) as otherwise contemplated in the deposit agreement). Please note that the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a timely manner.

Fees and Charges

As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement:

 

Service

  

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

 

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Service

  

Fees

•  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;

 

   

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

 

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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.

Amendments and Termination

We may agree with the depositary to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days’ prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially prejudicial to your substantial rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act or to be eligible for book-entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be able to provide you with prior notice of any modifications or supplements that are required to accommodate compliance with applicable provisions of law.

You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become effective. The deposit agreement cannot be amended to prevent you from withdrawing the Class A ordinary shares represented by your ADSs (except as permitted by law).

We have the right to direct the depositary to terminate the deposit agreement. Similarly, the depositary may in certain circumstances on its own initiative terminate the deposit agreement. In either case, the depositary must give notice to the holders at least 30 days before termination. Until termination, your rights under the deposit agreement will be unaffected.

After termination, the depositary will continue to collect distributions received (but will not distribute any such property until you request the cancellation of your ADSs) and may sell the securities held on deposit. After the sale, the depositary will hold the proceeds from such sale and any other funds then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary will have no further obligations to holders other than to account for the funds then held for the holders of ADSs still outstanding (after deduction of applicable fees, taxes and expenses).

In connection with any termination of the deposit agreement, the depositary may make available to owners of ADSs a means to withdraw the Class A ordinary shares represented by ADSs and to direct the depositary of such Class A ordinary shares into an unsponsored American depositary share program established by the depositary. The ability to receive unsponsored American depositary shares upon termination of the deposit agreement would be subject to satisfaction of certain U.S. regulatory requirements applicable to the creation of unsponsored American depositary shares and the payment of applicable depositary fees.

 

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Books of Depositary

The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.

The depositary will maintain in New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADSs. These facilities may be closed from time to time, to the extent not prohibited by law.

Limitations on Obligations and Liabilities

The deposit agreement limits our obligations and the depositary’s obligations to you. Please note the following:

 

   

We and the depositary are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith.

 

   

The depositary disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is cast or for the effect of any vote, provided it acts in good faith and in accordance with the terms of the deposit agreement.

 

   

The depositary disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document forwarded to you on our behalf or for the accuracy of any translation of such a document, for the investment risks associated with investing in Class A ordinary shares, for the validity or worth of the Class A ordinary shares, for any tax consequences that result from the ownership of ADSs, for the credit-worthiness of any third party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.

 

   

We and the depositary will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.

 

   

We and the depositary disclaim any liability if we or the depositary are prevented or forbidden from or subject to any civil or criminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the deposit agreement, by reason of any provision, present or future of any law or regulation, or by reason of present or future provision of any provision of our Articles of Association, or any provision of or governing the securities on deposit, or by reason of any act of God or war or other circumstances beyond our control.

 

   

We and the depositary disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in our Articles of Association or in any provisions of or governing the securities on deposit.

 

   

We and the depositary further disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel, accountants, any person presenting Shares for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed by either of us in good faith to be competent to give such advice or information.

 

   

We and the depositary also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit that is made available to holders of Class A ordinary shares but is not, under the terms of the deposit agreement, made available to you.

 

   

We and the depositary may rely without any liability upon any written notice, request or other document believed to be genuine and to have been signed or presented by the proper parties.

 

   

We and the depositary also disclaim liability for any consequential or punitive damages for any breach of the terms of the deposit agreement.

 

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No disclaimer of any Securities Act liability is intended by any provision of the deposit agreement.

 

   

Nothing in the deposit agreement gives rise to a partnership or joint venture, or establishes a fiduciary relationship, among us, the depositary and you as ADS holder.

 

   

Nothing in the deposit agreement precludes Citibank (or its affiliates) from engaging in transactions in which parties adverse to us or the ADS owners have interests, and nothing in the deposit agreement obligates Citibank to disclose those transactions, or any information obtained in the course of those transactions, to us or to the ADS owners, or to account for any payment received as part of those transactions.

Taxes

You will be responsible for the taxes and other governmental charges payable on the ADSs and the securities represented by the ADSs. We, the depositary and the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due.

The depositary may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges are paid by the applicable holder. The depositary and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax withholding for any distributions on your behalf. However, you may be required to provide to the depositary and to the custodian proof of taxpayer status and residence and such other information as the depositary and the custodian may require to fulfill legal obligations. You are required to indemnify us, the depositary and the custodian for any claims with respect to taxes based on any tax benefit obtained for you.

Foreign Currency Conversion

The depositary will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute the U.S. dollars in accordance with the terms of the deposit agreement. You may have to pay fees and expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental requirements.

If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable period, the depositary may take the following actions in its discretion:

 

   

Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is lawful and practical.

 

   

Distribute the foreign currency to holders for whom the distribution is lawful and practical.

 

   

Hold the foreign currency (without liability for interest) for the applicable holders.

Governing Law/Waiver of Jury Trial

The deposit agreement, the ADRs and the ADSs will be interpreted in accordance with the laws of the State of New York. The rights of holders of Class A ordinary shares (including Class A ordinary shares represented by ADSs) is governed by the laws of the British Virgin Islands.

As an owner of ADSs, you irrevocably agree that any legal action arising out of the Deposit Agreement, the ADSs or the ADRs, involving the Company or the Depositary, may only be instituted in a state or federal court in the city of New York.

 

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AS A PARTY TO THE DEPOSIT AGREEMENT, YOU IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, YOUR RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF THE DEPOSIT AGREEMENT OR THE ADRs AGAINST US AND/OR THE DEPOSITARY.

The deposit agreement provides that, to the 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 Class A ordinary shares, the ADSs or the deposit agreement, including any claim under 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 in the facts and circumstances of that case in accordance with applicable case law. However, you will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 1,666,700 ADSs outstanding, representing approximately 14.5% of our outstanding ordinary shares, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs. All of the ADSs sold in this offering will be freely transferable by persons other than by our “affiliates” without restriction or further registration under the Securities Act. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our ordinary shares or the ADSs. We intend to apply to list the ADSs on The NASDAQ Global Market, but we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our ordinary shares not represented by the ADSs.

Lock-up Agreements

We have agreed, for a period of 180 days after the date of this prospectus, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, lend or otherwise dispose of, except in this offering, any of our ordinary shares or ADSs or securities that are substantially similar to our ordinary shares or ADSs, including but not limited to any options or warrants to purchase our ordinary shares, ADSs or any securities that are convertible into or exchangeable for, or that represent the right to receive, our ordinary shares, ADSs or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date such lock-up agreement was executed), without the prior written consent of the underwriters.

Furthermore, each of our executive officers and directors and our shareholders owning 1% or more of our ordinary shares outstanding immediately prior to this offering have also entered into a similar lock-up agreement for a period of 180 days from the date of this prospectus, subject to certain exceptions, with respect to our ordinary shares, ADSs and securities that are substantially similar to our ordinary shares or ADSs. These parties collectively own 83.5% our outstanding ordinary shares, without giving effect to this offering.

The restrictions described in the preceding paragraphs will be automatically extended under certain circumstances. See “Underwriting.”

Other than this offering, we are not aware of any plans by any significant shareholders to dispose of significant numbers of our ADSs or ordinary shares. However, one or more existing shareholders or owners of securities convertible or exchangeable into or exercisable for our ADSs or ordinary shares may dispose of significant numbers of our ADSs or ordinary shares in the future. We cannot predict what effect, if any, future sale of our ADSs or ordinary shares, or the availability of ADSs or ordinary shares for future sale, will have on the trading price of our ADSs from time to time. Sales of substantial amounts of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could adversely affect the trading price of our ADSs.

Rule 144

All of our ordinary shares that will be outstanding upon the completion of this offering, other than those ordinary shares sold in this offering, are “restricted securities” as that term is defined in Rule 144 under the Securities Act and may be sold publicly in the United States only if they are subject to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirement such as those provided by Rule 144 and Rule 701 promulgated under the Securities Act. In general, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who at the time of a sale is not, and has not been during the three months preceding the sale, an affiliate of ours and has beneficially owned our restricted securities for at least six months will be entitled to sell the restricted securities without registration under the Securities Act, subject only to the availability of current public information about us, and will be

 

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entitled to sell restricted securities beneficially owned for at least one year without restriction. Persons who are our affiliates and have beneficially owned our restricted securities for at least six months may sell a number of restricted securities within any three-month period that does not exceed the greater of the following:

 

   

1% of the then outstanding ordinary shares of the same class, represented by ADSs or otherwise, which immediately after this offering will be equal to 115,311 ordinary shares, assuming the underwriters do not exercise their over-allotment option; or

 

   

the average weekly trading volume of our ordinary shares of the same class, represented by ADSs or otherwise, during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.

Sales by our affiliates under Rule 144 are also subject to certain requirements relating to manner of sale, notice and the availability of current public information about us.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases our ordinary shares from us in connection with a compensatory stock plan or other written agreement executed prior to the completion of this offering is eligible to resell those ordinary shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.

 

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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 AnPac Bio meets all of the conditions above. AnPac Bio is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key

 

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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.

If the PRC tax authorities determine that AnPac Bio 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 AnPac Bio would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that AnPac Bio is treated as a PRC resident enterprise.

Provided that our BVI holding company, AnPac Bio, 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 “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 acquire Class A ordinary shares or ADSs in this offering and hold

 

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such 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.

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.

We have applied to list the ADSs on The NASDAQ Global Market, and the ADSs will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our

 

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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.

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

 

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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”).

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. The asset test is applied using adjusted tax bases of the assets, however, if the non-U.S. corporation is a CFC and is not publicly traded for the year. We are likely to be a CFC following the transition to a dual class structure and will become publicly traded as a result of the offering. It is not entirely clear under current law how the asset test should be applied when a non-U.S. corporation is either a CFC or is not publicly traded for only part of the year. We believe, however, that it is reasonable for shareholders to apply the asset test using fair market values of our assets for each quarter that we either are not a CFC or are publicly traded, although the IRS could take a different position. Recently proposed Treasury regulations would, if finalized in their current form, clarify the law by providing that the fair market values of our assets should be used unless we are a CFC for a majority of the year and our stock is not publicly traded for a majority of the year. Those regulations are proposed to be effective, however, only for taxable years of U.S. Holders that begin after the regulations are published in final form, which would mean that they will not be effective until at least 2020 for any U.S. Holder that uses the calendar year as its taxable year. We expect we would be treated as publicly traded for 2020 and subsequent years. U.S. Holders (including in particular such U.S. Holders that have a tax year other than the calendar year) 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).

Subject to the foregoing discussion , 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, 2018, 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. The determination of whether we are a PFIC also may be affected by the cash raised in this offering and how, and how quickly, we use that cash and our other liquid assets. If we do not deploy significant amounts of cash for active purposes, our risk of being a PFIC may increase.

 

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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 Global 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.

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 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

 

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assets” in excess of US$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.

 

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UNDERWRITING

In connection with this offering, we have entered into an underwriting agreement with WestPark Capital, Inc. and Univest Securities, LLC as the representatives of the underwriters in this offering. The underwriters named below have severally agreed to purchase from us, on a firm commitment basis, the number of ordinary shares set forth opposite its name below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus.

 

Underwriter

   Number of
ordinary shares
 

WestPark Capital, Inc.

                       

Univest Securities, LLC

  

Total

  

The underwriters are offering the ADSs subject to their acceptance of the ADSs from us. The underwriting agreement provides that the underwriters are obligated to purchase all of the ADSs offered by this prospectus, other than those covered by the over-allotment option, if any ADSs are purchased. The underwriters are offering the ADSs when, as and if issued to and accepted by them, subject to a number of conditions set forth in the underwriting agreement.

An individual investor has indicated to us his interest in subscribing up to a total of US$1.75 million worth of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. Assuming an initial public offering price of US$13.00 per ADS, which is the mid-point of the estimated offering price range, the number of ADSs to be purchased by that investor would be up to 134,615 ADSs, or approximately 8.1% of the ADSs being offered in this offering. This indication of interest is not a binding agreement or commitment to purchase, and we and the underwriters are under no obligation to sell ADSs to that investor.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

Commissions and Discounts

The underwriters have advised us that the underwriters propose to offer our ADSs to the public at the offering price set forth on the cover page of this prospectus and to selected dealers at that price less a concession of not more than US$        per ADS. The underwriters and selected dealers may re-allow a concession to other dealers, including the underwriters, of not more than US$        per ADS. After completion of the initial public offering of the ADSs, the offering price, the concessions to selected dealers and the reallowance to its dealers may from time to time be changed by the underwriters.

We have agreed to sell the ADSs to the underwriters, (i) with respect to sales of ADSs to investors introduced by the underwriters in this offering, at the initial offering price of US$        per ADS, which represents the initial public offering price of the ADSs set forth on the cover page of this prospectus less a        % underwriting discount; and (ii) with respect to sales of ADSs to investors introduced by us in this offering, at the initial offering price of US$        per ADS, which represents the initial public offering price of the ADSs set forth on the cover page of this prospectus less a        % underwriting discount.

 

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The following table shows the per share price and total underwriting discounts and commissions to be paid to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 250,005 additional ADSs.

 

     Per
ADS
   Total Without
Exercise of Over-
allotment option
   Total With
Exercise of Over-
allotment option

Discounts & commissions

   $                    $                $            

Net proceeds to us

   $    $    $

We have also agreed to pay the underwriters’ expenses relating to the offering, including (1) all fees incurred in clearing this offering with the Financial Industry Regulatory Authority, or FINRA; (2) the costs of all mailing and printing of the underwriting documents, registration statements, prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final prospectuses as the underwriters may reasonably deem necessary; (3) all fees, expenses and disbursements relating to the registration, qualification or exemption of the offered securities under state “blue sky” securities laws and all other jurisdictions as the underwriters may reasonably designate (including, without limitation, all filing and registration fees, and the reasonable fees and disbursements of “blue sky” counsel up to a cap of US$5,000); (4) the fees and expenses of the underwriters’ U.S. legal counsel not to exceed US$200,000, the fees and expenses of the underwriters’ BVI legal counsel not to exceed US$20,000 and the fees and expenses of the underwriters’ PRC legal counsel not to exceed US$30,000, (5) all reasonable travel and other expenses relating to due diligence trips and site visits by the underwriters, and (6) all reasonable road show expenses relating to the offering. The maximum amount of fees, costs and expenses incurred by the underwriters (including expenses previously paid or reimbursed by us but excluding the fees in items (3) and (4) above) that we shall be responsible for may not exceed $75,000.

We have agreed to pay an expense deposit of $65,000, or the Advance, to the underwriters, which will be applied against the out-of-pocket accountable expenses that will be payable by us to the underwriters in connection with this offering. Any portion of the Advance will be returned to us in the event it is not actually incurred.

The expenses of the offering, not including the underwriting discount, are estimated at US$3.5 million and are payable by us.

Underwriters’ Warrants

Upon the closing of this offering, we have agreed to sell to the representatives of the underwriters warrants to purchase up to 8.5% of the number of Class A ordinary shares underlying the ADSs sold to investors introduced by the underwriters in this offering, exclusive of the over-allotment option. The warrants will be exercisable at a per share and warrant exercise price equal to 120% of the public offering price per ADS sold pursuant to this offering, subject to standard anti-dilution adjustments for share splits and similar transactions. The warrants will be exercisable at any time, and from time to time, in whole or in part, during the period from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with Financial Industry Regulatory Authority, or FINRA, Rule 5110(f)(2)(G)(i). The warrants are also exercisable on a cashless basis. The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). Except as permitted by Rule 5110(g)(1), the underwriters (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate the warrants or the securities underlying the warrants, nor will any, of them engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the option or the underlying securities for a period of 180 days from the date of effectiveness of the registration statement of which this prospectus forms a part or the commencement of sales under this prospectus. Although the warrants and the underlying Class A ordinary shares have been registered in the registration statement of which this prospectus forms a part, the underwriters’ warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the date of effectiveness in compliance with FINRA Rule 5110(f)(2)(G)(iv). The piggyback registration right provided will not be greater

 

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than seven years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(v). The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of ordinary shares at a price below the warrant exercise price. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants, other than underwriting commissions incurred and payable by the holders.

Over-allotment Option

We have granted a 30-day option to the underwriters, exercisable one or more times in whole or in part, to purchase up to an additional 250,005 ADSs on the same terms as the other shares being purchased by the underwriters from us, underwriting discounts and commissions to cover over-allotments, if any. The underwriters may exercise this option only to cover over-allotments made in connection with this offering. If the underwriters exercise this option in whole or in part, then the underwriters will be committed, subject to the conditions described in the underwriting agreement, to purchase the additional offered securities in proportion to each of their commitments set forth in the prior table.

Lock-up Agreements

We have agreed with the underwriters that we will not, without the prior consent of WestPark Capital, Inc. and Univest Securities, LLC, as the representatives of the underwriters, directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of any ordinary shares or securities convertible into, exchangeable or exercisable for any ordinary shares (excluding the exercise of certain warrants and/or options currently outstanding and exercisable) for a period of 180 days after the date of this prospectus.

In addition, each of our executive officers and directors and certain of our shareholders owning 1% or more of our ordinary shares outstanding immediately prior to this offering have agreed with the underwriters not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for estate planning purposes or to beneficiaries of officers, directors and shareholders upon their death), or otherwise dispose of or enter into any transaction which may result in the disposition of any ordinary shares or securities convertible into, exchangeable or exercisable for any ordinary shares, without the prior written consent of WestPark Capital, Inc. and Univest Securities, LLC as the representatives of the underwriters, for a period of 180 days after the date of this prospectus.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the ADSs is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our ordinary shares. However, the underwriters may engage in transactions that stabilize the price of the ADSs, such as bids or purchases to peg, fix or maintain that price.

In connection with the offering, the underwriters may purchase and sell our ADSs in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs described above. The underwriters may close out any covered short position by either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase ADSs through the option granted to them under the underwriting agreement described above. “Naked” short sales are sales in excess of such option. The underwriters must close out any

 

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naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our ordinary shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of ordinary shares made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular member of a syndicate repays to the underwriters a portion of the underwriting discount received by it because the underwriters has repurchased shares sold by or for the account of such member in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our ADSs or preventing or retarding a decline in the market price of our ordinary shares. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on The NASDAQ Stock Market, in the over-the-counter market or otherwise.

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our ordinary shares. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

The underwriters do not expect to sell more than 5% of the ADSs in the aggregate to accounts over which they exercise discretionary authority.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

Participation in Future Offerings

Until twelve months from the closing of the offering, the underwriters shall have the right to act, on an nonexclusive basis, as investment banker, book-runner and/or placement agent or non-exclusive advisor for any offering of securities (excluding bank financing), merger or acquisition transaction.

Determination of Offering Price

The public offering price of the ADSs offered by this prospectus has been determined by negotiation between us and the underwriters. Among the factors considered in determining the public offering price of the ordinary shares were:

 

 

Our history and our prospects;

 

 

Our financial information and historical performance;

 

 

The industry in which we operate;

 

 

The status and development prospects for our products and services;

 

 

The experience and skills of our executive officers; and

 

 

The general condition of the securities markets at the time of this offering.

An active trading market for the shares may not develop. It is also possible that after this offering, our ordinary shares will not trade in the public market at or above the initial public offering price The offering price

 

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stated on the cover page of this prospectus should not be considered an indication of the actual value of the ordinary shares. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the ordinary shares can be resold at or above the public offering price.

The address of WestPark Capital, Inc. is 1900 Avenue of the Stars, Suite 310, Los Angeles, CA 90067, United States. The address of Univest Securities, LLC is 375 Park Avenue, 15th Floor, New York, NY 10152, United States.

Listing

We have applied to list the ADSs on The NASDAQ Global Market under the symbol “ANPC.”

Electronic Distribution

A prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters of this offering, or by its affiliates. Other than the prospectus in electronic format, the information on the underwriters’ website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.

Other Relationships

The underwriters and their affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Some of the underwriters and their affiliates may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They may in the future receive customary fees and commissions for these transactions.

In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Nasdaq Capital Markets Advisory LLC, or NCMA, has provided financial advisory services to us in connection with this offering. We have agreed to pay NCMA a transaction fee for their financial advisory services that is 0.5% of the gross proceeds of this offering. We have also agreed to pay NCMA a set-up fee of US$10,000, which is deductible from the transaction fee payable by us. NCMA is not acting as an underwriter and will not sell or offer to sell any securities.

Selling Restrictions Outside the United States

No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the ordinary shares offered by this prospectus, or the possession, circulation or distribution of this prospectus or any other material relating to us or the ordinary shares offered by this prospectus in any jurisdiction where action for that purpose is required. Accordingly, the ordinary shares offered by this prospectus may not be offered or sold, directly or indirectly, and neither this prospectus nor any other material or advertisements in connection with the ordinary shares offered by this prospectus may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable laws, rules and regulations of any such country or jurisdiction.

 

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Notice to Prospective Investors in Canada

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment hereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

The ADSs may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the ADSs must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Notice to Prospective Investors in the United Kingdom

This prospectus is only being distributed to and is only directed at persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(c) of the Prospectus Directive who are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 within, (ii) high net worth entities, and/or (iii) other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) (all such persons together being referred to as “relevant persons”).

This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom who is not a relevant person should not act or rely on this prospectus or any of its contents.

Notice to Prospective Investors in Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs may not be circulated or distributed, nor may the ordinary shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.

Notice to Prospective Investors in the People’s Republic of China

This prospectus may not be circulated or distributed in China and the ADSs may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of China except pursuant to applicable laws, rules and regulations of China.

 

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Notice to Prospective Investors in Hong Kong

The ordinary shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to our ordinary shares be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to our ordinary shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Notice to Prospective Investors in Taiwan

The ordinary shares have not been and will not be registered with the Financial Supervisory Commission of Taiwan, pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in any manner which would constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or would otherwise require registration with or the approval of the Financial Supervisory Commission of Taiwan.

 

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EXPENSES RELATED TO THIS OFFERING

Set forth below is an itemization of the total expenses, excluding underwriting discounts and commissions, that we expect to incur in connection with this offering. With the exception of the SEC registration fee, the FINRA filing fee, and the stock exchange application and listing fee, all amounts are estimates.

 

SEC Registration Fee

   US$ 3,792  

FINRA Fee

   US$ 4,883  

Stock Exchange Application and Listing Fee

   US$ 150,000  

Printing and Engraving Expenses

   US$ 100,000  

Legal Fees and Expenses

   US$ 1,840,000  

Accounting Fees and Expenses

   US$ 890,000  

Miscellaneous

   US$ 500,000  
  

 

 

 

Total

   US$ 3,488,675  
  

 

 

 

LEGAL MATTERS

We are being represented by Cleary Gottlieb Steen & Hamilton LLP with respect to certain legal matters as to United States federal securities and New York State law. The underwriters are being represented by Sheppard Mullin Richter & Hampton LLP with respect to certain legal matters as to United States federal securities and New York State law. The validity of the Class A ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to BVI law will be passed upon for us by Maples and Calder (Hong Kong) LLP. Certain legal matters as to PRC law will be passed upon for us by Zhong Lun Law Firm. Cleary Gottlieb Steen & Hamilton LLP may rely upon Maples and Calder (Hong Kong) LLP with respect to matters governed by BVI law and Zhong Lun Law Firm with respect to matters governed by PRC law.

EXPERTS

The consolidated financial statements of AnPac Bio-Medical Science Co., Ltd. as of and for the years ended December 31, 2017 and 2018, appearing in this prospectus and registration statement, have been audited by Ernst & Young Hua Ming LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and have been included in reliance on their report given on their authority as experts in accounting and auditing.

The office of Ernst & Young Hua Ming LLP is located at 50th Floor, Shanghai World Financial Center, 100 Century Avenue, Pudong New Area, Shanghai 200120, People’s Republic of China.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed a registration statement, including relevant exhibits, with the SEC on Form F-1 under the Securities Act with respect to the underlying Class A ordinary shares represented by the ADSs to be sold in this offering. We have also filed a related registration statement on Form F-6 with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement on Form F-1, does not contain all of the information contained in the registration statement. You should read our registration statements and their exhibits and schedules for further information with respect to us and our ADSs.

Immediately upon the effectiveness of the registration statement on Form F-1 of which this prospectus forms a part, we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be 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. We maintain our website at www.anpacbio.com.

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 will not be 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 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.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     F-2  

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2018

     F-3 - F-4  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2018

     F-5  

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2018

     F-6  

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER  31, 2017 AND 2018

     F-7 - F-8  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2018

     F-9 - F-43  

CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2018 AND UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2019

     F-44 - F-45  

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

     F-46  

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

     F-47  

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

     F-48 - F-49  

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     F-50 - F-63  

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of AnPac Bio-Medical Science Co., Ltd.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of AnPac Bio-Medical Science Co., Ltd. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive loss, shareholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

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 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 audits 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 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 audits provide a reasonable basis for our opinion.

/s/ Ernst & Young Hua Ming LLP

We have served as the Company’s auditor since 2018.

Shanghai, the People’s Republic of China

September 20, 2019

except for Note 10, 18 and 19, as to which the date is

November 15, 2019

 

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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,  
     Notes   2017      2018      2018  
         RMB      RMB      US$  

ASSETS

          

Current assets:

          

Cash and cash equivalents

       11,412        12,887        1,803  

Advances to suppliers

       1,161        2,807        393  

Accounts receivable, net of allowance for doubtful accounts of RMB18 and RMB198 (US$29) as of December 31, 2017 and 2018, respectively

       1,988        2,749        385  

Amounts due from related parties

   15     282        269        38  

Inventories

       240        62        9  

Other current assets

       2,866        2,078        289  
    

 

 

    

 

 

    

 

 

 

Total current assets

       17,949        20,852        2,917  

Property and equipment, net

   4     18,681        18,141        2,538  

Land use rights, net

   5     12,511        1,222        171  

Intangible assets, net

   6     5,506        5,406        756  

Goodwill

       2,223        2,223        311  

Long-term investments

   7     2,047        3,456        484  

Other assets

       1,231        1,462        205  
    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

       60,148        52,762        7,382  
    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

          

Current liabilities:

          

Short-term debt

   8     12,500        25,961        3,632  

Accounts payable

       2,461        1,618        227  

Advance from customers

       1,985        4,313        604  

Amounts due to related parties

   15     3,077        28,687        4,013  

Accrued expenses and other current liabilities

   9     15,326        10,859        1,519  
    

 

 

    

 

 

    

 

 

 

Total current liabilities

       35,349        71,438        9,995  

Deferred tax liabilities

   13     1,310        1,222        171  

Other long-term liabilities

       13,992        2,495        349  
    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

       50,651        75,155        10,515  
    

 

 

    

 

 

    

 

 

 

Commitments and contingencies

   17        

 

F-3


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

CONSOLIDATED BALANCE SHEETS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

            As of December 31,  
     Notes      2017     2018     2018  
            RMB     RMB     US$  
                           

Shareholders’ equity (deficit):

         

Ordinary shares (US$0.01 par value per share; 10,000,000 shares authorized as of December 31, 2017 and 2018; 8,524,000 and 8,596,900 shares issued and outstanding as of December 31, 2017 and 2018, respectively)

     10        564       569       80  

Additional paid-in capital

        143,057       152,367       21,317  

Accumulated deficits

        (132,290     (174,353     (24,393

Accumulated other comprehensive loss

     11        (1,773     (976     (137
     

 

 

   

 

 

   

 

 

 

Total AnPac Bio-Medical Science Co., Ltd. shareholders’ equity (deficit)

        9,558       (22,393     (3,133

Noncontrolling interests

        (61     —         —    
     

 

 

   

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY (DEFICIT)

        9,497       (22,393     (3,133
     

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

        60,148       52,762       7,382  
     

 

 

   

 

 

   

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

            Year Ended December 31,  
     Notes      2017     2018     2018  
            RMB     RMB     US$  

Revenues:

         

Cancer screening and detection tests (including RMB590 and RMB639 (US$93) from related parties for years ended December 31, 2017 and 2018, respectively)

        5,203       9,557       1,337  

Physical checkup packages

        483       693       97  
     

 

 

   

 

 

   

 

 

 

Total revenues

        5,686       10,250       1,434  

Cost of revenues

        (3,954     (5,672     (794
     

 

 

   

 

 

   

 

 

 

Gross profit

        1,732       4,578       640  

Operating expenses:

         

Selling and marketing expenses (including nil and RMB700 (US$102) from related parties for years ended December 31, 2017 and 2018, respectively)

        (6,490     (9,827     (1,375

Research and development expenses

        (11,405     (10,106     (1,414

General and administrative expenses

        (24,938     (28,847     (4,036

Other operating income

        178       593       84  
     

 

 

   

 

 

   

 

 

 

Loss from operations

        (40,923     (43,609     (6,101

Non-operating income and expenses:

         

Interest expense, net (including nil and RMB824 (US$120) from related parties for years ended December 31, 2017 and 2018, respectively)

        (338     (925     (129

Foreign exchange gain (loss), net

        644       (2,776     (388

Share of net loss in equity method investments

        (3     (441     (62

Other income, net

        1,309       5,256       735  
     

 

 

   

 

 

   

 

 

 

Net loss before income taxes

        (39,311     (42,495     (5,945

Income tax (expense) benefit

     13        (9     199       28  
     

 

 

   

 

 

   

 

 

 

Net loss

        (39,320     (42,296     (5,917
     

 

 

   

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

        (244     (233     (32
     

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

        (39,076     (42,063     (5,885
     

 

 

   

 

 

   

 

 

 

Loss per share:

         

Ordinary shares—basic and diluted

     18        (4.92     (4.93     (0.69

Weighted average number of ordinary shares used in loss per share computation:

         

Ordinary shares—basic and diluted

     18        7,937,300       8,524,100       8,524,100  

Other comprehensive (loss) income, net of tax:

         

Foreign currency translation differences

        (4,675     797       112  
     

 

 

   

 

 

   

 

 

 

Total comprehensive loss

        (43,995     (41,499     (5,806

Total comprehensive loss attributable to noncontrolling interests

        (244     (233     (33
     

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to ordinary shareholders

        (43,751     (41,266     (5,773
     

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

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)

 

     Attributable to AnPac Bio- Medical Science Co., Ltd. Shareholders     Noncontrolling
Interests
    Total
Equity
(Deficit)
 
    

 

 

Ordinary Shares

    Additional
Paid-in
Capital
    Accumulated
Deficits
    Accumulated
Other
Comprehensive
Income (Loss)
Note 11
    Total AnPac
Bio-Medical
Science Co.,
Ltd.
Shareholders’
Equity
 
     Shares     Amount  

Balance at January 1, 2017

     7,689,100       508       92,197       (93,214     2,902       2,393       183       2,576  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         (39,076     —         (39,076     (244     (39,320

Issuance of ordinary shares

     834,900       56       40,102       —         —         40,158       —         40,158  

Foreign currency translation differences

     —         —         —         —         (4,675     (4,675     —         (4,675

Share-based compensation (Note 12)

     —         —         10,758       —         —         10,758       —         10,758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     8,524,000       564       143,057       (132,290     (1,773     9,558       (61     9,497  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         (42,063     —         (42,063     (233     (42,296

Issuance of ordinary shares

     93,700       6       2,555       —         —         2,561       —         2,561  

Foreign currency translation differences

     —         —         —         —         797       797       —         797  

Acquisition of non-controlling interests

     —         —         (454     —         —         (454     294       (160

Repurchase and cancellation of shares

     (20,800     (1     (727     —         —         (728     —         (728

Share-based compensation (Note 12)

     —         —         7,936       —         —         7,936       —         7,936  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

     8,596,900       569       152,367       (174,353     (976     (22,393     —         (22,393
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018 (US$)

       80       21,317       (24,393     (137     (3,133     —         (3,133
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


Table of Contents

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)

 

     Year Ended December 31,  
     2017     2018     2018  
     RMB     RMB     US$  

Operating activities:

      

Net loss

     (39,320     (42,296     (5,917

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     2,286       3,144       440  

Share of net loss in equity method investments

     3       441       62  

Bad debt expense

     202       452       63  

Gain on disposal of land use rights

     —         (4,955     (693

Foreign exchange (gain) loss, net

     (1,759     2,473       346  

Share-based compensation

     10,758       7,936       1,110  

Fair value loss on convertible loans

     —         784       110  

Inventory provision

     29       —         —    

Changes in operating assets and liabilities:

      

Advances to suppliers

     (941     (1,646     (230

Accounts receivable

     (1,250     (1,095     (153

Inventories

     421       178       25  

Amounts due from related parties

     (282     13       2  

Other current assets

     914       670       94  

Other assets

     486       (231     (32

Accounts payable

     740       (843     (118

Amounts due to related parties

     (1,032     960       134  

Advance from customers

     1,149       2,328       326  

Accrued expenses and other current liabilities

     5,450       1,412       195  

Other long-term liabilities

     519       (784     (110

Deferred tax liabilities

     (14     (88     (12
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (21,641     (31,147     (4,358
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Purchases of property and equipment

     (2,604     (2,417     (338

Purchases of intangible assets

     (17     (430     (60

Proceeds from disposal of land use rights

     —         5,257       735  

Cash paid for business combination, net of cash acquired

     (3,346     (3,540     (495

Proceeds from short-term investments

     5,000       12,000       1,679  

Purchases of short-term investments

     (5,000     (12,000     (1,679

Purchases of long-term investments

     (2,050     (1,550     (217
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (8,017     (2,680     (375
  

 

 

   

 

 

   

 

 

 

 

F-7


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

     Year Ended December 31,  
     2017     2018     2018  
     RMB     RMB     US$  

Financing activities:

      

Proceeds from short-term borrowings

     4,500       26,645       3,727  

Repayment of short-term borrowings

     (6,500     (14,700     (2,057

Loan to a related party

     800       —         —    

Repayment of related party loan

     —         (350     (49

Advance from investors

     849       25,000       3,498  

Repurchase of shares

     —         (728     (102

Proceeds from issuance of ordinary shares

     40,158       404       57  
  

 

 

   

 

 

   

 

 

 

Net cash generated from financing activities

     39,807       36,271       5,074  
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (2,893     (969     (136
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     7,256       1,475       206  

Cash and cash equivalents at beginning of year

     4,156       11,412       1,597  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     11,412       12,887       1,803  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Interest paid

     1,233       891       125  

Supplemental disclosure of non-cash investing and financing activities:

      

Purchase of ordinary shares when registered included in advance from investors

     —         2,157       302  

Purchase of property and equipment included in accrued expenses and other current liabilities

     669       28       4  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8


Table of Contents

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

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 marketing and selling a multi-cancer screening and detection test that uses innovative, patented cancer differentiation analysis (the “CDA”) technology and proprietary cancer-detection device in the People’s Republic of China (the “PRC” or “China”). Dr. Chris Chang Yu is the Founder of the Group (the “Founder”). As of the date of this report, the details of the Company’s principal subsidiaries are as follows:

 

Major subsidiaries

   Percentage of
Ownership
    Date of
Incorporation
   Place of
Incorporation
   Major Operation

Changhe Bio-Medical Technology (Yangzhou) Co., Ltd.

  

 

100

 

March 2010

  

PRC

  

Cancer screening
and detection
tests

Changwei System Technology (Shanghai) Co., Ltd.

  

 

100

 

March 2011

  

PRC

  

Research and
development

AnPac Bio-Medical Technology (Lishui) Co., Ltd.

  

 

100

%** 

 

October 2012

  

PRC

  

Cancer screening
and detection
tests and device
manufacturing

Shanghai Xinshenpai Technology Co., Ltd.

  

 

100

 

October 2013

  

PRC

  

Cancer screening
and detection
tests

AnPac Bio-Medical Technology (Shanghai) Co., Ltd.

  

 

100

%* 

 

April 2014

  

PRC

  

Cancer screening
and detection
tests

AnPac Technology USA Co., Ltd. (“AnPac US”)

  

 

100

 

September 2015

  

USA

  

Conduct clinical
trials for research
on cancer
screening and
detection tests

Lishui AnPac Medical Laboratory Co., Ltd.

  

 

100

 

August 2016

  

PRC

  

Cancer screening
and detection
tests

Shiji (Hainan) Medical Technology Ltd.

     100   November 2017    PRC    Cancer screening
and detection
tests

Penghui Health Management (Shanghai) Co., Ltd.

  

 

100

 

May 2018

  

PRC

  

Cancer screening
and detection
tests

 

*

The percentage of ownership was increased from 84% to 100% as of June 12, 2018.

**

The percentage of ownership was increased from 98% to 100% as of July 6, 2018.

 

F-9


Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

 

(a)

Basis of presentation

The consolidated financial statements of the Group have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

 

(b)

Basis of consolidation

The accompanying consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances are eliminated upon consolidation.

 

(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 assets and valuation allowance, purchase price allocation, 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.

 

(d)

Foreign currency

The functional currency of the Company and AnPac US is the United States dollar and its reporting currency is Renminbi. 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 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 loss, a component of shareholders’ equity (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$1.00 to RMB7.1477 on September 30, 2019, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be converted, realized or settled into US$ at such rate or at any other rate.

 

F-10


Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(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)

Short-term investments

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments. Investments that are expected to be realized in cash during the next 12 months are also included in short-term investments.

The Group accounts for short-term debt instruments in accordance with ASC 320, Investments—Debt Securities (“ASC 320”). The Group classifies the short-term investments in debt as “held-to-maturity”, “trading” or “available-for-sale”, whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.

Securities that the Group has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost. For individual securities classified as held-to-maturity securities, the Group evaluates whether a decline in fair value below the amortized cost basis is other-than-temporary in accordance with ASC 320. Other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its fair value at the balance sheet date of the reporting period for which the assessment is made.

The Group’s short-term held-to-maturity investments consisted of wealth management products as the Group has the positive intent and ability to hold those securities to maturity. For the years ended December 31, 2017 and 2018, the Group recorded interest income from its short-term investments of RMB93 and RMB158 (US$23) in the consolidated statements of comprehensive loss, respectively.

 

(h)

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-11


Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(h)

Accounts receivable, net of allowance for doubtful accounts (continued)

 

Movement in the allowances for doubtful debts were as follows:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Balance at beginning of year

     76        18        3  

Additional provision

     275        334        47  

Write-offs

     (333      (154      (22
  

 

 

    

 

 

    

 

 

 

Balance at end of year

     18        198        28  
  

 

 

    

 

 

    

 

 

 

 

(i)

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.

 

(j)

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

   Over the shorter of the lease
term or estimated useful lives

Buildings

   20 years

Furniture, fixtures and equipment

   3-5 years

Motor vehicles

   5 years

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 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.

 

(k)

Long-term investments

The Group’s investments include equity method investments and cost method investments.

The Group uses the equity method in accordance with ASC 323-10, Investments—Equity Method and Joint Ventures: Overall, to account for an equity investment over which it has significant influence but does not own a

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(k)

Long-term investments (continued)

 

majority equity interest or otherwise control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The share of earnings or losses of the investee are recognized in the consolidated statements of 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.

The Group accounts for investments in which the Group owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity as a cost-method investment in accordance with ASC 325-20, Investments—Other: Cost Method Investments. The Group’s cost-method investment is carried at historical cost in its consolidated financial statements and 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 comprehensive loss equal to the excess of the investment’s cost over its fair value when the impairment is deemed other-than-temporary.

No impairment loss was recognized in any of the periods presented.

 

(l)

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.

 

(m)

Business combinations

The Group accounts for all business combinations under the purchase method in accordance with ASC 805, 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

 

F-13


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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(m)

Business combinations (continued)

 

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.

 

(n)

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

   3 years

Medical license

   15 years

 

(o)

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, 2017 and 2018 was related to its business acquisition in November 2017. Goodwill acquired in a business combination are 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, 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, which is also its only reportable segment.

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, Goodwill. 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 above 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.

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(o)

Goodwill (continued)

 

In 2017 and 2018, the Group performed a qualitative assessment for the reporting unit. Based on the requirements of ASC 350-20, the Group evaluated all relevant 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, 2017 and 2018.

 

(p)

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.

 

(q)

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.

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.

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(q)

Fair value of financial instruments (continued)

 

The Company elected the fair value option to account for its convertible loans. The fair value of the convertible loans as of December 31, 2018 was RMB17,961 (US$2,612), calculated using the scenario analysis method based on probability of remaining as straight debt using discounted cash flow and equity based on the premium conversion ratio of 25%, respectively. 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 inputs 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. Refer to Note 8 for additional information.

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.

 

(r)

Revenue recognition

Effective January 1, 2017, the Group early adopted ASC 606, Revenue from Contracts with Customers and subsequent amendments to the initial guidance or implementation guidance issued between August 2015 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”). The transition adjustment using modified retrospective method recorded in 2017 beginning retained earnings was immaterial.

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 the sales of 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 i.e. 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 result to the customer. 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.

Revenue from physical checkup packages

The Group facilitates 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

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(r)

Revenue recognition (continued)

 

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. Therefore, 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 and 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.

All 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 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.

Contract liabilities represent considerations received from corporations and life insurance companies in advance of satisfying the Group’s performance obligations under the contract, which are presented in “advance from customers” in the consolidated balance sheets. Revenue recognized that was included in contract liabilities at the beginning of the period was RMB717 and RMB503 (US$73) for the years ended December 31, 2017 and 2018, respectively.

The following table reflects the changes in contract liabilities as of December 31, 2017 and 2018:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Contract liabilities

     1,985        4,313        603  

 

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Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(r)

Revenue recognition (continued)

 

Contract liabilities increased by RMB2,328 (US$326), due to the increase in consideration received by corporations and life insurance companies in the normal course of business.

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.

 

(s)

Costs of revenues

Costs of revenues consists of staff costs, outsourced testing costs, blood sample taking costs, medical consumable costs, share-based compensation and depreciation of CDA equipment.

 

(t)

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.

 

(u)

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 comprehensive loss on a systematic basis over the useful life of the related asset.

 

(v)

Leases

Leases are 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: (a) ownership is transferred to the lessee by the end of the lease term, (b) there is a bargain purchase option, (c) the lease term is at least 75% of the property’s estimated remaining economic life, or (d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an occurrence of an obligation at the inception of the lease. The Group has no capital leases for the years presented.

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(v)

Leases (continued)

 

All other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods of their respective lease terms. The Group leases office space, storage unit, research laboratory, employee accommodation and manufacturing space under operating lease agreements. Certain of the lease agreements contain rent holidays. Rent holidays are considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on straight-line basis over the term of the lease.

 

(w)

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 RMB2,704 and RMB3,250 (US$455) for the year ended December 31, 2017 and 2018, respectively.

 

(x)

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 Company’s share-based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting for share-based payments to nonemployees (“ASU 2018-07”) by aligning it with the accounting for share-based payments to employees, with certain exceptions. The measurement of equity-classified nonemployee awards will be fixed at the grant date. The Group elected to early adopt ASU 2018-07 on January 1, 2017 and the transition adjustment recorded in 2017 beginning retained earnings was immaterial.

In accordance with ASC 718, the Group recognizes share-based compensation cost for equity awards to employees and non-employees with a performance condition based on the probable outcome of that performance condition. Compensation cost is recognized if it is probable that the performance condition will be achieved and shall not be recognized if it is not probable that the performance condition will be achieved.

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 uses the accelerated method for all awards granted with graded vesting based on performance 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 Group, with the assistance of an independent third-party valuation firm, determined the fair value of the stock options granted to employees. The binomial option pricing model was applied in determining the estimated fair value of the options granted to employees and non-employees.

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(y)

Income taxes

The Group follows the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes. 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 comprehensive loss as income tax expenses.

 

(z)

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 comprehensive loss.

 

(aa)

Segment reporting

The Group follows ASC 280, Segment Reporting. The Group’s Chief Executive Officer as the chief operating decision-maker reviews 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. 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.

 

(ab)

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 comprehensive loss.

 

F-20


Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(ac)

Concentration of risks

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, 2017 and 2018, the aggregate amounts of cash and cash equivalents of RMB8,913 and RMB7,016 (US$982), respectively, were held at major financial institutions located in the PRC and RMB2,497 and RMB5,871 (US$821), respectively, were deposited with major financial institutions located outside the PRC. 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 secured 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 the Group has deposits has increased. In the event of bankruptcy of one of the banks which holds the Group’s deposits, the Group is unlikely to claim its 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 RMB, derived from sales of the Group’s cancer screening and detection test and physical checkup package services, are exposed to credit risk. As of December 31, 2017 and 2018, the Group had three customers and one customer, respectively, each with a receivable balance exceeding 10% of the total accounts receivable balance. The risk is mitigated by credit evaluations the Group performs on its customers.

Business, customer, political, social and economic risks

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.

For the year ended December 31, 2017 and 2018, the Group had one customer and one customer, respectively, that accounted for more than 10% of the total revenues.

For the year ended December 31, 2017 and 2018, the Group had two suppliers and two suppliers, respectively, that accounted for more than 10% of cost of revenues.

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

 

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Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(ac)

Concentration of risks (continued)

 

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 approximately 6.3% and appreciation of approximately 5.7%, in the years ended December 31, 2017 and 2018. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

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 CL are denominated in US$. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the US$ 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$.

Liquidity Risks

As of December 31, 2018, the Group had RMB12,887 (US$1,803) of cash and cash equivalents and a working capital deficit of RMB50,586 (US$7,077). For the year ended December 31, 2018, the Group incurred RMB31,147 (US$4,358) of negative cash flows from operations and RMB2,847 (US$398) of capital expenditures. The Group believes that its current liquidity resources, future operating cash flows generated and subsequent committed financing will be adequate to meet its obligations as they come due for a period of at least one year from September 20, 2019, the date at which the consolidated financial statements were available to be issued. In the event of any unexpected adverse change in its business, the Group has the ability and intent to obtain additional equity or debt financing and received a financial support guarantee from Dr. Chris Chang Yu’s personal assets.

 

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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.

 

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Table of Contents

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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

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Recent accounting pronouncements (continued)

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. ASU 2016-01 is effective for the Group beginning January 1, 2019 with interim periods within annual periods beginning January 1, 2020. The Group will adopt ASU 2016-01 on January 1, 2019, and it is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 modifies existing guidance for off-balance sheet treatment of a lessees’ operating leases by requiring lessees to recognize lease assets and lease liabilities. Under ASU 2016-02, lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Group will adopt ASU 2016-02 on January 1, 2020 using the modified retrospective method and will not restate comparable periods. The Group is currently evaluating the impact on its consolidated financial statements of adopting this guidance. The Group currently believes the most significant change will be related to the recognition of right-of-use assets and operating lease liabilities on the consolidated balance sheets upon adoption, which will increase total assets and liabilities.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”). The amendments in ASU 2016-13 update guidance on reporting credit losses for financial assets. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Group will adopt ASU 2016-13 on January 1, 2021, and is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. ASU 2017-01 is effective for the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. The Group does not expect that this standard will have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-2, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This

 

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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.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

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Recent accounting pronouncements (continued)

 

update allows companies the option to reclassify to retained earnings the tax effects related to items in accumulated other comprehensive income (loss) as a result of the Tax Cuts and Jobs Act that was enacted in the United States on December 22, 2017. This update is effective in fiscal years, including interim periods, beginning after December 15, 2018, and early adoption is permitted. This guidance should be applied either in the period of adoption or retrospectively to each period in which the effects of the change in the U.S. federal income tax rate in the Tax Cuts and Jobs Act is recognized. The Group does not expect this guidance to have a material impact on the Group’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The update eliminates, modifies, and adds certain disclosure requirements for fair value measurements. This update is effective in fiscal years, including interim periods, beginning after December 15, 2019, and early adoption is permitted. The added disclosure requirements and the modified disclosure on the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented. All other changes to disclosure requirements in this update should be applied retrospectively to all periods presented upon their effective date. The Group is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

 

3.

BUSINESS COMBINATION

In November 2017, the Group acquired 100% of the equity interests in Shiji (Hainan) Medical Technology Co., Ltd. from third parties. The acquisition was made as part of the Group’s strategy to enhance the Group’s ability in medical detection.

The following is a summary of the fair values of the assets acquired and liabilities assumed:

 

     Allocation of
purchase cost (RMB)
     US$  

Cash and cash equivalents

     1,454        203  

Other receivables

     212        30  

Inventory

     210        29  

Other current assets

     114        16  

Property and equipment

     1,043        146  

Intangible assets

     5,300        741  

Goodwill

     2,223        311  

Accounts payable

     (181      (25

Accrued expenses and other current liabilities

     (710      (99

Deferred tax liabilities

     (1,325      (185
  

 

 

    

 

 

 

Total

     8,340        1,167  
  

 

 

    

 

 

 

Goodwill was recognized as a result of expected synergies from combining operations of the Group and acquired business and other intangible assets that do not qualify for separate recognition. Goodwill is not amortized and is not deductible for tax purposes. In accordance with ASC 350, the Group assigned and assessed

 

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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.

BUSINESS COMBINATION (CONTINUED)

 

goodwill for impairment at the reporting unit level. All the acquired business has been migrated to the Group’s business. The Group concluded that it has only one reporting unit. Accordingly, goodwill is allocated to one single reporting unit.

An analysis of the cash flows in respect of the acquisition is as follows:

 

     RMB      US$  

Cash consideration

     8,340        1,167  

Cash and bank balances acquired

     1,454        203  
  

 

 

    

 

 

 

Net outflow of cash and cash equivalents included in cash flows from investing activities

     6,886        963  
  

 

 

    

 

 

 

The actual results of operations after the acquisition date and pro forma result of operations for the acquisition have not been presented because the effect was not significant to the Group’s consolidated results of operations.

 

4.

PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Buildings

     15,771        15,771        2,206  

Leasehold improvements

     18        52        8  

Furniture, fixtures and equipment

     7,513        8,466        1,184  

Motor vehicles

     270        526        74  
  

 

 

    

 

 

    

 

 

 

Total

     23,572        24,815        3,472  

Less:

        

Accumulated depreciation

     (5,323      (7,093      (993
  

 

 

    

 

 

    

 

 

 
     18,249        17,722        2,479  

Construction in progress

     432        419        59  
  

 

 

    

 

 

    

 

 

 

Property and equipment, net

     18,681        18,141        2,538  
  

 

 

    

 

 

    

 

 

 

Depreciation expense was RMB1,787 and RMB2,357 (US$355) for the years ended December 31, 2017 and 2018, respectively.

No impairment charges were recognized on the property and equipment for the years ended December 31, 2017 and 2018.

 

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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.

LAND USE RIGHTS

The land use rights as of December 31, 2018 and 2017 are summarized as follows:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Land use rights, cost

     13,901        1,388        194  
  

 

 

    

 

 

    

 

 

 

Less:

        

Accumulated amortization

     (1,390      (166      (23
  

 

 

    

 

 

    

 

 

 

Land use rights, net

     12,511        1,222        171  
  

 

 

    

 

 

    

 

 

 

Amortization expense of the land use rights for the years ended December 31, 2017 and 2018 was RMB278 and RMB257 (US$36), respectively.

As of December 31, 2018, expected amortization expense for the land use rights is approximately RMB 28 in 2019, RMB28 in 2020, RMB28 in 2021, RMB28 in 2022, RMB28 in 2023 and RMB1,082 in 2024 and thereafter.

The Group obtained a government grant in 2012 and 2013 from the Lishui government to purchase a land use right in Lishui, Zhejiang province, PRC for a consideration of RMB13,901. The Group utilized a portion of the land use right to construct its research and development facility. In 2018, as a significant portion of the land use right remained unutilized, the Lishui government agreed to repurchase the unutilized land use right back from the Group for RMB5,257 (US$735), which was recognized in Other income, net for the year ended December 31, 2018 as there was no further condition attached to the amount.

 

6.

INTANGIBLE ASSETS, NET

Intangible assets, net consist of the following:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Purchased software

     504        934        131  

Medical license

     5,300        5,300        741  
  

 

 

    

 

 

    

 

 

 

Total

     5,804        6,234        872  

Less: Accumulated amortization

     (298      (828      (116
  

 

 

    

 

 

    

 

 

 

Total

     5,506        5,406        756  
  

 

 

    

 

 

    

 

 

 

Amortization expense of intangible assets for the years ended December 31, 2017 and 2018 amounted to RMB221 and RMB530 (US$74), respectively.

 

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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)

 

6.

INTANGIBLE ASSETS, NET (CONTINUED)

 

The estimated aggregate amortization expense for each of the five succeeding years is as follows:

 

Year ending December 31,

   RMB  

2019

     599  

2020

     500  

2021

     479  

2022

     353  

2023

     353  

Thereafter

     3,122  
  

 

 

 

 

7.

LONG-TERM INVESTMENTS

As at December 31, 2017 and 2018, long-term investments consisted of the following:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Equity method investments

  

Anpac Beijing Health Management Co., Ltd (“Anpac Beijing”)

     1,047        607        85  

Shanghai Moxu Bio-medical Science Co., Ltd.(“Moxu”)

     —          99        14  

Cost method investments

        

Jiangsu Anpac Health Management Co., Ltd. (“Jiangsu Anpac”)

     1,000        2,750        385  
  

 

 

    

 

 

    

 

 

 

Total

     2,047        3,456        484  
  

 

 

    

 

 

    

 

 

 

Equity method investments

On October 19, 2017, the Group and other third parties established Anpac Beijing, of which the Group owned 35% of the investment.

On June 8, 2018, the Group and other third parties established Moxu, of which the Group owned 20% of the investment.

Cost method investments

In January 2016, the Group and other third parties established Jiangsu Anpac, of which the Group owned 10% of the investment. In November 2017, the Group further acquired a 5% equity interest. The Group accounted for the investment under cost method since the Group does not have the ability to exert significant influence over Jiangsu Anpac.

 

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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.

SHORT-TERM DEBT

 

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Short-term borrowings (i)

     12,500        8,000        1,119  

Convertible loans (ii)

     —          17,961        2,513  
  

 

 

    

 

 

    

 

 

 

Total

     12,500        25,961        3,632  
  

 

 

    

 

 

    

 

 

 

(i) These short-term borrowings bear a fixed interest rate of 11%, except for one borrowing of RMB3,500 (US$490) from the local government which was interest free and repaid in June 2018.

(ii) During April to August of 2018, the Group issued convertible loans (“CL”) with an aggregate principal amount of US$2,500 to Jiaxing Zhijun Investment Management Co., Ltd. (“Zhijun”). The CL is originally due in one year and bears interest of 9% per annum if the conversion feature is not triggered. The CL is ultimately guaranteed by Dr. Chris Chang Yu’s personal assets.

Conversion feature

During the term of the CL, if the Group completes a financing round that raises in aggregate, an amount greater than US$5,000 (or an amount otherwise mutually agreed between the Group and Zhijun), Zhijun may convert the principal amount of the CL into the Group’s ordinary shares at a premium of 25% of the loan principal.

Modification of CL

On April 26, 2019, the Group and Zhijun agreed to extend the term of the CL to October 31, 2019. No other terms of the CL were modified. In accordance with ASC 470-50, Debt, as the present value of cash flows under the term of the new debt instrument did not differ by more than 10% from the present value of the remaining cash flows under the term of the original debt instrument, the modification was accounted for prospectively as yield adjustments based on the revised terms.

The Group has elected to recognize the CL at fair value and therefore there was no further evaluation of embedded features for bifurcation. The Group recognized an unrealized loss of RMB784 (US$114) in other income, net for the year ended December 31, 2018.

 

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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)

 

9.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      USD  

Salary and welfare payable

     6,858        7,735        1,082  

Payable for business combination and long-term investment

     3,540        300        42  

Advances from investors

     2,157        —          —    

Payable for acquisition of non-controlling interests

     85        245        34  

Accrued rental

     549        801        112  

Accrued expenses

     725        691        97  

Value added tax and other taxes payable

     285        523        73  

Payable for property and equipment

     669        28        4  

Accrued utilities

     79        5        1  

Other payables

     379        531        74  
  

 

 

    

 

 

    

 

 

 

Total.

     15,326        10,859        1,519  
  

 

 

    

 

 

    

 

 

 

 

10.

ORDINARY SHARES

As of December 31, 2017 and 2018, 100,000 and 100,000 shares were authorized with 85,240 and 85,969 shares issued and outstanding with par value of US$1.00, respectively.

On October 29, 2019, the board of directors approved the re-designation of the authorized share capital of 100,000 ordinary shares to 71,369 Class A ordinary shares and 28,631 Class B ordinary shares.

On October 31, 2019, the board of directors approved that the increase of authorized share capital of the Class A and Class B ordinary shares to 700,000 and 300,000, respectively. Holders of Class A ordinary shares and Class B ordinary shares have the same rights, except for voting and conversion rights. Each Class A ordinary share is entitled to one vote; and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

On October 31, 2019, the board of directors approved a share split of 1-for-100, pursuant to which the authorized share capital of the Class A and Class B ordinary shares would further increase to 70,000,000 and 30,000,000, respectively, with a par value of US$0.01. The registration of the above changes was completed on November 12, 2019 and the ordinary shares have been retrospectively adjusted accordingly.

 

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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.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) includes the foreign currency translation differences. A rollforward of the amounts included in accumulated other comprehensive loss for the years ended December 31, 2017 and 2018 was as follows:

 

     Foreign currency
translation adjustments
 
     RMB  

Balance as of January 1, 2017

     2,902  

Foreign currency translation differences

     (4,675
  

 

 

 

Balance as of December 31, 2017

     (1,773

Foreign currency translation differences

     797  
  

 

 

 

Balance as of December 31, 2018

     (976
  

 

 

 
     US$  

Balance as of December 31, 2018

     (137
  

 

 

 

There have been no reclassifications out of accumulated other comprehensive income to net income for the periods presented.

 

12.

SHARE BASED COMPENSATION

On February 1, 2010, the shareholders and Board of Directors (the “Board”) of the Company approved a resolution which authorized the chairman of the Board to grant share options to its eligible employees, directors, officers and consultants of the Group of a number of shares not exceeding 11,900 before July 1, 2017. On October 19, 2015, the shareholders and the Board approved a resolution to increase the authorized number to grant in the future up to 18,666. 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, the shareholders and the Board further approved a resolution to grant in the future up to 8,600. The terms of the option awards shall not exceed ten years from the date of grant.

The options granted are vested either (i) immediately upon grant date; or (ii) over various vesting schedule which no more than four years.

 

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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.

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:

 

     Number of
Options
    Weighted
Average
Exercise Price
     Weighted
Average
Grant date

Fair Value
     Weighted
Average
Remaining

Contractual
Term
     Aggregate
Intrinsic

Value
 
           US$ per
option
     US$ per
option
     Years      US$  

Share options outstanding at January 1, 2017

     4,042       0.01        363.10        7.63        3,330  

Granted

     1,067       0.03        941.99        

Forfeited

     (38     0.00        303.85        

Exercised

     (800     0.02        444.71        
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Share options outstanding at January 1, 2018

     4,271       0.01        492.96        7.21        4,041  

Granted

     2,060       0.05        952.59        

Forfeited

     (16     0.10        444.71        
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Share options outstanding at December 31, 2018

     6,315       0.02        643.02        7.22        6,068  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Vested and expected to vest at December 31, 2018

     6,315       0.02        643.02        7.22        6,068  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of December 31, 2018

     3,885       0.01        501.89        6.28        3,733  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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 ordinary shares.

The total fair value of the equity awards vested during the years ended December 31, 2017 and 2018 were RMB8,076 and RMB 2,312 (US$323), respectively. As of December 31, 2018, there was RMB13,499 (US$1,889) of total unrecognized employee share-based compensation expense related to unvested options, may be adjusted for actual forfeitures occurring in the future. Total unrecognized compensation cost may be recognized over a weighted-average period of 2.64 years.

 

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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.

SHARE BASED COMPENSATION (CONTINUED)

 

Nonemployees

The options granted to nonemployees are accounted for as equity awards with service and/or performance vesting conditions. The following table summarized the Group’s nonemployee share option activity:

 

     Number of
Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Grant date

Fair Value
     Weighted
Average
Remaining

Contractual
Term
     Aggregate
Intrinsic

Value
 
           US$
per option
     US$
per option
     Years      US$  

Share options outstanding at January 1, 2017

     3,565       0.00        610.76        8.80        2,937  

Granted

     259       0.04        938.27        

Forfeited

     (720     0.00        823.91        

Exercised

     (910     0.00        823.91        
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Share options outstanding at January 1, 2018

     2,194       0.00        491.07        7.22        2,076  

Granted

     537       0.05        955.44        

Forfeited

     (1,600     0.00        444.71        

Exercised

     (194     0.00        650.11        
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Share options outstanding at December 31, 2018

     937       0.04        803.43        8.11        900  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Vested and expected to vest at December 31, 2018

     887       0.04        794.56        8.02        852  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of December 31, 2018

     657       0.03        744.25        7.77        631  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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 ordinary shares.

The total fair value of the equity awards vested during the years ended December 31, 2017 and 2018 were RMB3,100 and RMB3,004 (US$420), respectively. As of December 31, 2018, there was RMB921 (US$129) of total unrecognized nonemployee share-based compensation expenses, related to unvested share based awards. Total unrecognized compensation cost may be recognized over a weighted-average period of 3.71 years.

Fair value of options

The Company uses the binomial tree option pricing model to estimate the fair value of share options with the assistance of an independent third-party valuation firm. The assumptions used to value the share options granted to employees and nonemployee were as follows:

 

     2017      2018  

Risk-free interest rate

     2.20%-2.46%        2.46%-3.11%  

Expected volatility range

     58.59%-65.18%        62.14%-63.61%  

Exercise multiple

     2.5        2.5  

Fair market value per ordinary share as at grant dates

     US$938.30-946.18        US$946.18-960.98  

The estimated fair value of the Company’s ordinary shares at their respective grant dates was determined with the assistance of an independent third-party valuation firm. The risk-free interest rate for periods within the

 

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Table of Contents

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.

SHARE BASED COMPENSATION (CONTINUED)

 

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 of ordinary shares of several comparable companies in the same industry. The expected exercise multiple is based on management’s estimation, which the Company 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 year ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Cost of revenues

     —          317        44  

Selling and marketing expenses

     2,444        2,871        402  

Research and development expenses

     4,044        1,958        274  

General and administrative expenses

     4,270        2,790        390  
  

 

 

    

 

 

    

 

 

 

Total share-based compensation expenses

     10,758        7,936        1,110  
  

 

 

    

 

 

    

 

 

 

 

13.

INCOME TAXES

BVI

The Company is incorporated in the BVI and conducts its primary business operations through the subsidiaries in the PRC and the USA. 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 Company’s subsidiaries in the PRC are subject to the statutory rate of 25%, in accordance with the Enterprise Income Tax law (the “EIT Law”), which was effective since January 1, 2008. AnPac Bio-Medical Technology (Shanghai) Co., Ltd., Shanghai Xinshenpai Technology Co., Ltd. and Penghui Health Management Co., Ltd. enjoy a preferential income tax rate of 20%, as they qualify as small and micro-sized enterprises.

Dividends, interests, rent and royalties payable by the Company’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 10% withholding tax, unless the respective non-PRC resident enterprise’s jurisdiction of incorporation has a tax treaty or arrangements with PRC that provides for a reduced withholding tax rate or an exemption from withholding tax.

United States

AnPac US is subject to U.S. federal corporate income tax at a rate of 21% for the year ended December 31, 2018, and 35% for the year ended December 31, 2017. AnPac US is also subject to state income tax in California for the years ended December 31, 2017 and 2018.

 

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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.

INCOME TAXES (CONTINUED)

 

The Group’s loss before income taxes consisted of:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Non-PRC

     (16,073      (18,944      (2,650

PRC

     (23,238      (23,551      (3,295
  

 

 

    

 

 

    

 

 

 

Total

     (39,311      (42,495      (5,945
  

 

 

    

 

 

    

 

 

 

The current and deferred components of income tax (expense) benefit appearing in the consolidated statements of comprehensive loss are as follows:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Current tax

     (23      111        16  

Deferred tax

     14        88        12  
  

 

 

    

 

 

    

 

 

 

Total

     (9      199        28  
  

 

 

    

 

 

    

 

 

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the years ended December 31, 2017 and 2018 applicable to the PRC operations to income tax (expense) benefit were as follows:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Loss before income taxes

     (39,311      (42,495      (5,945

Income tax benefit computed at the statutory income tax rate at 25%

     9,828        10,624        1,487  

Non-deductible expenses

     (4,990      (4,485      (627

International rate differences

     (2,076      (2,227      (312

Preferential tax rate differences

     (66      (210      (29

Effect of change in tax rate

     66        (826      (116

Change in valuation allowance

     (2,771      (2,677      (375
  

 

 

    

 

 

    

 

 

 

Income tax (expense) benefit

     (9      199        27  
  

 

 

    

 

 

    

 

 

 

 

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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.

INCOME TAXES (CONTINUED)

 

Deferred Taxes

The significant components of deferred taxes were as follows:

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Deferred tax assets:

        

Net loss carryforward

     12,247        14,705        2,057  

Accrued expenses

     903        1,043        146  

Bad debt expenses

     83        85        12  

Others

     43        120        17  

Valuation allowance

     (13,276      (15,953      (2,232
  

 

 

    

 

 

    

 

 

 

Total deferred tax assets

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Deferred tax liabilities:

     

Long-lived assets arising from acquisition

     (1,310      (1,222      (171
  

 

 

    

 

 

    

 

 

 

Total deferred tax liabilities

     (1,310      (1,222      (171
  

 

 

    

 

 

    

 

 

 

The Group operates through several subsidiaries. Valuation allowance is considered for each of the entities.

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, 2017 and 2018, 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, 2018, the Group had tax losses of RMB92,918 (US$13,000) derived from entities in the PRC and U.S., of which can be carried forward per tax regulation to offset future taxable income. The PRC taxable losses will expire from 2018 to 2023 if not utilized. The U.S. taxable losses of RMB9,099 (US$ 1,273) can be utilized indefinitely while the remainder will expire from 2035 to 2037.

Unrecognized Tax Benefits

As of December 31, 2017 and 2018, the Group recorded an unrecognized tax benefit of RMB6,936 and RMB9,398 (US$1,315), respectively, of which RMB6,696 and RMB9,267 (US$1,298), respectively, were presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits were primarily related to transfer pricing and deductibility of expense. The amounts of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of December 31, 2017 and 2018, unrecognized tax benefits of RMB240 and RMB131 (US$18), if ultimately recognized, will impact the effective tax rate.

 

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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.

INCOME TAXES (CONTINUED)

 

A roll-forward of unrecognized tax benefits is as follows:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Balance at beginning of year

     3,982        6,936        970  

Addition based on tax positions related to the current year

     2,954        3,064        429  

Decrease based on tax positions related to prior years

     —          (602      (84
  

 

 

    

 

 

    

 

 

 

Balance at end of year

     6,936        9,398        1,315  
  

 

 

    

 

 

    

 

 

 

The Group recorded interest accrued in relation to the unrecognized tax benefit in income tax expense of RMB23 and RMB40 (US$6) for the years ended December 31, 2017 and 2018, respectively.

 

14.

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 10% of its annual after-tax profits to a general reserve fund until such fund has reached 50% of its respective registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus funds are at the discretion of the board of directors for the foreign invested enterprises. For other subsidiaries incorporated in the PRC, the general reserve fund was appropriated based on 10% of net profits as reported in each subsidiary’s PRC statutory accounts. General reserve and statutory surplus funds are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective company. Staff welfare and bonus fund and statutory public welfare funds are restricted to capital expenditures for the collective welfare of employees. The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor are they allowed for distribution except under liquidation. As of December 31, 2017 and 2018, the PRC subsidiaries did not have after-tax profit and therefore no statutory reserves were allocated.

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, 2017 and 2018, restricted net assets of the Company’s PRC subsidiaries were RMB 2,105 and RMB 2,580 (US$ 361), respectively.

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.

 

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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.

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 Group in 2017 and 2018 consisted of:

 

Related Party

  

Nature of the party

  

Relationship with the Group

Dr. Chris Chang Yu

   Individual    Founder and Chairman

Anpai

   Health management    Equity investee of the Group

Anpac Beijing

   Health management    Equity investee of the Group

Jiaxing Zhijun Sihang Investment Partnership Enterprise (limited partnership) (“Jiaxing Zhijun”)

   Private equity investment    Shareholder

Zhijun

   Investment management    General partner of the shareholder

CRS Holdings Inc. (“CRS”)

   Investor    Controlled by Dr. Chris Chang Yu

Jiangsu Anpac

   Health management    Equity investee of the Group

 

(a)

Related party balances

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Due from related parties:

        

Anpai

     282        269        38  
  

 

 

    

 

 

    

 

 

 

Amounts due from Anpai comprise of accounts receivable.

 

     As of December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Due to related parties:

        

CRS

     2,277        2,413        338  

Jiaxing Zhijun

     —          25,000        3,497  

Zhijun

     —          824        115  

Jiangsu Anpac

     800        450        63  
  

 

 

    

 

 

    

 

 

 
     3,077      28,687      4,013  
  

 

 

    

 

 

    

 

 

 

Amounts due to CRS and Jiangsu Anpac comprise of loans which were interest-free, unsecured and repayable on demand while amounts due to Jiaxing Zhijun comprise of an advance of RMB25,000 (US$3,498) which will be invested into the Group’s ordinary shares when registered and the accrued interest expense due to Zhijun of RMB824 (US$115) for the convertible loans.

 

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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.

RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

(b)

Related party transactions

During the years ended December 31, 2017 and 2018, related party transactions consisted of the following:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Revenue rendered to Anpac Beijing

     —          231        32  

Revenue rendered to Jiangsu Anpac

     354        110        15  

Revenue rendered to Anpai

     236        298        42  

Consulting service received from Anpac Beijing

     —          700        98  

Advance from Jiaxing Zhijun

     —          25,000        3,498  

CL from Zhijun

     —          16,445        2,301  

Interest expense to Zhijun

     —          824        115  

Loan from CRS

     1,240        1,431        200  

Repayment to CRS

     (5,780      (1,144      (160

Loan from Jiangsu Anpac

     800        —          —    

Repayment to Jiangsu Anpac

     —          (350      (49
  

 

 

    

 

 

    

 

 

 

 

16.

FAIR VALUE MEASUREMENTS

The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:

 

     Fair value measurements as at December 31, 2018 using  
     Quoted
prices in
active
markets
(Level 1)
     Significant
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
     Total  
     RMB      RMB      RMB      RMB  

CL

     —          —          17,961        17,961  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Group recognized an unrealized gain of RMB784 (US$110) for measuring CL using the scenario analysis described in note 2(q) occurring in the year ended December 31, 2018. There was no transfer into or out of Level 3 of the fair value hierarchy for the year ended December 31, 2018.

 

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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.

COMMITMENTS AND CONTINGENCIES

 

(a)

Operating lease commitments

As lessee

The Group has entered into lease agreements for its business operations. Such leases are classified as operating leases.

Future minimum lease payments under non-cancellable operating lease agreements at December 31, 2018 were as follows:

 

     Year Ended December 31,  
     2018      2018  
     RMB      US$  

2019

     1,753        245  

2020

     849        119  

2021

     204        29  
  

 

 

    

 

 

 

Total

     2,806        393  
  

 

 

    

 

 

 

 

(b)

Litigation

In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. As of December 31, 2017 and 2018, the Group is not a party to any legal or administrative proceedings which will have a material adverse effect on the Group’s business, financial position, results of operations and cash flows.

 

18.

LOSS PER SHARE

Basic and diluted loss per share for each of the years presented is calculated as follows:

 

     Years ended December 31,  
     2017      2018      2018  
     RMB      RMB      US$  

Numerator:

        

Net loss used in calculating loss per share-basic and diluted

     (39,076      (42,063      (5,885

Denominator:

        

Weighted average number of ordinary shares outstanding used in calculating basic and diluted loss per share

     7,937,300        8,524,100        8,524,100  

Basic and diluted loss per share

     (4.92      (4.93      (0.69

The Group did not include share options in the computation of diluted earnings per share for the year ended December 31, 2017 and 2018 because those share options were anti-dilutive for loss per share.

 

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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)

19.

SUBSEQUENT EVENTS

The Company evaluated subsequent events through November 15, 2019, the date on which these consolidated financial statements were issued.

From March to November 2019, the Group entered into share purchase agreements with certain investors for an aggregate investment consideration of US$6,197 and RMB4,800 (US$672).

On March 6, 2019, the Group and Shanghai Muqing Industrial Co., Ltd entered into an investment agreement to establish Shanghai Muqing AnPac Health Technology Co., Ltd. (“Muqing Anpac”) for a total investment of RMB2,000. The Group will own 51% of the total equity of Muqing Anpac.

On June 12, 2019, the Company signed a RMB8,000 (US$1,119) loan contract with Shanghai Pudong Zhangjiang Micro-credit Co., Ltd. with a maturity of one year, which was guaranteed by a personal property owned by Dr. Chris Chang Yu.

On October 30, 2019, the Group has signed CL modification contract with Zhijun to extend the CL due date to April 30, 2020.

On October 29, 2019, the board of directors approved the re-designation of the ordinary shares to Class A and Class B ordinary shares. On October 31, 2019, the board of directors approved the increase in the authorized number of Class A and Class B ordinary shares and the 1-for-100 share split as detailed in note 10.

On October 31, 2019, the Group adopted the 2019 share option plan providing for the future grants of share options to its officers, directors, employees and consultants. The maximum number of Class A ordinary shares that may be issued pursuant to all awards under 2019 Plan is 1,105,300.

 

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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.

PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed balance sheets

 

     As of December 31,  
     2017     2018     2018  
     RMB     RMB     US$  

ASSETS

      

Current assets

      

Cash and cash equivalents

     2,162       3,703       518  

Amounts due from related parties

     49,364       53,672       7,509  

Other current assets

     78       82       12  
  

 

 

   

 

 

   

 

 

 

Total current assets

     51,604       57,457       8,039  

Non-current assets:

      

Investments in subsidiaries

     (34,441     (49,811     (6,969

Other assets

     912       851       119  
  

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

     18,075       8,497       1,189  
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

      

Current liabilities:

      

Short-term debt

     1,241       17,961       2,513  

Amounts due to related parties

     4,807       12,600       1,763  

Accrued expenses and other current liabilities

     2,469       329       46  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     8,517       30,890       4,322  
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity (deficit):

      

Ordinary shares (US$0.01 par value per share; 10,000,000 shares authorized as of December 31, 2017 and 2018; 8,524,000 and 8,596,900 shares issued and outstanding as of December 31, 2017 and 2018, respectively)

     564       569       80  

Additional paid-in capital

     143,057       152,367       21,317  

Retained earnings

     (132,290     (174,353     (24,393

Accumulated other comprehensive (loss) income

     (1,773     (976     (137
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     9,558       (22,393     (3,133
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

     18,075       8,497       1,189  
  

 

 

   

 

 

   

 

 

 

 

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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.

PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

Condensed statements of comprehensive loss

 

     2017     2018     2018  
     RMB     RMB     US$  

Operating loss:

      

Selling and marketing expenses

     (2,443     (2,871     (402

Research and development expenses

     (4,044     (1,958     (274

General and administrative expenses

     (4,686     (3,537     (494
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,173     (8,366     (1,170

Interest expense

     (24     (828     (116

Other expense, net

     —         (784     (110

Share of losses of subsidiaries

     (27,879     (32,085     (4,489
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes and net loss

     (39,076     (42,063     (5,885
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

      

—Foreign currency translation adjustments

     (4,675     797       112  
  

 

 

   

 

 

   

 

 

 

Total comprehensive loss

     (43,751     (41,266     (5,773
  

 

 

   

 

 

   

 

 

 

Condensed statements of cash flows

 

     2017     2018     2018  
     RMB     RMB     US$  

Net cash used in operating activities

     (628     (1,259     (176

Net cash used in investing activities

     (7,691     (12,475     (1,745

Net cash generated from financing activities

     10,239       15,150       2,120  

Effect of exchange rate changes on cash and cash equivalents

     (52     125       17  
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,868       1,541       216  

Cash and cash equivalents at beginning of year

     294       2,162       302  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     2,162       3,703       518  
  

 

 

   

 

 

   

 

 

 

 

(a)

Basis of presentation

Condensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investments in its subsidiaries

The parent company records its investments in its subsidiaries under the equity method of accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investments in subsidiaries” and their respective profit or loss as “Share of loss in subsidiaries’ on the condensed statements of comprehensive loss. Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary is reduced to zero unless the parent company has guaranteed obligations of the subsidiary or is otherwise committed to provide further financial support. If the subsidiary subsequently reports net income, the parent company shall resume

 

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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.

PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

applying the equity method only after its share of that net income equals the share of net loss not recognized during the period the equity method was suspended.

The subsidiaries did not pay any dividends to the Company for the years presented.

 

F-43


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2018 AND UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2019

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of

shares and per share data)

 

         As of  
     Notes   December 31,
2018
     September 30,
2019
     September 30,
2019
 
         RMB     

RMB

(unaudited)

    

US$

(unaudited)

 

ASSETS

          

Current assets:

          

Cash and cash equivalents

       12,887        23,975        3,354  

Advances to suppliers

       2,807        375        52  

Accounts receivable, net of allowance for doubtful accounts of RMB 198 and RMB 177 (US$ 25) as of December 31, 2018 and September 30, 2019, respectively

       2,749        7,961        1,114  

Amounts due from related parties

   11     269        587        82  

Inventories

       62        268        37  

Other current assets

       2,078        5,250        735  
    

 

 

    

 

 

    

 

 

 

Total current assets

       20,852        38,416        5,374  

Property and equipment, net

   3     18,141        19,123        2,675  

Land use rights, net

   4     1,222        1,201        168  

Intangible assets, net

   5     5,406        5,177        724  

Goodwill

       2,223        2,223        311  

Long-term investments

   6     3,456        3,898        545  

Other assets

       1,462        1,979        278  
    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS.

       52,762        72,017        10,075  
    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

          

Current liabilities:

          

Short-term debt

   7     25,961        29,655        4,149  

Accounts payable

       1,618        3,940        551  

Advance from customers

       4,313        2,710        379  

Amounts due to related parties

   11     28,687        29,692        4,154  

Accrued expenses and other current liabilities

   8     10,859        42,931        6,006  
    

 

 

    

 

 

    

 

 

 

Total current liabilities

       71,438        108,928        15,239  

Deferred tax liabilities

       1,222        1,156        162  

Other long-term liabilities

       2,495        1,891        265  
    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES.

       75,155        111,975        15,666  
    

 

 

    

 

 

    

 

 

 

Commitments and contingencies

   13        

 

F-44


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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2018 AND UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2018 AND SEPTEMBER 30, 2019 — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

            As of     Pro forma shareholders’ deficits as of  
     Notes      December 31,
2018
    September 30,
2019
    September 30,
2019
   

September 30,

2019

   

September 30,

2019

 
            RMB     RMB
(unaudited)
    US$
(unaudited)
    RMB
(unaudited)
   

US$

(unaudited)

 

Shareholders’ deficit:

             

Ordinary shares (US$0.01 par value per share; 10,000,000 shares authorized as of December 31, 2018 and September 30, 2019; 8,596,900 and 7,547,400 shares issued and outstanding as of December 31, 2018 and September 30, 2019, respectively)

     9        569       495       69       —         —    

Class A ordinary shares (US$0.01 par value per share; no authorized, issued, and outstanding as of December 31, 2018 and September 30, 2019; 70,000,000 shares authorized, 4,932,200 issued and outstanding, unaudited, pro forma)

        —         —         —         319       44  

Class B ordinary shares (US$0.01 par value per share; no authorized, issued, and outstanding as of December 31, 2018 and September 30, 2019; 30,000,000 shares authorized, 2,615,200 issued and outstanding, unaudited, pro forma)

        —         —         —         176       25  

Additional paid-in capital

        152,367       191,780       26,831       191,780       26,831  

Accumulated deficits

        (174,353     (233,116     (32,614     (233,116     (32,614

Accumulated other comprehensive (loss)/ income

        (976     767       107       767       107  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total AnPac Bio-Medical Science Co., Ltd. shareholders’ deficit

        (22,393     (40,074     (5,607     (40,074     (5,607

Noncontrolling interests

        —         116       16      
     

 

 

   

 

 

   

 

 

     

TOTAL SHAREHOLDERS’ DEFICIT

        (22,393     (39,958     (5,591    
     

 

 

   

 

 

   

 

 

     

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT

        52,762       72,017       10,075      
     

 

 

   

 

 

   

 

 

     

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-45


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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

            For the nine months ended
September 30,
 
     Notes      2018     2019     2019  
            RMB     RMB     US$  

Revenues:

         

Cancer screening and detection tests (including RMB341 and RMB505 (US$71) from related parties for the nine months ended September 30, 2018 and 2019, respectively)

        6,106       7,677       1,074  

Physical checkup packages

        525       436       61  
     

 

 

   

 

 

   

 

 

 

Total revenues

        6,631       8,113       1,135  

Cost of revenues

        (3,634     (4,266     (597
     

 

 

   

 

 

   

 

 

 

Gross Profit

        2,997       3,847       538  

Operating expenses:

         

Selling and marketing expenses (including RMB700 and RMB1,081 (US$151) from related parties for the nine months ended September 30, 2018 and 2019, respectively)

        (7,202     (10,730     (1,501

Research and development expenses

        (7,746     (7,138     (999

General and administrative expenses

        (18,773     (40,439     (5,658

Other operating income

        475       138       19  
     

 

 

   

 

 

   

 

 

 

Loss from operations

        (30,249     (54,322     (7,601

Non-operating income and expenses:

         

Interest expense, net (including RMB 440 and RMB1,186 (US$ 166) from related parties for the nine months ended September 30, 2018 and 2019, respectively)

        (677     (1,897     (265

Foreign exchange loss, net

        (1,970     (1,937     (270

Share of net (loss) gain in equity method investments

        (224     442       62  

Other income (expense), net

        484       (1,130     (158
     

 

 

   

 

 

   

 

 

 

Net loss before income taxes

        (32,636     (58,844     (8,232

Income tax benefit (expense)

        177       (113     (16
     

 

 

   

 

 

   

 

 

 

Net loss

        (32,459     (58,957     (8,248
     

 

 

   

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

        (233     (194     (27
     

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

        (32,226     (58,763     (8,221
     

 

 

   

 

 

   

 

 

 

Loss per share:

         

Ordinary shares—basic and diluted

     14        (3.78     (6.75     (0.94

Weighted average number of ordinary shares used in loss per share computation:

         

Ordinary shares—basic and diluted

     14        8,523,300       8,708,900       8,708,900  

Other comprehensive income, net of tax:

         

Foreign currency translation differences

        902       1,743       244  
     

 

 

   

 

 

   

 

 

 

Total comprehensive loss

        (31,557     (57,214     (8,004

Total comprehensive loss attributable to noncontrolling interests

        (233     (194     (27
     

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to ordinary shareholders

        (31,324     (57,020     (7,977
     

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

     Attributable to AnPac Bio-Medical Science Co., Ltd. Shareholders     Noncontrolling
interests
    Total Equity
(Deficit)
 
    

 

 

Ordinary Shares

    Additional
Paid-in
Capital
    Accumulated
Deficits
    Accumulated
Other
Comprehensive
Income (Loss)
    Total AnPac
Bio-Medical
Science Co., Ltd.
Shareholders’
Equity (Deficit)
 
     Shares     Amount  

Balance at January 1, 2018

     8,524,000       564       143,057       (132,290     (1,773     9,558       (61     9,497  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         (32,226     —         (32,226     (233     (32,459

Issuance of ordinary shares

     17,600       1       1,301       —         —         1,302       —         1,302  

Foreign currency translation differences

     —         —         —         —         902       902       —         902  

Acquisition of non-controlling interests

     —         —         (454     —         —         (454     294       (160

Repurchase and cancellation of shares

     (20,800     (1     (726     —         —         (727     —         (727

Share-based compensation (Note 10)

     —         —         6,435       —         —         6,435       —         6,435  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

     8,520,800       564       149,613       (164,516     (871     (15,210           (15,210
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2019

     8,596,900       569       152,367       (174,353     (976     (22,393           (22,393
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         (58,763     —         (58,763     (194     (58,957

Issuance of ordinary shares

     525,200       36       20,938       —         —         20,974       —         20,974  

Capital contribution from noncontrolling interest holders

     —         —         —         —         —         —         310       310  

Foreign currency translation differences

     —         —         —         —         1,743       1,743       —         1,743  

Repurchase and cancellation of shares

     (1,574,700     (110     110       —         —               —          

Share-based compensation (Note 10)

     —         —         18,365       —         —         18,365       —         18,365  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2019

     7,547,400       495       191,780       (233,116     767       (40,074     116       (39,958
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2019 (US$)

       69       26,831       (32,614     107       (5,607     16       (5,591
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2019

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

     For the nine months ended
September 30,
 
     2018     2019     2019  
     RMB     RMB     US$  

Operating activities:

      

Net loss

     (32,459     (58,957     (8,248

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     1,902       1,924       269  

Share of net loss/(gain) in equity method investments

     224       (442     (62

Bad debt expense

     148       150       21  

Foreign exchange loss, net

     2,589       3,310       463  

Share-based compensation

     6,435       18,365       2,569  

Fair value loss on convertible loans

     485       3,099       436  

Changes in operating assets and liabilities:

      

Advances to suppliers

     (192     2,432       340  

Accounts receivable

     (2,603     (5,363     (750

Inventories

     (86     (206     (29

Amounts due from related parties

     282       (318     (45

Other current assets

     (346     (3,171     (444

Other assets

     (149     (517     (72

Accounts payable

     727       2,322       325  

Amounts due to related parties

     360       1,155       162  

Advance from customers

     406       (1,604     (224

Accrued expenses and other current liabilities

     (295     5,875       822  

Other long-term liabilities

     (393     (604     (85

Deferred tax liabilities

     (66     (66     (9
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (23,031     (32,616     (4,561
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Purchases of property and equipment

     (2,995     (2,623     (367

Purchases of intangible assets

     (105     (206     (29

Cash paid for business combination, net of cash acquired

     (3,240     —         —    

Proceeds from short-term investments

     12,000       13,382       1,872  

Purchase of short-term investments

     (12,000     (13,382     (1,872

Purchases of long-term investments

     (1,550     —         —    
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (7,890     (2,829     (396
  

 

 

   

 

 

   

 

 

 

 

F-48


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2019 — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

     For the nine months ended
September 30,
 
     2018     2019     2019  
     RMB     RMB     US$  

Financing activities:

      

Proceeds from short-term borrowings

     24,445       18,300       2,560  

Payment for short-term borrowings

     (12,500     (18,300     (2,560

Repayment of related party loan

     (350     (150     (21

Capital contribution from noncontrolling interest holders

     —         310       43  

Advance from investors

     25,000       26,405       3,694  

Repurchase of shares

     (728     —         —    

Proceeds from issuance of ordinary shares

     404       20,974       2,934  
  

 

 

   

 

 

   

 

 

 

Net cash generated from financing activities

     36,271       47,539       6,650  
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (828     (1,006     (142
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     4,522       11,088       1,551  

Cash and cash equivalents at beginning of period

     11,412       12,887       1,803  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     15,934       23,975       3,354  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Interest paid

     891       714       100  

Supplemental disclosure of non-cash investing and financing activities:

      

Purchase of ordinary shares when registered included in advance from investors

     2,157       —         —    

Purchase of property and equipment included in accrued expenses and other current liabilities

     28       36       5  

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-49


Table of Contents

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

1.

ORGANIZATION AND PRINCIPAL ACTIVITIES

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 marketing and selling a multi-cancer screening and detection test that uses innovative, patented cancer differentiation analysis (the “CDA”) technology and proprietary cancer-detection device in the People’s Republic of China (the “PRC” or “China”). Dr. Chris Chang Yu is the Founder of the Group (the “Founder”).

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

 

(a)

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this interim financial report should be read in conjunction with the audited consolidated financial statements and accompanying notes for the two years ended December 31, 2018 included in the Group’s Form F-1 registration statement.

The accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, operating results and cash flows of the Group for each of the periods presented. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of results to be expected for any other interim period or for the year ending December 31, 2019. The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP for annual financial statements.

 

(b)

Convenience translation

Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB7.1477 on September 30, 2019, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be converted, realized or settled into US$ at such rate or at any other rate.

 

(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 assets and valuation allowance, purchase price allocation, 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.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(d)

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 the sales of 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 i.e. 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 result to the customer. 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.

Revenue from physical checkup packages

The Group facilitates 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. Therefore, 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 and 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.

All revenues are generated in the PRC.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(d)

Revenue recognition (continued)

 

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.

Contract liabilities represent considerations received from corporations and life insurance companies in advance of satisfying the Group’s performance obligations under the contract, which are presented in “advance from customers” in the consolidated balance sheets. Revenue recognized that was included in contract liabilities at the beginning of the period was RMB32 and RMB263 (US$37) for the nine months ended September 30, 2018 and 2019, respectively.

The following table reflects the changes in contract liabilities as of December 31, 2018 and September 30, 2019:

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Contract liabilities

     4,313        2,710        379  

Contract liabilities decreased by RMB 1,603 (US$224), due to the decrease in consideration received by corporations and life insurance companies in the normal course of business.

 

(e)

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.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(e)

Fair value of financial instruments (continued)

 

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.

The Group’s financial instruments include 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 fair value of the convertible loans as of September 30, 2019 was RMB 21,655 (US$ 3,030), calculated using the scenario analysis method based on probability of remaining as straight debt using discounted cash flow and equity based on the premium conversion ratio of 25%, respectively. 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 inputs 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. Refer to Note 7 for additional information.

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.

 

(f)

Unaudited pro forma shareholder’s deficit

Pursuant to the resolution of the board of directors on October 29, 2019, the authorized share capital of 100,000 ordinary shares was re-designated to 71,369 Class A ordinary shares and 28,631 Class B ordinary shares. Pursuant to the resolutions of the board of directors on October 31, 2019, the authorized share capital of the Class A and Class B ordinary shares was increased to 700,000 and 300,000, respectively. Holders of Class A ordinary shares and Class B ordinary shares have the same rights, except for voting and conversion rights. Each Class A ordinary share is entitled to one vote; and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

Pursuant to the resolution of the board of directors on October 31, 2019, the Group effected a share split of 1-for-100, pursuant to which the authorized share capital of the Class A and Class B ordinary shares increased to 70,000,000 and 30,000,000, respectively, with a par value of US$0.01.

Unaudited pro forma shareholders’ equity as of September 30, 2019 reflects the re-designation of the ordinary shares to Class A and Class B ordinary shares and the subsequent 1-for-100 share-split.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(g)

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, 2018, and September 30, 2019, the aggregate amounts of cash and cash equivalents of RMB 7,016 and RMB 9,371 (US$ 1,311), respectively, were held at major financial institutions located in the PRC and RMB5,871 and RMB 14,604 (US$ 2,043), respectively, were deposited with major financial institutions located outside the PRC. Management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions.

Accounts receivables, unsecured and denominated in RMB, derived from sales of the Group’s cancer screening and detection test and physical checkup package services, are exposed to credit risk. As of December 31, 2018 and September 30, 2019, the Group had one customer and three customers, respectively, each with a receivable balance exceeding 10% of the total accounts receivable balance. The risk is mitigated by credit evaluations the Group performs on its customers.

 

(h)

Income taxes

The Group’s income tax provision for the nine months ended September 30, 2018 and 2019 is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Group updates the estimated annual effective tax rate and makes a year-to-date adjustment to the provision.

 

(i)

Recently adopted accounting pronouncements

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU does not provide a definition of restricted cash or restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. As a result of this update, restricted cash are included within cash and cash equivalents on the statements of consolidated cash flows. The Group adopted ASU 2016-18 effective January 1, 2019. No cumulative impact was recognized as of January 1, 2019.

In February 2018, the FASB issued ASU No. 2018-2, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-2”). This update allows companies the option to reclassify to retained earnings the tax effects related to items in accumulated other comprehensive income (loss) as a result of the Tax Cuts and Jobs Act that was enacted in the United States on December 22, 2017. This update is effective in fiscal years, including interim periods, beginning after December 15, 2018, and early adoption is permitted. This guidance should be applied either in the period of adoption or retrospectively to each period in which the effects of the change in the U.S. federal income tax rate in the Tax Cuts and Jobs Act is recognized. The Group adopted ASU 2018-2 effective January 1, 2019. No cumulative impact was recognized as of January 1, 2019.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

 

(i)

Recently adopted accounting pronouncements (continued)

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The update eliminates, modifies, and adds certain disclosure requirements for fair value measurements. This update is effective in fiscal years, including interim periods, beginning after December 15, 2019, and early adoption is permitted. The added disclosure requirements and the modified disclosure on the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented. All other changes to disclosure requirements in this update should be applied retrospectively to all periods presented upon their effective date. The Group adopted ASU 2018-2 effective January 1, 2019. No cumulative impact was recognized as of January 1, 2019.

 

3.

PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Buildings

     15,771        16,029        2,243  

Leasehold improvements

     52        53        7  

Furniture, fixtures and equipment

     8,466        9,216        1,289  

Motor vehicles

     526        533        75  
  

 

 

    

 

 

    

 

 

 

Total

     24,815        25,831        3,614  

Less:

        

Accumulated depreciation

     (7,093      (8,560      (1,198
  

 

 

    

 

 

    

 

 

 
     17,722        17,271        2,416  

Construction in progress

     419        1,852        259  
  

 

 

    

 

 

    

 

 

 

Property and equipment, net.

     18,141        19,123        2,675  
  

 

 

    

 

 

    

 

 

 

Depreciation expense was RMB 1,293 and RMB 1,467 (US$ 205) for the nine months ended September 30, 2018 and 2019, respectively.

No impairment charges were recognized on the property and equipment for the nine months ended September 30, 2018 and 2019.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

4.

LAND USE RIGHTS

The land use rights assets as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Land use rights, cost

     1,388        1,388        194  
  

 

 

    

 

 

    

 

 

 

Less:

        

Accumulated amortization

     (166      (187      (26
  

 

 

    

 

 

    

 

 

 

Land use rights, net.

     1,222        1,201        168  
  

 

 

    

 

 

    

 

 

 

Amortization expense of the land use rights for the nine months ended September 30, 2018 and 2019 was RMB 209 and RMB 21 (US$ 3), respectively.

As of September 30, 2019, expected amortization expense for the land use rights is approximately RMB 7 in remaining three months of 2019, RMB 28 in 2020, RMB 28 in 2021, RMB 28 in 2022, RMB 28 in 2023 and RMB 1,083 in 2024 and thereafter.

 

5.

INTANGIBLE ASSETS, NET

Intangible assets, net consist of the following:

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Purchased software

     934        1,141        160  

Medical license

     5,300        5,300        741  
  

 

 

    

 

 

    

 

 

 

Total

     6,234        6,441        901  

Less: Accumulated amortization

     (828      (1,264      (177
  

 

 

    

 

 

    

 

 

 

Total.

     5,406        5,177        724  
  

 

 

    

 

 

    

 

 

 

Amortization expense of intangible assets for the nine months ended September 30, 2018 and 2019 amounted to RMB 401 and RMB 436 (US$ 61), respectively.

The estimated aggregate amortization expense for each of the five succeeding years is as follows:

 

Period ending September 30,

   RMB  

Remaining three months of 2019

     134  

2020

     552  

2021

     531  

2022

     485  

2023

     353  

Thereafter

     3,122  
  

 

 

 

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

6.

LONG-TERM INVESTMENTS

As at December 31, 2018 and September 30, 2019, long-term investments consisted of the following:

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Equity method investments

  

Anpac Beijing Health Management Co., Ltd (“Anpac Beijing”).

     607        1,054        148  

Shanghai Moxu Bio-medical Science Co., Ltd.(“Moxu”)

     99        94        12  

Cost method investments

        

Jiangsu Anpac Health Management Co., Ltd. (“Jiangsu Anpac”)

     2,750        2,750        385  
  

 

 

    

 

 

    

 

 

 

Total

     3,456        3,898        545  
  

 

 

    

 

 

    

 

 

 

Equity method investments

On October 19, 2017, the Group and other third parties established Anpac Beijing, of which the Group owned 35% of the investment.

On June 8, 2018, the Group and other third parties established Moxu, of which the Group owned 20% of the investment.

Cost method investments

In January 2016, the Group and other third parties established Jiangsu Anpac, of which the Group owned 10% of the investment. In November 2017, the Group further acquired a 5% equity interest. The Group accounted for the investment under cost method since the Group does not have the ability to exert significant influence over Jiangsu Anpac.

 

7.

SHORT-TERM DEBT

 

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Short-term non-bank borrowings (i)

     8,000        8,000        1,119  

Convertible loans (ii)

     17,961        21,655        3,030  
  

 

 

    

 

 

    

 

 

 

Total

     25,961        29,655        4,149  
  

 

 

    

 

 

    

 

 

 

(i) These short-term borrowings bear a fixed interest rate of 11%.

(ii) During April to August of 2018, the Group issued convertible loans (“CL”) with an aggregate principal amount of US$ 2,500 to Jiaxing Zhijun Investment Management Co., Ltd. (“Zhijun”). The CL is originally due in

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

7.

SHORT-TERM DEBT (CONTINUED)

 

one year and bears interest of 9% per annum if the conversion feature is not triggered. The CL is ultimately guaranteed by Dr. Chris Chang Yu’s personal assets.

Conversion feature

During the term of the CL, if the Group completes a financing round that raises in aggregate, an amount greater than US$ 5,000 (or an amount otherwise mutually agreed between the Group and Zhijun), Zhijun may convert the principal amount of the CL into the Group’s ordinary shares at a premium of 25% of the loan principal.

Modification of CL

On April 26, 2019 and October 30, 2019, the Group and Zhijun agreed to extend the term of the CL to October 31, 2019 and April 30, 2020, respectively. No other terms of the CL were modified. As the Group has elected to recognize the CL at fair value, all fair value changes relating to the extensions were and will be recorded on the respective modification dates accordingly.

The Group has elected to recognize the CL at fair value and therefore there was no further evaluation of embedded features for bifurcation. The Group recognized an unrealized loss of RMB 3,099 (US$ 434) in other income, net for the nine months ended September 30, 2019.

 

8.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Salary and welfare payable

     7,735        8,396        1,175  

Payable for business combination and long-term investment

     300                

Payable for acquisition of non-controlling interests

     245        245        34  

Accrued rental

     801        1,416        198  

Accrued expenses

     691        5,763        806  

Value added tax and other taxes payable

     523        81        11  

Payable for property and equipment

     28        36        5  

Accrued utilities

     5        5        1  

Other payables

     531        584        82  

Advances from investors

            26,405        3,694  
  

 

 

    

 

 

    

 

 

 

Total

     10,859        42,931        6,006  
  

 

 

    

 

 

    

 

 

 

Advances from investors represent proceeds used to purchase the Group’s ordinary shares. The ordinary shares were subsequently registered and issued to the investors from October 21, 2019 to October 25, 2019.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

9.

ORDINARY SHARES

As of December 31, 2018 and September 30, 2019, 100,000 and 100,000 shares were authorized with 85,969 and 74,819 shares issued and outstanding with par value of US$1.00, respectively.

On October 29, 2019, the board of directors approved the re-designation of the authorized share capital of 100,000 ordinary shares to 71,369 Class A ordinary shares and 28,631 Class B ordinary shares. On October 31, 2019, the board of directors approved that the increase of authorized share capital of the Class A and Class B ordinary shares to 700,000 and 300,000, respectively. Holders of Class A ordinary shares and Class B ordinary shares have the same rights, except for voting and conversion rights. Each Class A ordinary share is entitled to one vote; and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

On October 31, 2019, the board of directors approved a share split of 1-for-100, pursuant to which the authorized share capital of the Class A and Class B ordinary shares would increase to 70,000,000 and 30,000,000, respectively, with a par value of US$0.01.

The registration of the above changes was completed on November 12, 2019 and the ordinary shares have been retrospectively adjusted accordingly.

 

10.

SHARE BASED COMPENSATION

During the nine months ended September 30, 2019, the Company granted 3,270 options to employee and 1,533 options to non-employees. The terms of the option awards shall not exceed ten years from the date of grant and will became vested (i) immediately upon grant; (ii) over various vesting schedules, which is no more than four years; or (iii) until the closing of an IPO. For the grants vested until the closing of an IPO, given that this constitutes a performance condition that is not considered probable until the IPO completion date, the Company will not recognize any compensation expense until an IPO occurs. Upon the IPO completion date, the Company will immediately recognize expenses associated with these options.

The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:

 

    

The nine months ended September 30,

 
     2018      2019      2019  
     RMB      RMB      US$  

Cost of revenues

     237        246        34  

Selling and marketing expenses

     2,750        5,204        728  

Research and development expenses

     1,440        1,848        259  

General and administrative expenses

     2,008        11,067        1,548  
  

 

 

    

 

 

    

 

 

 

Total share-based compensation expenses.

     6,435        18,365        2,569  
  

 

 

    

 

 

    

 

 

 

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

10.

SHARE BASED COMPENSATION (CONTINUED)

 

The Company uses the binomial tree option pricing model to estimate the fair value of share options with the assistance of an independent third party valuation firm. The assumptions used to value the share options granted to employees and nonemployee were as follows:

 

     The nine months ended
September 30, 2019
 

Risk-free interest rate

     1.58%-2.50

Expected volatility range

     60.37%-64.25

Exercise multiple

     2.5  

Fair market value per ordinary share as at grant dates

     US$980.42  
  

 

 

 

 

11.

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 Group in 2017, 2018 and the nine months ended September 30, 2019 consisted of:

 

Related Party

  

Nature of the party

  

Relationship with the Group

Dr. Chris Chang Yu

   Individual    Founder and Chairman

Anpai

   Health management    Equity investee of the Group

Anpac Beijing

   Health management    Equity investee of the Group

Jiaxing Zhijun Sihang Investment Partnership Enterprises (limited partnership) (“Jiaxing Zhijun”)

   Private equity investment    Shareholder

Zhijun

   Investment management    General partner of the shareholder

CRS Holdings Inc. (“CRS”)

   Investor    Controlled by Dr. Chris Chang Yu

Jiangsu Anpac

   Health management    Equity investee of the Group

 

(a)

Related party balances

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Due from related parties:

        

Anpai

     269        379        53  

Jiangsu Anpac

     —          54        8  

Anpac Beijing

     —          154        21  
  

 

 

    

 

 

    

 

 

 

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

11.

RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

Amounts due from Anpai and Jiangsu Anpac comprise of accounts receivable. Amounts due from Anpac Beijing comprise of prepayments.

 

     As of  
     December 31,
2018
     September 30,
2019
     September 30,
2019
 
     RMB      RMB      US$  

Due to related parties:

        

CRS

     2,413        2,357        329  

Jiaxing Zhijun

     25,000        25,000        3,498  

Zhijun

     824        2,035        285  

Jiangsu Anpac

     450        300        42  
  

 

 

    

 

 

    

 

 

 
     28,687        29,692        4,154  
  

 

 

    

 

 

    

 

 

 

Amounts due to CRS and Jiangsu Anpac comprise of loans which were interest-free, unsecured and repayable on demand while amounts due to Jiaxing Zhijun comprise of an advance of RMB25,000 (US$ 3,498) which will be invested into the Group’s ordinary shares when registered and the accrued interest expense due to Zhijun of RMB 2,035 (US$ 285) for the convertible loans.

 

(b)

Related party transactions

During the nine months ended September 30, 2018 and 2019, related party transactions consisted of the following:

 

     The nine months period ended September 30,  
     2018      2019      2019  
     RMB      RMB      US$  

Revenue rendered to Anpac Beijing.

     14        —          —    

Revenue rendered to Jiangsu Anpac .

     94        61        9  

Revenue rendered to Anpai.

     233        444        62  

Consulting service received from Anpac Beijing.

     700        1,081        151  

Advance from Jiaxing Zhijun

     25,000        —          —    

CL from Zhijun

     16,445        —          —    

Interest expense to Zhijun

     440        1,186        166  

Loan from CRS

     1,200        2,276        318  

Repayment to CRS

     (1,139      (1,253      (175

Repayment to Jiangsu Anpac

     (350      —          —    
  

 

 

    

 

 

    

 

 

 

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

12.

FAIR VALUE MEASUREMENTS

The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:

 

     Fair value measurements as at September 30, 2019 using  
     Quoted
prices in
active

markets
(Level 1)
     Significant
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
     Total  
     RMB      RMB      RMB      RMB  

CL

     —          —          21,655        21,655  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Group recognized an unrealized loss of RMB 3,099 (US$434) for measuring CL using the scenario analysis described in note 2(e) occurring in the nine months ended September 30, 2019. There was no transfer into or out of Level 3 of the fair value hierarchy for the nine months ended September 30, 2019.

 

13.

COMMITMENTS AND CONTINGENCIES

 

(a)

Operating lease commitments

As lessee

The Group has entered into lease agreements for its business operations. Such leases are classified as operating leases.

Future minimum lease payments under non-cancellable operating lease agreements at September 30, 2019 were as follows:

 

     As of September 30,  
     2019      2019  
     RMB      US$  

Remaining three months of 2019

     498        70  

2020

     1,236        173  

2021

     474        66  

2022

     12        2  
  

 

 

    

 

 

 

Total

     2,220        311  
  

 

 

    

 

 

 

 

(b)

Litigation

In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. As of September 30, 2019, the Group is not a party to any legal or administrative proceedings which will have a material adverse effect on the Group’s business, financial position, results of operations and cash flows.

 

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ANPAC BIO-MEDICAL SCIENCE CO., LTD.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

 

14.

LOSS PER SHARE

Basic and diluted loss per share for each of the years presented is calculated as follows:

 

     The nine months ended September 30,  
     2018      2019      2019  
     RMB      RMB      US$  

Numerator:

        

Net loss used in calculating loss per share-basic and diluted

     (32,226      (58,763      (8,221

Denominator:

        

Weighted average number of ordinary shares outstanding used in calculating basic and diluted loss per share

     8,523,300        8,708,900        8,708,900  

Basic and diluted loss per share

     (3.78      (6.75      (0.94
  

 

 

    

 

 

    

 

 

 

The Group did not include share options in the computation of diluted earnings per share for the nine months ended September 30, 2018 and 2019 because those share options were anti-dilutive for loss per share.

 

15.

SUBSEQUENT EVENTS

The Group evaluated subsequent events through November 15, 2019, the date on which these consolidated financial statements were issued.

From October to November 2019, the Group entered into share purchase agreements with certain investors for an aggregate investment consideration of RMB300 (US$42).

On October 30, 2019, the Group has signed CL modification contract with Zhijun to extend the CL due date to April 30, 2020.

On October 29, 2019, the board of directors approved the re-designation of the ordinary shares to Class A and Class B ordinary shares. On October 31, 2019, the board of directors approved the increase in the authorized number of Class A and Class B ordinary shares and the 1-for-100 share split as detailed in note 9.

On October 31, 2019, the Group adopted the 2019 share option plan providing for the future grants of share options to its officers, directors, employees and consultants. The maximum number of Class A ordinary shares that may be issued pursuant to all awards under 2019 Plan is 1,105,300.

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

ITEM 6.

INDEMNIFICATION OF DIRECTORS AND OFFICERS.

British Virgin Islands 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 British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or 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 memorandum and articles of association provides that we shall indemnify provides that we shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who is a director of the company or a party in a legal proceeding by reason of the fact that the person is or was a director of the company. According to our memorandum and articles of association, the indemnity only applies if the person acts honestly and in good faith with a view to the best interests of the company and in the case of criminal proceedings, the person has no reasonable cause to believe that his or her conduct was unlawful.

Pursuant to the indemnification agreements, the form of which is filed as Exhibit 10.1 to this registration statement, we 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 such a director or officer.

The underwriting agreement, the form of which will be filed as Exhibit 1.1 to this registration statement, will also provide indemnification for us and our officers and directors for certain liabilities.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to 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.

 

ITEM 7.

RECENT SALES OF UNREGISTERED SECURITIES.

During the past three years, we issued the following securities. We believe that each of the following issuances was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering or in reliance on Regulation S under the Securities Act regarding sales by an issuer in offshore transactions. No underwriter was involved in these issuances of securities. The numbers of ordinary shares in the following table are presented giving retroactive effect to the 1-for-100 share subdivision of our ordinary shares.

 

Securities/Purchaser

 

Date of Issuance

  Number of Securities    

Consideration

An individual

  February 17, 2017     43,000     Consultancy services to us
An investor   May 4, 2017     98,400     US$0.8 million
An investor   May 4, 2017     8,400     RMB0.7 million (US$0.1 million)
An individual   May 4, 2017     48,000     Consultancy services to us
An investor   November 3, 2017     13,600     RMB1.0 million (US$0.1 million)
Jiaxing Zhijun Sihang Investment Partnership Enterprises (Limited Partnership)   November 3, 2017     414,200     RMB28.0 million (US$4.1 million)

 

II-1


Table of Contents

Securities/Purchaser

 

Date of Issuance

  Number of Securities    

Consideration

Certain investors   November 3, 2017     88,700                 US$0.8 million
An individual   November 3, 2017     10,000                 Consultancy services to us
Mr. Weidong Dai   November 3, 2017     100,000                 Past and future services to us
Certain investors   August 2, 2018     11,700                 US$0.2 million
A law firm   August 2, 2018     5,900                 Legal services to us
CRS Holdings Inc. for the benefit of a third party individual   December 24, 2018     76,100                 US$0.2 million
Certain investors   June 25, 2019     245,700                 US$2.4 million

CRS Holdings Inc.

  September 17, 2019     214,000                 US$0.7 million

Two investors

  October 21, 2019     393,900                 US$3.1 million

An investor

  October 25, 2019     54,800                

RMB4.5 million

(US$0.6 million)

YuLin Bio-medical Science Co, Ltd.

  October 25, 2019     769,000                 US$7,690 (related to shareholding restructuring)

Zhijun Sihang Holdings Limited

  October 25, 2019     783,900                 RMB53.0 million
(US$7.4 million) (related to shareholding restructuring)

Options

     
Certain directors, officers, employees and consultants   April 28, 2016 to September 1, 2019    

Options to purchase
1,163,500 ordinary
shares
 
 
 
  Past and future services to us

 

ITEM 8.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

See Exhibit Index beginning on page II-4 of this registration statement.

The agreements included as exhibits to this registration statement contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosure that was made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.

We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosure of material information regarding material contractual provisions is required to make the statements in this registration statement not misleading.

(b) Financial Statement Schedules

Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or the Notes thereto.

 

ITEM 9.

UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

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Table of Contents

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

 

  (1)

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (2)

For purposes of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

  (3)

For purposes of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

  (i)

Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

  (ii)

Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

  (iii)

The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

  (iv)

Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

  (4)

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-3


Table of Contents

AnPac Bio-Medical Science Co., Ltd.

Exhibit Index

 

Exhibit
Number

    

Description of Document

  1.1      Form of Underwriting Agreement
  3.1†      Second Amended and Restated Memorandum and Articles of Association of the Registrant, as currently in effect
  3.2†      Form of Third Amended and Restated Memorandum and Articles of Association of the Registrant
  4.1      Registrant’s Specimen American Depositary Receipt (included in Exhibit 4.3)
  4.2      Registrant’s Specimen Certificate for Class A Ordinary Shares
  4.3      Form of Deposit Agreement, among the Registrant, the depositary and the holders and beneficial owners of American Depositary Shares issued thereunder
  4.4†      English Translation of Shareholders Agreement between the Registrant and other parties thereto dated June 30, 2017
  4.5†      English Translation of Shareholders Agreement between the Registrant and other parties thereto dated August 17, 2017
  4.6      Form of Underwriters’ Warrants
  5.1      Opinion of Maples and Calder (Hong Kong) LLP regarding the validity of the ordinary shares being registered and certain British Virgin Islands tax matters
  5.2      Opinion of Cleary, Gottlieb, Steen & Hamilton LLP as to the Legality of the Underwriter’s Warrants
  8.1      Opinion of Maples and Calder (Hong Kong) LLP regarding certain British Virgin Islands tax matters (included in Exhibit 5.1)
  8.2      Opinion of Zhong Lun Law Firm regarding certain PRC tax matters (included in Exhibit 99.2)
  10.1†      Form of Indemnification Agreement between the Registrant and its directors and executive officers
  10.2†      English Translation of Form of Employment Agreement between the Registrant and its executive officers
  10.3†      2019 Share Incentive Plan of the Registrant
  10.4      English Translation of Supplemental Convertible Loan Agreement among Jiaxing Zhijun Investment Management Co., Ltd., Dr. Chris Chang Yu and the Registrant dated October 30, 2019
  10.5†      Master Services Agreement and Service Order between the Registrant and NASDAQ Capital Markets Advisory LLC.
  10.6†      English Translation of Equity Investment Agreement of Dr. Chris Chang Yu dated August 11, 2019
  21.1†      List of Principal Subsidiaries of the Registrant
  23.1      Consent of Ernst & Young Hua Ming LLP, an independent registered public accounting firm
  23.2†      Consent of Maples and Calder (Hong Kong) LLP (included in Exhibit 5.1)
  23.3†      Consent of Zhong Lun Law Firm (included in Exhibit 99.2)
  24.1†      Powers of Attorney (included on signature page)
  99.1†      Code of Business Conduct and Ethics of the Registrant
  99.2      Opinion of Zhong Lun Law Firm regarding certain PRC law matters
  99.3†      Consent of Frost & Sullivan

 

*

To be filed by amendment.

Previously filed.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Shanghai, China, on November 15, 2019.

 

AnPac Bio-Medical Science Co., Ltd.
By:  

/s/ Chris Chang Yu

  Name:   Chris Chang Yu
  Title:   Chairman of the Board of Directors and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Chris Chang Yu

Chris Chang Yu

   Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)   November 15, 2019

*

Rain Yu Zhang

  

Chief Financial Officer

(Principal Financial and Accounting Officer)

  November 15, 2019

*

Feng Guo

   Director   November 15, 2019

*

Jiefeng Gu

   Director   November 15, 2019

*

Lin Yu

   Director   November 15, 2019

*

Pu Xing

   Director   November 15, 2019

*

Ren Luo

   Director   November 15, 2019

*

Sarah Yu

   Director   November 15, 2019

 

*By:  

/s/ Chris Chang Yu

     November 15, 2019
 

Name: Chris Chang Yu

Attorney-in-fact

    

 

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Table of Contents

SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

Pursuant to the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of AnPac Bio-Medical Science Co., Ltd. has signed this registration statement or amendment thereto in California in California, USA on November 15, 2019.

 

Authorized U.S. Representative
By:  

/s/ Sharon M. Vorse-Yu

  Name:   Sharon M. Vorse-Yu
  Title:   Vice President, Technical Operations AnPac Technology USA Co., Ltd.

 

II-6

Exhibit 1.1

[] American Depositary Shares

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

REPRESENTING [] CLASS A ORDINARY SHARES, PAR VALUE US$0.01 PER SHARE

UNDERWRITING AGREEMENT

[    ], 2019

WestPark Capital Inc.

1900 Avenue of the Stars, Suite 310

Los Angeles, CA 90067

United States of America

Univest Securities, LLC

375 Park Avenue, 15th Floor

New York, NY 10152

As representatives (the “Representatives”) of the several Underwriters named in Schedule I hereto

Ladies and Gentlemen:

AnPac Bio-Medical Science Co., Ltd., a business company limited by shares under the laws of the British Virgin Islands (the “Company”), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the Underwriters”) an aggregate of [●] Class A ordinary shares, par value US$0.01 per share, of the Company (the “Firm Shares”) in the form of [●] American Depositary Shares (as defined below) (the “Firm ADSs”).

The Company also proposes to issue and sell to the several Underwriters not more than an additional [●] Class A ordinary shares, par value US$0.01 per share, of the Company (the “Additional Shares”) in the form of [●] American Depositary Shares (the “Additional ADSs”), if and to the extent that you, as Representatives of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such Additional ADSs granted to the Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the “Offered Shares.” The Firm ADSs and the Additional ADSs are hereinafter collectively referred to as the “Offered ADSs.” The Offered ADSs and the underlying Offered Shares are hereinafter collectively referred to as the “Offered Securities.” The Class A ordinary shares, par value US$0.01 per share, of the Company to be issued and outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the “Class A Ordinary Shares,” and the Class A Ordinary Shares and Class B ordinary shares, par value US$0.01 per share, of the Company are hereinafter collectively referred to as the “Ordinary Shares”).

 

-1-


The Underwriters will take delivery of the Offered Shares in the form of American Depositary Shares (the “American Depositary Shares” or “ADSs”). The American Depositary Shares are to be issued pursuant to a Deposit Agreement dated as of [●], 2019 (the “Deposit Agreement”) among the Company, Citibank, N.A., as Depositary (the Depositary”), and the owners and holders from time to time of the American Depositary Shares issued under the Deposit Agreement. Each American Depositary Share will initially represent the right to receive one Class A Ordinary Shares deposited pursuant to the Deposit Agreement.

The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form F-1, including a prospectus, relating to the Offered Shares and a registration statement on Form F-6 relating to the Offered ADSs. The registration statement relating to the Offered Shares, as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the U.S. Securities Act of 1933, as amended (the “Securities Act”), is hereinafter referred to as the “Registration Statement;” the prospectus in the form first used to confirm sales of the Offered Securities (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the “Prospectus.” The registration statement on Form F-6 relating to the American Depositary Shares, as amended at the time it becomes effective, is hereinafter referred to as the “ADS Registration Statement.” If the Company has filed an abbreviated registration statement to register additional Offered Shares pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), then any reference herein to the term “Registration Statement” shall be deemed to include the corresponding Rule 462 Registration Statement. The Company has filed, in accordance with Section 12 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), a registration statement on Form 8-A to register the Offered Securities (the “Exchange Act Registration Statement”).

For purposes of this Agreement, “free writing prospectus” has the meaning set forth in Rule 405 under the Securities Act, “Time of Sale Prospectus” means the preliminary prospectus together with the documents and pricing information set forth in Schedule II hereto, and “broadly available road show” means a “bona fide electronic road show” as defined in Rule 433(h)(5) under the Securities Act that has been made available without restriction to any person. As used herein, the terms “Registration Statement,” “preliminary prospectus,” “Time of Sale Prospectus” and “Prospectus” shall include the documents, if any, incorporated by reference therein as of the date hereof.

1.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

1.1    The Company represents and warrants to and agrees with each of the Underwriters that:

(a)    Effectiveness of Registration Statement. Each of the Registration Statement and the ADS Registration Statement has become effective under the Securities Act; the Exchange Act Registration Statement has become effective under the Exchange Act; no stop order suspending the effectiveness of the Registration Statement, the ADS Registration Statement or the Exchange Act Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Company, threatened by the Commission.

 

-2-


(b)    Compliance with Securities Law. (i) Each of the Registration Statement and the ADS Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement, the ADS Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (iii) the Time of Sale Prospectus does not, and at the time of each sale of the Offered Securities in connection with the offering when the Prospectus is not yet available to prospective purchasers, at the Closing Date (as defined in Section 4) and at each Option Closing Date (as defined in Section 2), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iv) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the Underwriter Information described as such in Section 9(b) hereof.

(c)    Ineligible Issuer Status and Issuer Free Writing Prospectus. The Company is not an “ineligible issuer” in connection with the offering pursuant to Rules 164, 405 and 433 under the Securities Act. Any free writing prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Except for the free writing prospectuses, if any, identified in Schedule II hereto, and electronic road shows, if any, each furnished to you before first use, the Company has not prepared, used or referred to, and will not, without the prior consent of the Representatives, prepare, use or refer to, any free writing prospectus. The Company has satisfied and agrees that it will satisfy the conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show. As of the time of each sale of the Offered Securities in connection with the offering when the Prospectus is not yet available to prospective purchasers, no free writing prospectus, when considered together with the Time of Sale Prospectus, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the Underwriter Information described as such in Section 9(b) hereof.

 

-3-


(d)    Good Standing of the Company. The Company has been duly incorporated, is validly existing as a business company limited by shares in good standing under the laws of the British Virgin Islands, has the corporate power and authority to own or lease its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. A “Material Adverse Effect” means a material adverse effect on the condition (financial or otherwise), earnings, results of operations, business or prospects of the Company and its Subsidiaries, taken as a whole, or on the ability of the Company and its Subsidiaries to carry out their obligations under this Agreement and the Deposit Agreement. The currently effective memorandum and articles of association of the Company comply with the requirements of applicable British Virgin Islands law and are in full force and effect. The third amended and restated memorandum and articles of association of the Company adopted on October 31, 2019 and filed as Exhibit 3.2 to the Registration Statement comply with the requirements of applicable British Virgin Islands laws and, prior to the closing on the Closing Date, will be in full force and effect. Complete and correct copies of all constitutive documents of the Company and all amendments thereto have been delivered to the Representatives; except as set forth in the Registration Statements, no change will be made to any such constitutive documents on or after the date of this Agreement through and including the Closing Date.

(e)    Subsidiaries. Each of the Company’s direct and indirect subsidiaries (each a “Subsidiary” and collectively, the “Subsidiaries”) has been identified on Schedule III. Each of the Subsidiaries has been duly incorporated, is validly existing as a corporation with limited liability established under the laws of the People’s Republic of China (the “PRC”) or the U.S., as the case may be, and in good standing under the laws of the jurisdiction of its incorporation, has full power and authority (corporate or otherwise) to own its property and to conduct its business as described in the Time of Sale Prospectus and the Prospectus, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except as disclosed in the Time of Sale Prospectus and the Prospectus and to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole; all of the equity interests of each Subsidiary have been duly and validly authorized and issued, are owned directly or indirectly by the Company, are duly paid in accordance with its articles of association and are free and clear of all liens, encumbrances, equities or claims. None of the outstanding share capital or equity interest in any Subsidiary was issued in violation of preemptive or similar rights of any security holder of such Subsidiary. All of the constitutive or organizational documents of each of the Subsidiaries comply with the requirements of applicable laws of its jurisdiction of incorporation or organization and are in full force and effect. Apart from the Subsidiaries, the Company has no direct or indirect subsidiaries or any other company over which it has direct or indirect effective control.

 

-4-


(f)    Authorization of this Agreement. This Agreement has been duly authorized, executed and delivered by the Company.

(g)    Authorization of the Deposit Agreement. The Deposit Agreement has been duly authorized, executed and delivered by the Company and assuming due authorization, execution and delivery by the Depositary, constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles. The description of the Deposit Agreement contained in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus is true and accurate in all material respects.

(h)    Due Authorization. The Registration Statement, the preliminary prospectus, the Prospectus, any issuer free writing prospectus and the ADS Registration Statement and the filing of the Registration Statement, the Prospectus, any issuer free writing prospectus and the ADS Registration Statement with the Commission have been duly authorized by and on behalf of the Company, and the Registration Statement and the ADS Registration Statement have been duly executed pursuant to such authorization by and on behalf of the Company. All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement by the Company and the issuance and sale of the Offered Securities and the Representatives’ Warrant ((as defined below) including the Warrant Shares (as defined below)) by the Company.

(i)    Share Capital. The maximum number of shares that the Company is authorized to issue conforms as to legal matters to the description thereof contained in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus.

(j)    Ordinary Share. (i) The Ordinary Shares issued and outstanding prior to the issuance of the Offered Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable. As of the date hereof, the Company has authorized, issued and outstanding shares as set forth in the sections of the Time of Sale Prospectus and the Prospectus under the headings “Capitalization” and “Description of Share Capital” and, as of the Closing Date, the Company shall have authorized and outstanding capitalization as set forth in the sections of the Time of Sale Prospectus and the Prospectus under the headings “Capitalization” and “Description of Share Capital.” (ii) Except as described in the Time of Sale Prospectus and the Prospectus, there are (A) no outstanding securities issued by the Company convertible into or exchangeable for, rights, warrants or options to acquire from the Company, or obligations of the Company to issue, Ordinary Shares or any of the share capital of the Company, and (B) no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any share capital of, or any direct interest in, any of the Company’s Subsidiaries.

 

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(k)    Offered ADSs. The Offered ADSs, when issued by the Depositary against the deposit of the Offered Shares in respect thereof in accordance with the provisions of the Deposit Agreement, will be duly authorized, validly issued and the persons in whose names such Offered ADSs are registered will be entitled to the rights of registered holders of American depositary receipt specified therein and in the Deposit Agreement.

(l)    Offered Shares. (i) The Offered Shares to be sold by the Company have been duly authorized and, when issued, delivered and fully paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Offered Shares will not be subject to any preemptive rights, resale rights, rights of first refusal or similar rights. Except as disclosed in the Time of Sale Prospectus and the Prospectus and subject to the terms and conditions of the Deposit Agreement, the Offered Shares, when issued and delivered against payment therefor in accordance with the terms of this Agreement, will be free of any restriction upon the voting or transfer thereof pursuant to the Company’s constitutive documents or any agreement or other instrument to which the Company is a party. (ii) The Offered Securities, when issued, are freely transferable by the Company to or for the account of the several Underwriters and the initial purchasers thereof, and, except as described in the Time of Sale Prospectus and the Prospectus and subject to the terms and conditions of the Deposit Agreement, there are no restrictions on subsequent transfers of the Offered Securities under the laws of the British Virgin Islands or the United States. (iii) The ordinary shares issuable upon exercise of the Representatives’ Warrant (the “Warrant Shares”) will be duly authorized and validly reserved for issuance upon exercise of the Representatives’ Warrant in a number sufficient to meet the exercise requirement thereunder and, when fully paid for and issued in accordance with the terms of the Representatives’ Warrant, such Warrant Shares will be validly issued, fully paid and non-assessable, and the issuance of such Warrant Shares will not be subject to any preemptive rights, resale rights, rights of first refusal or similar rights. Except as disclosed in the Time of Sale Prospectus and the Prospectus and subject to the terms and conditions of the Deposit Agreement, the Warrant Shares, when issued and delivered against payment therefor in accordance with the terms of the Representatives’ Warrant, will be free of any restriction upon the voting or transfer thereof pursuant to the Company’s constitutive documents or any agreement or other instrument to which the Company is a party. The Warrant Shares, when issued, are freely transferable by the Company to or for the account of the Representatives, and, except as disclosed in the Time of Sale Prospectus and the Prospectus and subject to the terms and conditions of the Deposit Agreement, there are no restrictions on subsequent transfers of the Warrant Shares under the laws of the British Virgin Islands or the United States.

(m)    Accurate Disclosure. The statements in the Time of Sale Prospectus and the Prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Dividend Policy,” “Enforceability of Civil Liabilities,” “Corporate History and Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “PRC Regulations,” “Management,” “Principal Shareholders,” “Related Party Transactions,” “Description of Share Capital,” “Description of American Depositary Shares,” “Taxation” and “Underwriting” (except for information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein) insofar as such statements summarize legal matters, agreements, documents or proceedings discussed therein, are accurate, complete and fair summaries of such matters described therein in all material respects.

 

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(n)    Listing. The ADSs have been approved for listing on the NASDAQ, subject to official notice of issuance.

(o)    Compliance with Law, Constitutive Documents and Contracts. Except as disclosed in the Time of Sale Prospectus and the Prospectus, neither the Company nor any of the Subsidiaries is (i) in breach or violation of any provision of applicable law, or (ii) is in breach or violation of its respective constitutive documents, or (iii) in default under (nor has any event occurred which, with notice, lapse of time or both, would result in any breach or violation of, constitute a default under or give the holder of any indebtedness (or a person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) any agreement or other instrument that is (x) binding upon the Company or any of the Subsidiaries and (y) material to the Company and the Subsidiaries taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any of the Subsidiaries, except where such breach or default in (i) and (iii) above would not reasonably be expected to have a Material Adverse Effect.

(p)    Absence of Defaults and Conflicts Resulting from Transaction. The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement and the Deposit Agreement will not contravene (i) any provision of applicable law or the memorandum and articles of association or other constitutive documents of the Company, (ii) any agreement or other instrument binding upon the Company or any of the Subsidiaries that is material to the Company and the Subsidiaries, taken as a whole, or (iii) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any of the Subsidiaries; and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement or the Deposit Agreement, except such as may be required by the securities or Blue Sky laws of the various states of the United States of America in connection with the offer and sale of the Offered Securities.

(q)    No Material Adverse Change in Business. Since the end of the period covered by the latest audited financial statements included in the Registration Statement, the Time of Sale Prospectus and the Prospectus and except as disclosed in the Time of Sale Prospectus and the Prospectus, (i) there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its Subsidiaries, taken as a whole; (ii) there has been no purchase of its own outstanding share capital by the Company, no dividend or distribution of any kind declared, paid or made by the Company on any class of its share capital; (iii) there has been no material adverse change in the share capital, short-term debt (other than changes in the fair value of the Company’s convertible loans from Jiaxing Zhijun Investment Management Co., Ltd. or the interest accrued thereupon or short-term debt incurred in the ordinary course of business) or long-term debt of the Company and its Subsidiaries, taken as a whole; (iv) neither the Company nor any of its Subsidiaries has (A) entered into or assumed any material transaction or agreement, (B) incurred, assumed or acquired any material liability or obligation, direct or contingent, (C) acquired or disposed of or agreed to acquire or dispose of any business or any other material asset, or (D) agreed to take any of the foregoing actions; and (v) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood, typhoon, or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree.

 

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(r)    No Pending Proceedings. There are no legal or governmental proceedings pending or, to the Company’s knowledge, threatened (including any inquiries or investigations by any court or governmental agency or body, domestic or foreign) to which the Company, any of its Subsidiaries or any of its executive officers, directors and key employees is a party or to which any of the properties of the Company or any of its Subsidiaries is subject (i) other than proceedings that would not have a Material Adverse Effect or (ii) that are required to be described in the Registration Statement or the Prospectus and are not so described; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.

(s)    Preliminary Prospectuses. Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.

(t)    Investment Company Act. The Company is not, and after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Time of Sale Prospectus and the Prospectus will not be, required to register as an “investment company” as such term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”).

(u)    Environmental Laws. (i) The Company and its Subsidiaries, are in compliance with any and all applicable national, local and foreign laws and regulations (including, for the avoidance of doubt, all applicable laws and regulations of the PRC) relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), except where such noncompliance with Environmental Laws would not, singly or in the aggregate, have a Material Adverse Effect. (ii) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties), except for those that would, singly or in the aggregate, not have a Material Adverse Effect.

(v)    Intentionally Omitted.

(w)    Registration Rights. Except as disclosed in the Time of Sale Prospectus and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act (collectively, “registration rights”), and any person to whom the Company has granted registration rights has agreed not to exercise such rights until after the expiration of the Restricted Period referred to in Section 6.1(y) hereof.

 

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(x)    Compliance with Anti-Corruption Laws. Neither the Company nor any of its Subsidiaries or, to the Company’s knowledge, its affiliates, nor any director, officer or employee of the Company or its Subsidiaries nor, to the Company’s knowledge, any agent or representative of the Company or of any of its Subsidiaries or affiliates, has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) taken or will take any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment, or giving of money, property, gifts or anything else of value, directly or indirectly, to any “government official” (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; (iii) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit; or (iv) will use, directly or indirectly, the proceeds of the offering in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any person in violation of any applicable anti-corruption laws; and the Company and its Subsidiaries and, to the Company’s knowledge, its affiliates have conducted their businesses in compliance with applicable anti-corruption laws and have instituted and maintained and will continue to maintain policies and procedures reasonably designed to promote and achieve compliance with such laws and with the representations and warranties contained herein.

(y)    Compliance with Anti-Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of all jurisdictions where the Company and its Subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

(z)    Compliance with OFAC. (i) Neither the Company nor any of its Subsidiaries, nor any director, officer or employee thereof, nor, to the knowledge of the Company, any agent, affiliate or representative of the Company or any of its Subsidiaries, is an individual or entity (“Person”) that is, or is owned or controlled by one or more Persons that are:

(A)    the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the United Nations Security Council (“UNSC”), the European Union (“EU”), Her Majesty’s Treasury (“HMT”), or other relevant sanctions authority (collectively, Sanctions”), nor

 

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(B)    located, organized or resident in a country or territory that is, the subject of Sanctions (including, without limitation, Crimea, Cuba, Iran, North Korea, Sudan and Syria).

(ii)    The Company and its Subsidiaries will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person:

(A)    to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is, or whose government is, the subject of Sanctions; or

(B)    in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise).

(iii)    For the past five years, the Company and its Subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.

(aa)    Title to Property. Each of the Company and its Subsidiaries has good and marketable title (valid land use rights and building ownership certificates in the case of real property located in the PRC) to all real property and good and marketable title to all personal property, in each case, owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries; and any real property and buildings held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries, in each case except as described in the Time of Sale Prospectus and the Prospectus.

(bb)    Possession of Intellectual Property. The Company and its Subsidiaries own, possess, have been authorized to use or can acquire on reasonable terms such trademarks, trade names, patent rights, copyrights, domain names, licenses, approvals, trade secrets, inventions, technology, know-how and other intellectual property and similar rights, including registrations and applications for registration thereof (collectively, “Intellectual Property Rights”) necessary or material to the conduct of the business now conducted as described in the Time of Sale Prospectus and the Prospectus except for such lack of Intellectual Property Rights as would not, individually or in aggregate, have or result in a Material Adverse Effect (i) There are no rights of third parties to any of the Intellectual Property Rights owned by the Company or its Subsidiaries; (ii) there is no infringement, misappropriation breach, default or other violation, or the occurrence of any event that with notice or the passage of time would constitute any of the foregoing, by the Company or its Subsidiaries or, to the Company’s knowledge, third parties of any of the Intellectual Property Rights of the Company or its Subsidiaries; (iii) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s or the Subsidiaries’ rights in or to, or the violation of any of the terms of, any of their Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (iv) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity, enforceability or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (v) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or any Subsidiary infringes, misappropriates or otherwise violates or conflicts with any Intellectual Property Rights or other proprietary rights of others and the Company is unaware of any other fact which would form a reasonable basis for any such claim; and (vi) none of the Intellectual Property Rights used by the Company or its Subsidiaries in their businesses has been obtained or is being used by the Company or its Subsidiaries in violation of any contractual obligation binding on the Company or its Subsidiaries in violation of the rights of any persons; except in each case covered by clauses (j) through (v) above such as would not individually or in the aggregate have a Material Adverse Effect.

 

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(cc)    Merger or Consolidation. Neither the Company nor any of its Subsidiaries is a party to any effective memorandum of understanding, letter of intent, definitive agreement or any similar agreements with respect to a merger or consolidation or an acquisition or disposition of assets, technologies, business units or businesses which is required to be described in the Registration Statement, the Time of Sale Prospectus and the Prospectus and which is not so described.

(dd)    Termination of Contracts. Except as described in the Time of Sale Prospectus and the Prospectus, neither the Company nor any of its Subsidiaries has sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in the Time of Sale Prospectus and the Prospectus or filed as an exhibit to the Registration Statement, and no such termination or non-renewal has been threatened by the Company or any of its Subsidiaries, or to the knowledge of the Company, any other party to any such contract or agreement.

(ee)    Absence of Labor Dispute; Compliance with Labor Law. No material labor dispute with the employees of the Company or any of its Subsidiaries exists, or to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of the principal suppliers, service providers or business partners of the Company and its Subsidiaries that could have a Material Adverse Effect. Except as disclosed in the Time of Sale Prospectus and the Prospectus, the Company and its Subsidiaries are and have been in all times in compliance with all applicable labor laws and regulations in all material respects, and no governmental investigation or proceedings with respect to labor law compliance exists, or to the knowledge of the Company, is imminent.

 

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(ff)    IT Systems. The Company and its Subsidiaries have implemented and maintained effective controls, policies, procedures, and safeguards to maintain and protect their material confidential information and the integrity, continuous operation, redundancy and security of their IT system and data (including all personal, personally identifiable, sensitive, confidential or regulated data) used in connection with their businesses and implemented backup technology consistent with industry standards and practice, and there have been no breaches, violations, outages, security breach, attack or unauthorized uses of or accesses to same that would have a Material Adverse Effect; the Company and its Subsidiaries are presently in material compliance with all applicable laws, rules and regulations, or internal policies relating to the privacy and security of their IT system and data.

(gg)    Intentionally Omitted.

(hh)    Possession of Licenses and Permits. Except as disclosed in the Time of Sale Prospectus and the Prospectus, (i) each of the Company and its Subsidiaries possesses all licenses, certificates, authorizations, declarations and permits issued by, and has made all necessary reports to and filings with, the appropriate national, local or foreign regulatory authorities having jurisdiction over the Company and each of its Subsidiaries and their respective assets and properties, for the Company and its Subsidiaries that are necessary to conduct their respective businesses; (ii) the Company and its Subsidiaries is in compliance with the terms and conditions of all such licenses, certificates, authorizations and permits in all material respects; (iii) such licenses, certificates, authorizations and permits are valid and in full force and effect and contain no materially burdensome restrictions or conditions not described in the Time of Sale Prospectus or the Prospectus; (iv) neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such license, certificate, authorization or permit; (v) neither the Company nor any of its Subsidiaries has any reason to believe that any such license, certificate, authorization or permit will not be renewed in the ordinary course if the subject of an unfavorable decision, ruling or finding would result in a Material Adverse Effect; except in the case of (i) and (v) above, where such failure to possess, file or renew would not have a Material Adverse Effect.

(ii)    Related Party Transactions. No material relationships or material transactions, direct or indirect, exist between any of the Company or its Subsidiaries on the one hand and their respective shareholders, sponsors, affiliates, officers and directors or any affiliates or family members of such persons on the other hand, except as described in the Time of Sale Prospectus and the Prospectus.

(jj)    PFIC Status. Based upon the Company’s current and projected income and assets, including the expected proceeds from this offering, the Company does not expect to be a passive foreign investment company (“PFIC”) within the meaning of Section 1297 of the United States Internal Revenue Code of 1986, as amended, for its current taxable year.

 

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(kk)    No Transaction or Other Taxes. Except as disclosed in the Time of Sale Prospectus and the Prospectus, no transaction, stamp, capital or other documentary, issuance, registration, transaction, transfer, withholding or other taxes or duties are payable by or on behalf of the Underwriters to the government of the PRC or the British Virgin Islands or any political subdivision or taxing authority thereof in connection with (i) the creation, allotment, issuance, sale and delivery of the Offered Securities by the Company or the deposit of the Offered Shares with the Depositary and the Custodian, as defined in the Deposit Agreement (the “Custodian”), the issuance of the Offered ADSs by the Depositary, and the delivery of the Offered ADSs to or for the account of the Underwriters, (ii) the purchase from the Company of the Offered Securities and the initial sale and delivery of the Offered Securities to purchasers thereof by the Underwriters, or (iii) the execution, delivery or performance of this Agreement or the Deposit Agreement; except that British Virgin Islands and PRC stamp duty may be payable in the event that this Agreement or the Deposit Agreement is executed in or brought within the jurisdiction of the British Virgin Islands or the PRC, as applicable.

(ll)    Independent Accountants. Ernst & Young Hua Ming LLP, whose reports on the consolidated financial statements of the Company are included in the Registration Statement, the Time of Sale Prospectus and the Prospectus, are independent registered public accountants with respect to the Company as required by the Securities Act and by the rules of the Public Company Accounting Oversight Board.

(mm)    Financial Statements. The financial statements included in the Registration Statement, the Time of Sale Prospectus and the Prospectus, together with the related notes and schedules thereto, present fairly the consolidated financial position of the Company as of the dates indicated and consolidated results of operations, cash flows and changes in shareholders’ equity of the Company for the periods specified and have been prepared in compliance as to form in all material respects with the applicable accounting requirements of the Securities Act and the related rules and regulations adopted by the Commission and in conformity with United States generally accepted accounting principles applied on a consistent basis during the periods involved; the other financial data contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus are accurately and fairly presented and prepared on a basis consistent with the financial statements and books and records of the Company; there are no financial statements (historical or pro forma) that are required to be included in the Registration Statement, the Time of Sale Prospectus or the Prospectus that are not included as required; and the Company and the Subsidiaries do not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations) not described in the Registration Statement, the Time of Sale Prospectus and the Prospectus.

(nn)    Critical Accounting Policies. The section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Time of Sale Prospectus and the Prospectus accurately and fairly describes (i) the accounting policies that the Company believes are the most important in the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult subjective or complex judgment; (ii) the material judgments and uncertainties affecting the application of critical accounting policies and estimates; (iii) the likelihood that materially different amounts would be reported under different conditions or using different assumptions and an explanation thereof; (iv) all material trends, demands, commitments and events known to the Company, and uncertainties, and the potential effects thereof, that the Company believes would materially affect its liquidity and are reasonably likely to occur; and (v) all off-balance sheet commitments and arrangements of the Company and its Subsidiaries, if any. The Company’s directors and management have reviewed and agreed with the selection, application and disclosure of the Company’s critical accounting policies as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus.

 

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(oo)    Internal Controls and Compliance with the Sarbanes-Oxley Act. Except as disclosed in the Time of Sale Prospectus and the Prospectus, the Company maintains a system of internal controls over accounting matters sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles in the United States and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Time of Sale Prospectus and the Prospectus, since the end of the Company’s most recent audited fiscal year, there has been (i) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (ii) no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(pp)    Absence of Accounting Issues. The Company has not received any notice, oral or written, from the board of directors stating that it is reviewing or investigating, and neither the Company’s independent auditors nor its internal auditors have recommended that the board of directors review or investigate, (i) adding to, deleting, changing the application of, or changing the Company’s disclosure with respect to, any of the Company’s material accounting policies or (ii) any matter which could result in a restatement of the Company’s financial statements for any annual or interim period during the current or prior three fiscal years.

(qq)    Operating and Other Company Data. All operating and other Company data disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, are true and accurate in all material respects.

(rr)    Third-party Data. Any statistical, industry-related and market-related data included in the Registration Statement, the Time of Sale Prospectus or Prospectus are based on or derived from sources that the Company reasonably and in good faith believes to be reliable and accurate, and such data agree with the sources from which they are derived, and the Company has obtained the written consent for the use of such data from such sources to the extent required.

(ss)    Registration Statement Exhibits. There are no legal or governmental proceedings or contracts or other documents of a character required to be described in the Registration Statement, the ADS Registration Statement or the Exchange Act Registration Statement or, in the case of documents, to be filed as exhibits to the Registration Statement, that are not described and filed as required.

(tt)    No Unapproved Marketing Documents. The Company has not distributed and, prior to the later to occur of any delivery date and completion of the distribution of the Offered Securities, will not distribute any offering material in connection with the offering and sale of the Offered Securities other than the preliminary prospectus filed as part of the Registration Statement or as part of any amendment thereto, the Prospectus and any issuer free writing prospectus to which the Representatives have consented, as set forth on Schedule II hereto.

 

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(uu)    Payments of Dividends; Payments in Foreign Currency. Except as described in the Time of Sale Prospectus and the Prospectus, (i) none of the Company nor any of its Subsidiaries is prohibited, directly or indirectly, from (A) paying any dividends or making any other distributions on its share capital, (B) making or repaying any loan or advance to the Company or any other Subsidiary or (C) transferring any of its properties or assets to the Company or any other Subsidiary; and (ii) all dividends and other distributions declared and payable upon the share capital of the Company or any of its Subsidiaries (A) may be converted into United States dollars, that may be freely transferred out of such Person’s jurisdiction of incorporation, without the consent, approval, authorization or order of, or qualification with, any court or governmental agency or body in such Person’s jurisdiction of incorporation or tax residence; and (B) are not and will not be subject to withholding, value added or other taxes under the currently effective laws and regulations of such Person’s jurisdiction of incorporation, without the necessity of obtaining any consents, approvals, authorizations, orders, registrations, clearances or qualifications of or with any court or governmental agency or body having jurisdiction over such Person.

(vv)    Compliance with PRC Overseas Investment and Listing Regulations. Except as disclosed in the Time of Sale Prospectus and the Prospectus, each of the Company and its Subsidiaries has complied in all material respects, and has taken all reasonable steps to ensure compliance in all material respects by each of its shareholders that is directly or indirectly owned or controlled by, a PRC resident or citizen with any applicable rules and regulations of the relevant PRC government agencies (including but not limited to the Ministry of Commerce, the National Development and Reform Commission, the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (the “SAFE”) relating to overseas investment by PRC residents and citizens (the “PRC Overseas Investment and Listing Regulations”), including, without limitation, requesting each such Person that is, or is directly or indirectly owned or controlled by, a PRC resident or citizen, to complete any registration and other procedures required under applicable PRC Overseas Investment and Listing Regulations (including any applicable rules and regulations of the SAFE).

(ww)    M&A Rules. The Company is aware of and has been advised as to the content of the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and any official clarifications, guidance, interpretations or implementation rules in connection with or related thereto (the “PRC Mergers and Acquisitions Rules”) jointly promulgated by the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Tax Administration, the State Administration of Industry and Commerce, the CSRC and SAFE on August 8, 2006 and amended by the Ministry of Commerce on June 22, 2009, including the provisions thereof which purport to require offshore special purpose entities formed for listing purposes and controlled directly or indirectly by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of their securities on an overseas stock exchange. Except as disclosed in the Time of Sale Prospectus and the Prospectus, the issuance and sale of the Offered Securities, the listing and trading of the Offered ADSs on the NASDAQ and the consummation of the transactions contemplated by this Agreement and the Deposit Agreement (i) are not and will not be, as of the date hereof or at the Closing Date or the applicable Option Closing Date, as the case may be, adversely affected by the PRC Mergers and Acquisitions Rules and (ii) do not require the prior approval of the CSRC.

 

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(xx)    Foreign Private Issuer. The Company is a “foreign private issuer” within the meaning of Rule 405 under the Securities Act.

(yy)    Absence of Manipulation. None of the Company, the Subsidiaries or, to the knowledge of the Company, any of their respective directors, officers, affiliates or controlling persons has taken, directly or indirectly, any action which was designed to cause or result in, or that has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Offered Securities.

(zz)    No Sale, Issuance and Distribution of Shares. Except as described in the Time of Sale Prospectus and the Prospectus, the Company has not sold, issued or distributed any Ordinary Shares during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.

(aaa)    No Immunity. None of the Company, the Subsidiaries or any of their respective properties, assets or revenues has any right of immunity, under the laws of the British Virgin Islands, the PRC or the State of New York, from any legal action, suit or proceeding, the giving of any relief in any such legal action, suit or proceeding, set-off or counterclaim, the jurisdiction of any British Virgin Islands, Hong Kong, PRC, New York or United States federal court, service of process, attachment upon or prior to judgment, or attachment in aid of execution of judgment, or execution of a judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of a judgment, in any such court, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Agreement or the Deposit Agreement; and, to the extent that the Company, any of the Subsidiaries or any of their respective properties, assets or revenues may have or may hereafter become entitled to any such right of immunity in any such court in which proceedings may at any time be commenced, each of the Company and the Subsidiaries waives or will waive such right to the extent permitted by law and has consented to such relief and enforcement as provided in Section 13 of this Agreement and Section 7.6 of the Deposit Agreement.

(bbb)    Validity of Choice of Law. The choice of the laws of the State of New York as the governing law of this Agreement and the Deposit Agreement is a valid choice of law under the laws of the British Virgin Islands and the PRC and will be observed and given effect to by courts in the British Virgin Islands and the PRC, except as disclosed in the Time of Sale Prospectus and the Prospectus. The Company has the power to submit, and pursuant to Section 13 of this Agreement and Section [7.6] of the Deposit Agreement, has legally, validly, effectively and irrevocably submitted, to the personal jurisdiction of each New York State and United States Federal court sitting in The City of New York (each, a “New York Court”) and has validly and irrevocably waived any objection to the laying of venue of any suit, action or proceeding brought in any such court; and the Company has the power to designate, appoint and empower, and pursuant to Section 13 of this Agreement and Section [7.6] of the Deposit Agreement, has legally, validly, effectively and irrevocably designated, appointed and empowered, an authorized agent for service of process in any action arising out of or relating to this Agreement, the Deposit Agreement, any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the Registration Statement, the ADS Registration Statement or the offering of the Offered Securities in any New York Court, and service of process effected on such authorized agent will be effective to confer valid personal jurisdiction over the Company as provided in Section 13 hereof and Section [7.6] of the Deposit Agreement.

 

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(ccc)    Enforceability of Judgment. Any final and conclusive judgment for a fixed or readily calculable sum of money rendered by a New York Court having jurisdiction under its own domestic laws in respect of any suit, action or proceeding against the Company based upon this Agreement or the Deposit Agreement and any instruments or agreements entered into for the consummation of the transactions contemplated herein and therein, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issues would be necessary and would be recognized and enforceable against the Company, without re-examination or review of the merits of the cause of action in respect of which the original judgment was given or re-litigation of the matters adjudicated upon, by the courts of the PRC, provided that (i) with respect to courts of the British Virgin Islands, (A) such court issuing the judgment had proper jurisdiction in the matter and the Company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process, (B) such judgement was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the Company, (C) in obtaining judgment there was no fraud on the part of the person in whose favor judgement was given or on the part of such court, (D) recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to the public policy of the British Virgin Islands, and (E) the proceedings pursuant to which judgement was obtained were not contrary to natural justice, and (ii) with respect to courts of the PRC, any application or request for recognition and execution of such judgment is subject to compliance with the PRC Civil Procedures Law. The Company is not aware of any reason why the enforcement in the British Virgin Islands or the PRC of such a New York Court judgment would be, as of the date hereof, contrary to public policy of the British Virgin Islands or PRC.1

(ddd)    No Finder’s Fee. Except as disclosed in the Time of Sale Prospectus and the Prospectus, there are no contracts, agreements or understandings between the Company or its Subsidiaries and any person that would give rise to a valid claim against the Company or its Subsidiaries or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this offering, or any other arrangements, agreements, understandings, payments or issuance with respect to the Company and its Subsidiaries or any of their respective officers, directors, shareholders, partners, employees or affiliates that may affect the Underwriters’ compensation as determined by the Financial Industry Regulatory Authority (“FINRA”).

(eee)    No Broker-Dealer Affiliation. There are no affiliations or associations between (i) any member of FINRA and (ii) the Company or any of its Subsidiaries or, to the knowledge of the Company, any of their respective officers, directors or 5% or greater security holders or any beneficial owner of the Company’s unregistered equity securities that were acquired at any time on or after the 180th day immediately preceding the date that the Registration Statement was initially filed with the Commission.

 

 

1 

Subject to confirmation from BVI counsel to the underwriters.

 

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(fff)    Representation of Officers. Any certificate signed by any officer of the Company and delivered to the Representatives or counsel to the Underwriters pursuant to Section 5 of this Agreement in connection with the offering shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each Underwriter.

(ggg)    Tax Filings. (i) The Company and each of its Subsidiaries have filed all national, local and foreign tax returns required to be filed through the date of this Agreement or have requested extensions thereof and have paid all taxes required to be paid thereon (except for cases where failure to file or pay would not have a Material Adverse Effect, or except for taxes currently being contested in good faith and for which adequate reserves have been made in the financial statements of the Company), and no tax deficiency has been determined adversely to the Company or any of its Subsidiaries which has had (nor does the Company nor any of its Subsidiaries have any notice or knowledge of any tax deficiency which could reasonably be expected to be determined adversely to the Company or its Subsidiaries and which could reasonably be expected to have) a Material Adverse Effect. (ii) Any unpaid material income and corporation tax liability of the Company for any years not finally determined have been accrued on the Company’s financial statements in accordance with the United States generally accepted accounting principles. (iii) All local and national PRC governmental tax holidays, exemptions, waivers, financial subsidies, and other local and national PRC tax relief, concessions and preferential treatment enjoyed by the Company or any of the Subsidiaries as described in the Registration Statement, the Time of Sale Prospectus and the Prospectus are valid, binding and enforceable and do not violate any laws, regulations, rules, orders, decrees, guidelines, judicial interpretations, notices or other legislation of the PRC.

(hhh)    EGC Status. From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”). “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.

(iii)    Testing-the-Waters Communication. The Company (A) has not engaged in any Testing-the-Waters Communication other than Testing-the-Waters Communications with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act, and (B) has not authorized anyone other than the Representatives and the Company’s employees and consultants to engage in Testing-the-Waters Communications. The Company shall use its reasonable efforts to inform the Representatives of any Testing-the-Waters Communications completed without the Representatives present as soon as commercially practicable after completion of such communication. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any other Written Testing-the-Waters Communications. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.

 

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(jjj)    As of the time of each sale of the Offered Securities in connection with the offering when the Prospectus is not yet available to prospective purchasers, no individual Written Testing-the-Waters Communication, when considered together with the Time of Sale Prospectus, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(kkk)    Liquidity and Capital Resources. The Registration Statement, the Time of Sale Prospectus and the Prospectus fairly and accurately describe all material trends, demands, commitments, events, uncertainties and the potential effects thereof known to the Company, and that the Company believes would materially affect its liquidity and are reasonably likely to occur.

2.    AGREEMENTS TO SELL AND PURCHASE.

The Company hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company at US$[●] per American Depositary Share (for PRC based investors introduced by the Company to the Underwriters) or US$[●] per American Depositary Share (for other investors) (collectively, the “Purchase Price”) the number of Firm ADSs (subject to such adjustments to eliminate fractional ADSs as you may determine) that bears the same proportion to the number of Firm ADSs to be sold by the Company as the number of Firm ADSs set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm ADSs.

On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional ADSs, and the Underwriters shall have the right to purchase, severally and not jointly, up to [●] Additional ADSs at the Purchase Price, provided, however, that the amount paid by the Underwriters for any Additional ADSs shall be reduced by an amount per ADS equal to any dividends declared by the Company and payable on the Firm ADSs but not payable on such Additional ADSs. You may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 30 days after the date of this Agreement. Any exercise notice shall specify the number of Additional ADSs to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least one business day after the written notice is given and may not be earlier than the closing date for the Firm ADSs nor later than ten business days after the date of such notice. Additional ADSs may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm ADSs. On each day, if any, that Additional ADSs are to be purchased (an “Option Closing Date”), each Underwriter agrees, severally and not jointly, to purchase the number of Additional ADSs (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional ADSs to be purchased on such Option Closing Date as the number of Firm ADSs set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm ADSs.

 

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3.    TERMS OF PUBLIC OFFERING

The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Offered ADSs as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Offered ADSs are to be offered to the public initially at US$[●] per ADS (the “Public Offering Price”) and to certain dealers selected by the Representatives at a price that represents a concession not in excess of US$[●] per ADS under the Public Offering Price.

4.    PAYMENT AND DELIVERY.

(a)    Payment for the Firm ADSs to be sold by the Company shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm ADSs for the respective accounts of the several Underwriters at [10]:00 a.m., New York City time, on [●], 2019, or at such other time on the same or such other date, not later than [●], 2019, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the “Closing Date.”

(b)    Payment for any Additional ADSs shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional ADSs for the respective accounts of the several Underwriters at [10]:00 a.m., New York City time, on the date specified in the corresponding notice described in Section 2 or at such other time on the same or on such other date, in any event not later than seven days after the date so specified, as shall be designated in writing by you.

(c)    The Offered ADSs to be delivered to each Underwriter shall be delivered in book entry form, and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. Such Offered ADSs shall be delivered by or on behalf of the Company to the Representatives through the facilities of the Depository Trust Company (“DTC”), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal or other immediately available funds to the account(s) specified by the Company to the Representatives on the Closing Date or Option Closing Date, as the case may be, or at such other time and date as shall be designated in writing by the Representatives. The Purchase Price payable by the Underwriters shall be reduced by (i) any transfer taxes paid by, or on behalf of, the Underwriters in connection with the transfer of the Offered Securities to the Underwriters and (ii) any withholding required by law. The Company will cause the certificates representing the Offered Shares to be made available for inspection at least 24 hours prior to the Closing Date or Option Closing Date, as the case may be.

 

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(d)    The Company hereby agrees to issue to the Representatives (and/or their designees) on the Closing Date, warrants to purchase such number of ordinary shares of the Company up to eight and one-half percent (8.5%) of the ordinary shares underlying the Firm ADSs (the “Representatives’ Warrant”). The Representatives’ Warrant, in the form attached hereto as Exhibit C, shall be exercisable, in whole or in part, commencing on the effective date of the Registration Statement (the “Effective Date”) and expiring on the five-year anniversary thereof at an initial exercise price per ADS of $[●], which is equal to 120% of the Public Offering Price per Offered ADS. The Representatives’ Warrant shall include a “cashless” exercise feature and shall include a provision for “piggy-back” registration rights until expiration or until the shares underlying the warrant are eligible for resale pursuant to an exemption from registration. The Representatives understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representatives’ Warrant and the underlying securities during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representatives’ Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representatives or of any such Underwriter or selected dealer; or as otherwise expressly permitted by Rule 5110(g), and only if any such transferee agrees to the foregoing lock-up restrictions

5.    CONDITIONS TO THE UNDERWRITERS’ OBLIGATIONS.

The obligations of the Company to sell the Offered Securities to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Offered Securities on the Closing Date and each Option Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [5:00] p.m. (New York City time) on the date hereof.

The several obligations of the Underwriters are subject to the following further conditions:

(a)    Subsequent to the execution and delivery of this Agreement and prior to the Closing Date or the applicable Option Closing Date, as the case may be, there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus that is material and adverse and that makes it, in your judgment, impracticable to market the Offered Securities on the terms and in the manner contemplated in the Time of Sale Prospectus.

(b)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, a certificate, dated such date, signed by a duly authorized executive officer of the Company, (i) to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date or the applicable Option Closing Date, as the case may be, and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before such date (and the officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened) and (ii) with respect to such other matters as the Representatives may reasonably require.

 

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(c)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, a certificate, dated such date and signed by the chief financial officer of the Company with respect to certain operating data and financial figures contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus, in form and substance reasonably satisfactory to the Representatives.

(d)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion and negative assurance letter of Cleary Gottlieb Steen & Hamilton LLP, U.S. counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to the Representatives.

(e)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion or opinions of Maples and Calder (Hong Kong) LLP, British Virgin Islands counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to the Representatives.

(f)    The Company shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of Zhong Lun Law Firm, PRC counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to the Representatives (together with a consent letter, in form and substance reasonably satisfactory to the Representatives, permitting the Company to provide a copy of such opinion to the Representatives) and a copy of such opinion shall have been provided to the Representatives.

At the request of the Company, the opinions of counsel for the Company described above (except for the opinion of the PRC counsel of the Company) shall be addressed to the Representatives and shall so state therein.

(g)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, a negative assurance letter of Sheppard, Mullin, Richter & Hampton, LLP, U.S. counsel for the Underwriters, dated the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives.

(h)    Intentionally Omitted.

(i)    The Representatives shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of Patterson Belknap Webb & Tyler LLP, counsel for the Depositary, dated the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance reasonably satisfactory to the Representatives.

(j)    The Representatives shall have received, on each of the date hereof and the Closing Date or the applicable Option Closing Date, as the case may be, a letter dated such date, in form and substance reasonably satisfactory to the Underwriters, from Ernst & Young Hua Ming LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to the underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus; provided that the letter delivered on the Closing Date shall use a “cut-off date” not earlier than three business days prior to such Closing Date.

 

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(k)    The “lock-up” letters, each substantially in the form of Exhibit A hereto, executed by the individuals and entities listed on Schedule IV relating to sales and certain other dispositions of Ordinary Shares or certain other securities, delivered to the Representatives on or before the date hereof (the “Lock-Up Letter”), shall be in full force and effect on the Closing Date.

(l)    The Deposit Agreement shall be in full force and effect on the Closing Date and the applicable Option Closing Date. The Company and the Depositary shall have taken all actions necessary to permit the deposit of the Offered Shares and the issuance of the Offered ADSs in accordance with the Deposit Agreement.

(m)    The Depositary shall have furnished or caused to be furnished to the Representatives a certificate satisfactory to the Representatives of one of its authorized officers with respect to the deposit with it of the Offered Shares against issuance of the Offered ADSs, the execution, issuance, countersignature and delivery of the ADSs pursuant to the Deposit Agreement and such other matters related thereto as the Representatives may reasonably request.

(n)    The Offered ADSs shall have been approved for listing on the NASDAQ, subject to only official notice of issuance.

(o)    If the Company elects to rely upon Rule 462(b) under the Securities Act, the Company shall have filed a Rule 462 Registration Statement with the Commission in compliance with Rule 462(b) promptly after 4:00 p.m., New York City time, on the date of this Agreement, and the Company shall have at the time of filing either paid to the Commission the filing fee for the Rule 462 Registration Statement or given irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Securities Act.

(p)    The Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective.

(q)    No stop order suspending the effectiveness of the Registration Statement, the ADS Registration Statement, any Rule 462 Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission.

(r)    FINRA shall not have raised any objection with respect to the fairness or reasonableness of the underwriting, or other arrangements of the transactions contemplated hereby.

 

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(s)    On the Closing Date or the applicable Option Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents, certificates and opinions as they may reasonably require for the purposes of enabling them to pass upon the accuracy and completeness of any statement in the Registration Statement, the Time of Sale Prospectus and the Prospectus, issuance and sale of the Offered Securities as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained.

The several obligations of the Underwriters to purchase Additional ADSs hereunder are subject to the delivery to the Representatives on the applicable Option Closing Date of such documents as the Representatives may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional ADSs to be sold on such Option Closing Date and other matters related to the issuance of such Additional ADSs.

Notwithstanding the immediately preceding paragraph, the Representatives may, in their sole discretion, waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of a Closing Date or an Option Closing Date.

6.    COVENANTS OF THE COMPANY.

6.1    The Company, in addition to its other agreements and obligations hereunder, covenants with each Underwriter as follows:

(a)    To file the Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act.

(b)    To furnish to you, without charge, [one] signed copy of the Registration Statement and the ADS Registration Statement (including, in each case, exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement and the ADS Registration Statement (in each case, without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Sections 6(f) or 6(g)below, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.

(c)    Before amending or supplementing the Registration Statement, the ADS Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.

(d)    To furnish to you a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company and not to use or refer to any proposed free writing prospectus to which you reasonably object.

(e)    Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.

 

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(f)    If the Time of Sale Prospectus is being used to solicit offers to buy the Offered Securities at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when the Time of Sale Prospectus is delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.

(g)    If, during such period after the first date of the public offering of the Offered Securities as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which the Offered Securities may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.

(h)    To endeavor to qualify the Offered Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request.

(i)    To advise you promptly and confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement, the ADS Registration Statement, the Exchange Act Registration Statement, any Time of Sale Prospectus, Prospectus or free writing prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order, suspending the effectiveness of the Registration Statement or the ADS Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement or the ADS Registration Statement, to use its best efforts to obtain the lifting or removal of such order as soon as possible.

 

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(j)    To make generally available to the Company’s security holders and to you as soon as practicable an earnings statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the date of this Agreement, which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including Rule 158 under the Securities Act).

(k)    During the period when the Prospectus is required to be delivered under the Securities Act, to file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and the rules and regulations of the Commission thereunder; during the five-year period after the date of this Agreement, so long as the Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the Exchange Act, to furnish to you and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to shareholders for such year; and to furnish to you (i) as soon as available, a copy of each report of the Company filed with or furnished to the Commission under the Exchange Act or mailed to shareholders, and (ii) from time to time, such other information concerning the Company as you may reasonably request; provided, however, that (i) in each case the Company will have no obligation to deliver such reports to the extent they are publicly available on the Company’s website or the Commission’s EDGAR reporting system, and (ii) if the Company ceases to be subject to reporting obligations under the Exchange Act, it will have no obligation hereunder to deliver any reports.

(l)    To apply the net proceeds to the Company from the sale of the Offered Securities in the manner set forth under the heading “Use of Proceeds” in the Time of Sale Prospectus and to file such reports with the Commission with respect to the sale of the Offered Securities and the application of the proceeds therefrom as may be required by Rule 463 under the Securities Act; not to invest, or otherwise use the proceeds received by the Company from its sale of the Offered Securities in such a manner (i) as would require the Company or any of the Subsidiaries to register as an investment company under the 1940 Act, and (ii) that would result in the Company being not in compliance with any applicable laws, rules and regulations of the State Administration of Foreign Exchange of the PRC.

(m)    Not to, and to cause each of its Subsidiaries not to, take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Offered Securities.

(n)    To comply with the terms of the Deposit Agreement so that the Offered ADSs will be issued by the Depositary and delivered to each Underwriter’s participant account in DTC, pursuant to this Agreement on the Closing Date and each applicable Option Closing Date.

 

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(o)    (i) Not to attempt to avoid any judgment in connection with this Agreement obtained by it, applied to it, or denied to it in a court of competent jurisdiction outside the British Virgin Islands; (ii) following the consummation of the offering, to use its reasonable efforts to obtain and maintain all approvals required in the British Virgin Islands to pay and remit outside the British Virgin Islands all dividends declared by the Company and payable on the Ordinary Shares, if any; and (iii) to use its reasonable efforts to obtain and maintain all approvals, if any, required in the British Virgin Islands for the Company to acquire sufficient foreign exchange for the payment of dividends and all other relevant purposes.

(p)    To comply with the PRC Overseas Investment and Listing Regulations, and to use its reasonable efforts to cause holders of its Ordinary Shares that are, or that are directly or indirectly owned or controlled by, Chinese residents or Chinese citizens, to comply with the PRC Overseas Investment and Listing Regulations applicable to them, including, without limitation, requesting each such shareholder to complete any registration and other procedures required under applicable PRC Overseas Investment and Listing Regulations (including any applicable rules and regulations of SAFE).

(q)    To promptly notify you if the Company ceases to be an Emerging Growth Company at any time prior to the later of (a) completion of the distribution of the Offered Securities within the meaning of the Securities Act and (b) completion of the Restricted Period (as defined in this Section 6).

(r)    If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication, when considered together with the Time of Sale Prospectus, included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify you and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

(s)    The Company will indemnify and hold harmless the Underwriters against any transaction, stamp, capital or other issuance, registration, documentary, transfer, withholding or other similar taxes or duties (other than taxes imposed on the net income of an Underwriter), including any interest and penalties, on the creation, allotment, issue and sale of the Offered Securities to the Underwriters and on the execution and delivery of, and the performance of the obligations (including the initial resale and delivery of the Offered Securities by the Underwriters) under, this Agreement or the Deposit Agreement and on bringing any such document within any jurisdiction. All payments to be made by the Company hereunder shall be made free and clear of and without withholding or deduction for or on account of any present or future taxes or duties imposed, assessed or levied by the PRC, the British Virgin Islands or any authority thereof or therein unless the Company is compelled by law to deduct or withhold such taxes, duties or charges. In that event, the Company shall pay such additional amounts as may be necessary in order that the net amounts received after such withholding or deduction shall equal the amounts that would have been received if no withholding or deduction had been made, except to the extent of taxes or duties that would not have been imposed but for (a) such Underwriter’s being a resident of the jurisdiction imposing such taxes or duties or having a permanent establishment therein or having other connections therewith, or (b) the failure of the recipient of such payment to comply with any reasonable certification, identification or other reporting requirements concerning the nationality, residence, identity or connection with the taxing authority of the recipient if such compliance is required or imposed by law as a precondition to an exemption from, or reduction in, such taxes or duties. In addition, all sums payable to an Underwriter hereunder shall be considered exclusive of any value added or similar taxes. Where the Company is obliged to pay value added or similar tax on any amount payable hereunder to an Underwriter, the Company shall, in addition to the sum payable hereunder, pay an amount equal to any applicable value added or similar tax.

 

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(t)    The Company, without the prior written consent of the Representatives on behalf of the Underwriters, will not, during the period ending 180 days after the date of the Prospectus (the “Restricted Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Ordinary Shares or American Depositary Shares or any securities convertible into or exercisable or exchangeable for Ordinary Shares or American Depositary Shares or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Ordinary Shares or American Depositary Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares, American Depositary Shares or such other securities, in cash or otherwise or (iii) file any registration statement (other than registration statements on Form S-8 relating to the issuance, vesting, exercise or settlement of equity awards granted or to be granted pursuant to any employee benefit plan described in the Time of Sale Prospectus and the Prospectus) with the Commission relating to the offering of any Ordinary Shares, American Depositary Shares or any securities convertible into or exercisable or exchangeable for Ordinary Shares or American Depositary Shares.

The restrictions contained in the preceding paragraph shall not apply to (i) the Offered Securities to be sold hereunder, (ii) the issuance by the Company of Ordinary Shares upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Representatives has been advised in writing, (iii) the grant of options to purchase Ordinary Shares or other equity-based awards under the Company’s share incentive plans existing as of the date hereof, or (iv) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Ordinary Shares or American Depositary Shares, provided that (A) such plan does not provide for the transfer of Ordinary Shares or American Depositary Shares during the Restricted Period and (B) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of Ordinary Shares or American Depositary Shares may be made under such plan during the Restricted Period.

(u)    If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a Lock-up Letter for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit B hereto through a major news service at least two business days before the effective date of the release or waiver.

 

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6.2    The Company, in addition to its other agreements and obligations hereunder, covenants with the Representatives as follows:

(a)    The Representatives shall have a right of participation (“Right of Participation”), for a period of twelve (12) months after the Closing Date, to act, on a nonexclusive basis, as (i) investment banker, book-runner, placement agent, or underwriter for any equity and debt offering of securities (excluding banking financing, but including all equity linked financings) for the Company, or any successor to or subsidiary of the Company, and (ii) as the Company’s financial advisor with respect to any merger or acquisition involving the Company (each, a “Subject Transaction”), in each case subject to the mutual agreement by the Company and the Representatives as to the Representatives’ role in any particular transaction. The Company shall notify the Representatives of its intention to pursue a Subject Transaction, including the material terms thereof, by providing written notice thereof by electronic mail addressed to the Representatives. If the Representatives fails to exercise its Right of Participation with respect to any Subject Transaction within five (5) Business Days after the mailing of such written notice, then the Representatives shall have no further claim or right with respect to the Subject Transaction. The Representatives may elect, in its sole and absolute discretion, not to exercise its Right of Participation with respect to any Subject Transaction; provided that any such election by the Representatives shall not adversely affect the Representatives’ Right of Participation with respect to any other Subject Transaction during the twelve (12) month period agreed to above. In the event the Company fails to comply with this provision, damages shall be computed as the maximum allowable amount under applicable FINRA rules and regulations.

(b)    As of the Closing Date, the Company shall have retained an investor relations advisory firm reasonably acceptable to the Representatives and the Company, which shall initially be Jin Public Relations Inc., and shall retain such firm or another firm reasonably acceptable to the Representatives for a period of not less than one (1) year after the Closing Date.

(c)    For a period of two (2) years from the Closing Date, the Representatives are hereby given the right to designate one observer to the board of directors of the Company, which observer shall be mutually agreeable to the Company and the Representatives, to attend all meetings of the board of directors and committees thereof in a non-voting observer capacity; provided, however, (i) that the Company reserves the right to withhold any information and to exclude such observer from any meeting, or any portion thereof, if necessary to protect confidentiality of information, avoid a material conflict of interest, or preserve attorney-client privilege; (ii) that in no event shall the failure to provide the notice described above invalidate in any way any action taken at a meeting of the board of directors or a committee thereof; and (iii) such observer and the Representatives shall be required to enter into a confidentiality agreement in the form reasonably required by the Company and shall comply with applicable law with respect to use of information of the Company obtained in the role of a board observer.

(d)    For a period of two (2) years after the Closing Date, the Company shall furnish or make available to the Representatives copies of annual reports and annual financial statements as required by the Commission and the Nasdaq Stock Market’s rules and also furnish or make available to the Representatives a copy of all filings the Company shall make with the Commission under the Securities Act and/or Exchange Act and the rules and regulations promulgated thereunder. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been furnished or made available to the Representatives pursuant to this Section.

 

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(e)    [On or prior to the date of this Agreement, the Company will have appropriate Directors’ & Officers’ (“D&O”) and Errors & Omissions (“E&O”) insurance with appropriate liability levels as reasonably determined by the Company. The Company acknowledges and agrees that the Representatives and their principal officers shall be named additional insureds of the Company’s D&O and E&O insurance policies to the extent reasonably obtainable and subject to customary market practice as reasonably determined by the Company and the insurer.]

7.    EXPENSES.

The Company hereby agrees to pay all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Offered Securities with the Commission; (b) all filing fees associated with the review of the public offering of the Offered Securities by FINRA; (c) all fees and expenses relating to the listing of such Offered Securities on the NASDAQ Global Market; (d) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Offered Securities under state “blue sky” securities laws and all other jurisdictions as the Representatives may reasonably designate (including, without limitation, all filing and registration fees, and the reasonable fees and disbursements of “blue sky” counsel up to a cap of $5,000); (e) all fees, expenses and disbursements relating to the registration, qualification or exemption of such Offered Securities under the securities laws of such foreign jurisdictions as the Representatives may reasonably designate; (f) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representatives may reasonably deem necessary; (g) the costs and expenses of a public relations firm for the Company mutually agreed upon by the Representatives and the Company; (h) the costs of preparing, printing and delivering certificates representing the Offered Securities; (i) fees and expenses of the transfer agent for the Offered Securities of the Company; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of the Offered Securities from the Company to the Underwriters; (k) the costs associated with post-closing advertising in the national editions of the Wall Street Journal and New York Times; (l) the fees and expenses of the Company’s accountants; (m) the fees and expenses of the Company’s legal counsel and other agents and representatives; (n) fees and expenses of the U.S. legal counsel for the Underwriters not to exceed $200,000 ($[25,000] of which was already paid), fees and expenses of the BVI legal counsel for the Underwriters not to exceed $20,000 and fees and expenses of PRC legal counsel for the Underwriters not to exceed $30,000; (o) all reasonable travel and other expenses relating to due diligence trips and site visits to the Company and (p) all reasonable road show expenses for the Offering, with all of the Underwriters’ out-of-pocket expenses under this Section 7 (including expenses previously paid or reimbursed by the Company but excluding the fees in subsections (d) and (n) above) not to exceed US$75,000. The Representatives acknowledges receipt from the Company of an advance of $[65,000] (the “Advance”) prior to the date of this Agreement to cover expenses as set forth above. The Representatives may deduct from the proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein payable by the Company to the Underwriters that exceed the aggregate of any expenses previously paid or reimbursed by the Company (including the Advance), subject to the Underwriters providing written evidence of the expenses reasonably satisfactory to the Company prior to the applicable Closing Date. It is understood, however, that except as provided in this section, Section 9 entitled “Indemnity and Contribution,” Section 10(b) entitled “Termination,” and the last paragraph of Section 11 entitled “Effectiveness; Defaulting Underwriters,” the Underwriters will pay all of their costs and expenses, including out-of-pocket expenses, fees and disbursements of their counsel and any advertising expenses in connection with any offers they may make.

 

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8.    COVENANTS OF THE UNDERWRITERS.

Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of such Underwriter.

9.    INDEMNITY AND CONTRIBUTION.

(a)    The Company agrees to indemnify and hold harmless each Underwriter, each director, officer, employee, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, the ADS Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show as defined in Rule 433(h) under the Securities Act (a “road show”), or the Prospectus or any amendment or supplement thereto, or any Written Testing-the-Waters Communication or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Underwriter and each such director, officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, director, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein.

 

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(b)    Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus or the Prospectus or any amendment or supplement thereto, any issuer free writing prospectus or any road show, it being understood and agreed that the only such information furnished by any Underwriter consists of the concession figures appearing in the [fourth] paragraph, the disclosure on sales to discretionary accounts appearing in the [seventeenth] paragraph and addresses of the Underwriters in the [    ] paragraph (the “Underwriter Information”).

(c)    In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a), 9(b), or 9(c), such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter within the meaning of Rule 405 under the Securities Act, or (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any Underwriters, such firm shall be designated in writing by the Representatives. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement (x) includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding, and (y) does not include any statement as to, or any admission of, fault, culpability or a failure to act by or on behalf of any indemnified party.

 

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(d)    To the extent the indemnification provided for in Section 9(a), 9(b) or 9(c), is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Offered Securities or (ii) if the allocation provided by clause 9(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(d)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Offered Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Offered Securities (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Offered Securities. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters’ respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Offered ADSs they have purchased hereunder, and not joint.

 

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(e)    The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 9(d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Offered Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

(f)    The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Offered Securities.

10.    TERMINATION.

(a)    The Underwriters may terminate this Agreement by notice given by the Representatives to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the NYSE MKT, or the NASDAQ Global Market, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States, the PRC or the British Virgin Islands shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by United States Federal, New York State, PRC or British Virgin Islands authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets, currency exchange rates or controls or any calamity or crisis that, in the judgment of the Representatives, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in the judgment of the Representatives, impracticable or inadvisable to proceed with the offer, sale or delivery of the Offered Securities on the terms and in the manner contemplated in the Time of Sale Prospectus or the Prospectus.

 

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(b)    Expenses. Notwithstanding anything to the contrary in this Agreement, in the event that this Agreement is terminated pursuant to this section, such termination shall be without liability of any party to any other party except that the Company will reimburse all out-of-pocket expenses reasonably incurred by the Underwriters subject to a cap in accordance with Section 7 hereof; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, the Advance received by the Representatives will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).

11.    EFFECTIVENESS; DEFAULTING UNDERWRITERS.

This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

If, on the Closing Date or the applicable Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Offered ADSs that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Offered ADSs which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Offered ADSs to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm ADSs set forth opposite their respective names in Schedule I bears to the aggregate number of Firm ADSs set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Offered ADSs which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Offered ADSs that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 12 by an amount in excess of one-ninth of such number of Offered ADSs without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm ADSs and the aggregate number of Firm ADSs with respect to which such default occurs is more than one-tenth of the aggregate number of Firm ADSs to be purchased on such date, and arrangements satisfactory to the Representatives, the Company for the purchase of such Firm ADSs are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional ADSs and the aggregate number of Additional ADSs with respect to which such default occurs is more than one-tenth of the aggregate number of Additional ADSs to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional ADSs to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional ADSs that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

 

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If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters subject to a cap in connection with Section 7 of this Agreement or the offering contemplated hereunder.

12.    SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR SERVICE.

The Company hereby irrevocably submits to the exclusive jurisdiction of the New York Courts in any suit or proceeding arising out of or relating to this Agreement, the Deposit Agreement, the Time of Sale Prospectus, the Prospectus, the Registration Statement, the ADS Registration Statement, the offering of the Offered Securities, or any transactions contemplated hereby. The Company and each of the Company’s Subsidiaries irrevocably and unconditionally waive any objection to the laying of venue of any suit or proceeding arising out of or relating to this Agreement, the Deposit Agreement, the Time of Sale Prospectus, the Prospectus, the Registration Statement, the ADS Registration Statement, the offering of the Offered Securities, or any transactions contemplated hereby in the New York Courts, and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. The Company irrevocably appoints AnPac Technology USA Co., Ltd. as its authorized agent in the Borough of Manhattan in The City of New York upon which process may be served in any such suit or proceeding, and agree that service of process in any manner permitted by applicable law upon such agent shall be deemed in every respect effective service of process in any manner permitted by applicable law upon the Company, as the case may be, in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement. The Company waives, to the fullest extent permitted by law, any other requirements of or objections to personal jurisdiction with respect thereto.

13.    JUDGMENT CURRENCY.

If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder into any currency other than United States dollars, the parties hereto agree, to the fullest extent permitted by law, that the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Underwriters could purchase United States dollars with such other currency in The City of New York on the business day preceding that on which final judgment is given. The obligation of the Company pursuant to this Agreement with respect to any sum due from it to any Underwriter or any person controlling any Underwriter shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day following receipt by such Underwriter or controlling person of any sum in such other currency, and only to the extent that such Underwriter or controlling person may in accordance with normal banking procedures purchase United States dollars with such other currency. If the United States dollars so purchased are less than the sum originally due to such Underwriter or controlling person hereunder, the Company agree as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter or controlling person against such loss. If the United States dollars so purchased are greater than the sum originally due to such Underwriter or controlling person hereunder, such Underwriter or controlling person agrees to pay to the Company, an amount equal to the excess of the dollars so purchased over the sum originally due to such Underwriter or controlling person hereunder.

 

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14.    ENTIRE AGREEMENT.

This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the sale and purchase of the Offered Securities and the offering of the Offered Securities, represents the entire agreement between the Company and the Underwriters with respect to the preparation of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Offered Securities and the offering of the Offered Securities.

15.    COUNTERPARTS.

This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

16.    APPLICABLE LAW.

This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.

17.    HEADINGS.

The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.

18.    NOTICES.

All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriters shall be delivered, mailed or sent to the Representatives at WestPark Capital Inc., 1900 Avenue of the Stars, Suite 310, Los Angeles, CA 90067, Attn: Craig Kaufman and Univest Securities, LLC, 375 Park Avenue, 15th Floor, New York, NY 10152, Attn: Edric Guo with a copy (which shall not constitute notice) to Sheppard, Mullin, Richter and Hampton LLP, 30 Rockefeller Plaza, 39th Floor, New York, NY 10112, Attn: Richard A. Friedman or Stephen A. Cohen, and if to the Company shall be delivered, mailed or sent to AnPac Bio-Medical Science Co., Ltd., 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China, Attention: Chris Chang Yu, Chief Executive Officer with a copy (which shall not constitute notice) to Cleary, Gottlieb, Steen & Hamilton LLP, 37th Floor, Hysan Place, 500 Hennessy Road, Causeway Bay, Hong Kong, Attn: Shuang Zhao.

19.    PARTIES AT INTEREST.

The Agreement set forth has been and is made solely for the benefit of the Underwriters, the Company and to the extent provided in Section 9 hereof the controlling persons, partners, directors and officers referred to in such sections and their respective successors, assigns, heirs, personal Representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any rights under or by virtue of this Agreement.

 

-37-


20.    ABSENCE OF FIDUCIARY RELATIONSHIP.

The Company acknowledges and agrees to each of the following:

(a)    No Other Relationship. The Representatives have been retained solely to act as an underwriter in connection with the sale of the Offered Securities and that no fiduciary, advisory or agency relationship between the Company and the Representatives has been created in respect of any of the transactions contemplated by this Agreement or the Prospectus, irrespective of whether the Representatives have advised or are advising the Company on other matters.

(b)    Arms’ Length Negotiations. The price of the Offered Securities set forth in this Agreement was established by the Company following discussions and arms-length negotiations with the Representatives and the Company is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated by this Agreement.

(c)    Absence of Obligation to Disclose. The Company has been advised that the Representatives and its affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company and that the Representatives have no obligation to disclose such interests and transactions to the Company by virtue of any fiduciary, advisory or agency relationship.

(d)    Waiver. The Company waives, to the fullest extent permitted by law, any claims it may have against each Representative for breach of fiduciary duty or alleged breach of fiduciary duty and agrees that each Representative shall not have any liability (whether direct or indirect) to the Company in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the Company, including shareholders, employees or creditors of the Company.

21.    RECOGNITION OF THE U.S. SPECIAL RESOLUTION REGIMES.

(a)    In the event that any Underwriter that is a Covered Entity becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer from such Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.

(b)    In the event that any Underwriter that is a Covered Entity or a BHC Act Affiliate of such Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under this Agreement that may be exercised against such Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.

 

-38-


BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 1841(k).

Covered Entity” means any of the following:

(i)    a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);

(ii)    a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or

(iii)    a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).

Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.

U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.

22.    SUCCESSORS AND ASSIGNS.

This Agreement shall be binding upon the Underwriters, the Company and their successors and assigns and any successor or assign of any substantial portion of the Company’s, and any of the Underwriters’ respective businesses and/or assets. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (a) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the directors, officers and employees of the Underwriters and each person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (b) the indemnity agreement of the Underwriters contained in Section 9(b) of this Agreement shall be deemed to be for the benefit of the Company’s directors, officers who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 22, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.

23.    PARTIAL UNENFORCEABILITY.

The invalidity or unenforceability of any section, subsection, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other section, subsection, paragraph or provision hereof. If any section, subsection, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.

 

-39-


24.    AMENDMENTS.

This Agreement may only be amended or modified in writing, signed by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit.

[SIGNATURE PAGE TO FOLLOW]

 

-40-


If the foregoing correctly sets forth the agreement between the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below.

 

Very truly yours,
ANPAC BIO-MEDICAL SCIENCE CO., LTD.
By:  

                                  

Name:  

 

Title:  

 

Accepted as of the date hereof

Acting for itself and the several Underwriters named in Schedule I hereto

 

By:   WESTPARK CAPITAL, INC.
By:  

                                      

Name:  

 

Title:  

 

By:   UNIVEST SECURITIES, LLC
By:  

                                      

Name:  

 

Title:  

 

 

-41-


SCHEDULE I

 

Underwriter

   Number of Firm ADSs to be Purchased  

Westpark Capital, Inc.

  

Univest Securities, LLC

  

 

-42-


SCHEDULE II

Time of Sale Prospectus

 

1.

Preliminary Prospectus issued [●], 2019

 

2.

[identify all free writing prospectuses filed by the Company under Rule 433(d) of the Securities Act]

 

3.

Public Offering Price: US$[●] per ADS

 

4.

Size of the Offering: [    ] ADSs, or [    ] ADSs assuming the exercise in full of the over-allotment option.

 

-43-


SCHEDULE III

SUBSIDIARIES OF THE COMPANY

 

Name

   Place of Incorporation  

AnPac Technology USA Co., Ltd.

     United States of America  

Changwei System Technology (Shanghai) Co., Ltd.

     People’s Republic of China  

AnPac Bio-Medical Technology (Lishui) Co., Ltd.

     People’s Republic of China  

Changhe Bio-Medical Technology (Yangzhou) Co., Ltd.

     People’s Republic of China  

AnPac Bio-Medical Technology (Shanghai) Co., Ltd.

     People’s Republic of China  

Shanghai Xinshenpai Technology Co., Ltd.

     People’s Republic of China  

Lishui AnPac Medical Laboratory Co., Ltd.

     People’s Republic of China  

Penghui Health Management (Shanghai) Co., Ltd.

     People’s Republic of China  

Shiji (Hainan) Medical Technology Limited

     People’s Republic of China  

Shanghai Muqing AnPac Health Technology Co., Ltd.

     People’s Republic of China  

Shenzhen Anchun Bio-Medical Technology Co., Ltd.

     People’s Republic of China  

 

-44-


SCHEDULE IV

LIST OF LOCKED-UP PARTIES

All directors, executive officers, and 1% or above shareholders of the Company.

 

-45-


EXHIBIT A

FORM OF LOCK-UP LETTER

                , 2019

WestPark Capital Inc.

1900 Avenue of the Stars, Suite 310

Los Angeles, CA 90067

United States of America

Univest Securities, LLC

375 Park Avenue, 15th Floor

New York, NY 10152

United States of America

As Representatives (the “Representatives”) of the several Underwriters (as defined below)

Ladies and Gentlemen:

The undersigned understands that you propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with AnPac Bio-Medical Science Co., Ltd., an business company limited by shares under the laws of the British Virgin Islands (the “Company”), providing for the public offering (the “Public Offering”) by the several Underwriters, including you (the “Underwriters”), of an aggregate of [                ] Class A ordinary shares, par value US$0.01 per share, of the Company (the “Class A Ordinary Shares”) in the form of [                ] American Depositary Shares (the “ADSs”).

 

-46-


To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the “Prospectus”) or such earlier date that the Representatives consents to in writing (the “Restricted Period)”, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Class A Ordinary Shares or Class B ordinary shares par value US$0.01 per share, of the Company (together with the Class A Ordinary Shares, the “Ordinary Shares”), beneficially owned (as such term is used in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), by the undersigned or any other securities so owned convertible into or exercisable or exchangeable for the Ordinary Shares (collectively, the “Other Securities”) or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Ordinary Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Ordinary Shares or such Other Securities, in cash or otherwise. The foregoing sentence shall not apply to (a) transactions relating to Ordinary Shares or Other Securities acquired (i) from the Underwriters in the Public Offering or (ii) in open market transactions after the completion of the Public Offering, (b) transfers of Ordinary Shares or Other Securities (i) as a bona fide gift, (ii) by will or intestacy, (iii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, or if the undersigned is a trust, to a trustor or beneficiary of the trust or the estate of a beneficiary of such trust (for purposes of this agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin), (iv) to any immediate family member, (v) to a partnership, limited liability company or other entity of which the undersigned and the immediate family of the undersigned are the legal and beneficial owner of all the outstanding equity securities or similar interests, (vi) to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (i) through (v) above, (vii) by operation of law, such as pursuant to a qualified domestic order, divorce settlement, divorce decree or separation agreement or (viii) to the Company from an employee of or service provider of the Company upon death, disability or termination of employment, in each case, of such employee or service provider or (c) distributions of Ordinary Shares or Other Securities (i) to limited partners, members or stockholders of the undersigned or (ii) to affiliates of the undersigned or any investment fund or other entity controlled or managed by the undersigned; provided that in the case of any transfer or distribution pursuant to clause (b) or (c), each donee or distributee or trustee shall sign and deliver a lock-up letter for the remainder of the Restricted Period substantially in the form of this letter, (d) the transfer of Ordinary Shares or Other Securities to the Company or its subsidiaries in connection with the vesting, settlement or exercise of equity awards (including by way of “net” or “cashless” exercise”), including for the payment of exercise price and tax and remittance payments due as a result of the vesting, settlement or exercise of such equity awards pursuant to any equity incentive plan or other equity award plan described in the Prospectus (each, an “Incentive Plan”), (e) transfers of Ordinary Shares or Other Securities to the Company in connection with the repurchase of Ordinary Shares or Other Securities issued pursuant to equity awards granted under any Incentive Plan or pursuant to the agreements pursuant to which such shares were issued as described in the Prospectus, provided that such repurchase of Ordinary Shares or Other Securities is in connection with the termination of the undersigned’s service to the Company, (f) the transfer of Ordinary Shares or Other Securities pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by the Board of Directors of the Company and made to all holders of the Company’s capital stock involving a change of control of the Company, provided that in the event that such tender offer, merger, consolidation or other similar transaction is not completed, the undersigned’s Ordinary Shares and Other Securities shall remain subject to the provisions of this agreement, or (g) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Ordinary Shares, Other Securities or ADSs, provided that (i) such plan does not provide for the transfer of Ordinary Shares, Other Securities or ADSs during the Restricted Period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of Ordinary Shares, Other Securities or ADSs may be made under such plan during the Restricted Period.

 

-47-


In addition, nothing in this agreement shall be deemed to prohibit (a) any transfer of any undersigned’s Ordinary Shares or Other Securities to the Company for the primary purpose of satisfying any tax or other governmental withholding obligation, through cashless surrender or otherwise, with respect to any award of equity-based compensation granted pursuant to the Incentive Plan or in connection with tax or other obligations as a result of testate succession or intestate distribution, (b) any transfer of undersigned’s Ordinary Shares pursuant to any contractual arrangement that was entered into prior to the date of this agreement and provides for the repurchase of undersigned’s Ordinary Shares by the Company in connection with the termination of the undersigned’s employment or other service relationship with the Company and any subsidiaries or affiliates of the Company; or (c) the exercise of any rights to acquire any undersigned’s Ordinary Shares by means of cash or cashless exercises or the disposition of undersigned’s Ordinary Shares to the Company, or exchange or conversion of any stock options or any other securities convertible into or exchangeable or exercisable for undersigned’s Ordinary Shares granted pursuant to the Company’s equity incentive plans, provided that any undersigned’s Ordinary Shares received upon such exercise, exchange or conversion shall be subject to the terms of this agreement.

The undersigned agrees that, without the prior written consent of the Representatives on behalf of the Underwriters, it will not, during the Restricted Period, make any demand for or exercise any right with respect to, the registration of any Ordinary Shares or Other Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Ordinary Shares except in compliance with the foregoing restrictions.

If the undersigned is an officer or director of the Company, (a) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Ordinary Shares, the Representatives will notify the Company of the impending release or waiver, and (b) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.

The undersigned understands that the Company and the Underwriters are relying upon this agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that, subject to terms and conditions in this agreement, this agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

Notwithstanding anything to the contrary contained herein, this agreement will automatically terminate and the undersigned shall be released from all obligations under this agreement upon the earliest to occur, if any, of (i) the date that the Company advises the Representatives in writing that it has determined not to proceed with the Public Offering, (ii) the date that the Company files an application with the Securities and Exchange Commission to withdraw the registration statement related to the Public Offering, (iii) the date that the Underwriting Agreement is executed but is terminated (other than the provisions thereof which survive termination) prior to payment for and delivery of the Ordinary Shares in the form of ADSs to be sold thereunder, or (iv) [December 31], 2019, if the Underwriting Agreement is not executed on or before such date.

 

-48-


This agreement and any claim, controversy or dispute arising under or related to this agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the conflict of laws principles thereof.

 

Very truly yours,

                                      

Name:

 

-49-


EXHIBIT B

FORM OF WAIVER OF LOCK-UP

                , 2019

[Name and Address of

Officer or Director

Requesting Waiver]

Dear Mr./Ms. [Name]:

This letter is being delivered to you in connection with the offering by AnPac Bio-Medical Science Co., Ltd. (the Company”) of [                ] Class A ordinary shares, par value US$[●] per share, of the Company in the form of [                ] American depositary shares, and the lock-up letter dated , 2019 (the “Lock-up Letter”), executed by you in connection with such offering, and your request for a [waiver] [release] dated , 2019, with respect to [●] Class A ordinary shares (the Shares”).

The undersigned hereby agrees to [waive] [release] the transfer restrictions set forth in the Lock-up Letter, but only with respect to the Shares, effective [●]; provided, however, that such [waiver] [release] is conditioned on the Company announcing the impending [waiver] [release] by press release through a major news service at least two business days before effectiveness of such [waiver] [release]. This letter will serve as notice to the Company of the impending [waiver] [release].

Except as expressly [waived] [released] hereby, the Lock-up Letter shall remain in full force and effect.

Very truly yours,

WestPark Capital, Inc.

Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto

 

By:  

 

Name:  

 

Title:  

 

Univest Securities, LLC

Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto

 

By:  

 

Name:  

 

Title:  

 

 

-50-


FORM OF PRESS RELEASE

AnPac Bio-Medical Science Co., Ltd.

[Date]

AnPac Bio-Medical Science Co., Ltd. (the “Company”) announced today that WestPark Capital, Inc. and Univest Securities, LLC, the representatives of the several Underwriters in the Company’s recent public sale of [                ] ordinary shares in the form of [                ] American Depositary Shares is [waiving][releasing] a lock-up restriction with respect to [●] ordinary shares (the “Shares”) of the Company held by [certain officers or directors] [an officer or director] of the Company. The [waiver][release] will take effect on , 2019, and the Shares may be sold on or after such date.

This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.

 

-51-

Exhibit 4.2

The BVI Business Companies Act

(No. 16 of 2004)

Share Certificate

 

Certificate Number [    ]       Number of Shares [    ]

AnPac Bio-Medical Science Co., Ltd.

The Company is authorised to issue 100,000,000 shares with a par value of US$0.01 each comprising (i) 70,000,000 Class A Ordinary Shares with a par value of US$0.01 each; and (ii) 30,000,000 Class B Ordinary Shares with a par value of US$0.01 each

THIS IS TO CERTIFY THAT [    ] is the registered holder of [    ] Shares of US$0.01 each fully paid in the above named Company, subject to the Memorandum and Articles of Association of the said Company and to the terms and conditions endorsed hereon.

Signed by a director of the Company

this                day of                                        

 

    

Name:

Director

Exhibit 4.3

 

 

DEPOSIT AGREEMENT

 

 

by and among

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

and

CITIBANK, N.A.,

as Depositary,

and

ALL HOLDERS AND BENEFICIAL OWNERS OF

AMERICAN DEPOSITARY SHARES

ISSUED HEREUNDER

 

 

Dated as of [date], 2019


TABLE OF CONTENTS

 

ARTICLE I

  

DEFINITIONS

     1  

Section 1.1

   ADS Record Date      1  

Section 1.2

   Affiliate      1  

Section 1.3

   American Depositary Receipt(s)”, “ADR(s)” and “Receipt(s)      1  

Section 1.4

   American Depositary Share(s)” and “ADS(s)      2  

Section 1.5

   Articles of Association      2  

Section 1.6

   Beneficial Owner      3  

Section 1.7

   Certificated ADS(s)      3  

Section 1.8

   Citibank      3  

Section 1.9

   Commission      3  

Section 1.10

   Company      3  

Section 1.11

   Custodian      3  

Section 1.12

   Deliver” and “Delivery      3  

Section 1.13

   Deposit Agreement      4  

Section 1.14

   Depositary      4  

Section 1.15

   Deposited Property      4  

Section 1.16

   Deposited Securities      4  

Section 1.17

   Dollars” and “$      4  

Section 1.18

   DTC      4  

Section 1.19

   DTC Participant      4  

Section 1.20

   Exchange Act      5  

Section 1.21

   Foreign Currency      5  

Section 1.22

   “Full Entitlement ADR(s)”, “Full Entitlement ADS(s)” and “Full Entitlement Share(s)”      5  

Section 1.23

   Holder(s)      5  

Section 1.24

   “Partial Entitlement ADR(s)”, “Partial Entitlement ADS(s)” and “Partial Entitlement Share(s)”      5  

Section 1.25

   Principal Office      5  

Section 1.26

   Registrar      5  

Section 1.27

   Restricted Securities      5  

Section 1.28

   “Restricted ADR(s)”, “Restricted ADS(s)” and “Restricted Shares”      6  

Section 1.29

   Securities Act      6  

Section 1.30

   Share Registrar      6  

Section 1.31

   Shares      6  

Section 1.32

   “Uncertificated ADS(s)”      6  

Section 1.33

   United States” and “U.S.      6  

 

i


ARTICLE II

  

APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS; DEPOSIT OF SHARES; EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS

     7  

Section 2.1

   Appointment of Depositary      7  

Section 2.2

   Form and Transferability of ADSs      7  

Section 2.3

   Deposit of Shares      9  

Section 2.4

   Registration and Safekeeping of Deposited Securities      11  

Section 2.5

   Issuance of ADSs      11  

Section 2.6

   Transfer, Combination and Split-up of ADRs      12  

Section 2.7

   Surrender of ADSs and Withdrawal of Deposited Securities      13  

Section 2.8

   Limitations on Execution and Delivery, Transfer, etc. of ADSs; Suspension of Delivery, Transfer, etc.      14  

Section 2.9

   Lost ADRs, etc.      15  

Section 2.10

   Cancellation and Destruction of Surrendered ADRs; Maintenance of Records      15  

Section 2.11

   Escheatment      15  

Section 2.12

   Partial Entitlement ADSs      16  

Section 2.13

   Certificated/Uncertificated ADSs      17  

Section 2.14

   Restricted ADSs      18  

ARTICLE III

  

CERTAIN OBLIGATIONS OF HOLDERS AND BENEFICIAL OWNERS OF ADSs

     19  

Section 3.1

   Proofs, Certificates and Other Information      19  

Section 3.2

   Liability for Taxes and Other Charges      20  

Section 3.3

   Representations and Warranties on Deposit of Shares      20  

Section 3.4

   Compliance with Information Requests      21  

Section 3.5

   Ownership Restrictions      21  

Section 3.6

   Reporting Obligations and Regulatory Approvals      21  

ARTICLE IV

  

THE DEPOSITED SECURITIES

     22  

Section 4.1

   Cash Distributions      22  

Section 4.2

   Distribution in Shares      23  

Section 4.3

   Elective Distributions in Cash or Shares      24  

Section 4.4

   Distribution of Rights to Purchase Additional ADSs      25  

Section 4.5

   Distributions Other Than Cash, Shares or Rights to Purchase Shares      26  

Section 4.6

   Distributions with Respect to Deposited Securities in Bearer Form      27  

Section 4.7

   Redemption      27  

Section 4.8

   Conversion of Foreign Currency      28  

Section 4.9

   Fixing of ADS Record Date      29  

Section 4.10

   Voting of Deposited Securities      29  

Section 4.11

   Changes Affecting Deposited Securities      32  

Section 4.12

   Available Information      32  

Section 4.13

   Reports      32  

Section 4.14

   List of Holders      32  

Section 4.15

   Taxation      35  

 

ii


ARTICLE V

  

THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY

     34  

Section 5.1

   Maintenance of Office and Transfer Books by the Registrar      34  

Section 5.2

   Exoneration      34  

Section 5.3

   Standard of Care      35  

Section 5.4

   Resignation and Removal of the Depositary; Appointment of Successor Depositary      36  

Section 5.5

   The Custodian      37  

Section 5.6

   Notices and Reports      37  

Section 5.7

   Issuance of Additional Shares, ADSs etc.      38  

Section 5.8

   Indemnification      39  

Section 5.9

   ADS Fees and Charges      40  

Section 5.10

   Restricted Securities Owners      41  

ARTICLE VI

  

AMENDMENT AND TERMINATION

     42  

Section 6.1

   Amendment/Supplement      42  

Section 6.2

   Termination      42  

ARTICLE VII

  

MISCELLANEOUS

     44  

Section 7.1

   Counterparts      44  

Section 7.2

   No Third-Party Beneficiaries/Acknowledgments      44  

Section 7.3

   Severability      44  

Section 7.4

   Holders and Beneficial Owners as Parties; Binding Effect      45  

Section 7.5

   Notices      45  

Section 7.6

   Governing Law and Jurisdiction      46  

Section 7.7

   Assignment      47  

Section 7.8

   Compliance with, and No Disclaimer under, U.S. Securities Laws      47  

Section 7.9

   The British Virgin Islands Law References      48  

Section 7.10

   Titles and References      48  

EXHIBITS

  
   Form of ADR      A-1  
   Fee Schedule      B-1  

 

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DEPOSIT AGREEMENT

DEPOSIT AGREEMENT, dated as of [●], 2019, by and among (i) ANPAC BIO-MEDICAL SCIENCE CO., LTD., a business company limited by shares incorporated in the British Virgin Islands, and its successors (the “Company”), (ii) CITIBANK, N.A., a national banking association organized under the laws of the United States of America (“Citibank”) acting in its capacity as depositary, and any successor depositary hereunder (Citibank in such capacity, the “Depositary”), and (iii) all Holders and Beneficial Owners of American Depositary Shares issued hereunder (all such capitalized terms as hereinafter defined).

W I T N E S S E T H    T H A T:

WHEREAS, the Company desires to establish with the Depositary an ADR facility to provide inter alia for the deposit of the Shares (as hereinafter defined) and the creation of American Depositary Shares representing the Shares so deposited and for the execution and Delivery (as hereinafter defined) of American Depositary Receipts (as hereinafter defined) evidencing such American Depositary Shares; and

WHEREAS, the Depositary is willing to act as the Depositary for such ADR facility upon the terms set forth in the Deposit Agreement (as hereinafter defined); and

WHEREAS, any American Depositary Receipts issued pursuant to the terms of the Deposit Agreement are to be substantially in the form of Exhibit A attached hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in the Deposit Agreement; and

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

All capitalized terms used, but not otherwise defined, herein shall have the meanings set forth below, unless otherwise clearly indicated:

Section 1.1    “ADS Record Date” shall have the meaning given to such term in Section 4.9.

Section 1.2    Affiliate shall have the meaning assigned to such term by the Commission (as hereinafter defined) under Regulation C promulgated under the Securities Act (as hereinafter defined), or under any successor regulation thereto.

Section 1.3    “American Depositary Receipt(s)”, “ADR(s)” and “Receipt(s)” shall mean the certificate(s) issued by the Depositary to evidence the American Depositary Shares issued under the terms of the Deposit Agreement in the form of Certificated ADS(s) (as hereinafter defined), as such ADRs may be amended from time to time in accordance with the provisions of the Deposit Agreement. An ADR may evidence any number of ADSs and may, in the case of ADSs held through a central depository such as DTC, be in the form of a “Balance Certificate.”


Section 1.4    “American Depositary Share(s)” and “ADS(s)” shall mean the rights and interests in the Deposited Property (as hereinafter defined) granted to the Holders and Beneficial Owners pursuant to the terms and conditions of the Deposit Agreement and, if issued as Certificated ADS(s) (as hereinafter defined), the ADR(s) issued to evidence such ADSs. ADS(s) may be issued under the terms of the Deposit Agreement in the form of (a) Certificated ADS(s) (as hereinafter defined), in which case the ADS(s) are evidenced by ADR(s), or (b) Uncertificated ADS(s) (as hereinafter defined), in which case the ADS(s) are not evidenced by ADR(s) but are reflected on the direct registration system maintained by the Depositary for such purposes under the terms of Section 2.13. Unless otherwise specified in the Deposit Agreement or in any ADR, or unless the context otherwise requires, any reference to ADS(s) shall include Certificated ADS(s) and Uncertificated ADS(s), individually or collectively, as the context may require. Each ADS shall represent the right to receive, and to exercise the beneficial ownership interests in, the number of Shares specified in the form of ADR attached hereto as Exhibit A (as amended from time to time) that are on deposit with the Depositary and/or the Custodian, subject, in each case, to the terms and conditions of the Deposit Agreement and the applicable ADR (if issued as a Certificated ADS), until there shall occur a distribution upon Deposited Securities referred to in Section 4.2 or a change in Deposited Securities referred to in Section 4.11 with respect to which additional ADSs are not issued, and thereafter each ADS shall represent the right to receive, and to exercise the beneficial ownership interests in, the applicable Deposited Property on deposit with the Depositary and the Custodian determined in accordance with the terms of such Sections, subject, in each case, to the terms and conditions of the Deposit Agreement and the applicable ADR (if issued as a Certificated ADS). In addition, the ADS(s)-to-Share(s) ratio is subject to amendment as provided in Articles IV and VI of the Deposit Agreement (which may give rise to Depositary fees).

Section 1.5    “Articles of Association

shall mean the Memorandum and Articles of Association of the Company, as amended and restated from time to time.

 

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Section 1.6    “Beneficial Owner” shall mean, as to any ADS, any person or entity having a beneficial interest deriving from the ownership of such ADS. Notwithstanding anything else contained in the Deposit Agreement, any ADR(s) or any other instruments or agreements relating to the ADSs and the corresponding Deposited Property, the Depositary, the Custodian and their respective nominees are intended to be, and shall at all times during the term of the Deposit Agreement be, the record holders only of the Deposited Property represented by the ADSs for the benefit of the Holders and Beneficial Owners of the corresponding ADSs. The Depositary, on its own behalf and on behalf of the Custodian and their respective nominees, disclaims any beneficial ownership interest in the Deposited Property held on behalf of the Holders and Beneficial Owners of ADSs. The beneficial ownership interests in the Deposited Property are intended to be, and shall at all times during the term of the Deposit Agreement continue to be, vested in the Beneficial Owners of the ADSs representing the Deposited Property. The beneficial ownership interests in the Deposited Property shall, unless otherwise agreed by the Depositary, be exercisable by the Beneficial Owners of the ADSs only through the Holders of such ADSs, by the Holders of the ADSs (on behalf of the applicable Beneficial Owners) only through the Depositary, and by the Depositary (on behalf of the Holders and Beneficial Owners of the corresponding ADSs) directly, or indirectly through the Custodian or their respective nominees, in each case upon the terms of the Deposit Agreement and, if applicable, the terms of the ADR(s) evidencing the ADSs. A Beneficial Owner of ADSs may or may not be the Holder of such ADSs. A Beneficial Owner shall be able to exercise any right or receive any benefit hereunder solely through the person who is the Holder of the ADSs owned by such Beneficial Owner. Unless otherwise identified to the Depositary, a Holder shall be deemed to be the Beneficial Owner of all the ADSs registered in his/her/its name. The manner in which a Beneficial Owner holds ADSs (e.g., in a brokerage account vs. as registered holder) may affect the rights and obligations of, the manner in which, and the extent to which, services are made available to, Beneficial Owners pursuant to the terms of the Deposit Agreement.

Section 1.7    Certificated ADS(s) shall have the meaning set forth in Section 2.13.

Section 1.8    Citibank shall mean Citibank, N.A., a national banking association organized under the laws of the United States of America, and its successors.

Section 1.9    “Commission” shall mean the Securities and Exchange Commission of the United States or any successor governmental agency thereto in the United States.

Section 1.10    “Company” shall mean AnPac Bio-Medical Science Co., Ltd., a business company incorporated and existing under the laws of the British Virgin Islands, and its successors.

Section 1.11    “Custodian” shall mean (i) as of the date hereof, Citibank, N.A. - Hong Kong, having its principal office at 9/F, Citi Tower, One Bay East, 83 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong, as the custodian of Deposited Property for the purposes of the Deposit Agreement, (ii) Citibank, N.A., acting as custodian of Deposited Property pursuant to the Deposit Agreement, and (iii) any other entity that may be appointed by the Depositary pursuant to the terms of Section 5.5 as successor, substitute or additional custodian hereunder. The term “Custodian” shall mean any Custodian individually or all Custodians collectively, as the context requires.

Section 1.12    “Deliver” and “Delivery” shall mean (x) when used in respect of Shares and other Deposited Securities, either (i) the physical delivery of the certificate(s) representing such securities, or (ii) the book-entry transfer and recordation of such securities on the books of the Share Registrar (as hereinafter defined) or in the applicable book-entry settlement system, if available, and (y) when used in respect of ADSs, either (i) the physical delivery of ADR(s) evidencing the ADSs, or (ii) the book-entry transfer and recordation of ADSs on the books of the Depositary or any book-entry settlement system in which the ADSs are settlement-eligible.

 

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Section 1.13    “Deposit Agreement” shall mean this Deposit Agreement and all exhibits hereto, as the same may from time to time be amended and supplemented from time to time in accordance with the terms of the Deposit Agreement.

Section 1.14    “Depositary” shall mean Citibank, N.A., a national banking association organized under the laws of the United States, in its capacity as depositary under the terms of the Deposit Agreement, and any successor depositary hereunder.

Section 1.15    Deposited Property shall mean the Deposited Securities and any cash and other property held on deposit by the Depositary and the Custodian in respect of the ADSs under the terms of the Deposit Agreement, subject, in the case of cash, to the provisions of Section 4.8. All Deposited Property shall be held by the Custodian, the Depositary and their respective nominees for the benefit of the Holders and Beneficial Owners of the ADSs representing the Deposited Property. The Deposited Property is not intended to, and shall not, constitute proprietary assets of the Depositary, the Custodian or their nominees. Beneficial ownership in the Deposited Property is intended to be, and shall at all times during the term of the Deposit Agreement continue to be, vested in the Beneficial Owners of the ADSs representing the Deposited Property.

Section 1.16     Deposited Securities shall mean the Shares and any other securities held on deposit by the Custodian from time to time in respect of the ADSs under the Deposit Agreement and constituting Deposited Property.

Section 1.17    “Dollars” and “$” shall refer to the lawful currency of the United States.

Section 1.18    “DTC” shall mean The Depository Trust Company, a national clearinghouse and the central book-entry settlement system for securities traded in the United States and, as such, the custodian for the securities of DTC Participants (as hereinafter defined) maintained in DTC, and any successor thereto.

Section 1.19    “DTC Participant” shall mean any financial institution (or any nominee of such institution) having one or more participant accounts with DTC for receiving, holding and delivering the securities and cash held in DTC. A DTC Participant may or may not be a Beneficial Owner. If a DTC Participant is not the Beneficial Owner of the ADSs credited to its account at DTC, or of the ADSs in respect of which the DTC Participant is otherwise acting, such DTC Participant shall be deemed, for all purposes hereunder, to have all requisite authority to act on behalf of the Beneficial Owner(s) of the ADSs credited to its account at DTC or in respect of which the DTC Participant is so acting. A DTC Participant, upon acceptance in any one of its DTC accounts of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the Deposit Agreement, shall (notwithstanding any explicit or implicit disclosure that it may be acting on behalf of another party) be deemed for all purposes to be a party to, and bound by, the terms of the Deposit Agreement and the applicable ADR(s) to the same extent as, and as if the DTC Participant were, the Holder of such ADSs.

 

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Section 1.20    “Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended from time to time.

Section 1.21    “Foreign Currency” shall mean any currency other than Dollars.

Section 1.22    Full Entitlement ADR(s), Full Entitlement ADS(s) and Full Entitlement Share(s) shall have the respective meanings set forth in Section 2.12.

Section 1.23    “Holder(s)” shall mean the person(s) in whose name the ADSs are registered on the books of the Depositary (or the Registrar, if any) maintained for such purpose. A Holder may or may not be a Beneficial Owner. If a Holder is not the Beneficial Owner of the ADS(s) registered in its name, such person shall be deemed, for all purposes hereunder, to have all requisite authority to act on behalf of the Beneficial Owners of the ADSs registered in its name. The manner in which a Holder holds ADSs (e.g., in certificated vs. uncertificated form) may affect the rights and obligations of, and the manner in which, and the extent to which, the services are made available to, Holders pursuant to the terms of the Deposit Agreement.

Section 1.24    Partial Entitlement ADR(s), Partial Entitlement ADS(s) and Partial Entitlement Share(s) shall have the respective meanings set forth in Section 2.12.

Section 1.25    “Principal Office” shall mean, when used with respect to the Depositary, the principal office of the Depositary at which at any particular time its depositary receipts business shall be administered, which, at the date of the Deposit Agreement, is located at 388 Greenwich Street, New York, New York 10013, U.S.A.

Section 1.26    “Registrar” shall mean the Depositary or any bank or trust company having an office in the Borough of Manhattan, The City of New York, which shall be appointed by the Depositary to register issuances, transfers and cancellations of ADSs as herein provided, and shall include any co-registrar appointed by the Depositary for such purposes. Registrars (other than the Depositary) may be removed and substitutes appointed by the Depositary. Each Registrar (other than the Depositary) appointed pursuant to the Deposit Agreement shall be required to give notice in writing to the Depositary accepting such appointment and agreeing to be bound by the applicable terms of the Deposit Agreement.

Section 1.27    “Restricted Securities” shall mean Shares, Deposited Securities or ADSs which (i) have been acquired directly or indirectly from the Company or any of its Affiliates in a transaction or chain of transactions not involving any public offering and are subject to resale limitations under the Securities Act or the rules issued thereunder, or (ii) are held by an executive officer or director (or persons performing similar functions) or other Affiliate of the Company, or (iii) are subject to other restrictions on sale or deposit under the laws of the United States, the British Virgin Islands, or under a shareholder agreement or the Articles of Association or under the regulations of an applicable securities exchange unless, in each case, such Shares, Deposited Securities or ADSs are being transferred or sold to persons other than an Affiliate of the Company in a transaction (a) covered by an effective resale registration statement, or (b) exempt from the registration requirements of the Securities Act (as hereinafter defined), and the Shares, Deposited Securities or ADSs are not, when held by such person(s), Restricted Securities.

 

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Section 1.28    Restricted ADR(s)”, “Restricted ADS(s)” and “Restricted Sharesshall have the respective meanings set forth in Section 2.14.

Section 1.29    “Securities Act” shall mean the United States Securities Act of 1933, as amended from time to time.

Section 1.30    “Share Registrar” shall mean Maples Fund Services (Cayman) Limited or any other institution appointed by the Company from time to time to carry out the duties of registrar for the Shares, and any successor thereto.

Section 1.31    “Shares” shall mean the Company’s Class A ordinary shares, par value US$0.01 per share, validly issued and outstanding and fully paid and may, if the Depositary so agrees after consultation with the Company, include evidence of the right to receive Shares; provided that in no event shall Shares include evidence of the right to receive Shares with respect to which the full purchase price has not been paid or Shares as to which preemptive rights have theretofore not been validly waived or exercised; provided further, however, that, if there shall occur any change in par value, sub-division or split-up, consolidation, reclassification, exchange, conversion or any other event described in Section 4.11 in respect of the Shares of the Company, the term “Shares” shall thereafter, to the maximum extent permitted by law, represent the successor securities resulting from such event.

Section 1.32    Uncertificated ADS(s) shall have the meaning set forth in Section 2.13.

Section 1.33    “United States” and “U.S.” shall have the meaning assigned to it in Regulation S as promulgated by the Commission under the Securities Act.

 

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ARTICLE II

APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS;

DEPOSIT OF SHARES; EXECUTION AND

DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS

Section 2.1    Appointment of Depositary. The Company hereby appoints the Depositary as depositary for the Deposited Property and hereby authorizes and directs the Depositary to act in accordance with the terms and conditions set forth in the Deposit Agreement and the applicable ADRs. Each Holder and each Beneficial Owner, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the Deposit Agreement shall be deemed for all purposes to (a) be a party to and bound by the terms of the Deposit Agreement and the applicable ADR(s), and (b) appoint the Depositary as its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the Deposit Agreement and the applicable ADR(s), to adopt any and all procedures necessary to comply with applicable law and to take such action as the Depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the Deposit Agreement and the applicable ADR(s), the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof.

Section 2.2    Form and Transferability of ADSs.

(a)    Form. Certificated ADSs shall be evidenced by definitive ADRs which shall be engraved, printed, lithographed or produced in such other manner as may be agreed upon by the Company and the Depositary. ADRs may be issued under the Deposit Agreement in denominations of any whole number of ADSs. The ADRs shall be substantially in the form set forth in Exhibit A to the Deposit Agreement, with any appropriate insertions, modifications and omissions, in each case as otherwise contemplated in the Deposit Agreement or required by law. ADRs shall be (i) dated, (ii) signed by the manual or facsimile signature of a duly authorized signatory of the Depositary, (iii) countersigned by the manual or facsimile signature of a duly authorized signatory of the Registrar, and (iv) registered in the books maintained by the Registrar for the registration of issuances and transfers of ADSs. No ADR and no Certificated ADS evidenced thereby shall be entitled to any benefits under the Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company, unless such ADR shall have been so dated, signed, countersigned and registered. ADRs bearing the facsimile signature of a duly-authorized signatory of the Depositary or the Registrar, who at the time of signature was a duly-authorized signatory of the Depositary or the Registrar, as the case may be, shall bind the Depositary, notwithstanding the fact that such signatory has ceased to be so authorized prior to the Delivery of such ADR by the Depositary. The ADRs shall bear a CUSIP number that is different from any CUSIP number that was, is or may be assigned to any depositary receipts previously or subsequently issued pursuant to any other arrangement between the Depositary (or any other depositary) and the Company and which are not ADRs outstanding hereunder.

 

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(b)    Legends. The ADRs may be endorsed with, or have incorporated in the text thereof, such legends or recitals not inconsistent with the provisions of the Deposit Agreement as may be (i) necessary to enable the Depositary and the Company to perform their respective obligations hereunder, (ii) required to comply with any applicable laws or regulations, or with the rules and regulations of any securities exchange or market upon which ADSs may be traded, listed or quoted, or to conform with any usage with respect thereto, (iii) necessary to indicate any special limitations or restrictions to which any particular ADRs or ADSs are subject by reason of the date of issuance of the Deposited Securities or otherwise, or (iv) required by any book-entry system in which the ADSs are held. Holders and Beneficial Owners shall be deemed, for all purposes, to have notice of, and to be bound by, the terms and conditions of the legends set forth, in the case of Holders, on the ADR registered in the name of the applicable Holders or, in the case of Beneficial Owners, on the ADR representing the ADSs owned by such Beneficial Owners.

(c)    Title. Subject to the limitations contained herein and in the ADR, title to an ADR (and to each Certificated ADS evidenced thereby) shall be transferable upon the same terms as a certificated security under the laws of the State of New York, provided that, in the case of Certificated ADSs, such ADR has been properly endorsed or is accompanied by proper instruments of transfer. Notwithstanding any notice to the contrary, the Depositary and the Company may deem and treat the Holder of an ADS (that is, the person in whose name an ADS is registered on the books of the Depositary) as the absolute owner thereof for all purposes. Neither the Depositary nor the Company shall have any obligation nor be subject to any liability under the Deposit Agreement or any ADR to any holder or any Beneficial Owner unless, in the case of a holder of ADSs, such holder is the Holder registered on the books of the Depositary or, in the case of a Beneficial Owner, such Beneficial Owner, or the Beneficial Owner’s representative, is the Holder registered on the books of the Depositary.

(d)    Book-Entry Systems. The Depositary shall make arrangements for the acceptance of the ADSs into DTC. All ADSs held through DTC will be registered in the name of the nominee for DTC (currently “Cede & Co.”). As such, the nominee for DTC will be the only “Holder” of all ADSs held through DTC. Unless issued by the Depositary as Uncertificated ADSs, the ADSs registered in the name of Cede & Co. will be evidenced by one or more ADR(s) in the form of a “Balance Certificate,” which will provide that it represents the aggregate number of ADSs from time to time indicated in the records of the Depositary as being issued hereunder and that the aggregate number of ADSs represented thereby may from time to time be increased or decreased by making adjustments on such records of the Depositary and of DTC or its nominee as hereinafter provided. Citibank, N.A. (or such other entity as is appointed by DTC or its nominee) may hold the “Balance Certificate” as custodian for DTC. Each Beneficial Owner of ADSs held through DTC must rely upon the procedures of DTC and the DTC Participants to exercise or be entitled to any rights attributable to such ADSs. The DTC Participants shall for all purposes be deemed to have all requisite power and authority to act on behalf of the Beneficial Owners of the ADSs held in the DTC Participants’ respective accounts in DTC and the Depositary shall for all purposes be authorized to rely upon any instructions and information given to it by DTC Participants. So long as ADSs are held through DTC or unless otherwise required by law, ownership of beneficial interests in the ADSs registered in the name of the nominee for DTC will be shown on, and transfers of such ownership will be effected only through, records maintained by (i) DTC or its nominee (with respect to the interests of DTC Participants), or (ii) DTC Participants or their nominees (with respect to the interests of clients of DTC Participants). Any distributions made, and any notices given, by the Depositary to DTC under the terms of the Deposit Agreement shall (unless otherwise specified by the Depositary) satisfy the Depositary’s obligations under the Deposit Agreement to make such distributions, and give such notices, in respect of the ADSs held in DTC (including, for avoidance of doubt, to the DTC Participants holding the ADSs in their DTC accounts and to the Beneficial Owners of such ADSs).

 

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Section 2.3    Deposit of Shares. Subject to the terms and conditions of the Deposit Agreement and applicable law, Shares or evidence of rights to receive Shares (other than Restricted Securities) may be deposited by any person (including the Depositary in its individual capacity but subject, however, in the case of the Company or any Affiliate of the Company, to Section 5.7) at any time, whether or not the transfer books of the Company or the Share Registrar, if any, are closed, by Delivery of the Shares to the Custodian. Every deposit of Shares shall be accompanied by the following: (A) (i) in the case of Shares represented by certificates issued in registered form, appropriate instruments of transfer or endorsement, in a form satisfactory to the Custodian, (ii) in the case of Shares represented by certificates in bearer form, the requisite coupons and talons pertaining thereto, and (iii) in the case of Shares delivered by book-entry transfer and recordation, confirmation of such book-entry transfer and recordation in the books of the Share Registrar or of the applicable book-entry settlement system, if available, as applicable, to the Custodian or that irrevocable instructions have been given to cause such Shares to be so transferred and recorded, (B) such certifications and payments (including, without limitation, the Depositary’s fees and related charges) and evidence of such payments (including, without limitation, stamping or otherwise marking such Shares by way of receipt) as may be required by the Depositary or the Custodian in accordance with the provisions of the Deposit Agreement and applicable law, (C) if the Depositary so requires, a written order directing the Depositary to issue and deliver to, or upon the written order of, the person(s) stated in such order the number of ADSs representing the Shares so deposited, (D) evidence reasonably satisfactory to the Depositary (which may be an opinion of counsel) that all necessary approvals have been granted by, or there has been compliance with the rules and regulations of, any applicable governmental agency in the British Virgin Islands, and (E) if the Depositary so requires, (i) an agreement, assignment or instrument reasonably satisfactory to the Depositary or the Custodian which provides for the prompt transfer by any person in whose name the Shares are or have been recorded to the Custodian of any distribution, or right to subscribe for additional Shares or to receive other property in respect of any such deposited Shares or, in lieu thereof, such indemnity or other agreement as shall be reasonably satisfactory to the Depositary or the Custodian and (ii) if the Shares are registered in the name of the person on whose behalf they are presented for deposit, a proxy or proxies entitling the Custodian to exercise voting rights in respect of the Shares for any and all purposes until the Shares so deposited are registered in the name of the Depositary, the Custodian or any nominee.

 

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Without limiting any other provision of the Deposit Agreement, the Depositary shall instruct the Custodian not to, and the Depositary shall not knowingly, accept for deposit (a) any Restricted Securities (except as contemplated by Section 2.14) nor (b) any fractional Shares or fractional Deposited Securities nor (c) a number of Shares or Deposited Securities which upon application of the ADS to Shares ratio would give rise to fractional ADSs. No Shares shall be accepted for deposit unless accompanied by evidence, if any is required by the Depositary, that is reasonably satisfactory to the Depositary or the Custodian that all conditions to such deposit have been satisfied by the person depositing such Shares under the laws and regulations of the British Virgin Islands and any necessary approval has been granted by any applicable governmental body in the British Virgin Islands, if any. The Depositary may issue ADSs against evidence of rights to receive Shares from the Company, any agent of the Company or any custodian, registrar, transfer agent, clearing agency or other entity involved in ownership or transaction records in respect of the Shares. Such evidence of rights shall consist of written blanket or specific guarantees of ownership of Shares furnished by the Company or any such custodian, registrar, transfer agent, clearing agency or other entity involved in ownership or transaction records in respect of the Shares.

Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under the Deposit Agreement (A) any Shares or other securities required to be registered under the provisions of the Securities Act, unless (i) a registration statement is in effect as to such Shares or other securities or (ii) the deposit is made upon terms contemplated in Section 2.14, or (B) any Shares or other securities the deposit of which would violate any provisions of the Articles of Association. For purposes of the foregoing sentence, the Depositary shall be entitled to rely upon representations and warranties made or deemed made pursuant to the Deposit Agreement and shall not be required to make any further investigation. The Depositary will comply with written instructions of the Company (received by the Depositary reasonably in advance) not to accept for deposit hereunder any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Company’s compliance with the securities laws of the United States.

 

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Section 2.4    Registration and Safekeeping of Deposited Securities. The Depositary shall instruct the Custodian upon each Delivery of Shares being deposited hereunder with the Custodian (or other Deposited Securities pursuant to Article IV hereof), together with the other documents above specified, to deliver the certificates representing such Shares, together with the appropriate instrument(s) of transfer or endorsement, duly stamped (if applicable), to the Share Registrar for transfer and registration of the Shares (as soon as transfer and registration can be accomplished and at the expense of the person for whom the deposit is made) in the name of the Depositary, the Custodian or a nominee of either. Deposited Securities shall be registered in the name of, and held by, the Depositary, or a Custodian for the account and to the order of the Depositary or a nominee of the Depositary, in each case, on behalf of the Holders and Beneficial Owners, at such place(s) as the Depositary or the Custodian shall determine. Notwithstanding anything else contained in the Deposit Agreement, any ADR(s), or any other instruments or agreements relating to the ADSs and the corresponding Deposited Property, the registration of the Deposited Securities in the name of the Depositary, the Custodian or any of their respective nominees, shall, to the maximum extent permitted by applicable law, vest in the Depositary, the Custodian or the applicable nominee the record ownership in the applicable Deposited Securities with the beneficial ownership rights and interests in such Deposited Securities being at all times vested with the Beneficial Owners of the ADSs representing the Deposited Securities. Notwithstanding the foregoing, the Depositary, the Custodian and the applicable nominee shall at all times be entitled to exercise the beneficial ownership rights in all Deposited Property, in each case only on behalf of the Holders and Beneficial Owners of the ADSs representing the Deposited Property, upon the terms set forth in the Deposit Agreement and, if applicable, the ADR(s) representing the ADSs. The Depositary, the Custodian and their respective nominees shall for all purposes be deemed to have all requisite power and authority to act in respect of Deposited Property on behalf of the Holders and Beneficial Owners of ADSs representing the Deposited Property, and upon making payments to, or acting upon instructions from, or information provided by, the Depositary, the Custodian or their respective nominees all persons shall be authorized to rely upon such power and authority.

Section 2.5    Issuance of ADSs. The Depositary has made arrangements with the Custodian for the Custodian to confirm to the Depositary upon receipt of a deposit of Shares (i) that a deposit of Shares has been made pursuant to Section 2.3, (ii) that such Deposited Securities have been recorded in the name of the Depositary, the Custodian or a nominee of either on the shareholders’ register maintained by or on behalf of the Company by the Share Registrar on the books of the applicable book-entry settlement system, if available, (iii) that all required documents have been received, and (iv) the person(s) to whom or upon whose order ADSs are deliverable in respect thereof and the number of ADSs to be so delivered. Such notification may be made by letter, cable, telex, SWIFT message or, at the risk and expense of the person making the deposit, by facsimile or other means of electronic transmission. Upon receiving such notice from the Custodian, the Depositary, subject to the terms and conditions of the Deposit Agreement and applicable law, shall issue the ADSs representing the Shares so deposited to or upon the order of the person(s) named in the notice delivered to the Depositary and, if applicable, shall execute and deliver at its Principal Office Receipt(s) registered in the name(s) requested by such person(s) and evidencing the aggregate number of ADSs to which such person(s) are entitled, but, in each case, only upon payment to the Depositary of the charges of the Depositary for accepting a deposit of Shares and issuing ADSs (as set forth in Section 5.9 and Exhibit B hereto) and all taxes and governmental charges and fees payable in connection with such deposit and the transfer of the Shares and the issuance of the ADS(s). The Depositary shall only issue ADSs in whole numbers and deliver, if applicable, ADR(s) evidencing whole numbers of ADSs.

 

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Section 2.6    Transfer, Combination and Split-up of ADRs.

(a)    Transfer. The Registrar shall register the transfer of ADRs (and of the ADSs represented thereby) on the books maintained for such purpose and the Depositary shall (x) cancel such ADRs and execute new ADRs evidencing the same aggregate number of ADSs as those evidenced by the ADRs canceled by the Depositary, (y) cause the Registrar to countersign such new ADRs and (z) Deliver such new ADRs to or upon the order of the person entitled thereto, if each of the following conditions has been satisfied: (i) the ADRs have been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a transfer thereof, (ii) the surrendered ADRs have been properly endorsed or are accompanied by proper instruments of transfer (including signature guarantees in accordance with standard securities industry practice), (iii) the surrendered ADRs have been duly stamped (if required by the laws of the State of New York or of the United States), and (iv) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 and Exhibit B hereto) have been paid, subject, however, in each case, to the terms and conditions of the applicable ADRs, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

(b)    Combination & Split-Up. The Registrar shall register the split-up or combination of ADRs (and of the ADSs represented thereby) on the books maintained for such purpose and the Depositary shall (x) cancel such ADRs and execute new ADRs for the number of ADSs requested, but in the aggregate not exceeding the number of ADSs evidenced by the ADRs canceled by the Depositary, (y) cause the Registrar to countersign such new ADRs and (z) Deliver such new ADRs to or upon the order of the Holder thereof, if each of the following conditions has been satisfied: (i) the ADRs have been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a split-up or combination thereof, and (ii) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 and Exhibit B hereto) have been paid, subject, however, in each case, to the terms and conditions of the applicable ADRs, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

 

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Section 2.7    Surrender of ADSs and Withdrawal of Deposited Securities. The Holder of ADSs shall be entitled to Delivery (at the Custodian’s designated office) of the Deposited Securities at the time represented by the ADSs upon satisfaction of each of the following conditions: (i) the Holder (or a duly-authorized attorney of the Holder) has duly Delivered ADSs to the Depositary at its Principal Office (and if applicable, the ADRs evidencing such ADSs) for the purpose of withdrawal of the Deposited Securities represented thereby, (ii) if applicable and so required by the Depositary, the ADRs Delivered to the Depositary for such purpose have been properly endorsed in blank or are accompanied by proper instruments of transfer in blank (including signature guarantees in accordance with standard securities industry practice), (iii) if so required by the Depositary, the Holder of the ADSs has executed and delivered to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to or upon the written order of the person(s) designated in such order, and (iv) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 and Exhibit B) have been paid, subject, however, in each case, to the terms and conditions of the ADRs evidencing the surrendered ADSs, of the Deposit Agreement, of the Articles of Association and of any applicable laws and the rules of the applicable book-entry settlement system, if available, and to any provisions of or governing the Deposited Securities , in each case as in effect at the time thereof.

Upon satisfaction of each of the conditions specified above, the Depositary (i) shall cancel the ADSs Delivered to it (and, if applicable, the ADR(s) evidencing the ADSs so Delivered), (ii) shall direct the Registrar to record the cancellation of the ADSs so Delivered on the books maintained for such purpose, and (iii) shall direct the Custodian to Deliver, or cause the Delivery of, in each case, without unreasonable delay, the Deposited Securities represented by the ADSs so canceled together with any certificate or other document of title for the Deposited Securities, or evidence of the electronic transfer thereof (if available), as the case may be, to or upon the written order of the person(s) designated in the order delivered to the Depositary for such purpose, subject however, in each case, to the terms and conditions of the Deposit Agreement, of the ADRs evidencing the ADSs so canceled, of the Articles of Association, of any applicable laws and of the rules of the applicable book-entry settlement system, if available, and to the terms and conditions of or governing the Deposited Securities, in each case as in effect at the time thereof.

The Depositary shall not accept for surrender ADSs representing less than one (1) Share. In the case of Delivery to it of ADSs representing a number other than a whole number of Shares, the Depositary shall cause ownership of the appropriate whole number of Shares to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) return to the person surrendering such ADSs the number of ADSs representing any remaining fractional Share, or (ii) sell or cause to be sold the fractional Share represented by the ADSs so surrendered and remit the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the ADSs.

 

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Notwithstanding anything else contained in any ADR or the Deposit Agreement, the Depositary may make delivery at the Principal Office of the Depositary of Deposited Property consisting of (i) any cash dividends or cash distributions, or (ii) any proceeds from the sale of any non-cash distributions, which are at the time held by the Depositary in respect of the Deposited Securities represented by the ADSs surrendered for cancellation and withdrawal. At the request, risk and expense of any Holder so surrendering ADSs, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any Deposited Property (other than Deposited Securities) held by the Custodian in respect of such ADSs to the Depositary for delivery at the Principal Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission.

 

  Section 2.8

Limitations on Execution and Delivery, Transfer, etc. of ADSs; Suspension of Delivery, Transfer, etc.

(a)    Additional Requirements. As a condition precedent to the execution and Delivery, the registration of issuance, transfer, split-up, combination or surrender, of any ADS, the delivery of any distribution thereon, or the withdrawal of any Deposited Property, the Depositary or the Custodian may require (i) payment from the depositor of Shares or presenter of ADSs or of an ADR of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees and charges of the Depositary as provided in Section 5.9 and Exhibit B, (ii) the production of proof reasonably satisfactory to it as to the identity and genuineness of any signature or any other matter contemplated by Section 3.1, and (iii) compliance with (A) any laws or governmental regulations relating to the execution and Delivery of ADRs or ADSs or to the withdrawal of Deposited Securities and (B) such reasonable regulations as the Depositary and the Company may establish consistent with the provisions of the representative ADR, if applicable, the Deposit Agreement and applicable law.

(b)    Additional Limitations. The issuance of ADSs against deposits of Shares generally or against deposits of particular Shares may be suspended, or the deposit of particular Shares may be refused, or the registration of transfer of ADSs in particular instances may be refused, or the registration of transfers of ADSs generally may be suspended, during any period when the transfer books of the Company, the Depositary, a Registrar or the Share Registrar are closed or if any such action is deemed necessary or advisable by the Depositary (whereupon the Depositary shall notify the Company) or the Company, in good faith, at any time or from time to time because of any requirement of law or regulation, any government or governmental body or commission or any securities exchange on which the ADSs or Shares are listed, or under any provision of the Deposit Agreement or the representative ADR(s), if applicable, or under any provision of, or governing, the Deposited Securities, or because of a meeting of shareholders of the Company or for any other reason, subject, in all cases, to Section 7.8(a).

(c)    Regulatory Restrictions. Notwithstanding any provision of the Deposit Agreement or any ADR(s) to the contrary, Holders are entitled to surrender outstanding ADSs to withdraw the Deposited Securities associated herewith at any time subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders’ meeting or the payment of dividends, (ii) the payment of fees, taxes and similar charges, (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the ADSs or to the withdrawal of the Deposited Securities, and (iv) other circumstances specifically contemplated by Instruction I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time).

 

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Section 2.9    Lost ADRs, etc. In case any ADR shall be mutilated, destroyed, lost, or stolen, the Depositary shall execute and deliver a new ADR of like tenor at the expense of the Holder (a) in the case of a mutilated ADR, in exchange of and substitution for such mutilated ADR upon cancellation thereof, or (b) in the case of a destroyed, lost or stolen ADR, in lieu of and in substitution for such destroyed, lost, or stolen ADR, after the Holder thereof (i) has submitted to the Depositary a written request for such exchange and substitution before the Depositary has notice that the ADR has been acquired by a bona fide purchaser, (ii) has provided such security or indemnity (including an indemnity bond) as may be required by the Depositary to save it and any of its agents harmless, and (iii) has satisfied any other reasonable requirements imposed by the Depositary, including, without limitation, evidence reasonably satisfactory to the Depositary of such destruction, loss or theft of such ADR, the authenticity thereof and the Holder’s ownership thereof.

Section 2.10    Cancellation and Destruction of Surrendered ADRs; Maintenance of Records. All ADRs surrendered to the Depositary shall be canceled by the Depositary. Canceled ADRs shall not be entitled to any benefits under the Deposit Agreement or be valid or enforceable against the Depositary for any purpose. The Depositary is authorized to destroy ADRs so canceled, provided the Depositary maintains a record of all destroyed ADRs. Any ADSs held in book-entry form (e.g., through accounts at DTC) shall be deemed canceled when the Depositary causes the number of ADSs evidenced by the Balance Certificate to be reduced by the number of ADSs surrendered (without the need to physically destroy the Balance Certificate).

Section 2.11    Escheatment. In the event any unclaimed property relating to the ADSs, for any reason, is in the possession of Depositary and has not been claimed by the Holder thereof or cannot be delivered to the Holder thereof through usual channels, the Depositary shall, upon expiration of any applicable statutory period relating to abandoned property laws, escheat such unclaimed property to the relevant authorities in accordance with the laws of each of the relevant States of the United States.

 

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Section 2.12    Partial Entitlement ADSs. In the event any Shares are deposited which (i) entitle the holders thereof to receive a per-share distribution or other entitlement in an amount different from the Shares then on deposit or (ii) are not fully fungible (including, without limitation, as to settlement or trading) with the Shares then on deposit (the Shares then on deposit collectively, “Full Entitlement Shares” and the Shares with different entitlement, “Partial Entitlement Shares”), the Depositary shall (i) cause the Custodian to hold Partial Entitlement Shares separate and distinct from Full Entitlement Shares, and (ii) subject to the terms of the Deposit Agreement, issue ADSs representing Partial Entitlement Shares which are separate and distinct from the ADSs representing Full Entitlement Shares, by means of separate CUSIP numbering and legending (if necessary) and, if applicable, by issuing ADRs evidencing such ADSs with applicable notations thereon (“Partial Entitlement ADSs/ADRs” and “Full Entitlement ADSs/ADRs”, respectively). If and when Partial Entitlement Shares become Full Entitlement Shares, the Depositary shall (a) give notice thereof to Holders of Partial Entitlement ADSs and give Holders of Partial Entitlement ADRs the opportunity to exchange such Partial Entitlement ADRs for Full Entitlement ADRs, (b) cause the Custodian to transfer the Partial Entitlement Shares into the account of the Full Entitlement Shares, and (c) take such actions as are necessary to remove the distinctions between (i) the Partial Entitlement ADRs and ADSs, on the one hand, and (ii) the Full Entitlement ADRs and ADSs on the other. Holders and Beneficial Owners of Partial Entitlement ADSs shall only be entitled to the entitlements of Partial Entitlement Shares. Holders and Beneficial Owners of Full Entitlement ADSs shall be entitled only to the entitlements of Full Entitlement Shares. All provisions and conditions of the Deposit Agreement shall apply to Partial Entitlement ADRs and ADSs to the same extent as Full Entitlement ADRs and ADSs, except as contemplated by this Section 2.12. The Depositary is authorized to take any and all other actions as may be necessary (including, without limitation, making the necessary notations on ADRs) to give effect to the terms of this Section 2.12. The Company agrees to give timely written notice to the Depositary if any Shares issued or to be issued are Partial Entitlement Shares and shall assist the Depositary with the establishment of procedures enabling the identification of Partial Entitlement Shares upon Delivery to the Custodian.

 

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Section 2.13    Certificated/Uncertificated ADSs. Notwithstanding any other provision of the Deposit Agreement, the Depositary may, at any time and from time to time, issue ADSs that are not evidenced by ADRs (such ADSs, the “Uncertificated ADS(s)” and the ADS(s) evidenced by ADR(s), the “Certificated ADS(s)”). When issuing and maintaining Uncertificated ADS(s) under the Deposit Agreement, the Depositary shall at all times be subject to (i) the standards applicable to registrars and transfer agents maintaining direct registration systems for equity securities in New York and issuing uncertificated securities under New York law, and (ii) the terms of New York law applicable to uncertificated equity securities. Uncertificated ADSs shall not be represented by any instruments but shall be evidenced by registration in the books of the Depositary maintained for such purpose. Holders of Uncertificated ADSs, that are not subject to any registered pledges, liens, restrictions or adverse claims of which the Depositary has notice at such time, shall at all times have the right to exchange the Uncertificated ADS(s) for Certificated ADS(s) of the same type and class, subject in each case to (x) applicable laws and any rules and regulations the Depositary may have established in respect of the Uncertificated ADSs, and (y) the continued availability of Certificated ADSs in the U.S. Holders of Certificated ADSs shall, if the Depositary maintains a direct registration system for the ADSs, have the right to exchange the Certificated ADSs for Uncertificated ADSs upon (i) the due surrender of the Certificated ADS(s) to the Depositary for such purpose and (ii) the presentation of a written request to that effect to the Depositary, subject in each case to (a) all liens and restrictions noted on the ADR evidencing the Certificated ADS(s) and all adverse claims of which the Depositary then has notice, (b) the terms of the Deposit Agreement and the rules and regulations that the Depositary may establish for such purposes hereunder, (c) applicable law, and (d) payment of the Depositary fees and expenses applicable to such exchange of Certificated ADS(s) for Uncertificated ADS(s). Uncertificated ADSs shall in all material respects be identical to Certificated ADS(s) of the same type and class, except that (i) no ADR(s) shall be, or shall need to be, issued to evidence Uncertificated ADS(s), (ii) Uncertificated ADS(s) shall, subject to the terms of the Deposit Agreement, be transferable upon the same terms and conditions as uncertificated securities under New York law, (iii) the ownership of Uncertificated ADS(s) shall be recorded on the books of the Depositary maintained for such purpose and evidence of such ownership shall be reflected in periodic statements provided by the Depositary to the Holder(s) in accordance with applicable New York law, (iv) the Depositary may from time to time, upon notice to the Holders of Uncertificated ADSs affected thereby, establish rules and regulations, and amend or supplement existing rules and regulations, as may be deemed reasonably necessary to maintain Uncertificated ADS(s) on behalf of Holders, provided that (a) such rules and regulations do not conflict with the terms of the Deposit Agreement and applicable law, and (b) the terms of such rules and regulations are readily available to Holders upon request, (v) the Uncertificated ADS(s) shall not be entitled to any benefits under the Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company unless such Uncertificated ADS(s) is/are registered on the books of the Depositary maintained for such purpose, (vi) the Depositary may, in connection with any deposit of Shares resulting in the issuance of Uncertificated ADSs and with any transfer, pledge, release and cancellation of Uncertificated ADSs, require the prior receipt of such documentation as the Depositary may deem reasonably appropriate, and (vii) upon termination of the Deposit Agreement, the Depositary shall not require Holders of Uncertificated ADSs to affirmatively instruct the Depositary before remitting proceeds from the sale of the Deposited Property represented by such Holders’ Uncertificated ADSs under the terms of Section 6.2. When issuing ADSs under the terms of the Deposit Agreement, including, without limitation, issuances pursuant to Sections 2.5, 4.2, 4.3, 4.4, 4.5 and 4.11, the Depositary may in its discretion determine to issue Uncertificated ADSs rather than Certificated ADSs, unless otherwise specifically instructed by the applicable Holder to issue Certificated ADSs. All provisions and conditions of the Deposit Agreement shall apply to Uncertificated ADSs to the same extent as to Certificated ADSs, except as contemplated by this Section 2.13. The Depositary is authorized and directed to take any and all actions and establish any and all procedures deemed reasonably necessary to give effect to the terms of this Section 2.13. Any references in the Deposit Agreement or any ADR(s) to the terms “American Depositary Share(s)” or “ADS(s)” shall, unless the context otherwise requires, include Certificated ADS(s) and Uncertificated ADS(s). Except as set forth in this Section 2.13 and except as required by applicable law, the Uncertificated ADSs shall be treated as ADSs issued and outstanding under the terms of the Deposit Agreement. In the event that, in determining the rights and obligations of parties hereto with respect to any Uncertificated ADSs, any conflict arises between (a) the terms of the Deposit Agreement (other than this Section 2.13) and (b) the terms of this Section 2.13, the terms and conditions set forth in this Section 2.13 shall be controlling and shall govern the rights and obligations of the parties to the Deposit Agreement pertaining to the Uncertificated ADSs.

 

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Section 2.14    Restricted ADSs. The Depositary shall, at the request and expense of the Company, establish procedures enabling the deposit hereunder of Shares that are Restricted Securities in order to enable the holder of such Shares to hold its ownership interests in such Restricted Securities in the form of ADSs issued under the terms hereof (such Shares, “Restricted Shares”). Upon receipt of a written request from the Company to accept Restricted Shares for deposit hereunder, the Depositary agrees to establish procedures permitting the deposit of such Restricted Shares and the issuance of ADSs representing the right to receive, subject to the terms of the Deposit Agreement and the applicable ADR (if issued as a Certificated ADS), such deposited Restricted Shares (such ADSs, the “Restricted ADSs,” and the ADRs evidencing such Restricted ADSs, the “Restricted ADRs”). Notwithstanding anything contained in this Section 2.14, the Depositary and the Company may, to the extent not prohibited by law, agree to issue the Restricted ADSs in uncertificated form (“Uncertificated Restricted ADSs”) upon such terms and conditions as the Company and the Depositary may deem necessary and appropriate. The Company shall assist the Depositary in the establishment of such procedures and agrees that it shall take all steps necessary and reasonably satisfactory to the Depositary to ensure that the establishment of such procedures does not violate the provisions of the Securities Act or any other applicable laws. The depositors of such Restricted Shares and the Holders of the Restricted ADSs may be required prior to the deposit of such Restricted Shares, the transfer of the Restricted ADRs and Restricted ADSs or the withdrawal of the Restricted Shares represented by Restricted ADSs to provide such written certifications or agreements as the Depositary or the Company may require. The Company shall provide to the Depositary in writing the legend(s) to be affixed to the Restricted ADRs (if the Restricted ADSs are to be issued as Certificated ADSs), or to be included in the statements issued from time to time to Holders of Uncertificated ADSs (if issued as Uncertificated Restricted ADSs), which legends shall (i) be in a form reasonably satisfactory to the Depositary and (ii) contain the specific circumstances under which the Restricted ADSs, and, if applicable, the Restricted ADRs evidencing the Restricted ADSs, may be transferred or the Restricted Shares withdrawn. The Restricted ADSs issued upon the deposit of Restricted Shares shall be separately identified on the books of the Depositary and the Restricted Shares so deposited shall, to the extent required by law, be held separate and distinct from the other Deposited Securities held hereunder. The Restricted ADSs shall not be eligible for inclusion in any book-entry settlement system, including, without limitation, DTC (unless (x) otherwise agreed by the Company and the Depositary, (y) the inclusion of Restricted ADSs is acceptable to the applicable clearing system, and (z) the terms of such inclusion are generally accepted by the Commission for Restricted Securities of that type), and shall not in any way be fungible with the ADSs issued under the terms hereof that are not Restricted ADSs. The Restricted ADSs, and, if applicable, the Restricted ADRs evidencing the Restricted ADSs, shall be transferable only by the Holder thereof upon delivery to the Depositary of (i) all documentation otherwise contemplated by the Deposit Agreement and (ii) an opinion of counsel reasonably satisfactory to the Depositary setting forth, inter alia, the conditions upon which the Restricted ADSs presented, and, if applicable, the Restricted ADRs evidencing the Restricted ADSs, are transferable by the Holder thereof under applicable securities laws and the transfer restrictions contained in the legend applicable to the Restricted ADSs presented for transfer. Except as set forth in this Section 2.14 and except as required by applicable law, the Restricted ADSs and the Restricted ADRs evidencing Restricted ADSs shall be treated as ADSs and ADRs issued and outstanding under the terms of the Deposit Agreement. In the event that, in determining the rights and obligations of parties hereto with respect to any Restricted ADSs, any conflict arises between (a) the terms of the Deposit Agreement (other than this Section 2.14) and (b) the terms of (i) this Section 2.14 or (ii) the applicable Restricted ADR, the terms and conditions set forth in this Section 2.14 and of the Restricted ADR shall be controlling and shall govern the rights and obligations of the parties to the Deposit Agreement pertaining to the deposited Restricted Shares, the Restricted ADSs and Restricted ADRs.

 

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If the Restricted ADRs, the Restricted ADSs and the Restricted Shares cease to be Restricted Securities, the Depositary, upon receipt of (x) an opinion of counsel reasonably satisfactory to the Depositary setting forth, inter alia, that the Restricted ADRs, the Restricted ADSs and the Restricted Shares are not as of such time Restricted Securities, and (y) instructions from the Company to remove the restrictions applicable to the Restricted ADRs, the Restricted ADSs and the Restricted Shares, shall (i) eliminate the distinctions and separations that may have been established between the applicable Restricted Shares held on deposit under this Section 2.14 and the other Shares held on deposit under the terms of the Deposit Agreement that are not Restricted Shares, (ii) treat the newly unrestricted ADRs and ADSs on the same terms as, and fully fungible with, the other ADRs and ADSs issued and outstanding under the terms of the Deposit Agreement that are not Restricted ADRs or Restricted ADSs, and (iii) take all actions necessary to remove any distinctions, limitations and restrictions previously existing under this Section 2.14 between the applicable Restricted ADRs and Restricted ADSs, respectively, on the one hand, and the other ADRs and ADSs that are not Restricted ADRs or Restricted ADSs, respectively, on the other hand, including, without limitation, by making the newly-unrestricted ADSs eligible for inclusion in the applicable book-entry settlement systems.

ARTICLE III

CERTAIN OBLIGATIONS OF HOLDERS

AND BENEFICIAL OWNERS OF ADSs

Section 3.1    Proofs, Certificates and Other Information. Any person presenting Shares for deposit, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approval, legal or beneficial ownership of ADSs and Deposited Property, compliance with applicable laws, the terms of the Deposit Agreement or the ADR(s) evidencing the ADSs and the provisions of, or governing, the Deposited Property, to execute such certifications and to make such representations and warranties, and to provide such other information and documentation (or, in the case of Shares in registered form presented for deposit, such information relating to the registration on the books of the Company or of the Share Registrar) as the Depositary or the Custodian may deem necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations under the Deposit Agreement and the applicable ADR(s). The Depositary and the Registrar, as applicable, may withhold the execution or delivery or registration of transfer of any ADR or ADS or the distribution or sale of any dividend or distribution of rights or of the proceeds thereof or, to the extent not limited by the terms of Section 7.8(a), the delivery of any Deposited Property until such proof or other information is filed or such certifications are executed, or such representations and warranties are made, or such other documentation or information provided, in each case to the Depositary’s, the Registrar’s and the Company’s satisfaction. The Depositary shall provide the Company, in a timely manner, with copies or originals if necessary and appropriate of (i) any such proofs of citizenship or residence, taxpayer status, or exchange control approval or copies of written representations and warranties which it receives from Holders and Beneficial Owners, and (ii) any other information or documents which the Company may reasonably request and which the Depositary shall request and receive from any Holder or Beneficial Owner or any person presenting Shares for deposit or ADSs for cancellation, transfer or withdrawal. Nothing herein shall obligate the Depositary to (i) obtain any information for the Company if not provided by the Holders or Beneficial Owners, or (ii) verify or vouch for the accuracy of the information so provided by the Holders or Beneficial Owners.

 

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Section 3.2    Liability for Taxes and Other Charges. Any tax or other governmental charge payable by the Custodian or by the Depositary with respect to any Deposited Property, ADSs or ADRs shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or the Depositary may withhold or deduct from any distributions made in respect of Deposited Property held on behalf of such Holder and/or Beneficial Owner, and may sell for the account of a Holder and/or Beneficial Owner any or all of such Deposited Property and apply such distributions and sale proceeds in payment of, any taxes (including applicable interest and penalties) or charges that are or may be payable by Holders or Beneficial Owners in respect of the ADSs, Deposited Property and ADRs, the Holder and the Beneficial Owner remaining liable for any deficiency. The Custodian may refuse the deposit of Shares and the Depositary may refuse to issue ADSs, to deliver ADRs, register the transfer of ADSs, register the split-up or combination of ADRs and (subject to Section 7.8(a)) the withdrawal of Deposited Property until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner agrees to indemnify the Depositary, the Company, the Custodian, and any of their agents, officers, employees and Affiliates for, and to hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from (i) any ADSs held by such Holder and/or owned by such Beneficial Owner, (ii) the Deposited Property represented by the ADSs, and (iii) any transaction entered into by such Holder and/or Beneficial Owner in respect of the ADSs and/or the Deposited Property represented thereby. Notwithstanding anything to the contrary contained in the Deposit Agreement or any ADR, the obligations of Holders and Beneficial Owners under this Section 3.2 shall survive any transfer of ADSs, any cancellation of ADSs and withdrawal of Deposited Securities, and the termination of the Deposit Agreement.

Section 3.3    Representations and Warranties on Deposit of Shares. Each person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares and the certificates therefor are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares have been validly waived or exercised, (iii) the person making such deposit is duly authorized so to do, (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, (v) the Shares presented for deposit are not, and the ADSs issuable upon such deposit will not be, Restricted Securities (except as contemplated in Section 2.14), and (vi) the Shares presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of ADSs in respect thereof and the transfer of such ADSs. If any such representations or warranties are false in any way, the Company and the Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof.

 

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Section 3.4    Compliance with Information Requests. Notwithstanding any other provision of the Deposit Agreement or any ADR(s), each Holder and Beneficial Owner agrees to comply with requests from the Company pursuant to applicable law, the rules and requirements of any stock exchange on which the Shares or ADSs are, or will be, registered, traded or listed or the Articles of Association, which are made to provide information, inter alia, as to the capacity in which such Holder or Beneficial Owner owns ADSs (and Shares as the case may be) and regarding the identity of any other person(s) interested in such ADSs and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request. The Depositary agrees to use its reasonable efforts to forward, upon the request of the Company and at the Company’s expense, any such request from the Company to the Holders and to forward to the Company any such responses to such requests received by the Depositary.

Section 3.5    Ownership Restrictions. Notwithstanding any other provision contained in the Deposit Agreement or any ADR(s) to the contrary, the Company may restrict transfers of the Shares where such transfer might result in ownership of Shares exceeding limits imposed by applicable law or the Articles of Association. The Company may also restrict, in such manner as it deems appropriate, transfers of the ADSs where such transfer may result in the total number of Shares represented by the ADSs owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including, but not limited to, the imposition of restrictions on the transfer of ADSs, the removal or limitation of voting rights or mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Shares represented by the ADSs held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such disposition is permitted by applicable law and the Articles of Association. Nothing herein shall be interpreted as obligating the Depositary or the Company to ensure compliance with the ownership restrictions described in this Section 3.5.

Section 3.6    Reporting Obligations and Regulatory Approvals. Applicable laws and regulations may require holders and beneficial owners of Shares, including the Holders and Beneficial Owners of ADSs, to satisfy reporting requirements and obtain regulatory approvals in certain circumstances. Holders and Beneficial Owners of ADSs are solely responsible for determining and complying with such reporting requirements and obtaining such approvals. Each Holder and each Beneficial Owner hereby agrees to make such determination, file such reports, and obtain such approvals to the extent and in the form required by applicable laws and regulations as in effect from time to time. Neither the Depositary, the Custodian, the Company or any of their respective agents or affiliates shall be required to take any actions whatsoever on behalf of Holders or Beneficial Owners to determine or satisfy such reporting requirements or obtain such regulatory approvals under applicable laws and regulations.

 

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ARTICLE IV

THE DEPOSITED SECURITIES

Section 4.1    Cash Distributions. Whenever the Company intends to make a distribution of a cash dividend or other cash distribution in respect of any Deposited Securities, the Company shall give timely notice thereof to the Depositary at least twenty (20) days (or such other number of days as the Depositary and the Company may agree to in writing from time to time) prior to the proposed distribution specifying, inter alia, the record date applicable for determining the holders of Deposited Securities entitled to receive such distribution. Upon the timely receipt of such notice, the Depositary shall establish the ADS Record Date upon the terms described in Section 4.9. Upon the receipt of confirmation from the Custodian of (x) any cash dividend or other cash distribution on any Deposited Securities, or (y) proceeds from the sale of any Deposited Property held in respect of the ADSs under the terms hereof, the Depositary will (i) if any amounts are received in a Foreign Currency, promptly convert or cause to be converted such cash dividend, distribution or proceeds into Dollars (subject to the terms and conditions of Section 4.8), (ii) if applicable and unless previously established, establish the ADS Record Date upon the terms described in Section 4.9, and (iii) distribute promptly the amount thus received (net of (a) the applicable fees and charges set forth in the Fee Schedule attached hereto as Exhibit B, and (b) applicable taxes withheld) to the Holders entitled thereto as of the ADS Record Date in proportion to the number of ADSs held as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of ADSs outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities, or from any cash proceeds from the sales of Deposited Property, an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the ADSs shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company, the Custodian or the Depositary to the relevant governmental authority. Evidence of payment thereof by the Company shall be forwarded by the Company to the Depositary upon request. The Depositary will hold any cash amounts it is unable to distribute in a non-interest bearing account for the benefit of the applicable Holders and Beneficial Owners of ADSs until the distribution can be effected or the funds that the Depositary holds must be escheated as unclaimed property in accordance with the laws of the relevant states of the United States. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for in this Section 4.1, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in this Section 4.1, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in this Section 4.1 where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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Section 4.2    Distribution in Shares. Whenever the Company intends to make a distribution that consists of a dividend in, or free distribution of, Shares, the Company shall give timely notice thereof to the Depositary at least twenty (20) days (or such other number of days as the Depositary and the Company may agree to in writing from time to time) prior to the proposed distribution, specifying, inter alia, the record date applicable to holders of Deposited Securities entitled to receive such distribution. Upon the timely receipt of such notice from the Company, the Depositary shall establish the ADS Record Date upon the terms described in Section 4.9. Upon receipt of confirmation from the Custodian of the receipt of the Shares so distributed by the Company, the Depositary shall either (i) subject to Section 5.9, distribute to the Holders as of the ADS Record Date in proportion to the number of ADSs held as of the ADS Record Date, additional ADSs, which represent in the aggregate the number of Shares received as such dividend, or free distribution, subject to the other terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes), or (ii) if additional ADSs are not so distributed, take all actions necessary so that each ADS issued and outstanding after the ADS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interests in the additional integral number of Shares distributed upon the Deposited Securities represented thereby (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes). In lieu of delivering fractional ADSs, the Depositary shall sell the number of Shares or ADSs, as the case may be, represented by the aggregate of such fractions and distribute the net proceeds upon the terms described in Section 4.1. In the event that the Depositary determines that any distribution in property (including Shares) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company in the fulfillment of its obligation under Section 5.7, has furnished an opinion of U.S. counsel determining that Shares must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective), the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable, and the Depositary shall distribute the net proceeds of any such sale (after deduction of (a) taxes and (b) fees and charges of, and expenses incurred by, the Depositary) to Holders entitled thereto upon the terms described in Section 4.1. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of the Deposit Agreement. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for in this Section 4.2, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in this Section 4.2, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in this Section 4.2 where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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Section 4.3    Elective Distributions in Cash or Shares. Whenever the Company intends to make a distribution payable at the election of the holders of Deposited Securities in cash or in additional Shares, the Company shall give timely notice thereof to the Depositary at least sixty (60) days (or such other number of days as the Depositary and the Company may agree to in writing from time to time) prior to the proposed distribution specifying, inter alia, the record date applicable to holders of Deposited Securities entitled to receive such elective distribution and whether or not it wishes such elective distribution to be made available to Holders of ADSs. Upon the timely receipt of a notice indicating that the Company wishes such elective distribution to be made available to Holders of ADSs, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such elective distribution available to the Holders of ADSs. The Depositary shall make such elective distribution available to Holders only if (i) the Company shall have timely requested that the elective distribution be made available to Holders, (ii) the Depositary shall have determined that such distribution is reasonably practicable and (iii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7. If the above conditions are not satisfied or if the Company requests such elective distribution not to be made available to Holders of ADSs, the Depositary shall establish the ADS Record Date on the terms described in Section 4.9 and, to the extent permitted by law, distribute to the Holders, on the basis of the same determination as is made in the British Virgin Islands in respect of the Shares for which no election is made, either (X) cash upon the terms described in Section 4.1 or (Y) additional ADSs representing such additional Shares upon the terms described in Section 4.2. If the above conditions are satisfied, the Depositary shall establish an ADS Record Date on the terms described in Section 4.9 and establish procedures to enable Holders to elect the receipt of the proposed distribution in cash or in additional ADSs. The Company shall assist the Depositary in establishing such procedures to the extent necessary. If a Holder elects to receive the proposed distribution (X) in cash, the distribution shall be made upon the terms described in Section 4.1, or (Y) in ADSs, the distribution shall be made upon the terms described in Section 4.2. Nothing herein shall obligate the Depositary to make available to Holders a method to receive the elective distribution in Shares (rather than ADSs). There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Shares. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for in this Section 4.3, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in this Section 4.3, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in this Section 4.3 where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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Section 4.4    Distribution of Rights to Purchase Additional ADSs.

(a)    Distribution to ADS Holders. Whenever the Company intends to distribute to the holders of the Deposited Securities rights to subscribe for additional Shares, the Company shall give timely notice thereof to the Depositary at least sixty (60) days (or such other number of days as the Depositary and the Company may agree to in writing from time to time) prior to the proposed distribution specifying, inter alia, the record date applicable to holders of Deposited Securities entitled to receive such distribution and whether or not it wishes such rights to be made available to Holders of ADSs. Upon the timely receipt of a notice indicating that the Company wishes such rights to be made available to Holders of ADSs, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to Holders only if (i) the Company shall have timely requested that such rights be made available to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. In the event any of the conditions set forth above are not satisfied or if the Company requests that the rights not be made available to Holders of ADSs, the Depositary shall proceed with the sale of the rights as contemplated in Section 4.4(b) below. In the event all conditions set forth above are satisfied, the Depositary shall establish the ADS Record Date (upon the terms described in Section 4.9) and establish procedures to (x) distribute rights to purchase additional ADSs (by means of warrants or otherwise), (y) enable the Holders to exercise such rights (upon payment of the subscription price and of the applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes), and (z) deliver ADSs upon the valid exercise of such rights. The Company shall assist the Depositary to the extent necessary in establishing such procedures. Nothing herein shall obligate the Depositary to make available to the Holders a method to exercise rights to subscribe for Shares (rather than ADSs).

(b)    Sale of Rights. If (i) the Company does not timely request the Depositary to make the rights available to Holders or requests that the rights not be made available to Holders, (ii) the Depositary fails to receive satisfactory documentation within the terms of Section 5.7, or determines it is not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including public or private sale) as it may deem practicable. The Company shall assist the Depositary to the extent necessary to determine such legality and practicability. The Depositary shall, upon such sale, convert and distribute proceeds of such sale (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) upon the terms set forth in Section 4.1.

(c)    Lapse of Rights. If the Depositary is unable to make any rights available to Holders upon the terms described in Section 4.4(a) or to arrange for the sale of the rights upon the terms described in Section 4.4(b), the Depositary shall allow such rights to lapse.

The Depositary shall not be liable for (i) any failure to accurately determine whether it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution.

 

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Notwithstanding anything to the contrary in this Section 4.4, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders (i) unless and until a registration statement under the Securities Act (or other applicable law) covering such offering is in effect or (ii) unless the Company furnishes the Depositary opinion(s) of counsel for the Company in the United States and counsel to the Company in any other applicable country in which rights would be distributed, in each case reasonably satisfactory to the Depositary, to the effect that the offering and sale of such securities to Holders and Beneficial Owners are exempt from, or do not require registration under, the provisions of the Securities Act or any other applicable laws.

In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of Deposited Property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders of ADSs shall be reduced accordingly. In the event that the Depositary determines that any distribution of Deposited Property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such Deposited Property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges.

There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive or exercise rights on the same terms and conditions as the holders of Shares or be able to exercise such rights. Nothing herein shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights.

Section 4.5    Distributions Other Than Cash, Shares or Rights to Purchase Shares.

(a)    Whenever the Company intends to distribute to the holders of Deposited Securities property other than cash, Shares or rights to purchase additional Shares, the Company shall use its commercially reasonable efforts to give timely notice thereof to the Depositary and shall indicate whether or not it wishes such distribution to be made to Holders of ADSs. Upon receipt of a notice indicating that the Company wishes such distribution to be made to Holders of ADSs, the Depositary shall consult with the Company, and the Company shall assist the Depositary, to determine whether such distribution to Holders is lawful and reasonably practicable. The Depositary shall not make such distribution unless (i) the Company shall have requested the Depositary to make such distribution to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7, and (iii) the Depositary shall have determined that such distribution is reasonably practicable.

(b)    Upon receipt of satisfactory documentation and the request of the Company to distribute property to Holders of ADSs and after making the requisite determinations set forth in (a) above, the Depositary shall distribute the property so received to the Holders of record, as of the ADS Record Date, in proportion to the number of ADSs held by them respectively and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution.

 

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(c)    If (i) the Company does not request the Depositary to make such distribution to Holders or requests the Depositary not to make such distribution to Holders, (ii) the Depositary does not receive satisfactory documentation within the terms of Section 5.7, or (iii) the Depositary determines that all or a portion of such distribution is not reasonably practicable, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem practicable and shall (i) cause the proceeds of such sale, if any, to be converted into Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders as of the ADS Record Date upon the terms of Section 4.1. If the Depositary is unable to sell such property, the Depositary may dispose of such property for the account of the Holders in any way it deems reasonably practicable under the circumstances.

(d)    Neither the Depositary nor the Company shall be liable for (i) any failure to accurately determine whether it is lawful or practicable to make the property described in this Section 4.5 available to Holders in general or any Holders in particular, nor (ii) any loss incurred in connection with the sale or disposal of such property.

Section 4.6    Distributions with Respect to Deposited Securities in Bearer Form. Subject to the terms of this Article IV, distributions in respect of Deposited Securities that are held by the Depositary or the Custodian in bearer form shall be made to the Depositary for the account of the respective Holders of ADS(s) with respect to which any such distribution is made upon due presentation by the Depositary or the Custodian to the Company of any relevant coupons, talons, or certificates. The Company shall promptly notify the Depositary of such distributions. The Depositary or the Custodian shall promptly present such coupons, talons or certificates, as the case may be, in connection with any such distribution.

Section 4.7    Repurchase and Redemption. If the Company intends to repurchase or exercise any right of redemption in respect of any of the Deposited Securities, the Company shall give timely notice thereof to the Depositary at least forty five (45) days (or such other number of days as the Depositary and the Company may agree to in writing from time to time) prior to the intended date of repurchase or redemption which notice shall set forth the particulars of the proposed repurchase or redemption. Upon timely receipt of (i) such notice and (ii) satisfactory documentation given by the Company to the Depositary within the terms of Section 5.7, and only if the Depositary shall have determined that such proposed repurchase or redemption is practicable, the Depositary shall provide to each relevant Holder a notice setting forth the intended exercise by the Company of the repurchase or redemption rights and any other particulars set forth in the Company’s notice to the Depositary. The Depositary shall instruct the Custodian to present to the Company the Deposited Securities in respect of which repurchase or redemption rights are being exercised against payment of the applicable repurchase or redemption price. Upon receipt of confirmation from the Custodian that the repurchase or redemption has taken place and that funds representing the repurchase or redemption price have been received, the Depositary shall convert, transfer, and distribute the proceeds (net of applicable (a) fees and charges of, and the expenses incurred by, the Depositary, and (b) taxes), retire ADSs and cancel ADRs, if applicable, upon delivery of such ADSs by Holders thereof and the terms set forth in Sections 4.1 and 6.2. If less than all outstanding Deposited Securities are repurchased or redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as may be determined by the Depositary. The repurchase or redemption price per ADS shall be the dollar equivalent of the per share amount received by the Depositary (adjusted to reflect the ADS(s)-to-Share(s) ratio) upon the repurchase or redemption of the Deposited Securities represented by ADSs (subject to the terms of Section 4.8 and the applicable fees and charges of, and expenses incurred by, the Depositary, and taxes) multiplied by the number of Deposited Securities represented by each ADS repurchased or redeemed.

 

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Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed repurchase or redemption provided for in this Section 4.7, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in this Section 4.7, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in this Section 4.7 where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

Section 4.8    Conversion of Foreign Currency. Whenever the Depositary or the Custodian shall receive Foreign Currency, by way of dividends or other distributions or the net proceeds from the sale of Deposited Property, which in the judgment of the Depositary can at such time be converted on a practicable basis, by sale or in any other manner that it may determine in accordance with applicable law, into Dollars transferable to the United States and distributable to the Holders entitled thereto, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may reasonably determine, such Foreign Currency into Dollars, and shall distribute such Dollars (net of the fees and charges set forth in the Fee Schedule attached hereto as Exhibit B, and applicable taxes withheld) in accordance with the terms of the applicable sections of the Deposit Agreement. The Depositary and/or its agent (which may be a division, branch or Affiliate of the Depositary) may act as principal for any conversion of Foreign Currency. If the Depositary shall have distributed warrants or other instruments that entitle the holders thereof to such Dollars, the Depositary shall distribute such Dollars to the holders of such warrants and/or instruments upon surrender thereof for cancellation, in either case without liability for interest thereon. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Holders on account of any application of exchange restrictions or otherwise.

If such conversion or distribution generally or with regard to a particular Holder can be effected only with the approval or license of any government or agency thereof, the Depositary shall have authority to file such application for approval or license, if any, as it may deem desirable. In no event, however, shall the Depositary be obligated to make such a filing.

 

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If at any time the Depositary shall determine that in its judgment the conversion of any Foreign Currency and the transfer and distribution of proceeds of such conversion received by the Depositary is not practicable or lawful, or if any approval or license of any governmental authority or agency thereof that is required for such conversion, transfer and distribution is denied or, in the opinion of the Depositary, not obtainable at a reasonable cost or within a reasonable period, the Depositary may, in its discretion, (i) make such conversion and distribution in Dollars to the Holders for whom such conversion, transfer and distribution is lawful and practicable, (ii) distribute the Foreign Currency (or an appropriate document evidencing the right to receive such Foreign Currency) to Holders for whom this is lawful and practicable, or (iii) hold (or cause the Custodian to hold) such Foreign Currency (without liability for interest thereon) for the respective accounts of the Holders entitled to receive the same.

Section 4.9    Fixing of ADS Record Date. Whenever (a) the Depositary shall receive notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights, or other distribution), (b) for any reason the Depositary causes a change in the number of Shares that are represented by each ADS, (c) the Depositary shall receive notice of any meeting of, or solicitation of consents or proxies of, holders of Shares or other Deposited Securities, or (d) the Depositary shall find it necessary or convenient in connection with the giving of any notice, solicitation of any consent or any other matter, the Depositary shall fix the record date (the “ADS Record Date”) for the determination of the Holders of ADS(s) who shall be entitled to receive such distribution, to give instructions for the exercise of voting rights at any such meeting, to give or withhold such consent, to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each ADS. The Depositary shall make reasonable efforts to establish the ADS Record Date as closely as practicable to the applicable record date for the Deposited Securities (if any) set by the Company in the British Virgin Islands and shall not announce the establishment of any ADS Record Date prior to the relevant corporate action having been made public by the Company (if such corporate action affects the Deposited Securities). Subject to applicable law and the provisions of Section 4.1 through 4.8 and to the other terms and conditions of the Deposit Agreement, only the Holders of ADSs at the close of business in New York on such ADS Record Date shall be entitled to receive such distribution, to give such voting instructions, to receive such notice or solicitation, or otherwise take action.

Section 4.10    Voting of Deposited Securities. As soon as practicable after receipt of notice of any meeting at which the holders of Deposited Securities are entitled to vote, or of solicitation of consents or proxies from holders of Deposited Securities, the Depositary shall fix the ADS Record Date in respect of such meeting or solicitation of consent or proxy in accordance with Section 4.9. The Depositary shall, if requested by the Company in writing in a timely manner (the Depositary having no obligation to take any further action if the request shall not have been received by the Depositary at least thirty (30) days prior to the date of such vote or meeting), at the Company’s expense and provided no U.S. legal prohibitions exist, distribute to Holders as of the ADS Record Date: (a) such notice of meeting or solicitation of consent or proxy, (b) a statement that the Holders at the close of business on the ADS Record Date will be entitled, subject to any applicable law, the provisions of the Deposit Agreement, the Articles of Association and the provisions of or governing the Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Deposited Securities represented by such Holder’s ADSs, and (c) a brief statement as to the manner in which such voting instructions may be given.

 

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Notwithstanding anything contained in the Deposit Agreement or any ADR, the Depositary may, to the extent not prohibited by law or regulations, or by the requirements of the stock exchange on which the ADSs are listed, in lieu of distribution of the materials provided to the Depositary in connection with any meeting of, or solicitation of consents or proxies from, holders of Deposited Securities, distribute to the Holders a notice that provides Holders with, or otherwise publicizes to Holders, instructions on how to retrieve such materials or receive such materials upon request (e.g., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).

The Depositary has been advised by the Company that under the Articles of Association as in effect on the date of the Deposit Agreement, voting at any meeting of shareholders of the Company is by show of hands unless (before or on the declaration of the result of the show of hands) a poll is demanded. The Depositary will not join in demanding a poll, whether or not requested to do so by Holders of ADSs. Under the Articles of Association as in effect on the date of the Deposit Agreement, a poll may be demanded by (a) the chairman of the meeting or (b) any shareholder present in person or by proxy.

Voting instructions may be given only in respect of a number of ADSs representing an integral number of Deposited Securities. Upon the timely receipt from a Holder of ADSs as of the ADS Record Date of voting instructions in the manner specified by the Depositary, the Depositary shall endeavor, insofar as practicable and permitted under applicable law, the provisions of the Deposit Agreement, the Articles of Association and the provisions of the Deposited Securities, to vote, or cause the Custodian to vote, the Deposited Securities (in person or by proxy) represented by such Holder’s ADSs as follows: (a) in the event voting takes place at a shareholders meeting by a show of hands, the Depositary will instruct the Custodian to vote all Deposited Securities in accordance with the voting instructions received timely from a majority of Holders of ADSs who provided voting instructions, and (b) in the event voting takes place at a shareholders meeting by poll, the Depositary will instruct the Custodian to vote the Deposited Securities in accordance with the voting instructions timely received from the Holders of ADSs. If voting is by poll and the Depositary does not receive voting instructions from a Holder as of the ADS Record Date on or before the date established by the Depositary for such purpose, such Holder shall be deemed, and the Depositary shall deem such Holder, to have instructed the Depositary to give a discretionary proxy to a person designated by the Company to vote the Deposited Securities; provided, however, that no such discretionary proxy shall be given by the Depositary with respect to any matter to be voted upon as to which the Company informs the Depositary that (a) the Company does not wish such proxy to be given, (b) substantial opposition exists, or (c) the rights of holders of Deposited Securities may be adversely affected.

 

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Deposited Securities represented by ADSs for which no timely voting instructions are received by the Depositary from the Holder shall not be voted (except (a) in the case voting is by show of hands, in which case the Depositary will instruct the Custodian to vote all Deposited Securities in accordance with the voting instructions received from a majority of Holders of ADSs who provided timely voting instructions, (b) as contemplated in this Section 4.10). Neither the Depositary nor the Custodian shall under any circumstances exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of, for purposes of establishing a quorum or otherwise, the Deposited Securities represented by ADSs, except pursuant to and in accordance with the voting instructions timely received from Holders or as otherwise contemplated herein. If the Depositary timely receives voting instructions from a Holder which fail to specify the manner in which the Depositary is to vote the Deposited Securities represented by such Holder’s ADSs, the Depositary will deem such Holder (unless otherwise specified in the notice distributed to Holders) to have instructed the Depositary to vote in favor of the items set forth in such voting instructions.

Notwithstanding anything else contained herein, the Depositary shall, if so requested in writing by the Company, represent all Deposited Securities (whether or not voting instructions have been received in respect of such Deposited Securities from Holders as of the ADS Record Date) for the sole purpose of establishing quorum at a meeting of shareholders.

Notwithstanding anything else contained in the Deposit Agreement or any ADR, the Depositary shall not have any obligation to take any action with respect to any meeting, or solicitation of consents or proxies, of holders of Deposited Securities if the taking of such action would violate U.S. laws. The Company agrees to take any and all actions reasonably necessary to enable Holders and Beneficial Owners to exercise the voting rights accruing to the Deposited Securities and to deliver to the Depositary an opinion of U.S. counsel addressing any actions requested to be taken if so requested by the Depositary.

There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return voting instructions to the Depositary, or otherwise take action, in a timely manner.

 

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Section 4.11    Changes Affecting Deposited Securities. Upon any change in nominal or par value, sub-division or split-up, cancellation, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger, consolidation or sale of assets affecting the Company or to which it is a party, any property which shall be received by the Depositary or the Custodian in exchange for, or in conversion of, or replacement of, or otherwise in respect of, such Deposited Securities shall, to the extent permitted by law, be treated as new Deposited Property under the Deposit Agreement, and the ADSs shall, subject to the provisions of the Deposit Agreement, any ADR(s) evidencing such ADSs and applicable law, represent the right to receive such additional or replacement Deposited Property. In giving effect to such change, sub-division or split-up, cancellation, consolidation or other reclassification of Deposited Securities, recapitalization, reorganization, merger, consolidation or sale of assets, the Depositary may, with the Company’s approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary, and (b) taxes) and receipt of an opinion of counsel to the Company reasonably satisfactory to the Depositary that such actions are not in violation of any applicable laws or regulations, (i) issue and deliver additional ADSs as in the case of a share or stock dividend on the Shares, (ii) amend the Deposit Agreement and the applicable ADRs, (iii) amend the applicable Registration Statement(s) on Form F-6 as filed with the Commission in respect of the ADSs, (iv) call for the surrender of outstanding ADRs to be exchanged for new ADRs, and (v) take such other actions as are appropriate to reflect the transaction with respect to the ADSs. The Company agrees to, jointly with the Depositary, amend the Registration Statement on Form F-6 as filed with the Commission to permit the issuance of such new form of ADRs. Notwithstanding the foregoing, in the event that any Deposited Property so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company’s approval, and shall, if the Company requests, subject to receipt of an opinion of Company’s counsel reasonably satisfactory to the Depositary that such action is not in violation of any applicable laws or regulations, sell such Deposited Property at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) for the account of the Holders otherwise entitled to such Deposited Property upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash pursuant to Section 4.1. Neither the Company nor the Depositary shall be responsible for (i) any failure to determine that it may be lawful or practicable to make such Deposited Property available to Holders in general or to any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or (iii) any liability to the purchaser of such Deposited Property.

Section 4.12    Available Information.

The Company is subject to the periodic reporting requirements of the Exchange Act and, accordingly, is required to file or furnish certain reports with the Commission. These reports can be retrieved from the Commission’s website (www.sec.gov) and can be inspected and copied at the public reference facilities maintained by the Commission located (as of the date of the Deposit Agreement) at 100 F Street, N.E., Washington D.C. 20549.

Section 4.13    Reports. The Depositary shall make available for inspection by Holders at its Principal Office any reports and communications, including any proxy soliciting materials, received from the Company which are both (a) received by the Depositary, the Custodian, or the nominee of either of them as the holder of the Deposited Property and (b) made generally available to the holders of such Deposited Property by the Company. The Depositary shall also provide or make available to Holders copies of such reports when furnished by the Company pursuant to Section 5.6.

Section 4.14    List of Holders. Promptly upon written request by the Company, the Depositary shall furnish to it a list, as of a recent date, of the names, addresses and holdings of ADSs of all Holders.

 

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Section 4.15    Taxation. The Depositary will, and will instruct the Custodian to, forward to the Company or its agents such information from its records as the Company may reasonably request to enable the Company or its agents to file the necessary tax reports with governmental authorities or agencies. The Depositary, the Custodian or the Company and its agents may file such reports as are necessary to reduce or eliminate applicable taxes on dividends and on other distributions in respect of Deposited Property under applicable tax treaties or laws for the Holders and Beneficial Owners. In accordance with instructions from the Company and to the extent practicable, the Depositary or the Custodian will take reasonable administrative actions to obtain tax refunds, reduced withholding of tax at source on dividends and other benefits under applicable tax treaties or laws with respect to dividends and other distributions on the Deposited Property. As a condition to receiving such benefits, Holders and Beneficial Owners of ADSs may be required from time to time, and in a timely manner, to file such proof of taxpayer status, residence and beneficial ownership (as applicable), to execute such certificates and to make such representations and warranties, or to provide any other information or documents, as the Depositary or the Custodian may deem necessary or proper to fulfill the Depositary’s or the Custodian’s obligations under applicable law. The Depositary and the Company shall have no obligation or liability to any person if any Holder or Beneficial Owner fails to provide such information or if such information does not reach the relevant tax authorities in time for any Holder or Beneficial Owner to obtain the benefits of any tax treatment. The Holders and Beneficial Owners shall indemnify the Depositary, the Company, the Custodian and any of their respective directors, employees, agents and Affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained.

If the Company (or any of its agents) withholds from any distribution any amount on account of taxes or governmental charges, or pays any other tax in respect of such distribution (e.g., stamp duty tax, capital gains or other similar tax), the Company shall (and shall cause such agent to) remit as soon as reasonably practicable to the Depositary information about such taxes or governmental charges withheld or paid, and, if so requested, the tax receipt (or other proof of payment to the applicable governmental authority) therefor, in each case, in a form reasonably satisfactory to the Depositary. The Depositary shall, to the extent required by U.S. law, report to Holders any taxes withheld by it or the Custodian, and, if such information is provided to it by the Company, any taxes withheld by the Company. The Depositary and the Custodian shall not be required to provide the Holders with any evidence of the remittance by the Company (or its agents) of any taxes withheld, or of the payment of taxes by the Company, except to the extent the evidence is provided by the Company to the Depositary or the Custodian, as applicable. Neither the Depositary nor the Custodian shall be liable for the failure by any Holder or Beneficial Owner to obtain the benefits of credits on the basis of non-U.S. tax paid against such Holder’s or Beneficial Owner’s income tax liability.

The Depositary is under no obligation to provide the Holders and Beneficial Owners with any information about the tax status of the Company. The Depositary shall not incur any liability for any tax consequences that may be incurred by Holders and Beneficial Owners on account of their ownership of the ADSs, including without limitation, tax consequences resulting from the Company (or any of its subsidiaries) being treated as a “Passive Foreign Investment Company” (in each case as defined in the U.S. Internal Revenue Code and the regulations issued thereunder) or otherwise.

 

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ARTICLE V

THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY

Section 5.1    Maintenance of Office and Transfer Books by the Registrar. Until termination of the Deposit Agreement in accordance with its terms, the Registrar shall maintain in the Borough of Manhattan, the City of New York, an office and facilities for the issuance and delivery of ADSs, the acceptance for surrender of ADS(s) for the purpose of withdrawal of Deposited Securities, the registration of issuances, cancellations, transfers, combinations and split-ups of ADS(s) and, if applicable, to countersign ADRs evidencing the ADSs so issued, transferred, combined or split-up, in each case in accordance with the provisions of the Deposit Agreement.

The Registrar shall keep books for the registration of ADSs which at all reasonable times shall be open for inspection by the Company and by the Holders of such ADSs, provided that such inspection shall not be, to the Registrar’s knowledge, for the purpose of communicating with Holders of such ADSs in the interest of a business or object other than the business of the Company or other than a matter related to the Deposit Agreement or the ADSs.

The Registrar may close the transfer books with respect to the ADSs, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company subject, in all cases, to Section 7.8(a).

If any ADSs are listed on one or more stock exchanges or automated quotation systems in the United States, the Depositary shall act as Registrar or appoint a Registrar or one or more co-registrars for registration of issuances, cancellations, transfers, combinations and split-ups of ADSs and, if applicable, to countersign ADRs evidencing the ADSs so issued, transferred, combined or split-up, in accordance with any requirements of such exchanges or systems. Such Registrar or co-registrars may be removed and a substitute or substitutes appointed by the Depositary. As promptly as practicable, the Depositary shall notify the Company of any such removal or appointment.

Section 5.2    Exoneration. Notwithstanding anything contained in the Deposit Agreement or any ADR, neither the Depositary nor the Company shall be obligated to do or perform any act which is inconsistent with the provisions of the Deposit Agreement or incur any liability (to the extent not limited by Section 7.8(b)) (i) if the Depositary, the Custodian, the Company or their respective agents shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required or contemplated by the terms of the Deposit Agreement, by reason of any provision of any present or future law or regulation of the United States, the British Virgin Islands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of potential criminal or civil penalties or restraint, or by reason of any provision, present or future, of the Articles of Association or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, acts of terrorism, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement or in the Articles of Association or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of the Deposit Agreement, made available to Holders of ADSs, (v) for any action or inaction of any clearing or settlement system (and any participant thereof) for the Deposited Property or the ADSs, or (vi) for any consequential or punitive damages (including lost profits) for any breach of the terms of the Deposit Agreement.

 

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The Depositary, its controlling persons, its agents, any Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

Section 5.3    Standard of Care. The Company and the Depositary assume no obligation and shall not be subject to any liability under the Deposit Agreement or any ADRs to any Holder(s) or Beneficial Owner(s), except that the Company and the Depositary agree to perform their respective obligations specifically set forth in the Deposit Agreement or the applicable ADRs without negligence or bad faith.

Without limitation of the foregoing, neither the Depositary, nor the Company, nor any of their respective controlling persons, or agents, shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Property or in respect of the ADSs, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense (including fees and disbursements of counsel) and liability be furnished as often as may be required (and no Custodian shall be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary).

The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effect of any vote, provided that any such action or omission is in good faith and without negligence and in accordance with the terms of the Deposit Agreement. The Depositary shall not incur any liability for any failure to accurately determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Property, for the validity or worth of the Deposited Property, for the value of any Deposited Property or any distribution thereon, for any interest on Deposited Property, for any tax consequences that may result from the ownership of ADSs, Shares or other Deposited Property, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of the Deposit Agreement, for the failure or timeliness of any notice from the Company, or for any action of or failure to act by, or any information provided or not provided by, DTC or any DTC Participant.

 

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The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.

The Depositary shall not be liable for any acts or omissions made by a predecessor depositary whether in connection with an act or omission of the Depositary or in connection with any matter arising wholly prior to the appointment of the Depositary or after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.

Section 5.4    Resignation and Removal of the Depositary; Appointment of Successor Depositary. The Depositary may at any time resign as Depositary hereunder by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 90th day after delivery thereof to the Company (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2), or (ii) the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided.

The Depositary may at any time be removed by the Company by written notice of such removal, which removal shall be effective on the later of (i) the 90th day after delivery thereof to the Depositary (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided.

In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall be required by the Company to execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed (except as required by applicable law), shall become fully vested with all the rights, powers, duties and obligations of its predecessor (other than as contemplated in Sections 5.8 and 5.9). The predecessor depositary, upon payment of all sums due it and on the written request of the Company, shall, (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in Sections 5.8 and 5.9), (ii) duly assign, transfer and deliver all of the Depositary’s right, title and interest to the Deposited Property to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding ADSs and such other information relating to ADSs and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly provide notice of its appointment to such Holders.

 

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Any entity into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act.

Section 5.5    The Custodian. The Depositary has initially appointed Citibank, N.A. - Hong Kong as Custodian for the purpose of the Deposit Agreement. The Custodian or its successors in acting hereunder shall be authorized to act as custodian in the British Virgin Islands and shall be subject at all times and in all respects to the direction of the Depositary for the Deposited Property for which the Custodian acts as custodian and shall be responsible solely to it. If any Custodian resigns or is discharged from its duties hereunder with respect to any Deposited Property and no other Custodian has previously been appointed hereunder, the Depositary shall promptly appoint a substitute custodian. The Depositary shall require such resigning or discharged Custodian to Deliver, or cause the Delivery of, the Deposited Property held by it, together with all such records maintained by it as Custodian with respect to such Deposited Property as the Depositary may request, to the Custodian designated by the Depositary. Whenever the Depositary determines, in its discretion, that it is appropriate to do so, it may appoint an additional custodian with respect to any Deposited Property, or discharge the Custodian with respect to any Deposited Property and appoint a substitute custodian, which shall thereafter be Custodian hereunder with respect to the Deposited Property. Immediately upon any such change, the Depositary shall give notice thereof in writing to all Holders of ADSs, each other Custodian and the Company.

Citibank may at any time act as Custodian of the Deposited Property pursuant to the Deposit Agreement, in which case any reference to Custodian shall mean Citibank solely in its capacity as Custodian pursuant to the Deposit Agreement. Notwithstanding anything contained in the Deposit Agreement or any ADR to the contrary, the Depositary shall not be obligated to give notice to the Company, any Holders of ADSs or any other Custodian of its acting as Custodian pursuant to the Deposit Agreement.

Upon the appointment of any successor depositary, any Custodian then acting hereunder shall, unless otherwise instructed by the Depositary, continue to be the Custodian of the Deposited Property without any further act or writing, and shall be subject to the direction of the successor depositary. The successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority to act on the direction of such successor depositary.

Section 5.6    Notices and Reports. On or before the first date on which the Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action by such holders other than at a meeting, or of the taking of any action in respect of any cash or other distributions or the offering of any rights in respect of Deposited Securities, the Company shall transmit to the Depositary and the Custodian a copy of the notice thereof in the English language but otherwise in the form given or to be given to holders of Shares or other Deposited Securities. The Company shall also furnish to the Custodian and the Depositary a summary, in English, of any applicable provisions or proposed provisions of the Articles of Association that may be relevant or pertain to such notice of meeting or be the subject of a vote thereat.

 

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The Company will also transmit to the Depositary (a) an English language version of the other notices, reports and communications which are made generally available by the Company to holders of its Shares or other Deposited Securities and (b) the English-language versions of the Company’s annual reports prepared in accordance with the applicable requirements of the Commission to the extent that such notices, reports or communications are not publicly available on the Company’s website or are not otherwise publicly available. The Depositary shall arrange, at the request of the Company and at the Company’s expense, to provide copies thereof to all Holders or make such notices, reports and other communications available to all Holders on a basis similar to that for holders of Shares or other Deposited Securities or on such other basis as the Company may advise the Depositary or as may be required by any applicable law, regulation or stock exchange requirement. The Company has delivered to the Depositary and the Custodian a copy of the Articles of Association along with the provisions of or governing the Shares and any other Deposited Securities issued by the Company in connection with such Shares, and promptly upon any amendment thereto or change therein, the Company shall deliver to the Depositary and the Custodian a copy of such amendment thereto or change therein to the extent that such amendment or change is not publicly available on the Company’s website or is not otherwise publicly available. The Depositary may rely upon such copy for all purposes of the Deposit Agreement.

The Depositary will, at the expense of the Company, make available a copy of any such notices, reports or communications issued by the Company and delivered to the Depositary for inspection by the Holders of the ADSs at the Depositary’s Principal Office, at the office of the Custodian and at any other designated transfer office.

Section 5.7    Issuance of Additional Shares, ADSs etc. The Company agrees that in the event it or any of its Affiliates proposes (i) an issuance, sale or distribution of additional Shares, (ii) an offering of rights to subscribe for Shares or other Deposited Securities, (iii) an issuance or assumption of securities convertible into or exchangeable for Shares, (iv) an issuance of rights to subscribe for securities convertible into or exchangeable for Shares, (v) an elective dividend of cash or Shares, (vi) a redemption of Deposited Securities, (vii) a meeting of holders of Deposited Securities, or solicitation of consents or proxies, relating to any reclassification of securities, merger or consolidation or transfer of assets, (viii) any assumption, reclassification, recapitalization, reorganization, merger, consolidation or sale of assets which affects the Deposited Securities, or (ix) a distribution of securities other than Shares, it will obtain U.S. legal advice and take all steps necessary to ensure that the application of the proposed transaction to Holders and Beneficial Owners does not violate the registration provisions of the Securities Act, or any other applicable laws (including, without limitation, the Investment Company Act of 1940, as amended, the Exchange Act and the securities laws of the states of the U.S.). In support of the foregoing, the Company will furnish to the Depositary (a) a written opinion of U.S. counsel (reasonably satisfactory to the Depositary) stating whether such transaction (1) requires a registration statement under the Securities Act to be in effect or (2) is exempt from the registration requirements of the Securities Act and (b) an opinion of the British Virgin Islands counsel stating that (1) making the transaction available to Holders and Beneficial Owners does not violate the laws or regulations of the British Virgin Islands and (2) all requisite regulatory consents and approvals, if any, have been obtained in the British Virgin Islands. If the filing of a registration statement is required, the Depositary shall not have any obligation to proceed with the transaction unless it shall have received evidence reasonably satisfactory to it that such registration statement has been declared effective. If, being advised by counsel, the Company determines that a transaction is required to be registered under the Securities Act, the Company will either (i) register such transaction to the extent necessary, (ii) alter the terms of the transaction to avoid the registration requirements of the Securities Act or (iii) direct the Depositary to take specific measures, in each case as contemplated in the Deposit Agreement, to prevent such transaction from violating the registration requirements of the Securities Act. The Company agrees with the Depositary that neither the Company nor any of its Affiliates will at any time (i) deposit any Shares or other Deposited Securities, either upon original issuance or upon a sale of Shares or other Deposited Securities previously issued and reacquired by the Company or by any such Affiliate, or (ii) issue additional Shares, rights to subscribe for such Shares, securities convertible into or exchangeable for Shares or rights to subscribe for such securities or distribute securities other than Shares, unless such transaction and the securities issuable in such transaction do not violate the registration provisions of the Securities Act, or any other applicable laws (including, without limitation, the Investment Company Act of 1940, as amended, the Exchange Act and the securities laws of the states of the U.S.).

 

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Notwithstanding anything else contained in the Deposit Agreement, nothing in the Deposit Agreement shall be deemed to obligate the Company to file any registration statement in respect of any proposed transaction.

Section 5.8    Indemnification. The Depositary agrees to indemnify the Company and its directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) which may arise out of acts performed or omitted by the Depositary under the terms hereof due to the negligence or bad faith of the Depositary.

The Company agrees to indemnify the Depositary, the Custodian and any of their respective directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) that may arise (a) out of, or in connection with, any offer, issuance, sale, resale, transfer, deposit or withdrawal of ADRs, ADSs, the Shares, or other Deposited Securities, as the case may be, (b) out of, or as a result of, any offering documents in respect thereof or (c) out of acts performed or omitted, including, but not limited to, any delivery by the Depositary on behalf of the Company of information regarding the Company, in connection with the Deposit Agreement, any ancillary or supplemental agreement entered into between the Company and the Depositary, the ADRs, the ADSs, the Shares, or any Deposited Property, in any such case (i) by the Depositary, the Custodian or any of their respective directors, officers, employees, agents and Affiliates, except to the extent such loss, liability, tax, charge or expense is due to the negligence or bad faith of any of them, or (ii) by the Company or any of its directors, officers, employees, agents and Affiliates.

 

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The obligations set forth in this Section shall survive the termination of the Deposit Agreement and the succession or substitution of any party hereto.

Any person seeking indemnification hereunder (an “indemnified person”) shall notify the person from whom it is seeking indemnification (the “indemnifying person”) of the commencement of any indemnifiable action or claim promptly after such indemnified person becomes aware of such commencement (provided that the failure to make such notification shall not affect such indemnified person’s rights to seek indemnification except to the extent the indemnifying person is materially prejudiced by such failure) and shall consult in good faith with the indemnifying person as to the conduct of the defense of such action or claim that may give rise to an indemnity hereunder, which defense shall be reasonable in the circumstances. No indemnified person shall compromise or settle any action or claim that may give rise to an indemnity hereunder without the consent of the indemnifying person, which consent shall not be unreasonably withheld.

Section 5.9    ADS Fees and Charges. The Company, the Holders, the Beneficial Owners, persons depositing Shares or withdrawing Deposited Securities in connection with the issuance and cancellation of ADSs, and persons receiving ADSs upon issuance or whose ADSs are being cancelled shall be required to pay to the Depositary the Depositary’s fees and related charges identified as payable by them respectively in the Fee Schedule attached hereto as Exhibit B. All ADS fees and charges so payable may be deducted from distributions or must be remitted to the Depositary, or its designee, and may, at any time and from time to time, be changed by agreement between the Depositary and the Company, but, in the case of ADS fees and charges payable by Holders and Beneficial Owners, any such change (excluding any changes to the waiver by the Depositary of fees and charges contemplated herein) may be made only in the manner contemplated in Section 6.1. The Depositary shall provide, without charge, a copy of its latest ADS fee schedule to anyone upon request.

ADS fees and charges for (i) the issuance of ADSs and (ii) the cancellation of ADSs will be payable by the person for whom the ADSs are so issued by the Depositary (in the case of ADS issuances) and by the person for whom ADSs are being cancelled (in the case of ADS cancellations). In the case of ADSs issued by the Depositary into DTC or presented to the Depositary via DTC, the ADS issuance and cancellation fees and charges will be payable by the DTC Participant(s) receiving the ADSs from the Depositary 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(s) of the applicable Beneficial Owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are payable by Holders as of the applicable ADS Record Date established by the Depositary. 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, the applicable Holders as of the ADS Record Date established by the Depositary will be invoiced for the amount of the ADS fees and charges and such ADS fees may be deducted from distributions made to Holders. 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 from time to time 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.

 

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The Depositary may reimburse the Company for certain expenses incurred by the Company in respect of the ADR program established pursuant to the Deposit Agreement, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as the Company and the Depositary agree from time to time. The Company shall pay to the Depositary such fees and charges, and reimburse the Depositary for such out-of-pocket expenses, as the Depositary and the Company may agree from time to time. Responsibility for payment of such fees, charges and reimbursements may from time to time be changed by agreement between the Company and the Depositary. Unless otherwise agreed, the Depositary shall present its statement for such fees, charges and reimbursements to the Company once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary.

The obligations of Holders and Beneficial Owners to pay ADS fees and charges shall survive the termination of the Deposit Agreement. As to any Depositary, upon the resignation or removal of such Depositary as described in Section 5.4, the right to collect ADS fees and charges shall extend for those ADS fees and charges incurred prior to the effectiveness of such resignation or removal.

Section 5.10    Restricted Securities Owners. The Company agrees to advise in writing each of the persons or entities who, to the knowledge of the Company, holds Restricted Securities that such Restricted Securities are ineligible for deposit hereunder (except under the circumstances contemplated in Section 2.14) and, to the extent practicable, shall require each of such persons to represent in writing that such person will not deposit Restricted Securities hereunder (except under the circumstances contemplated in Section 2.14).

 

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ARTICLE VI

AMENDMENT AND TERMINATION

Section 6.1    Amendment/Supplement. Subject to the terms and conditions of this Section 6.1 and applicable law, the ADRs outstanding at any time, the provisions of the Deposit Agreement and the form of ADR attached hereto and to be issued under the terms hereof may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior written consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding ADSs until the expiration of thirty (30) days after notice of such amendment or supplement shall have been given to the Holders of outstanding ADSs. Notice of any amendment to the Deposit Agreement or any ADR shall not need to describe in detail the specific amendments effectuated thereby, and failure to describe the specific amendments in any such notice shall not render such notice invalid, provided, however, that, in each such case, the notice given to the Holders identifies a means for Holders and Beneficial Owners to retrieve or receive the text of such amendment (e.g., upon retrieval from the Commission’s, the Depositary’s or the Company’s website or upon request from the Depositary). The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the ADSs to be registered on Form F-6 under the Securities Act or (b) the ADSs to be settled solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial existing rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such ADSs, to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement and the ADR, if applicable, as amended or supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender such ADS and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require an amendment of, or supplement to, the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and any ADRs at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement and any ADRs in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations.

Section 6.2    Termination. The Depositary shall, at any time at the written direction of the Company, terminate the Deposit Agreement by distributing notice of such termination to the Holders of all ADSs then outstanding at least thirty (30) days prior to the date fixed in such notice for such termination. If (i) ninety (90) days shall have expired after the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) ninety (90) days shall have expired after the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and, in either case, a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.4 of the Deposit Agreement, the Depositary may terminate the Deposit Agreement by distributing notice of such termination to the Holders of all ADSs then outstanding at least thirty (30) days prior to the date fixed in such notice for such termination. The date so fixed for termination of the Deposit Agreement in any termination notice so distributed by the Depositary to the Holders of ADSs is referred to as the “Termination Date”. Until the Termination Date, the Depositary shall continue to perform all of its obligations under the Deposit Agreement, and the Holders and Beneficial Owners will be entitled to all of their rights under the Deposit Agreement.

 

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If any ADSs shall remain outstanding after the Termination Date, the Registrar and the Depositary shall not, after the Termination Date, have any obligation to perform any further acts under the Deposit Agreement, except that the Depositary shall, subject, in each case, to the terms and conditions of the Deposit Agreement, continue to (i) collect dividends and other distributions pertaining to Deposited Securities, (ii) sell Deposited Property received in respect of Deposited Securities, (iii) deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any other Deposited Property, in exchange for ADSs surrendered to the Depositary (after deducting, or charging, as the case may be, in each case, the fees and charges of, and expenses incurred by, the Depositary, and all applicable taxes or governmental charges for the account of the Holders and Beneficial Owners, in each case upon the terms set forth in Section 5.9 of the Deposit Agreement), and (iv) take such actions as may be required under applicable law in connection with its role as Depositary under the Deposit Agreement.

At any time after the Termination Date, the Depositary may sell the Deposited Property then held under the Deposit Agreement and shall after such sale hold un-invested the net proceeds of such sale, together with any other cash then held by it under the Deposit Agreement, in an un-segregated account and without liability for interest, for the pro rata benefit of the Holders whose ADSs have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement except (i) to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case, the fees and charges of, and expenses incurred by, the Depositary, and all applicable taxes or governmental charges for the account of the Holders and Beneficial Owners, in each case upon the terms set forth in Section 5.9 of the Deposit Agreement), and (ii) as may be required at law in connection with the termination of the Deposit Agreement. After the Termination Date, the Company shall be discharged from all obligations under the Deposit Agreement, except for its obligations to the Depositary under Sections 5.8, 5.9 and 7.6 of the Deposit Agreement. The obligations under the terms of the Deposit Agreement of Holders and Beneficial Owners of ADSs outstanding as of the Termination Date shall survive the Termination Date and shall be discharged only when the applicable ADSs are presented by their Holders to the Depositary for cancellation under the terms of the Deposit Agreement (except as specifically provided in the Deposit Agreement).

Notwithstanding anything contained in the Deposit Agreement or any ADR, in connection with the termination of the Deposit Agreement, the Depositary may, independently and without the need for any action by the Company, make available to Holders of ADSs a means to withdraw the Deposited Securities represented by their ADSs and to direct the deposit of such Deposited Securities into an unsponsored American depositary shares program established by the Depositary, upon such terms and conditions as the Depositary may deem reasonably appropriate, subject however, in each case, to satisfaction of the applicable registration requirements by the unsponsored American depositary shares program under the Securities Act, and to receipt by the Depositary of payment of the applicable fees and charges of, and reimbursement of the applicable expenses incurred by, the Depositary.

 

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ARTICLE VII

MISCELLANEOUS

Section 7.1    Counterparts. The Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of such counterparts together shall constitute one and the same agreement. Copies of the Deposit Agreement shall be maintained with the Depositary and shall be open to inspection by any Holder during business hours.

Section 7.2    No Third-Party Beneficiaries/Acknowledgments. The Deposit Agreement is for the exclusive benefit of the parties hereto (and their successors) and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person, except to the extent specifically set forth in the Deposit Agreement. Nothing in the Deposit Agreement shall be deemed to give rise to a partnership or joint venture among the parties nor establish a fiduciary or similar relationship among the parties. The parties hereto acknowledge and agree that (i) Citibank and its Affiliates may at any time have multiple banking relationships with the Company, the Holders, the Beneficial Owners, and their respective Affiliates, (ii) Citibank and its Affiliates may own and deal in any class of securities of the Company and its Affiliates and in ADSs, and may be engaged at any time in transactions in which parties adverse to the Company, the Holders, the Beneficial Owners or their respective Affiliates may have interests, (iii) the Depositary and its Affiliates may from time to time have in their possession non-public information about the Company, the Holders, the Beneficial Owners, and their respective Affiliates, (iv) nothing contained in the Deposit Agreement shall (a) preclude Citibank or any of its Affiliates from engaging in such transactions or establishing or maintaining such relationships, or (b) obligate Citibank or any of its Affiliates to disclose such information, transactions or relationships, or to account for any profit made or payment received in such transactions or relationships, (v) the Depositary shall not be deemed to have knowledge of any information any other division of Citibank or any of its Affiliates may have about the Company, the Holders, the Beneficial Owners, or any of their respective Affiliates, and (vi) the Company, the Depositary, the Custodian and their respective agents and controlling persons may be subject to the laws and regulations of jurisdictions other than the U.S. and the British Virgin Islands, and the authority of courts and regulatory authorities of such other jurisdictions, and, consequently, the requirements and the limitations of such other laws and regulations, and the decisions and orders of such other courts and regulatory authorities, may affect the rights and obligations of the parties to the Deposit Agreement.

Section 7.3    Severability. In case any one or more of the provisions contained in the Deposit Agreement or in the ADRs should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby.

 

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Section 7.4    Holders and Beneficial Owners as Parties; Binding Effect. The Holders and Beneficial Owners from time to time of ADSs issued hereunder shall be parties to the Deposit Agreement and shall be bound by all of the terms and conditions hereof and of any ADR evidencing their ADSs by acceptance thereof or any beneficial interest therein.

Section 7.5    Notices. Any and all notices to be given to the Company shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter personally delivered or sent by mail or air courier, addressed to AnPac Bio-Medical Science Co., Ltd. at 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China, Attention: Secretary of the Board, or to any other address which the Company may specify in writing to the Depositary.

Any and all notices to be given to the Depositary shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter personally delivered or sent by mail or air courier, addressed to Citibank, N.A., 388 Greenwich Street, New York, New York 10013, U.S.A., Attention: Depositary Receipts Department, or to any other address which the Depositary may specify in writing to the Company.

Any and all notices to be given to any Holder shall be deemed to have been duly given (a) if personally delivered or sent by mail or cable, telex or facsimile transmission, confirmed by letter, addressed to such Holder at the address of such Holder as it appears on the books of the Depositary or, if such Holder shall have filed with the Depositary a request that notices intended for such Holder be mailed to some other address, at the address specified in such request, or (b) if a Holder shall have designated such means of notification as an acceptable means of notification under the terms of the Deposit Agreement, by means of electronic messaging addressed for delivery to the e-mail address designated by the Holder for such purpose. Notice to Holders shall be deemed to be notice to Beneficial Owners for all purposes of the Deposit Agreement. Failure to notify a Holder or any defect in the notification to a Holder shall not affect the sufficiency of notification to other Holders or to the Beneficial Owners of ADSs held by such other Holders. Any notices given to DTC under the terms of the Deposit Agreement shall (unless otherwise specified by the Depositary) constitute notice to the DTC Participants who hold the ADSs in their DTC accounts and to the Beneficial Owners of such ADSs.

Delivery of a notice sent by mail, air courier or cable, telex or facsimile transmission shall be deemed to be effective at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box or delivered to an air courier service, without regard for the actual receipt or time of actual receipt thereof by a Holder. The Depositary or the Company may, however, act upon any cable, telex or facsimile transmission received by it from any Holder, the Custodian, the Depositary, or the Company, notwithstanding that such cable, telex or facsimile transmission shall not be subsequently confirmed by letter.

 

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Delivery of a notice by means of electronic messaging shall be deemed to be effective at the time of the initiation of the transmission by the sender (as shown on the sender’s records), notwithstanding that the intended recipient retrieves the message at a later date, fails to retrieve such message, or fails to receive such notice on account of its failure to maintain the designated e-mail address, its failure to designate a substitute e-mail address or for any other reason.

Section 7.6    Governing Law and Jurisdiction. The Deposit Agreement, the ADRs and the ADSs shall be interpreted in accordance with, and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, the laws of the State of New York without reference to the principles of choice of law thereof. Notwithstanding anything contained in the Deposit Agreement to the contrary, any ADR or any present or future provisions of the laws of the State of New York, the rights of holders of Shares and of any other Deposited Securities and the obligations and duties of the Company in respect of the holders of Shares and other Deposited Securities, as such, shall be governed by the laws of the British Virgin Islands (or, if applicable, such other laws as may govern the Deposited Securities).

Except as set forth in the following paragraph of this Section 7.6, the Company and the Depositary agree that the federal or state courts in the City of New York shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute between them that may arise out of or in connection with the Deposit Agreement and, for such purposes, each irrevocably submits to the non-exclusive jurisdiction of such courts. The Company hereby irrevocably designates, appoints and empowers AnPac Technology USA Co., Ltd. (the “Agent”) now at Suite 127, 2260 Clove Drive, San Jose, CA 95128 as its authorized agent to receive and accept for and on its behalf, and on behalf of its properties, assets and revenues, service by mail of any and all legal process, summons, notices and documents that may be served in any suit, action or proceeding brought against the Company in any federal or state court as described in the preceding sentence or in the next paragraph of this Section 7.6. If for any reason the Agent shall cease to be available to act as such, the Company agrees to designate a new agent in New York on the terms and for the purposes of this Section 7.6 reasonably satisfactory to the Depositary. The Company further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents in any suit, action or proceeding against the Company, by service by mail of a copy thereof upon the Agent (whether or not the appointment of such Agent shall for any reason prove to be ineffective or such Agent shall fail to accept or acknowledge such service), with a copy mailed to the Company by registered or certified air mail, postage prepaid, to its address provided in Section 7.5. The Company agrees that the failure of the Agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon.

Notwithstanding the foregoing, the Depositary and the Company unconditionally agree that in the event of any suit, action or proceeding against (a) the Company, (b) the Depositary in its capacity as Depositary under the Deposit Agreement or (c) against both the Company and the Depositary, in any such case, in any state or federal court of the United States, and the Depositary or the Company have any claim, for indemnification or otherwise, against each other arising out of the subject matter of such suit, action or proceeding, then the Company and the Depositary may pursue such claim against each other in the state or federal court in the United States in which such suit, action, or proceeding is pending and, for such purposes, the Company and the Depositary irrevocably submit to the non-exclusive jurisdiction of such courts. The Company agrees that service of process upon the Agent in the manner set forth in the preceding paragraph shall be effective service upon it for any suit, action or proceeding brought against it as described in this paragraph.

 

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The Company irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any actions, suits or proceedings brought in any court as provided in this Section 7.6, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

The Company irrevocably and unconditionally waives, to the fullest extent permitted by law, and agrees not to plead or claim, any right of immunity from legal action, suit or proceeding, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution or judgment, from execution of judgment, or from any other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, and consents to such relief and enforcement against it, its assets and its revenues in any jurisdiction, in each case with respect to any matter arising out of, or in connection with, the Deposit Agreement, any ADR or the Deposited Property.

EACH OF THE PARTIES TO THE DEPOSIT AGREEMENT (INCLUDING, WITHOUT LIMITATION, EACH HOLDER AND BENEFICIAL OWNER) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING AGAINST THE COMPANY AND/OR THE DEPOSITARY ARISING OUT OF, OR RELATING TO, THE DEPOSIT AGREEMENT, ANY ADR AND ANY TRANSACTIONS CONTEMPLATED THEREIN (WHETHER BASED ON CONTRACT, TORT, COMMON LAW OR OTHERWISE).

The provisions of this Section 7.6 shall survive any termination of the Deposit Agreement, in whole or in part.

Section 7.7    Assignment. Subject to the provisions of Section 5.4, the Deposit Agreement may not be assigned by either the Company or the Depositary.

Section 7.8    Compliance with, and No Disclaimer under, U.S. Securities Laws.

(a)    Notwithstanding anything in the Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Instruction I.A.(1) of the General Instructions to Form F-6 Registration Statement, as amended from time to time, under the Securities Act.

 

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(b)    Each of the parties to the Deposit Agreement (including, without limitation, each Holder and Beneficial Owner) acknowledges and agrees that no provision of the Deposit Agreement or any ADR shall, or shall be deemed to, disclaim any liability under the Securities Act or the Exchange Act, in each case to the extent established under applicable U.S. laws.

Section 7.9    The British Virgin Islands Law References. Any summary of the British Virgin Islands laws and regulations and of the terms of the Articles of Association set forth in the Deposit Agreement have been provided by the Company solely for the convenience of Holders, Beneficial Owners and the Depositary. While such summaries are believed by the Company to be accurate as of the date of the Deposit Agreement, (i) they are summaries and as such may not include all aspects of the materials summarized applicable to a Holder or Beneficial Owner, and (ii) these laws and regulations and the Articles of Association may change after the date of the Deposit Agreement. Neither the Depositary nor the Company has any obligation under the terms of the Deposit Agreement to update any such summaries.

Section 7.10    Titles and References.

(a)    Deposit Agreement. All references in the Deposit Agreement to exhibits, articles, sections, subsections, and other subdivisions refer to the exhibits, articles, sections, subsections and other subdivisions of the Deposit Agreement unless expressly provided otherwise. The words “the Deposit Agreement”, “herein”, “hereof”, “hereby”, “hereunder”, and words of similar import refer to the Deposit Agreement as a whole as in effect at the relevant time between the Company, the Depositary and the Holders and Beneficial Owners of ADSs and not to any particular subdivision unless expressly so limited. Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. Titles to sections of the Deposit Agreement are included for convenience only and shall be disregarded in construing the language contained in the Deposit Agreement. References to “applicable laws and regulations” shall refer to laws and regulations applicable to ADRs, ADSs or Deposited Property as in effect at the relevant time of determination, unless otherwise required by law or regulation.

(b)    ADRs. All references in any ADR(s) to paragraphs, exhibits, articles, sections, subsections, and other subdivisions refer to the paragraphs, exhibits, articles, sections, subsections and other subdivisions of the ADR(s) in question unless expressly provided otherwise. The words “the Receipt”, “the ADR”, “herein”, “hereof”, “hereby”, “hereunder”, and words of similar import used in any ADR refer to the ADR as a whole and as in effect at the relevant time, and not to any particular subdivision unless expressly so limited. Pronouns in masculine, feminine and neuter gender in any ADR shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. Titles to paragraphs of any ADR are included for convenience only and shall be disregarded in construing the language contained in the ADR. References to “applicable laws and regulations” shall refer to laws and regulations applicable to the Company, the Depositary, the Custodian, their agents and controlling persons, the ADRs, the ADSs and the Deposited Property as in effect at the relevant time of determination, unless otherwise required by law or regulation.

 

48


IN WITNESS WHEREOF, ANPAC BIO-MEDICAL SCIENCE CO., LTD., a business company limited by shares incorporated in the British Virgin Islands and CITIBANK, N.A. have duly executed the Deposit Agreement as of the day and year first above set forth and all Holders and Beneficial Owners shall become parties hereto upon acceptance by them of ADSs issued in accordance with the terms hereof, or upon acquisition of any beneficial interest therein.

 

ANPAC BIO-MEDICAL SCIENCE CO., LTD.
By:  

     

Name:  
Title:  
CITIBANK, N.A.
By:  

     

Name:  
Title:  

 

49


EXHIBIT A

[FORM OF ADR]

 

Number    CUSIP NUMBER:                 

                         

  
   American Depositary Shares (each American Depositary Share representing the right to receive one (1) fully paid Class A ordinary share)

AMERICAN DEPOSITARY RECEIPT

for

AMERICAN DEPOSITARY SHARES

representing

DEPOSITED CLASS A ORDINARY SHARES

of

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

(Incorporated under the laws of the British Virgin Islands)

(1)    CITIBANK, N.A., a national banking association organized and existing under the laws of the United States of America, as depositary (the “Depositary”), hereby certifies that                      is the owner of                      American Depositary Shares (hereinafter “ADS”) representing deposited Class A ordinary shares, including evidence of rights to receive such Class A ordinary shares (the “Shares”), of AnPac Bio-Medical Science Co., Ltd., a business company incorporated in the British Virgin Islands (the “Company”). As of the date of issuance of this ADR, each ADS represents the right to receive one (1) Share deposited under the Deposit Agreement (as hereinafter defined) with the Custodian, which at the date of issuance of this ADR is Citibank, N.A. - Hong Kong (the “Custodian”). The ADS(s)-to-Share(s) ratio is subject to amendment as provided in Articles IV and VI of the Deposit Agreement. The Depositary’s Principal Office is located at 388 Greenwich Street, New York, New York 10013, U.S.A.

 

A-1


(2)    The Deposit Agreement. This American Depositary Receipt is one of an issue of American Depositary Receipts (“ADRs”), all issued and to be issued upon the terms and conditions set forth in the Deposit Agreement, dated as of [●], 2019 (as amended and supplemented from time to time, the “Deposit Agreement”), by and among the Company, the Depositary, and all Holders and Beneficial Owners from time to time of ADSs issued thereunder. The Deposit Agreement sets forth the rights and obligations of Holders and Beneficial Owners of ADSs and the rights and duties of the Depositary in respect of the Shares deposited thereunder and any and all other Deposited Property (as defined in the Deposit Agreement) from time to time received and held on deposit in respect of the ADSs. Copies of the Deposit Agreement are on file at the Principal Office of the Depositary and with the Custodian. Each Holder and each Beneficial Owner, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the Deposit Agreement, shall be deemed for all purposes to (a) be a party to and bound by the terms of the Deposit Agreement and the applicable ADR(s), and (b) appoint the Depositary as its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the Deposit Agreement and the applicable ADR(s), to adopt any and all procedures necessary to comply with applicable law and to take such action as the Depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the Deposit Agreement and the applicable ADR(s), the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof. The manner in which a Beneficial Owner holds ADSs (e.g., in a brokerage account vs. as registered holder) may affect the rights and obligations of, the manner in which, and the extent to which, services are made available to, Beneficial Owners pursuant to the terms of the Deposit Agreement.

The statements made on the face and reverse of this ADR are summaries of certain provisions of the Deposit Agreement and the Articles of Association of the Company (as in effect on the date of the signing of the Deposit Agreement) and are qualified by and subject to the detailed provisions of the Deposit Agreement and the Articles of Association of the Company, to which reference is hereby made.

All capitalized terms not defined herein shall have the meanings ascribed thereto in the Deposit Agreement.

The Depositary makes no representation or warranty as to the validity or worth of the Deposited Property. The Depositary has made arrangements for the acceptance of the ADSs into DTC. Each Beneficial Owner of ADSs held through DTC must rely on the procedures of DTC and the DTC Participants to exercise and be entitled to any rights attributable to such ADSs. The Depositary may issue Uncertificated ADSs subject, however, to the terms and conditions of Section 2.13 of the Deposit Agreement.

 

A-2


(3)    Surrender of ADSs and Withdrawal of Deposited Securities. The Holder of this ADR (and of the ADSs evidenced hereby) shall be entitled to Delivery (at the Custodian’s designated office) of the Deposited Securities at the time represented by the ADSs evidenced hereby upon satisfaction of each of the following conditions: (i) the Holder (or a duly-authorized attorney of the Holder) has duly Delivered ADSs to the Depositary at its Principal Office the ADSs evidenced hereby (and, if applicable, this ADR evidencing such ADSs) for the purpose of withdrawal of the Deposited Securities represented thereby, (ii) if applicable and so required by the Depositary, this ADR Delivered to the Depositary for such purpose has been properly endorsed in blank or is accompanied by proper instruments of transfer in blank (including signature guarantees in accordance with standard securities industry practice), (iii) if so required by the Depositary, the Holder of the ADSs has executed and delivered to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to or upon the written order of the person(s) designated in such order, and (iv) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case, to the terms and conditions of this ADR evidencing the surrendered ADSs, of the Deposit Agreement, of the Articles of Association and of any applicable laws and the rules of the applicable book-entry settlement system, if available, and to any provisions of or governing the Deposited Securities, in each case as in effect at the time thereof.

Upon satisfaction of each of the conditions specified above, the Depositary (i) shall cancel the ADSs Delivered to it (and, if applicable, this ADR(s) evidencing the ADSs so Delivered), (ii) shall direct the Registrar to record the cancellation of the ADSs so Delivered on the books maintained for such purpose, and (iii) shall direct the Custodian to Deliver, or cause the Delivery of, in each case, without unreasonable delay, the Deposited Securities represented by the ADSs so canceled together with any certificate or other document of title for the Deposited Securities, or evidence of the electronic transfer thereof (if available), as the case may be, to or upon the written order of the person(s) designated in the order delivered to the Depositary for such purpose, subject however, in each case, to the terms and conditions of the Deposit Agreement, of this ADR evidencing the ADS so canceled, of the Articles of Association, of any applicable laws and of the rules of the applicable book-entry settlement system, if available, and to the terms and conditions of or governing the Deposited Securities, in each case as in effect at the time thereof.

The Depositary shall not accept for surrender ADSs representing less than one (1) Share. In the case of Delivery to it of ADSs representing a number other than a whole number of Shares, the Depositary shall cause ownership of the appropriate whole number of Shares to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) return to the person surrendering such ADSs the number of ADSs representing any remaining fractional Share, or (ii) sell or cause to be sold the fractional Share represented by the ADSs so surrendered and remit the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the ADSs.

Notwithstanding anything else contained in this ADR or the Deposit Agreement, the Depositary may make delivery at the Principal Office of the Depositary of Deposited Property consisting of (i) any cash dividends or cash distributions, or (ii) any proceeds from the sale of any non-cash distributions, which are at the time held by the Depositary in respect of the Deposited Securities represented by the ADSs surrendered for cancellation and withdrawal. At the request, risk and expense of any Holder so surrendering ADSs represented by this ADR, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any Deposited Property (other than Deposited Securities) held by the Custodian in respect of such ADSs to the Depositary for delivery at the Principal Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission.

 

A-3


(4)    Transfer, Combination and Split-up of ADRs. The Registrar shall register the transfer of this ADR (and of the ADSs represented hereby) on the books maintained for such purpose and the Depositary shall (x) cancel this ADR and execute new ADRs evidencing the same aggregate number of ADSs as those evidenced by this ADR canceled by the Depositary, (y) cause the Registrar to countersign such new ADRs, and (z) Deliver such new ADRs to or upon the order of the person entitled thereto, if each of the following conditions has been satisfied: (i) this ADR has been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a transfer thereof, (ii) this surrendered ADR has been properly endorsed or is accompanied by proper instruments of transfer (including signature guarantees in accordance with standard securities industry practice), (iii) this surrendered ADR has been duly stamped (if required by the laws of the State of New York or of the United States), and (iv) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case, to the terms and conditions of this ADR, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

The Registrar shall register the split-up or combination of this ADR (and of the ADSs represented hereby) on the books maintained for such purpose and the Depositary shall (x) cancel this ADR and execute new ADRs for the number of ADSs requested, but in the aggregate not exceeding the number of ADSs evidenced by this ADR canceled by the Depositary, (y) cause the Registrar to countersign such new ADRs, and (z) Deliver such new ADRs to or upon the order of the Holder thereof, if each of the following conditions has been satisfied: (i) this ADR has been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a split-up or combination hereof, and (ii) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case, to the terms and conditions of this ADR, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

(5)    Pre-Conditions to Registration, Transfer, Etc. As a condition precedent to the execution and Delivery, the registration of issuance, transfer, split-up, combination or surrender, of any ADS, the delivery of any distribution thereon, or the withdrawal of any Deposited Property, the Depositary or the Custodian may require (i) payment from the depositor of Shares or presenter of ADSs or of this ADR of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees and charges of the Depositary as provided in Section 5.9 and Exhibit B to the Deposit Agreement and in this ADR, (ii) the production of proof reasonably satisfactory to it as to the identity and genuineness of any signature or any other matter contemplated by Section 3.1 of the Deposit Agreement, and (iii) compliance with (A) any laws or governmental regulations relating to the execution and Delivery of this ADR or ADSs or to the withdrawal of Deposited Securities and (B) such reasonable regulations as the Depositary and the Company may establish consistent with the provisions of this ADR, if applicable, the Deposit Agreement and applicable law.

 

A-4


The issuance of ADSs against deposits of Shares generally or against deposits of particular Shares may be suspended, or the deposit of particular Shares may be refused, or the registration of transfer of ADSs in particular instances may be refused, or the registration of transfer of ADSs generally may be suspended, during any period when the transfer books of the Company, the Depositary, a Registrar or the Share Registrar are closed or if any such action is deemed necessary or advisable by the Depositary (whereupon the Depositary shall notify the Company) or the Company, in good faith, at any time or from time to time because of any requirement of law or regulation, any government or governmental body or commission or any securities exchange on which the ADSs or Shares are listed, or under any provision of the Deposit Agreement or this ADR, if applicable, or under any provision of, or governing, the Deposited Securities, or because of a meeting of shareholders of the Company or for any other reason, subject, in all cases to Section 7.8(a) of the Deposit Agreement and paragraph (25) of this ADR. Notwithstanding any provision of the Deposit Agreement or this ADR to the contrary, Holders are entitled to surrender outstanding ADSs to withdraw the Deposited Securities associated therewith at any time subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders’ meeting or the payment of dividends, (ii) the payment of fees, taxes and similar charges, (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the ADSs or to the withdrawal of the Deposited Securities, and (iv) other circumstances specifically contemplated by Instruction I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time).

(6)    Compliance with Information Requests. Notwithstanding any other provision of the Deposit Agreement or this ADR, each Holder and Beneficial Owner of the ADSs represented hereby agrees to comply with requests from the Company pursuant to applicable law, the rules and requirements of any stock exchange on which the Shares or ADSs are, or will be, registered, traded or listed, or the Articles of Association, which are made to provide information, inter alia, as to the capacity in which such Holder or Beneficial Owner owns ADSs (and the Shares represented by such ADSs, as the case may be) and regarding the identity of any other person(s) interested in such ADSs (and the Shares represented by such ADSs, as the case may be) and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request.

 

A-5


(7)    Ownership Restrictions. Notwithstanding any other provision contained in this ADR or of the Deposit Agreement to the contrary, the Company may restrict transfers of the Shares where such transfer might result in ownership of Shares exceeding limits imposed by applicable law or the Articles of Association. The Company may also restrict, in such manner as it deems appropriate, transfers of the ADSs where such transfer may result in the total number of Shares represented by the ADSs owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including but not limited to, the imposition of restrictions on the transfer of ADSs, the removal or limitation of voting rights or the mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Shares represented by the ADSs held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such disposition is permitted by applicable law and the Articles of Association. Nothing herein or in the Deposit Agreement shall be interpreted as obligating the Depositary or the Company to ensure compliance with the ownership restrictions described herein or in Section 3.5 of the Deposit Agreement.

(8)    Reporting Obligations and Regulatory Approvals. Applicable laws and regulations may require holders and beneficial owners of Shares, including the Holders and Beneficial Owners of ADSs, to satisfy reporting requirements and obtain regulatory approvals in certain circumstances. Holders and Beneficial Owners of ADSs are solely responsible for determining and complying with such reporting requirements and obtaining such approvals. Each Holder and each Beneficial Owner hereby agrees to make such determination, file such reports, and obtain such approvals to the extent and in the form required by applicable laws and regulations as in effect from time to time. Neither the Depositary, the Custodian, the Company or any of their respective agents or affiliates shall be required to take any actions whatsoever on behalf of Holders or Beneficial Owners to determine or satisfy such reporting requirements or obtain such regulatory approvals under applicable laws and regulations.

(9)    Liability for Taxes and Other Charges. Any tax or other governmental charge payable by the Custodian or by the Depositary with respect to any Deposited Property, ADSs or this ADR shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or the Depositary may withhold or deduct from any distributions made in respect of Deposited Property held on behalf of such Holder and/or Beneficial Owner, and may sell for the account of a Holder and/or Beneficial Owner any or all of such Deposited Property and apply such distributions and sale proceeds in payment of, any taxes (including applicable interest and penalties) or charges that are or may be payable by Holders or Beneficial Owners in respect of the ADSs, Deposited Property and this ADR, the Holder and the Beneficial Owner hereof remaining liable for any deficiency. The Custodian may refuse the deposit of Shares and the Depositary may refuse to issue ADSs, to deliver ADRs, register the transfer of ADSs, register the split-up or combination of ADRs and (subject to paragraph (25) of this ADR and Section 7.8(a) of the Deposit Agreement) the withdrawal of Deposited Property until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner agrees to indemnify the Depositary, the Company, the Custodian, and any of their agents, officers, employees and Affiliates for, and to hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from (i) any ADSs held by such Holder and/or owned by such Beneficial Owner, (ii) the Deposited Property represented by the ADSs, and (iii) any transaction entered into by such Holder and/or Beneficial Owner in respect of the ADSs and/or the Deposited Property represented thereby. Notwithstanding anything to the contrary contained in the Deposit Agreement or this ADR, the obligations of Holders and Beneficial Owners under the paragraph (8) and Section 3.2 of the Deposit Agreement shall survive any transfer of ADSs, any cancellation of ADSs and withdrawal of Deposited Securities, and the termination of the Deposit Agreement.

 

A-6


(10)    Representations and Warranties on Deposit of Shares. Each person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares and the certificates therefor are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares have been validly waived or exercised, (iii) the person making such deposit is duly authorized so to do, (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, (v) the Shares presented for deposit are not, and the ADSs issuable upon such deposit will not be, Restricted Securities (except as contemplated in Section 2.14 of the Deposit Agreement), and (vi) the Shares presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of ADSs in respect thereof and the transfer of such ADSs. If any such representations or warranties are false in any way, the Company and the Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof.

(11)    Proofs, Certificates and Other Information. Any person presenting Shares for deposit, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approval, legal or beneficial ownership of ADSs and Deposited Property, compliance with applicable laws, the terms of the Deposit Agreement or this ADR evidencing the ADSs and the provisions of, or governing, the Deposited Property, to execute such certifications and to make such representations and warranties, and to provide such other information and documentation (or, in the case of Shares in registered form presented for deposit, such information relating to the registration on the books of the Company or of the Share Registrar) as the Depositary or the Custodian may deem necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations under the Deposit Agreement and this ADR. The Depositary and the Registrar, as applicable, may withhold the execution or delivery or registration of transfer of any ADR or ADS or the distribution or sale of any dividend or distribution of rights or of the proceeds thereof or, to the extent not limited by paragraph (25) and Section 7.8(a) of the Deposit Agreement, the delivery of any Deposited Property until such proof or other information is filed or such certifications are executed, or such representations and warranties are made or such other documentation or information provided, in each case to the Depositary’s, the Registrar’s and the Company’s satisfaction.

(12)    ADS Fees and Charges. The following ADS fees are payable under the terms of the Deposit Agreement:

 

  (i)

ADS Issuance Fee: by any person for whom ADSs are issued (e.g., an issuance upon a deposit of Shares, upon a change in the ADS(s)-to-Share(s) ratio, or for any other reason), excluding issuances as a result of distributions described in paragraph (iv) below, a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) issued under the terms of the Deposit Agreement;

 

A-7


  (ii)

ADS Cancellation Fee: by any person for whom ADSs are being cancelled (e.g., a cancellation of ADSs for Delivery of deposited Shares, upon a change in the ADS(s)-to-Share(s) ratio, or for any other reason), a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) cancelled;

 

  (iii)

Cash Distribution Fee: by any Holder of ADSs, a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) held for the distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements);

 

  (iv)

Stock Distribution /Rights Exercise Fee: by any Holder of ADS(s), a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) held for the distribution of ADSs pursuant to (a) stock dividends or other free stock distributions, or (b) an exercise of rights to purchase additional ADSs;

 

  (v)

Other Distribution Fee: by any Holder of ADS(s), a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) held for the distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., spin-off shares);

 

  (vi)

Depositary Services Fee: by any Holder of ADS(s), a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) held on the applicable record date(s) established by the Depositary;

 

  (vii)

Registration of ADS Transfer Fee: by any Holder of ADS(s) being transferred or by any person to whom ADSs are transferred, a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) transferred (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); and

 

  (viii)

ADS Conversion Fee: by any Holder of ADS(s) being converted or by any person to whom the converted ADSs are delivered, a fee not in excess of U.S. $5.00 per 100 ADSs (or fraction thereof) converted from one ADS series to another ADS series (e.g., upon conversion of Partial Entitlement ADSs for Full Entitlement ADSs, or upon conversion of Restricted ADSs into freely transferrable ADSs, and vice versa).

 

A-8


The Company, Holders, Beneficial Owners, persons depositing Shares or withdrawing Deposited Securities in connection with ADS issuances and cancellations, and persons for whom ADSs are issued or cancelled shall be responsible for the following ADS charges under the terms of the Deposit Agreement:

 

  (a)

taxes (including applicable interest and penalties) and other governmental charges;

 

  (b)

such registration fees as may from time to time be in effect for the registration of Shares or other Deposited Securities on the share register and applicable to transfers of Shares or other Deposited Securities to or from the name of the Custodian, the Depositary or any nominees upon the making of deposits and withdrawals, respectively;

 

  (c)

such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing Shares or withdrawing Deposited Securities or of the Holders and Beneficial Owners of ADSs;

 

  (d)

in connection with the conversion of Foreign Currency, the fees, expenses, spreads, taxes and other charges of the Depositary and/or conversion service providers (which may be a division, branch or Affiliate of the Depositary). Such fees, expenses, spreads, taxes and other charges shall be deducted from the Foreign Currency;

 

  (e)

any reasonable and customary out-of-pocket expenses incurred in such conversion and/or on behalf of the Holders and Beneficial Owners in complying with currency exchange control or other governmental requirements; and

 

  (f)

the fees, charges, costs and expenses incurred by the Depositary, the Custodian, or any nominee in connection with the ADR program.

All ADS fees and charges so payable may be deducted from distributions or must be remitted to the Depositary, or its designee, and may, at any time and from time to time, be changed by agreement between the Depositary and Company but, in the case of ADS fees and charges payable by Holders and Beneficial Owners, any such change (excluding any changes to the waiver by the Depositary of fees and charges contemplated in the Deposit Agreement) may be made only in the manner contemplated by paragraph (23) of this ADR and as contemplated in Section 6.1 of the Deposit Agreement. The Depositary shall provide, without charge, a copy of its latest ADS fee schedule to anyone upon request.

 

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ADS fees and charges for (i) the issuance of ADSs and (ii) the cancellation of ADSs will be payable by the person for whom the ADSs are so issued by the Depositary (in the case of ADS issuances) and by the person for whom ADSs are being cancelled (in the case of ADS cancellations). In the case of ADSs issued by the Depositary into DTC or presented to the Depositary via DTC, the ADS issuance and cancellation fees and charges will be payable by the DTC Participant(s) receiving the ADSs from the Depositary 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(s) of the applicable Beneficial Owner(s) in accordance with the procedures and practices of the DTC Participant(s) as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are payable by Holders as of the applicable ADS Record Date established by the Depositary. 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, the applicable Holders as of the ADS Record Date established by the Depositary will be invoiced for the amount of the ADS fees and charges and such ADS fees may be deducted from distributions made to Holders. 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 from time to time 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.

The Depositary may reimburse the Company for certain expenses incurred by the Company in respect of the ADR program established pursuant to the Deposit Agreement, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as the Company and the Depositary agree from time to time. The Company shall pay to the Depositary such fees and charges, and reimburse the Depositary for such out-of-pocket expenses, as the Depositary and the Company may agree from time to time. Responsibility for payment of such fees, charges and reimbursements may from time to time be changed by agreement between the Company and the Depositary. Unless otherwise agreed, the Depositary shall present its statement for such fees, charges and reimbursements to the Company once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary.

The obligations of Holders and Beneficial Owners to pay ADS fees and charges shall survive the termination of the Deposit Agreement. As to any Depositary, upon the resignation or removal of such Depositary as described in Section 5.4 of the Deposit Agreement, the right to collect ADS fees and charges shall extend for those ADS fees and charges incurred prior to the effectiveness of such resignation or removal.

 

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(13)    Title to ADRs. Subject to the limitations contained in the Deposit Agreement and in this ADR, it is a condition of this ADR, and every successive Holder of this ADR by accepting or holding the same consents and agrees, that title to this ADR (and to each Certificated ADS evidenced hereby) shall be transferable upon the same terms as a certificated security under the laws of the State of New York, provided that, in the case of Certificated ADSs, this ADR has been properly endorsed or is accompanied by proper instruments of transfer. Notwithstanding any notice to the contrary, the Depositary and the Company may deem and treat the Holder of this ADR (that is, the person in whose name this ADR is registered on the books of the Depositary) as the absolute owner thereof for all purposes. Neither the Depositary nor the Company shall have any obligation nor be subject to any liability under the Deposit Agreement or this ADR to any holder of this ADR or any Beneficial Owner unless, in the case of a holder of ADSs, such holder is the Holder of this ADR registered on the books of the Depositary or, in the case of a Beneficial Owner, such Beneficial Owner, or the Beneficial Owner’s representative, is the Holder registered on the books of the Depositary.

(14)    Validity of ADR. The Holder(s) of this ADR (and the ADSs represented hereby) shall not be entitled to any benefits under the Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company unless this ADR has been (i) dated, (ii) signed by the manual or facsimile signature of a duly-authorized signatory of the Depositary, (iii) countersigned by the manual or facsimile signature of a duly-authorized signatory of the Registrar, and (iv) registered in the books maintained by the Registrar for the registration of issuances and transfers of ADRs. An ADR bearing the facsimile signature of a duly-authorized signatory of the Depositary or the Registrar, who at the time of signature was a duly authorized signatory of the Depositary or the Registrar, as the case may be, shall bind the Depositary, notwithstanding the fact that such signatory has ceased to be so authorized prior to the delivery of such ADR by the Depositary.

(15)    Available Information; Reports; Inspection of Transfer Books.

The Company is subject to the periodic reporting requirements of the Exchange Act and, accordingly, is required to file or furnish certain reports with the Commission. These reports can be retrieved from the Commission’s website (www.sec.gov) and can be inspected and copied at the public reference facilities maintained by the Commission located (as of the date of the Deposit Agreement) at 100 F Street, N.E., Washington D.C. 20549. The Depositary shall make available for inspection by Holders at its Principal Office any reports and communications, including any proxy soliciting materials, received from the Company which are both (a) received by the Depositary, the Custodian, or the nominee of either of them as the holder of the Deposited Property and (b) made generally available to the holders of such Deposited Property by the Company. The Depositary shall also provide or make available to the Holders copies of such reports when furnished by the Company pursuant to Section 5.6 of the Deposit Agreement.

The Registrar shall keep books for the registration of ADSs which at all reasonable times shall be open for inspection by the Company and by the Holders of such ADSs, provided that such inspection shall not be, to the Registrar’s knowledge, for the purpose of communicating with Holders of such ADSs in the interest of a business or object other than the business of the Company or other than a matter related to the Deposit Agreement or the ADSs.

The Registrar may close the transfer books with respect to the ADSs, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company subject, in all cases, to paragraph (25) and Section 7.8(a) of the Deposit Agreement.

 

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Dated:

 

CITIBANK, N.A.
Transfer Agent and Registrar
    CITIBANK, N.A.
as Depositary
By:  

 

    By:   

 

  Authorized Signatory        Authorized Signatory

The address of the Principal Office of the Depositary is 388 Greenwich Street, New York, New York 10013, U.S.A.

 

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[FORM OF REVERSE OF ADR]

SUMMARY OF CERTAIN ADDITIONAL PROVISIONS

OF THE DEPOSIT AGREEMENT

(16)    Dividends and Distributions in Cash, Shares, etc. (a) Cash Distributions: Upon the timely receipt by the Depositary of a notice from the Company that it intends to make a distribution of a cash dividend or other cash distribution, the Depositary shall establish the ADS Record Date upon the terms described in Section 4.9 of the Deposit Agreement. Upon the receipt of confirmation from the Custodian (x) any cash dividend or other cash distribution on any Deposited Securities, or (y) proceeds from the sale of any Deposited Property held in respect of the ADSs under the terms of the Deposit Agreement, the Depositary will (i) if any amounts are received in a Foreign Currency, promptly convert or cause to be converted such cash dividend, distribution or proceeds into Dollars (subject to the terms and conditions of Section 4.8 of the Deposit Agreement), (ii) if applicable and unless previously established, establish the ADS Record Date upon the terms described in Section 4.9 of the Deposit Agreement, and (iii) distribute promptly the amount thus received (net of (a) the applicable fees and charges described in the Fee Schedule attached as Exhibit B to the Deposit Agreement and (b) applicable taxes withheld) to the Holders entitled thereto as of the ADS Record Date in proportion to the number of ADSs held as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of ADSs outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities, or from any cash proceeds from the sales of Deposited Property, an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the ADSs shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company, the Custodian or the Depositary to the relevant governmental authority. Evidence of payment thereof by the Company shall be forwarded by the Company to the Depositary upon request. The Depositary will hold any cash amounts it is unable to distribute in a non-interest bearing account for the benefit of the applicable Holders and Beneficial Owners of ADSs until the distribution can be effected or the funds that the Depositary holds must be escheated as unclaimed property in accordance with the laws of the relevant states of the United States. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for above, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in Section 4.1 of the Deposit Agreement, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in Section 4.1 of the Deposit Agreement where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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(b) Share Distributions: Upon the timely receipt by the Depositary of a notice from the Company that it intends to make a distribution that consists of a dividend in, or free distribution of Shares, the Depositary shall establish the ADS Record Date upon the terms described in Section 4.9 of the Deposit Agreement. Upon receipt of confirmation from the Custodian of the receipt of the Shares so distributed by the Company, the Depositary shall either (i) subject to Section 5.9 of the Deposit Agreement, distribute to the Holders as of the ADS Record Date in proportion to the number of ADSs held as of the ADS Record Date, additional ADSs, which represent in the aggregate the number of Shares received as such dividend, or free distribution, subject to the other terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes), or (ii) if additional ADSs are not so distributed, take all actions necessary so that each ADS issued and outstanding after the ADS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interests in the additional integral number of Shares distributed upon the Deposited Securities represented thereby (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary, and (b) taxes). In lieu of delivering fractional ADSs, the Depositary shall sell the number of Shares or ADSs, as the case may be, represented by the aggregate of such fractions and distribute the net proceeds upon the terms described in Section 4.1 of the Deposit Agreement.

In the event that the Depositary determines that any distribution in property (including Shares) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company in the fulfillment of its obligations under Section 5.7 of the Deposit Agreement, has furnished an opinion of U.S. counsel determining that Shares must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective), the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable, and the Depositary shall distribute the net proceeds of any such sale (after deduction of (a) taxes and (b) fees and charges of, and the expenses incurred by, the Depositary) to Holders entitled thereto upon the terms of Section 4.1 of the Deposit Agreement. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of the Deposit Agreement. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for above, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in Section 4.2 of the Deposit Agreement, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in Section 4.2 of the Deposit Agreement where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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(c) Elective Distributions in Cash or Shares: Upon the timely receipt of a notice indicating that the Company wishes an elective distribution in cash or Shares to be made available to Holders of ADSs upon the terms described in the Deposit Agreement, the Company and the Depositary shall determine in accordance with the Deposit Agreement whether such distribution is lawful and reasonably practicable. The Depositary shall make such elective distribution available to Holders only if (i) the Company shall have timely requested that the elective distribution be made available to Holders, (ii) the Depositary shall have determined that such distribution is reasonably practicable and (iii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7 of the Deposit Agreement. If the above conditions are satisfied, the Depositary shall, subject to the terms and conditions of the Deposit Agreement, establish the ADS Record Date according to paragraph (17) and Section 4.9 of the Deposit Agreement and establish procedures to enable the Holder hereof to elect to receive the proposed distribution in cash or in additional ADSs. If a Holder elects to receive the distribution in cash, the distribution shall be made as in the case of a distribution in cash. If the Holder hereof elects to receive the distribution in additional ADSs, the distribution shall be made as in the case of a distribution in Shares upon the terms described in the Deposit Agreement. If such elective distribution is not reasonably practicable or if the Depositary did not receive satisfactory documentation set forth in the Deposit Agreement, the Depositary shall establish an ADS Record Date upon the terms of Section 4.9 of the Deposit Agreement and, to the extent permitted by law, distribute to Holders, on the basis of the same determination as is made in the British Virgin Islands in respect of the Shares for which no election is made, either (x) cash, upon the terms described in Section 4.1 of the Deposit Agreement or (y) additional ADSs representing such additional Shares, in each case, upon the terms described in Section 4.2 of the Deposit Agreement. Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holder hereof a method to receive the elective distribution in Shares (rather than ADSs). There can be no assurance that the Holder hereof will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Shares. Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed distribution provided for above, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in Section 4.3 of the Deposit Agreement, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in Section 4.3 of the Deposit Agreement where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

 

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(d) Distribution of Rights to Purchase Additional ADSs: Upon the timely receipt by the Depositary of a notice indicating that the Company wishes rights to subscribe for additional Shares to be made available to Holders of ADSs, the Depositary upon consultation with the Company, shall determine, whether it is lawful and reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to any Holders only if (i) the Company shall have timely requested that such rights be made available to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7 of the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. If such conditions are not satisfied or if the Company requests that the rights not be made available to Holders of ADSs, the Depositary shall sell the rights as described below. In the event all conditions set forth above are satisfied, the Depositary shall establish the ADS Record Date (upon the terms described in Section 4.9 of the Deposit Agreement) and establish procedures to (x) distribute rights to purchase additional ADSs (by means of warrants or otherwise), (y) enable the Holders to exercise such rights (upon payment of the subscription price and of the applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes), and (z) deliver ADSs upon the valid exercise of such rights. Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holders a method to exercise rights to subscribe for Shares (rather than ADSs). If (i) the Company does not timely request the Depositary to make the rights available to Holders or requests that the rights not be made available to Holders, (ii) the Depositary fails to receive satisfactory documentation within the terms of Section 5.7 of the Deposit Agreement or determines it is not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including public and private sale) as it may deem practicable. The Depositary shall, upon such sale, convert and distribute proceeds of such sale (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) upon the terms hereof and of Section 4.1 of the Deposit Agreement. If the Depositary is unable to make any rights available to Holders upon the terms described in Section 4.4(a) of the Deposit Agreement or to arrange for the sale of the rights upon the terms described in Section 4.4(b) of the Deposit Agreement, the Depositary shall allow such rights to lapse. The Depositary shall not be liable for (i) any failure to accurately determine whether it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution.

Notwithstanding anything herein or in Section 4.4 of the Deposit Agreement to the contrary, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders (i) unless and until a registration statement under the Securities Act (or other applicable law) covering such offering is in effect or (ii) unless the Company furnishes the Depositary opinion(s) of counsel for the Company in the United States and counsel to the Company in any other applicable country in which rights would be distributed, in each case reasonably satisfactory to the Depositary, to the effect that the offering and sale of such securities to Holders and Beneficial Owners are exempt from, or do not require registration under, the provisions of the Securities Act or any other applicable laws. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of Deposited Property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders of ADSs shall be reduced accordingly. In the event that the Depositary determines that any distribution of Deposited Property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such Deposited Property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges.

 

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There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive or exercise rights on the same terms and conditions as the holders of Shares or be able to exercise such rights. Nothing herein or in the Deposit Agreement shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights.

(e) Distributions other than Cash, Shares or Rights to Purchase Shares: Upon receipt of a notice indicating that the Company wishes property other than cash, Shares or rights to purchase additional Shares to be made to Holders of ADSs, the Depositary shall determine whether such distribution to Holders is lawful and reasonably practicable. The Depositary shall not make such distribution unless (i) the Company shall have requested the Depositary to make such distribution to Holders, (ii) the Depositary shall have received satisfactory documentation contemplated in Section 5.7 of the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution is reasonably practicable. Upon satisfaction of such conditions, the Depositary shall distribute the property so received to the Holders of record, as of the ADS Record Date, in proportion to the number of ADSs held by them respectively and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution.

If the conditions above are not satisfied, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem practicable and shall (i) cause the proceeds of such sale, if any, to be converted into Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders as of the ADS Record Date upon the terms hereof and of Section 4.1 of the Deposit Agreement. If the Depositary is unable to sell such property, the Depositary may dispose of such property for the account of the Holders in any way it deems reasonably practicable under the circumstances.

Neither the Depositary nor the Company shall be responsible for (i) any failure to accurately determine whether it is lawful or practicable to make the property described in Section 4.5 of the Deposit Agreement available to Holders in general or any Holders in particular, nor (ii) any loss incurred in connection with the sale or disposal of such property.

 

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(17)    Repurchase and Redemption. Upon timely receipt of notice from the Company that it intends to repurchase or exercise its right of redemption in respect of any of the Deposited Securities, and satisfactory documentation, and only if the Depositary shall have determined that such proposed repurchase or redemption is practicable, the Depositary shall (to the extent practicable) provide to each relevant Holder a notice setting forth the Company’s intention to exercise the repurchase or redemption rights and any other particulars set forth in the Company’s notice to the Depositary. The Depositary shall instruct the Custodian to present to the Company the Deposited Securities in respect of which repurchase or redemption rights are being exercised against payment of the applicable repurchase or redemption price. Upon receipt of confirmation from the Custodian that the repurchase or redemption has taken place and that funds representing the repurchase or redemption price have been received, the Depositary shall convert, transfer, and distribute the proceeds (net of applicable (a) fees and charges of, and the expenses incurred by, the Depositary, and (b) taxes), retire ADSs and cancel ADRs, if applicable, upon delivery of such ADSs by Holders thereof and the terms set forth in Sections 4.1 and 6.2 of the Deposit Agreement. If less than all outstanding Deposited Securities are repurchased or redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as may be determined by the Depositary. The repurchase or redemption price per ADS shall be the dollar equivalent of the per share amount received by the Depositary (adjusted to reflect the ADS(s)-to-Share(s) ratio) upon the repurchase or redemption of the Deposited Securities represented by ADSs (subject to the terms of Section 4.8 of the Deposit Agreement and the applicable fees and charges of, and expenses incurred by, the Depositary, and taxes) multiplied by the number of Deposited Securities represented by each ADS repurchased or redeemed.

Notwithstanding anything contained in the Deposit Agreement to the contrary, in the event the Company fails to give the Depositary timely notice of the proposed repurchase or redemption provided for above, the Depositary agrees to use commercially reasonable efforts to perform the actions contemplated in Section 4.7 of the Deposit Agreement, and the Company, the Holders and the Beneficial Owners acknowledge that the Depositary shall have no liability for the Depositary’s failure to perform the actions contemplated in Section 4.7 of the Deposit Agreement where such notice has not been so timely given, other than its failure to use commercially reasonable efforts, as provided herein.

(18)    Fixing of ADS Record Date. Whenever (a) the Depositary shall receive notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights or other distribution), (b) for any reason the Depositary causes a change in the number of Shares that are represented by each ADS, (c) the Depositary shall receive notice of any meeting of, or solicitation of consents or proxies of, holders of Shares or other Deposited Securities, or (d) the Depositary shall find it necessary or convenient in connection with the giving of any notice, solicitation of any consent or any other matter, the Depositary shall fix the record date (the “ADS Record Date”) for the determination of the Holders of ADS(s) who shall be entitled to receive such distribution, to give instructions for the exercise of voting rights at any such meeting, to give or withhold such consent, to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each ADS. The Depositary shall make reasonable efforts to establish the ADS Record Date as closely as practicable to the applicable record date for the Deposited Securities (if any) set by the Company in the British Virgin Islands and shall not announce the establishment of any ADS Record Date prior to the relevant corporate action having been made public by the Company (if such corporate action affects the Deposited Securities). Subject to applicable law, the terms and conditions of this ADR and Sections 4.1 through 4.8 of the Deposit Agreement, only the Holders of ADSs at the close of business in New York on such ADS Record Date shall be entitled to receive such distribution, to give such voting instructions, to receive such notice or solicitation, or otherwise take action.

 

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(19)    Voting of Deposited Securities. As soon as practicable after receipt of notice of any meeting at which the holders of Deposited Securities are entitled to vote, or of solicitation of consents or proxies from holders of Deposited Securities, the Depositary shall fix the ADS Record Date in respect of such meeting or solicitation of consent or proxy in accordance with Section 4.9 of the Deposit Agreement. The Depositary shall, if requested by the Company in writing in a timely manner (the Depositary having no obligation to take any further action if the request shall not have been received by the Depositary at least thirty (30) days prior to the date of such vote or meeting), at the Company’s expense and provided no U.S. legal prohibitions exist, distribute to Holders as of the ADS Record Date: (a) such notice of meeting or solicitation of consent or proxy, (b) a statement that the Holders at the close of business on the ADS Record Date will be entitled, subject to any applicable law, the provisions of the Deposit Agreement, the Articles of Association and the provisions of or governing the Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Deposited Securities represented by such Holder’s ADSs, and (c) a brief statement as to the manner in which such voting instructions may be given.

Notwithstanding anything contained in the Deposit Agreement or any ADR, the Depositary may, to the extent not prohibited by law or regulations, or by the requirements of the stock exchange on which the ADSs are listed, in lieu of distribution of the materials provided to the Depositary in connection with any meeting of, or solicitation of consents or proxies from, holders of Deposited Securities, distribute to the Holders a notice that provides Holders with, or otherwise publicizes to Holders, instructions on how to retrieve such materials or receive such materials upon request (e.g., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).

The Depositary has been advised by the Company that under the Articles of Association as in effect on the date of the Deposit Agreement, voting at any meeting of shareholders of the Company is by show of hands unless (before or on the declaration of the result of the show of hands) a poll is demanded. The Depositary will not join in demanding a poll, whether or not requested to do so by Holders of ADSs. Under the Articles of Association as in effect on the date of the Deposit Agreement, a poll may be demanded by (a) the chairman of the meeting or (b) any shareholder present in person or by proxy.

Voting instructions may be given only in respect of a number of ADSs representing an integral number of Deposited Securities. Upon the timely receipt from a Holder of ADSs as of the ADS Record Date of voting instructions in the manner specified by the Depositary, the Depositary shall endeavor, insofar as practicable and permitted under applicable law, the provisions of the Deposit Agreement, the Articles of Association and the provisions of the Deposited Securities, to vote, or cause the Custodian to vote, the Deposited Securities (in person or by proxy) represented by such Holder’s ADSs as follows: (a) in the event voting takes place at a shareholders’ meeting by a show of hands, the Depositary will instruct the Custodian to vote all Deposited Securities in accordance with the voting instructions received timely from a majority of Holders of ADSs who provided voting instructions, and (b) in the event voting takes place at a shareholders’ meeting by poll, the Depositary will instruct the Custodian to vote the Deposited Securities in accordance with the voting instructions timely received from the Holders of ADSs. If voting is by poll and the Depositary does not receive voting instructions from a Holder as of the ADS Record Date on or before the date established by the Depositary for such purpose, such Holder shall be deemed, and the Depositary shall deem such Holder, to have instructed the Depositary to give a discretionary proxy to a person designated by the Company to vote the Deposited Securities; provided, however, that no such discretionary proxy shall be given by the Depositary with respect to any matter to be voted upon as to which the Company informs the Depositary that (a) the Company does not wish such proxy to be given, (b) substantial opposition exists, or (c) the rights of holders of Deposited Securities may be adversely affected.

 

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Deposited Securities represented by ADSs for which no timely voting instructions are received by the Depositary from the Holder shall not be voted (except (a) in the case voting is by show of hands, in which case the Depositary will instruct the Custodian to vote all Deposited Securities in accordance with the voting instructions received from a majority of Holders of ADSs who provided timely voting instructions, (b) as contemplated in this Section 4.10). Neither the Depositary nor the Custodian shall under any circumstances exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of, for purposes of establishing a quorum or otherwise, the Deposited Securities represented by ADSs, except pursuant to and in accordance with the voting instructions timely received from Holders or as otherwise contemplated herein. If the Depositary timely receives voting instructions from a Holder which fail to specify the manner in which the Depositary is to vote the Deposited Securities represented by such Holder’s ADSs, the Depositary will deem such Holder (unless otherwise specified in the notice distributed to Holders) to have instructed the Depositary to vote in favor of the items set forth in such voting instructions.

Notwithstanding anything else contained herein, the Depositary shall, if so requested in writing by the Company, represent all Deposited Securities (whether or not voting instructions have been received in respect of such Deposited Securities from Holders as of the ADS Record Date) for the sole purpose of establishing quorum at a meeting of shareholders.

Notwithstanding anything else contained in the Deposit Agreement or any ADR, the Depositary shall not have any obligation to take any action with respect to any meeting, or solicitation of consents or proxies, of holders of Deposited Securities if the taking of such action would violate U.S. laws. The Company agrees to take any and all actions reasonably necessary to enable Holders and Beneficial Owners to exercise the voting rights accruing to the Deposited Securities and to deliver to the Depositary an opinion of U.S. counsel addressing any actions requested to be taken if so requested by the Depositary.

There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return voting instructions to the Depositary, or otherwise take action, in a timely manner.

 

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(20)    Changes Affecting Deposited Securities. Upon any change in nominal or par value, sub-division or split-up, cancellation, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger, consolidation or sale of assets affecting the Company or to which it is a party, any property which shall be received by the Depositary or the Custodian in exchange for, or in conversion of, or replacement of, or otherwise in respect of, such Deposited Securities shall, to the extent permitted by law, be treated as new Deposited Property under the Deposit Agreement, and this ADR shall, subject to the provisions of the Deposit Agreement, this ADR evidencing such ADSs and applicable law, represent the right to receive such additional or replacement Deposited Property. In giving effect to such change, sub-division or split-up, cancellation, consolidation or other reclassification of Deposited Securities, recapitalization, reorganization, merger, consolidation or sale of assets, the Depositary may, with the Company’s approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary, and (b) taxes) and receipt of an opinion of counsel to the Company reasonably satisfactory to the Depositary that such actions are not in violation of any applicable laws or regulations, (i) issue and deliver additional ADSs as in the case of a share or stock dividend on the Shares, (ii) amend the Deposit Agreement and the applicable ADRs, (iii) amend the applicable Registration Statement(s) on Form F-6 as filed with the Commission in respect of the ADSs, (iv) call for the surrender of outstanding ADRs to be exchanged for new ADRs, and (v) take such other actions as are appropriate to reflect the transaction with respect to the ADSs. Notwithstanding the foregoing, in the event that any Deposited Property so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company’s approval, and shall, if the Company requests, subject to receipt of an opinion of Company’s counsel reasonably satisfactory to the Depositary that such action is not in violation of any applicable laws or regulations, sell such Deposited Property at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) for the account of the Holders otherwise entitled to such Deposited Property upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash pursuant to Section 4.1 of the Deposit Agreement. Neither the Company nor the Depositary shall be responsible for (i) any failure to determine that it may be lawful or practicable to make such Deposited Property available to Holders in general or to any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale or (iii) any liability to the purchaser of such Deposited Property.

 

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(21)    Exoneration. Notwithstanding anything contained in the Deposit Agreement or this ADR, neither the Depositary nor the Company shall be obligated to do or perform any act which is inconsistent with the provisions of the Deposit Agreement or incur any liability (to the extent not limited by paragraph (25) hereof and Section 7.8(b) of the Deposit Agreement) (i) if the Depositary, the Custodian, the Company or their respective agents shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required or contemplated by the terms of the Deposit Agreement and this ADR, by reason of any provision of any present or future law or regulation of the United States, the British Virgin Islands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of potential criminal or civil penalties or restraint, or by reason of any provision, present or future, of the Articles of Association or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, acts of terrorism, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement or in the Articles of Association or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of the Deposit Agreement, made available to Holders of ADSs, (v) for any action or inaction of any clearing or settlement system (and any participant thereof) for the Deposited Property or the ADSs, or (vi) for any consequential or punitive damages (including lost profits) for any breach of the terms of the Deposit Agreement. The Depositary, its controlling persons, its agents, any Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

(22)    Standard of Care. The Company and the Depositary assume no obligation and shall not be subject to any liability under the Deposit Agreement or this ADR to any Holder(s) or Beneficial Owner(s), except that the Company and the Depositary agree to perform their respective obligations specifically set forth in the Deposit Agreement or this ADR without negligence or bad faith. Without limitation of the foregoing, neither the Depositary, nor the Company, nor any of their respective controlling persons, or agents, shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Property or in respect of the ADSs, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense (including fees and disbursements of counsel) and liability be furnished as often as may be required (and no Custodian shall be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary).

The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effect of any vote, provided that any such action or omission is in good faith and without negligence and in accordance with the terms of the Deposit Agreement. The Depositary shall not incur any liability for any failure to accurately determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Property, for the validity or worth of the Deposited Property, for the value of any Deposited Property or any distribution thereon, for any interest on Deposited Property, for any tax consequences that may result from the ownership of ADSs, Shares or other Deposited Property, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of the Deposit Agreement, for the failure or timeliness of any notice from the Company, or for any action of or failure to act by, or any information provided or not provided by, DTC or any DTC Participant.

 

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The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.

The Depositary shall not be liable for any acts or omissions made by a predecessor depositary whether in connection with an act or omission of the Depositary or in connection with any matter arising wholly prior to the appointment of the Depositary or after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.

(23)    Resignation and Removal of the Depositary; Appointment of Successor Depositary. The Depositary may at any time resign as Depositary under the Deposit Agreement by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 90th day after delivery thereof to the Company (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 of the Deposit Agreement), or (ii) the appointment by the Company of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by written notice of such removal, which removal shall be effective on the later of (i) the 90th day after delivery thereof to the Depositary (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 of the Deposit Agreement), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall be required by the Company to execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed (except as required by applicable law), shall become fully vested with all the rights, powers, duties and obligations of its predecessor (other than as contemplated in Sections 5.8 and 5.9 of the Deposit Agreement). The predecessor depositary, upon payment of all sums due it and on the written request of the Company shall (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in Sections 5.8 and 5.9 of the Deposit Agreement), (ii) duly assign, transfer and deliver all of the Depositary’s right, title and interest to the Deposited Property to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding ADSs and such other information relating to ADSs and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly provide notice of its appointment to such Holders. Any entity into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act.

 

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(24)    Amendment/Supplement. Subject to the terms and conditions of this paragraph 23, and Section 6.1 of the Deposit Agreement and applicable law, this ADR and any provisions of the Deposit Agreement may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior written consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding ADSs until the expiration of thirty (30) days after notice of such amendment or supplement shall have been given to the Holders of outstanding ADSs. Notice of any amendment to the Deposit Agreement or any ADR shall not need to describe in detail the specific amendments effectuated thereby, and failure to describe the specific amendments in any such notice shall not render such notice invalid, provided, however, that, in each such case, the notice given to the Holders identifies a means for Holders and Beneficial Owners to retrieve or receive the text of such amendment (e.g., upon retrieval from the Commission’s, the Depositary’s or the Company’s website or upon request from the Depositary). The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the ADSs to be registered on Form F-6 under the Securities Act or (b) the ADSs to be settled solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial existing rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such ADSs, to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement and this ADR, if applicable, as amended or supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender such ADS and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require an amendment of, or supplement to, the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and this ADR at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement and this ADR in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations.

 

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(25)    Termination. The Depositary shall, at any time at the written direction of the Company, terminate the Deposit Agreement by distributing notice of such termination to the Holders of all ADSs then outstanding at least thirty (30) days prior to the date fixed in such notice for such termination. If (i) ninety (90) days shall have expired after the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) ninety (90) days shall have expired after the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and, in either case, a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.4 of the Deposit Agreement, the Depositary may terminate the Deposit Agreement by distributing notice of such termination to the Holders of all ADSs then outstanding at least thirty (30) days prior to the date fixed in such notice for such termination. The date so fixed for termination of the Deposit Agreement in any termination notice so distributed by the Depositary to the Holders of ADSs is referred to as the “Termination Date”. Until the Termination Date, the Depositary shall continue to perform all of its obligations under the Deposit Agreement, and the Holders and Beneficial Owners will be entitled to all of their rights under the Deposit Agreement. If any ADSs shall remain outstanding after the Termination Date, the Registrar and the Depositary shall not, after the Termination Date, have any obligation to perform any further acts under the Deposit Agreement, except that the Depositary shall, subject, in each case, to the terms and conditions of the Deposit Agreement, continue to (i) collect dividends and other distributions pertaining to Deposited Securities, (ii) sell Deposited Property received in respect of Deposited Securities, (iii) deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any other Deposited Property, in exchange for ADSs surrendered to the Depositary (after deducting, or charging, as the case may be, in each case, the fees and charges of, and expenses incurred by, the Depositary, and all applicable taxes or governmental charges for the account of the Holders and Beneficial Owners, in each case upon the terms set forth in Section 5.9 of the Deposit Agreement), and (iv) take such actions as may be required under applicable law in connection with its role as Depositary under the Deposit Agreement. At any time after the Termination Date, the Depositary may sell the Deposited Property then held under the Deposit Agreement and shall after such sale hold un-invested the net proceeds of such sale, together with any other cash then held by it under the Deposit Agreement, in an un-segregated account and without liability for interest, for the pro rata benefit of the Holders whose ADSs have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement except (i) to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case, the fees and charges of, and expenses incurred by, the Depositary, and all applicable taxes or governmental charges for the account of the Holders and Beneficial Owners, in each case upon the terms set forth in Section 5.9 of the Deposit Agreement), and (ii) as may be required at law in connection with the termination of the Deposit Agreement. After the Termination Date, the Company shall be discharged from all obligations under the Deposit Agreement, except for its obligations to the Depositary under Sections 5.8, 5.9 and 7.6 of the Deposit Agreement. The obligations under the terms of the Deposit Agreement of Holders and Beneficial Owners of ADSs outstanding as of the Termination Date shall survive the Termination Date and shall be discharged only when the applicable ADSs are presented by their Holders to the Depositary for cancellation under the terms of the Deposit Agreement (except as specifically provided in the Deposit Agreement).

 

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Notwithstanding anything contained in the Deposit Agreement or any ADR, in connection with the termination of the Deposit Agreement, the Depositary may, independently and without the need for any action by the Company, make available to Holders of ADSs a means to withdraw the Deposited Securities represented by their ADSs and to direct the deposit of such Deposited Securities into an unsponsored American depositary shares program established by the Depositary, upon such terms and conditions as the Depositary may deem reasonably appropriate, subject however, in each case, to satisfaction of the applicable registration requirements by the unsponsored American depositary shares program under the Securities Act, and to receipt by the Depositary of payment of the applicable fees and charges of, and reimbursement of the applicable expenses incurred by, the Depositary.

(26)    Compliance with, and No Disclaimer under, U.S. Securities Laws. (a) Notwithstanding any provisions in this ADR or the Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Instruction I.A.(1) of the General Instructions to the Form F-6 Registration Statement, as amended from time to time, under the Securities Act.

(b)    Each of the parties to the Deposit Agreement (including, without limitation, each Holder and Beneficial Owner) acknowledges and agrees that no provision of the Deposit Agreement or any ADR shall, or shall be deemed to, disclaim any liability under the Securities Act or the Exchange Act, in each case to the extent established under applicable U.S. laws.

(27)    No Third Party Beneficiaries/Acknowledgements. The Deposit Agreement is for the exclusive benefit of the parties hereto (and their successors) and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person, except to the extent specifically set forth in the Deposit Agreement. Nothing in the Deposit Agreement shall be deemed to give rise to a partnership or joint venture among the parties nor establish a fiduciary or similar relationship among the parties. The parties hereto acknowledge and agree that (i) Citibank and its Affiliates may at any time have multiple banking relationships with the Company, the Holders, the Beneficial Owners, and their respective Affiliates, (ii) Citibank and its Affiliates may own and deal in any class of securities of the Company and its Affiliates and in ADSs, and may be engaged at any time in transactions in which parties adverse to the Company, the Holders, the Beneficial Owners or their respective Affiliates may have interests, (iii) the Depositary and its Affiliates may from time to time have in their possession non-public information about the Company, the Holders, the Beneficial Owners, and their respective Affiliates, (iv) nothing contained in the Deposit Agreement shall (a) preclude Citibank or any of its Affiliates from engaging in such transactions or establishing or maintaining such relationships, or (b) obligate Citibank or any of its Affiliates to disclose such information, transactions or relationships, or to account for any profit made or payment received in such transactions or relationships, (v) the Depositary shall not be deemed to have knowledge of any information any other division of Citibank or any of its Affiliates may have about the Company, the Holders, the Beneficial Owners, or any of their respective Affiliates, and (vi) the Company, the Depositary, the Custodian and their respective agents and controlling persons may be subject to the laws and regulations of jurisdictions other than the U.S. and the British Virgin Islands, and the authority of courts and regulatory authorities of such other jurisdictions, and, consequently, the requirements and the limitations of such other laws and regulations, and the decisions and orders of such other courts and regulatory authorities, may affect the rights and obligations of the parties to the Deposit Agreement.

 

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(28)    Governing Law / Waiver of Jury Trial. The Deposit Agreement, the ADRs and the ADSs shall be interpreted in accordance with, and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, the laws of the State of New York without reference to the principles of choice of law thereof. Notwithstanding anything contained in the Deposit Agreement to the contrary, any ADR or any present or future provisions of the laws of the State of New York, the rights of holders of Shares and of any other Deposited Securities and the obligations and duties of the Company in respect of the holders of Shares and other Deposited Securities, as such, shall be governed by the laws of the British Virgin Islands (or, if applicable, such other laws as may govern the Deposited Securities).

EACH OF THE PARTIES TO THE DEPOSIT AGREEMENT (INCLUDING, WITHOUT LIMITATION, EACH HOLDER AND BENEFICIAL OWNER) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING AGAINST THE COMPANY AND/OR THE DEPOSITARY ARISING OUT OF, OR RELATING TO, THE DEPOSIT AGREEMENT, ANY ADR AND ANY TRANSACTIONS CONTEMPLATED THEREIN (WHETHER BASED ON CONTRACT, TORT, COMMON LAW OR OTHERWISE).

 

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(ASSIGNMENT AND TRANSFER SIGNATURE LINES)

FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and transfer(s) unto                      whose taxpayer identification number is                      and whose address including postal zip code is                     , the within ADR and all rights thereunder, hereby irrevocably constituting and appointing                      attorney-in-fact to transfer said ADR on the books of the Depositary with full power of substitution in the premises.

 

Dated:      Name:  

                    

     By:  
     Title:  
     NOTICE: The signature of the Holder to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever.
     If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his/her full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Depositary, must be forwarded with this ADR.
    

 

SIGNATURE GUARANTEED

    
     All endorsements or assignments of ADRs must be guaranteed by a member of a Medallion Signature Program approved by the Securities Transfer Association, Inc.

Legends

[The ADRs issued in respect of Partial Entitlement American Depositary Shares shall bear the following legend on the face of the ADR: “This ADR evidences ADSs representing ‘partial entitlement’ Shares of the Company and as such do not entitle the holders thereof to the same per-share entitlement as other Shares (which are ‘full entitlement’ Shares) issued and outstanding at such time. The ADSs represented by this ADR shall entitle holders to distributions and entitlements identical to other ADSs when the Shares represented by such ADSs become ‘full entitlement’ Shares.”]

 

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EXHIBIT B

FEE SCHEDULE

ADS FEES AND RELATED CHARGES

All capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Deposit Agreement. Except as otherwise specified herein, any reference to ADSs herein includes Partial Entitlement ADSs, Full Entitlement ADSs, Certificated ADSs, Uncertificated ADSs, and Restricted ADSs.

I.    ADS Fees

The following ADS fees are payable under the terms of the Deposit Agreement:

 

Service

  

Rate

  

By Whom Paid

(1) Issuance of ADSs (e.g., an issuance upon a deposit of Shares, upon a change in the ADS(s)-to-Share(s) ratio, or for any other reason), excluding issuances as a result of distributions described in paragraph (4) below.    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) issued.    Person for whom ADSs are issued.
(2) Cancellation of ADSs (e.g., a cancellation of ADSs for Delivery of deposited Shares, upon a change in the ADS(s)-to-Share(s) ratio, or for any other reason).    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) cancelled.    Person for whom ADSs are being cancelled.
(3) Distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements).    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held.    Person to whom the distribution is made.
(4) Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) an exercise of rights to purchase additional ADSs.    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held.    Person to whom the distribution is made.
(5) Distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., spin-off shares).    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held.    Person to whom the distribution is made.

 

B-1


6) ADS Services.    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held on the applicable record date(s) established by the Depositary.    Person holding ADSs on the applicable record date(s) established by the Depositary.
7) 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. $5.00 per 100 ADSs (or fraction thereof) transferred.    Person for whom or to whom ADSs are transferred.
8) 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 into freely transferable ADSs, and vice versa).    Up to U.S. $5.00 per 100 ADSs (or fraction thereof) converted.    Person for whom ADSs are converted or to whom the converted ADSs are delivered.

II.    Charges

The Company, Holders, Beneficial Owners, persons depositing Shares or withdrawing Deposited Securities in connection with ADS issuances and cancellations, and persons for whom ADSs are issued or cancelled shall be responsible for the following ADS charges under the terms of the Deposit Agreement:

 

(i)

taxes (including applicable interest and penalties) and other governmental charges;

 

(ii)

such registration fees as may from time to time be in effect for the registration of Shares or other Deposited Securities on the share register and applicable to transfers of Shares or other Deposited Securities to or from the name of the Custodian, the Depositary or any nominees upon the making of deposits and withdrawals, respectively;

 

(iii)

such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing Shares or withdrawing Deposited Property or of the Holders and Beneficial Owners of ADSs;

 

(iv)

in connection with the conversion of Foreign Currency, the fees, expenses, spreads, taxes and other charges of the Depositary and/or conversion service providers (which may be a division, branch or Affiliate of the Depositary). Such fees, expenses, spreads, taxes, and other charges shall be deducted from the Foreign Currency;

 

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(v)

any reasonable and customary out-of-pocket expenses incurred in such conversion and/or on behalf of the Holders and Beneficial Owners in complying with currency exchange control or other governmental requirements; and

 

(vi)

the fees, charges, costs and expenses incurred by the Depositary, the Custodian, or any nominee in connection with the ADR program.

The above fees and charges may at any time and from time to time be changed by agreement between the Company and the Depositary.

 

B-3

Exhibit 4.6

FORM OF UNDERWRITERS’ WARRANT AGREEMENT

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) WESTPARK CAPITAL, INC., UNIVEST SECURITIES LLC OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF WESTPARK CAPITAL, INC., UNIVEST SECURITIES LLC OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [●], 20[19]. VOID AFTER 5:00 P.M., EASTERN TIME, [●], 20[24]1.

WARRANT TO PURCHASE ORDINARY SHARES REPRESENTED BY AMERICAN DEPOSITARY SHARES

for the Purchase of [●] Ordinary Shares represented by [●] American Depositary Shares

of

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [                ](“Holder”), as registered owner of this Purchase Warrant, to AnPac Bio-Medical Science Co., Ltd., a business company incorporated under the laws of the British Virgin Islands (the “Company”), Holder is entitled, at any time or from time to time from [●], 20[19] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [●], 20[24], which will be the five-year anniversary of the effective date of the Company’s Form F-1 registration statement (File No.333-234408) (such date, the “Effective Date”) pursuant to which the Company’s securities are offered to the public (the “Offering”) (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [●] Class A ordinary shares of the Company2, par value $0.01 (the “Shares”), in the form of American Depositary Shares (the “Warrant ADSs”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant, except as otherwise provided herein or with the Holder’s consent. This Purchase Warrant is initially exercisable at $[●]3 per Warrant ADS; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Warrant ADS and the number of ADSs to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.

2. Exercise.

2.1. Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Warrant ADSs being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

 

 

 

1 

Date that is 5 years from the Effective Date.

2 

Up to 8.5% of Class A shares offered in the Offering (excluding the over-allotment option).

3 

120% of the price of the ADSs sold in the Offering.

 

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2.2. Cashless Exercise. Provided that the Holder shall pay at least the par value of the Shares to be purchased, in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 2.1 above, Holder may elect to receive the number of ADSs equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company will issue to Holder ADSs in accordance with the following formula:

 

X    =    Y(A-B)   
     A   

 

Where,         
   X    =    The number of Warrant ADS to be issued to Holder;
   Y    =    The number of Warrant ADS for which the Purchase Warrant is being exercised;
   A    =    The fair market value of one ADS; and
   B    =    The Exercise Price.

For purposes of this Section 2.2, the fair market value of one ADS is defined as follows:

 

  (i)

if the Company’s ADSs are traded on a securities exchange, the fair market value shall be deemed to be the closing price on such exchange on the trading day immediately preceding the date of the exercise form being submitted in connection with the exercise of the Purchase Warrant;

 

  (ii)

if the Company’s ADSs are actively traded over-the-counter, the fair market value shall be deemed to be the closing bid price on the over-the-counter market on the trading day immediately preceding the date of the exercise form being submitted in connection with the exercise of the Purchase Warrant; or

 

  (iii)

if neither of clauses (i) or (ii) applies, the fair market value shall be the fair market value as determined in good faith by the Company’s Board of Directors.

2.3. Legend. Unless otherwise registered under the Securities Act of 1933, as amended (the “Act”), each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law which, in the opinion of counsel to the Company, is available.”

2.4. Resale of Shares. Holder and the Company acknowledge that as of the date hereof the Staff of the Division of Corporation Finance of the SEC has published Compliance & Disclosure Interpretation 528.04 in the Securities Act Rules section thereof, stating that the holder of securities issued in connection with a public offering may not rely upon Rule 144 promulgated under the Act to establish an exemption from registration requirements under Section 4(a)(1) under the Act, but may nonetheless apply Rule 144 constructively for the resale of such shares in the following manner: (a) provided that six (6) months has elapsed since the last sale under the registration statement, an underwriter or finder may resell the securities in accordance with the provisions of Rule 144(c), (e), and (f), except for the notice requirement; (b) a purchaser of the shares from an underwriter receives restricted securities unless the sale is made with an appropriate, current prospectus, or unless the sale is made pursuant to the conditions contained in (a) above; (c) a purchaser of the shares from an underwriter who receives restricted securities may include the underwriter’s holding period, provided that the underwriter or finder is not an affiliate of the issuer; and (d) if an underwriter transfers the shares to its employees, the employees may tack the firm’s holding period for purposes of Rule 144(d), but they must aggregate sales of the distributed shares with those of other employees, as well as those of the underwriter or finder, for a six-month period from the date of the transfer to the employees. Holder and the Company also acknowledge that the Staff of the Division of Corporation Finance of the SEC has advised in various no-action letters that the holding period associated with securities issued without registration to a service provider commences upon the completion of the services, which the Company agrees and acknowledges shall be the closing of the Offering, and that Rule 144(d)(3)(ii) provides that securities acquired from the issuer solely in exchange for other securities of the same issuer shall be deemed to have been acquired at the same time as the securities surrendered for conversion (which the Company agrees is the date of the initial issuance of this Purchase Warrant). In the event that following a request by Holder to transfer the Warrant ADSs in accordance with Compliance & Disclosure Interpretation 528.04 counsel for the Company reasonably concludes that Compliance & Disclosure Interpretation 528.04 no longer may be relied upon as a result of changes in applicable laws, regulations, or interpretations of the SEC Division of Corporation Finance, or as a result of judicial interpretations not known by the Company or its counsel on the date hereof (either, a “Registration Trigger Event”), then the Company shall promptly, and in any event within five (5) Business Days following the request, provide written notice to Holder of such determination. As a condition to giving such notice, the Company shall offer Holder a single demand registration right pursuant to an agreement in form acceptable to the Holder; provided that notwithstanding anything to the contrary, the obligations of the Company pursuant to this Section 2 shall terminate on the fifth (5th) anniversary of the Effective Date. In the absence of such conclusion by counsel for the Company, the Company shall, upon request of Holder given no earlier than six (6) months after the final closing of the Offering, instruct its transfer agent to permit the transfer of such shares in accordance with Compliance & Disclosure Interpretation 528.04, provided that Holder has provided such documentation as shall be reasonably be requested by the Company to establish compliance with the conditions of Compliance & Disclosure Interpretation 528.04.

 

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Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in New York City, the State of New York are authorized or required by law or other governmental action to close.

3. Transfer.

3.1. General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) WestPark Capital, Inc, (“WestPark”), Univest Securities LLC. (“Univest”) or an underwriter or a selected dealer participating in the Offering, and (ii) a bona fide officer or partner of WestPark, Univest or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). One hundred eighty (180) days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. Subject to applicable securities laws, the Company shall within five (5) Business Days upon receipt of the completed assignment form and payment of all transfer taxes, if any, transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Warrant ADSs purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

3.2. Restrictions Imposed by the Act. The Shares evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company, or (ii) a registration statement or a post-effective amendment to the registration statement relating to the offer and sale of such Shares has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.

 

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4. Registration Rights.

4.1. Demand Registration.

4.1.1. Grant of Right. The Company, upon written demand (a “Demand Notice”) of the holder(s) of at least 51% of the Purchase Warrants and/or the underlying Warrant ADSs (“Majority Holders”), agrees to register, on one occasion, all or any portion of the Warrant ADSs underlying the Purchase Warrants (collectively, the “Registrable Securities”). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective as soon as possible thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement, or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until 90 days after such offering is consummated. Notwithstanding the foregoing, if the filing, initial effectiveness or continued use of a registration statement filed hereunder would require the Company to make a public disclosure of material non-public information, which disclosure in the good-faith judgment of the Company based on the advice of counsel (i) would be required to be made in any registration statement so that such registration statement would not be materially misleading, (ii) would not be required to be made at such time but for the filing, effectiveness or continued use of such registration statement or (iii) would reasonably be expected to adversely affect in any material respect the Company or its business or the Company’s ability to effect a bona fide material proposed acquisition, disposition, financing, reorganization, recapitalization or similar transaction, then the Company may, upon giving prompt written notice of such decision to the Holders, delay the filing or initial effectiveness of, or suspend use of, such registration statement; provided that the Company shall not be permitted to do so by invoking the ground in item (iii) above (x) more than once in any six-month period or (y) for any single period of time in excess of 90 days (or up to 120 days in the case of year-end financial results), or for periods exceeding, in the aggregate, 90 days (or up to 120 days in the case of year-end financial results) during any 12-month period. In the event that the Company exercises its rights under the preceding sentence, the Holder agrees to suspend, promptly upon receipt of the notice referred to above, the use of any prospectus relating to such registration in connection with any sale or offer to sell Registrable Securities. In order to defer the filing of a registration statement pursuant to this Section 4.1.1, the Company shall promptly (but in any event within 10 days), upon determining to seek such deferral, deliver to each requesting Holder a certificate signed by an executive officer of the Company stating that the Company is deferring such filing pursuant to this Section 4.1.1 and a statement of the ground for such deferral; provided that the Company shall not be required to provide any material non-public information to the Holder. The demand for registration may be made on only one occasion while Holder holds any of the Registrable Securities during a period of four (4) years beginning on the Commencement Date in accordance with FINRA Rule 5110(f)(2)(G)(iv). The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holder(s) to all other registered Holders of the Purchase Warrants and/or the Registrable Securities within fifteen (15) days after the date of the receipt of any such Demand Notice.

4.1.2. Terms. The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 4.1.1, but the Holder shall pay their own out-of-pocket expenses, including any and all underwriting commissions and the expenses of any legal counsel selected by the Holder to represent it in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing and to qualify or register the Registrable Securities in such States as are reasonably requested by the Majority Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a state in which such registration would cause: (i) the Company to be obligated to qualify to do business in such state or transact as a foreign corporation doing business in such jurisdiction or submit to general service of process in such State, or (ii) the principal shareholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall use its commercially reasonable efforts to cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of nine consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holder shall only use the prospectuses provided by the Company to sell the Warrant ADSs covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission.

 

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4.2. “Piggy-Back” Registration.

4.2.1. Grant of Right. In addition to the demand right of registration described in Section 4.1 hereof, the Holder shall have the right for a period of no more than two (2) years from the Commencement Date in accordance with FINRA Rule 5110(f)(2)(G)(v), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form or for a dividend reinvestment plan); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of ADSs which may be included in the registration statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter(s) shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holder(s) seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holder(s); provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

4.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holders shall pay their own out-of-pocket expenses, including any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holder(s) of outstanding Registrable Securities with not less than fifteen (15) days written notice prior to the proposed date of filing of such registration statement, unless such notice is specifically waived in writing by the then Holder(s). Such notice to the Holders shall continue to be given for each registration statement filed by the Company during the two (2) year period following the Commencement Date until such time as all of the Registrable Securities have been registered for resale under the Act or sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2; provided, however, that such “piggy-back” registration rights shall terminate on the second (2nd) anniversary of the Commencement Date in accordance with FINRA Rule 5110(f)(2)(G)(v).

4.3 Damages. Should the registration or the effectiveness thereof required by Sections 4.1 and 4.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, other than due to any regulatory or other factors outside of the Company’s control, the Holder(s) shall be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

4.4. Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Holder(s) pursuant to the underwriting agreement relating to such registration statement (the “Underwriting Agreement”). The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant to which the underwriters have agreed to indemnify the Company.

 

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4.5. Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

4.6. Documents Delivered to Holders. The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter, at their own expenses, to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times, during normal business hours, as any such Holder shall reasonably request; provided that the Company shall not be required to disclose any confidential information or other records to the Underwriter, as representative of the Holders, or to any other person, until and unless such persons shall have entered into reasonable confidentiality agreements (in form and substance reasonably satisfactory to the Company), with the Company with respect thereto.

4.7. Underwriting Agreement. If the Company shall enter into an underwriting agreement, pursuant to which Registrable Securities of a Holder are being registered, such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Warrant ADSs and their intended methods of distribution. Such Holders, however, shall agree to such covenants and indemnification and contribution obligations for selling shareholders as are customarily contained in agreements of that type used by the managing underwriter.

4.8. Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders. Further, such Holders shall execute appropriate custody agreements and otherwise cooperate fully in the preparation of the registration statement and other documents relating to any offering in which they include securities pursuant to this Section 4. Each Holder shall also furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of the Registrable Securities.

5. New Purchase Warrants to be Issued.

5.1. Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder, without charge, a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Warrant ADSs purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.

5.2. Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

 

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6. Adjustments.

6.1. Adjustments to Exercise Price and Number of Warrant ADSs. The Exercise Price and the number of Warrant ADSs underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:

6.1.1. Share Dividends; Subdivisions. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares or ADSs is increased by a share dividend payable in Shares or ADSs or by a subdivision of Shares or ADSs or other similar event, then, on the effective day thereof, the number of Warrant ADSs purchasable hereunder shall be increased in proportion to such increase in outstanding Shares or ADSs, and the Exercise Price shall be proportionately decreased.

6.1.2. Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares or ADSs is decreased by a consolidation, combination or reclassification of Shares or ADSs or other similar event, then, on the effective date thereof, the number of Warrant ADSs purchasable hereunder shall be decreased in proportion to such decrease in issued and outstanding Shares or ADSs, and the Exercise Price shall be proportionately increased.

6.1.3. Replacement of Securities Upon Reorganization, etc. In case of any reclassification or reorganization of the issued and outstanding Shares or ADSs other than a change covered by Section 6.1.1 or Section 6.1.2 hereof or that solely affects the par value of such Shares or ADSs, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares or ADSs), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, and if this Purchase Warrant shall, immediately after such reorganization, reclassification, consolidation, merger, sale or similar transaction, remain outstanding, then the Purchase Warrant shall thereafter (until the expiration of the right of exercise of this Purchase Warrant), in lieu of or in addition to (as the case may be) the number of Warrant ADSs then exercisable under this Purchase Warrant, be exercisable for the kind and number of shares of stock or other securities or assets of the Company or of the successor person resulting from such transaction to which the Holder would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or similar transaction if the Holder had exercised this Purchase Warrant in full immediately prior to the time of such reorganization, reclassification, consolidation, merger, sale or similar transaction and acquired the applicable number of Shares then issuable hereunder as a result of such exercise (without taking into account any limitations or restrictions on the exercisability of this Purchase Warrant); in such case, appropriate adjustment shall be made with respect to the Holder’s rights under this Purchase Warrant to insure that the provisions of this Section 6.1.3 hereof shall thereafter be applicable, as nearly as possible, to this Purchase Warrant in relation to any shares of stock, securities or assets thereafter acquirable upon exercise of this Purchase Warrant (including, in the case of any consolidation, merger, sale or similar transaction in which the successor or purchasing person is other than the Company, an immediate adjustment in the Exercise Price to the value per Share reflected by the terms of such consolidation, merger, sale or similar transaction, and a corresponding immediate adjustment to the number of Warrant ADSs acquirable upon exercise of this Purchase Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is different from the Exercise Price in effect immediately prior to such consolidation, merger, sale or similar transaction). The provisions of this Section 6.1.3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or similar transactions. The Company shall not effect any such reorganization, reclassification, consolidation, merger, sale or similar transaction in which the Company is not the survivor unless, prior to the consummation thereof, the successor person (if other than the Company) resulting from such reorganization, reclassification, consolidation, merger, sale or similar transaction, shall assume, by written instrument substantially similar in form and substance to this Purchase Warrant and reasonably satisfactory to the Holder, the obligation to deliver to the Holder such shares of stock, securities or assets which, in accordance with the foregoing provisions, such Holder shall be entitled to receive upon exercise of this Purchase Warrant.

6.1.4. Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Warrant ADSs as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.

 

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6.2. Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares or ADSs), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of ADSs of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.

6.3. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.

7. Reservation and Listing. The Company shall at all times reserve and keep available out of its maximum number of authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights to provide for the issuance of the Warrant ADSs upon the exercise of any purchase rights under this Purchase Warrant. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Warrant ADSs and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Warrant ADSs issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, quoted on the OTC Bulletin Board or any successor trading market) on which the Company’s ADSs may then be listed and/or quoted.

8. Certain Notice Requirements.

8.1. Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least ten (10) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.

8.2. Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares or ADSs for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares or ADSs any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.

 

-8-


8.3. Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.

8.4. Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:

 

   If to the Holder:      
  

 

     
  

 

     
  

 

     
   Attn: [●]      
   If to the Company:      
   AnPac Bio-Medical Science Co., Ltd.      
   No. 105 Sinan Road      
   Shanghai 200025, China      
   Attn: Dr. Chris Chang Yu      
  

 Ms. Lisa Ying

     

9. Miscellaneous.

9.1. Amendments. The Company and [WestPark/Univest] may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and [WestPark/Univest] may deem necessary or desirable and that the Company and [WestPark /Univest] deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.

9.2. Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.

9.3. Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

9.4. Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.

 

-9-


9.5. Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. Each of the Company and the Holder hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be non-exclusive. Each of the Company and the Holder hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company or the Holder may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company and the Holder in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its shareholders and affiliates) hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

9.6. Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

9.7. Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and [WestPark/Univest] enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.

[Signature Page Follows]

 

-10-


IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the [●] day of [●],
20[●].

ANPAC BIO-MEDICAL SCIENCE CO., LTD.

 

By:  

 

Name:   Chris Chang Yu
Title:   Chairman of the Board of Directors and Chief Executive Officer

 

-11-


[Form to be used to exercise Purchase Warrant]

Date:

The undersigned hereby elects irrevocably to exercise the Purchase Warrant for [●] Warrant ADSs, of AnPac Bio-Medical Science Co., Ltd., a corporation governed by the laws of the British Virgin Islands (the “Company”), and hereby makes payment of $ (at the rate of $[●] per Warrant ADS) in payment of the Exercise Price pursuant thereto. Please issue the Warrant ADSs as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Warrant ADSs for which this Purchase Warrant has not been exercised.

Or

The undersigned hereby elects irrevocably to convert its right to purchase [●] Warrant ADSs of the Company under the Purchase Warrant for [●] Warrant ADSs, as determined in accordance with the following formula:

 

X    =    Y(A-B)   
     A   

 

Where,         
   X    =    The number of Warrant ADSs to be issued to Holder;
   Y    =    The number of Warrant ADSs for which the Purchase Warrant is being exercised;
   A    =    The fair market value of one Warrant ADS which is equal to $[●]; and
   B    =    The Exercise Price which is equal to $[●] per share

The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.

Please issue the Warrant ADSs as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Warrant ADSs for which this Purchase Warrant has not been converted.

Signature:                                                          

Signature Guaranteed:                                                          

INSTRUCTIONS FOR REGISTRATION OF SECURITIES

 

Name:         
  

 

     
   (Print in Block Letters)      
Address:         
  

 

     
  

 

     

NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

-12-


[Form to be used to assign Purchase Warrant]

ASSIGNMENT

(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):

FOR VALUE RECEIVED, [●] does hereby sell, assign and transfer unto the right to purchase Warrant ADSs, of AnPac Bio-Medical Science Co., Ltd., a corporation governed by the laws of the British Virgin Islands (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

Dated:                                                          

Signature :                                                          

Signature Guaranteed :                                                          

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

-13-

Exhibit 5.1

 

LOGO

Our ref: VSL/766305-000001/15429152v5

AnPac Bio-Medical Science Co., Ltd.

801 Bixing Street, Bihu County

Lishui, Zhejiang Province, 323006

People’s Republic of China

15 November 2019

AnPac Bio-Medical Science Co., Ltd. (the “Company”)

We have acted as counsel as to British Virgin Islands law to the Company in connection with the Company’s registration statement on Form F-1, including all amendments or supplements thereto (the “Registration Statement”), filed with the Securities and Exchange Commission under the U.S. Securities Act of 1933, as amended to date relating to the offering by the Company (the “Offering”) of certain American depositary shares (the “ADSs”) representing the Company’s Class A Ordinary Shares of a par value of US$0.01 each of the Company (the “Shares”).

We are furnishing this opinion as Exhibits 5.1, 8.1 and 23.2 to the Registration Statement.

 

1

Documents Reviewed

We have reviewed originals, copies, drafts or conformed copies of the following documents:

 

1.1

The public records of the Company on file and available for public inspection at the Registry of Corporate Affairs in the British Virgin Islands (the “Registry of Corporate Affairs”) on 30 October 2019, including the Company’s Certificate of Incorporation and its Amended and Restated Memorandum and Articles of Association (the “Memorandum and Articles”).

 

1.2

The Second Amended and Restated Memorandum and Articles of Association of the Company (the “Second Amended and Restated Memorandum and Articles of Association”) as adopted by the shareholders of the Company on 29 October 2019 and effective from registration of the same by the Registry of Corporate Affairs and the Third Amended and Restated Memorandum and Articles of Association of the Company (the “Third Amended and Restated Memorandum and Articles of Association”) as adopted by the shareholders of the Company on 31 October 2019 and effective from registration of the same by the Registry of Corporate Affairs.


1.3

The written resolutions of the board of directors of the Company dated 29 October 2019 and 31 October 2019 (the “Directors’ Resolutions”).

 

1.4

The written resolutions of the members of the Company dated 29 October 2019 and 31 October 2019 (the “Shareholders’ Resolutions”).

 

1.5

A certificate of good standing with respect to the Company issued by the Registry of Corporate Affairs dated 30 October 2019, (the “Certificate of Good Standing”).

 

1.6

A certificate from a director of the Company (a copy of which is attached as Annexure B) (the “Director’s Certificate”).

 

1.7

The Registration Statement.

 

2

Assumptions

The following opinions are given only as to, and based on, circumstances and matters of fact existing and known to us on the date of this opinion letter. These opinions only relate to the laws of the British Virgin Islands which are in force on the date of this opinion letter. In giving the following opinions we have relied (without further verification) upon the completeness and accuracy, as at the date of this opinion letter, of the Director’s Certificate and the Certificate of Good Standing. We have also relied upon the following assumptions, which we have not independently verified:

 

2.1

Copies of documents, conformed copies or drafts of documents provided to us are true and complete copies of, or in the final forms of, the originals.

 

2.2

All signatures, initials and seals are genuine.

 

2.3

All public records of the Company which we have examined are accurate and the information disclosed by the searches which we conducted against the Company at the Registry of Corporate Affairs is true and complete and such information has not since then been altered and such searches did not fail to disclose any information which had been delivered for registration but did not appear on the public records at the date of our searches.

 

2.4

Immediately prior to completion of the Offering, the Third Amended and Restated Memorandum and Articles of Association will have been registered by the Registry of Corporate Affairs and will remain in full force and effect and be unamended.

 

2.5

There is nothing contained in the minute book or corporate records of the Company (which we have not inspected) which would or might affect the opinions set out below.

 

2.6

There is nothing under any law (other than the laws of the British Virgin Islands) which would or might affect the opinions set out below.

 

3

Opinions

Based upon, and subject to, the foregoing assumptions and the qualifications set out below, and having regard to such legal considerations as we deem relevant, we are of the opinion that:

 

3.1

The Company is a company limited by shares incorporated with limited liability under the BVI Business Companies Act (as amended) (the “Act”), is in good standing at the Registry of Corporate Affairs, and is validly existing under the laws of the British Virgin Islands.


3.2

The maximum number of shares that the Company is authorised to issue, with effect from immediately prior to the completion of the Offering, will be 100,000,000 shares of a par value of US$0.01 each, comprising of (i) 70,000,000 Class A Ordinary Shares of a par value of US$0.01 each, and (ii) 30,000,000 Class B Ordinary Shares of a par value of US$0.01 each.

 

3.3

The issue and allotment of the Shares have been duly authorised and when allotted, issued and paid for as contemplated in the Registration Statement, the Shares will be legally issued and allotted, fully paid and non-assessable. As a matter of British Virgin Islands law, a share is only issued when it has been entered in the register of members (shareholders).

 

3.4

The statements under the caption “Taxation” in the prospectus forming part of the Registration Statement, to the extent that they constitute statements of British Virgin Islands law, are accurate in all material respects and that such statements constitute our opinion.

 

4

Qualifications

The opinions expressed above are subject to the following qualifications:

 

4.1

To maintain the Company in good standing under the laws of the British Virgin Islands, annual filing fees must be paid to the Registry of Corporate Affairs.

 

4.2

Under section 42 of the Act, the entry of the name of a person in the register of members of a company as a holder of a share in a company is prima facie evidence that legal title in the share vests in that person. A third party interest in the shares in question would not appear. An entry in the register of members may yield to a court order for rectification (for example, in the event of inaccuracy or omission).

 

4.3

In this opinion, the phrase “non-assessable” means, with respect to the Shares in the Company, that a shareholder shall not, solely by virtue of its status as a shareholder, be liable for additional assessments or calls on the Shares by the Company or its creditors (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstance in which a court may be prepared to pierce or lift the corporate veil).

 

4.4

Except as specifically stated herein, we make no comment with respect to any representations and warranties which may be made by or with respect to the Company in any of the documents or instruments cited in this opinion or otherwise with respect to the commercial terms of the transactions, which are the subject of this opinion.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our name under the headings “Enforceability of Civil Liabilities” and “Legal Matters” and elsewhere in the prospectus included in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the Rules and Regulations of the Commission thereunder.

Yours faithfully

/s/ Maples and Calder (Hong Kong) LLP

Maples and Calder (Hong Kong) LLP

Exhibit 5.2

            CLEARY GOTTLIEB STEEN & HAMILTON LLP

 

WASHINGTON, D.C.

 

PARIS

 

BRUSSELS

 

LONDON

 

FRANKFURT

 

COLOGNE

 

MOSCOW

  

One Liberty Plaza

New York, NY 10006-1470

T: +1 212 225 2000

F: +1 212 225 3999

 

clearygottlieb.com

 

D: +852 2532 3783

szhao@cgsh.com

  

ROME

 

MILAN

 

HONG KONG

 

BEIJING

 

BUENOS AIRES

 

SÃO PAULO

 

ABU DHABI

 

SEOUL

                                                                          November 15, 2019

AnPac Bio-Medical Science Co., Ltd.

801 Bixing Street, Bihu County

Lishui, Zhejiang Province, 323006

People’s Republic of China

Ladies and Gentlemen:

We have acted as special United States counsel to AnPac Bio-Medical Science Co., Ltd., a British Virgin Islands company (the “Company”), in connection with the preparation and filing with the United States Securities and Exchange Commission (the “Commission”) under the United States Securities Act of 1933, as amended (the “Securities Act”), of a registration statement on Form F-1 (File No.333-234408) (the “Registration Statement”), relating to the registration of (i) the offering of up to 1,916,705 American depositary shares (the “ADSs”), each representing one Class A ordinary share, par value of US$0.01 per share, of the Company (the “Ordinary Shares” and, together with the ADSs, collectively referred to as the “Securities”), (ii) the sale by the Company of underwriters’ warrants (the “Warrants”) to purchase up to 141,670 ADSs of the Company, and (iii) 141,670 ADSs underlying the Warrants.

In arriving at the opinion expressed below, we have reviewed the following documents:

 

  (a)

the Registration Statement;

 

  (b)

the form of the underwriting agreement (the “Underwriting Agreement”) between the Company and the underwriters named therein, included as Exhibit 1.1 to the Registration Statement; and

 

  (c)

the form of the Warrants, included as Exhibit 4.6 to the Registration Statement.

In addition, we have reviewed the originals or copies certified or otherwise identified to our satisfaction of all such other documents, and we have made such investigations of law, as we have deemed appropriate as a basis for the opinion expressed below.

In rendering the opinion expressed below, we have assumed the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. In addition, we have assumed and have not verified (i) the accuracy as to factual matters of each document we have reviewed (including, without limitation, the accuracy of the representations and warranties of the Company in the Underwriting Agreement), and (ii) that the Warrants conform to the form thereof that we have reviewed.

Cleary Gottlieb Steen & Hamilton LLP or an affiliated entity has an office in each of the cities listed above.


Securities and Exchange Commission

Page 2 of 3

 

Based on the foregoing, and subject to the further assumptions and qualifications set forth below, it is our opinion that, when duly issued, delivered and paid for in accordance with the Underwriting Agreement and the Warrants, the Warrants will be the valid, binding and enforceable obligations of the Company (except that we express no opinion with respect to Section 4.4 of the Warrants providing for indemnification).

Insofar as the foregoing opinion relates to the validity, binding effect or enforceability of any agreement or obligation of the Company, (a) we have assumed that the Company and each other party to such agreement or obligation has satisfied or, prior to the issuance of the Warrants, will satisfy those legal requirements that are applicable to it to the extent necessary to make such agreement or obligation enforceable against it, (b) we have assumed that at the time of the issuance, sale and delivery of each Warrant, the authorization thereof by the Company will not have been modified or rescinded and there will not have occurred any change in law affecting the validity, binding effect and enforceability of such Warrant, (c) such opinion is subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity and (d) such opinion is subject to the effect of judicial application of foreign laws or foreign governmental actions affecting creditors’ rights.

With respect to Section 9.5 of the Warrants, we express no opinion as to the subject matter jurisdiction of any United States federal court to adjudicate any action relating to the Warrants where jurisdiction based on diversity of citizenship under 28 U.S.C. §1332 does not exist. In addition, we express no opinion regarding any Securities that may be underlying or received upon exercise of any Warrants.

We note that any designation in Section 9.5 of the Warrants of the United States District Court for the Southern District of New York as the venue for actions or proceedings relating to such Warrants is (notwithstanding any waiver in Section 9.5) subject to the power of such courts to transfer actions pursuant to 28 U.S.C. §1404(a) or to dismiss such actions or proceedings on the grounds that such a federal court is an inconvenient forum for such an action or proceeding.

The foregoing opinion is limited to the law of the State of New York.


Securities and Exchange Commission

Page 3 of 3

 

We hereby consent to the use of our name in the prospectus constituting a part of the Registration Statement under the heading “Legal Matters” and in any prospectus supplement related thereto as counsel for the Company that has passed on the validity of the Warrants, and to the use of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder.

 

Very truly yours,

CLEARY GOTTLIEB STEEN & HAMILTON LLP
By:  

        /s/ Shuang ZHAO

          Shuang ZHAO, a Partner

Exhibit 10.4

Supplemental Convertible Loan Agreement

Party A: Jiaxing Zhijun Investment Management Co., Ltd.

Unified Social Credit Code: [                    ]

Legal or Authorized Representative: Feng Guo

Party B: AnPac Bio-Medical Science Co., Ltd.

Director/Authorized Representative: Chris Chang YU

Party C: Chris Chang YU

Passport No.: [                    ]

Party A, Party B and Party C are individually referred to as a “Party” and collectively as the “Parties”.

WHEREAS,

 

1.

Party A is a limited company incorporated and validly existing under the laws of the People’s Republic of China. Party B is a limited liability company incorporated and validly existing under the laws of the British Virgin Islands. Party A intends to grant to Party B a loan that is convertible to equity interest in Party B upon satisfaction of the conditions specified herein.

 

2.

Party C, a U.S. citizen and a co-founder of Party B, intends to provide guaranty to Party A for the repayment of the said loan by Party B.

 

3.

The Parties entered into a Framework Agreement on Convertible Loan (the “Original Agreement”) in 2018, and Party A or the individuals designated by and acting in concert with Party A advanced a loan of USD2,500,000 to the account designated by Party B prior to August 31, 2018 as confirmed by Party A and Party B in writing.

 

4.

Now the Parties wish to enter into a new agreement to replace the Original Agreement.

 

1


THEREFORE, the Parties hereby agree through friendly consultation as follows:

Article 1    Borrowing

 

1.1

The term of the offshore loan of USD2,500,000 made available by Party A to Party B (the “Loan”) shall commence from the date when Party A advanced the Loan to Party B (being the arrival time of the Loan at the account designated by Party B) and mature on April 30, 2020.

 

1.2

The Parties acknowledge that the Loan will be used for Party B’s daily operation, team building and technological research and development. Without Party A’s consent, Party B shall not change the purposes of the Loan agreed hereunder.

 

1.3

During the term of the Loan, the interest accrued on the Loan shall be calculated at a simple annual rate of 9% from the date of advancement by Party A.

Article 2    Repayment Arrangement

 

2.1

At any time from the advancement date of the Loan to April 30, 2020, upon Party B’s completion of the next round of financing (namely, the round of financing provided by institutional investors, which is completed after the date of this Agreement and before the date of conversion and amounts to USD5,000,000 or more, or a round of financing jointly confirmed by the Parties in writing, hereinafter referred to as the “Next Round of Financing”), Party A shall be entitled to require Party B to, and Party B is obliged to, convert the Loan principal into equity interest in Party B according to Article 3 hereof. See Article 3 for details of the conversion procedures. Provided that the conversion under this Article 2.1 and Article 3 is completed, Party B will no longer be obliged to repay to Party A the Loan principal and any interest accrued thereon as at the actual conversion date.

 

2.2

If Party A fails to complete the conversion under Article 2.1 and Article 3 during the period from the advancement date of the Loan to April 30, 2020 and it, within five (5) working days from the expiry of the term of the Loan, expresses its intention not to make such conversion, Party B shall, within six (6) months thereafter, repay the Loan principal and any interest accrued thereon as at the actual repayment date, or the Parties may negotiate to extend the term of the Loan.

 

2.3

With consent of Party A, Party B may prepay the Loan principal and any interest accrued thereon as at the actual prepayment date.

 

2.4

The Parties may through consultation agree on any other repayment arrangement.

Article 3    Conversion of Loan into Equity Interest

 

3.1

The Parties agree that, subject to satisfaction of the conditions set out in Article 2.1 or with consent of Party A, Party A has the right to convert the Loan principal as at the actual conversion date into Party B’s equity interest on the basis of Party B’s pre-investment assumed value of RMB488,000,000.

 

2


3.2

For the purposes of Articles 3.1 and 3.2 hereof, Party A shall complete filing, registration and any other legal procedures required for the conversion in accordance with relevant laws and regulations.

 

3.3

Party A may exercise its conversion right hereunder by a ten (10) working days’ prior written conversion notice to Party B and Party C.

 

3.4

Party B shall cooperate with Party A in completing the said procedures for conversion within fifteen (15) working days from receipt of the conversion notice specified in Article 3.3.

Article 4    Guaranty

 

4.1

Party C agrees to, with his disposable personal property within the territory of the People’s Republic of China, provide unlimited joint and several guaranty for the repayment of the Loan, conversion of the Loan into Party B’s equity interest, Party C’s representations and warranties and all other duties and obligations hereunder, as well as Party B’s obligations, liabilities, representations and warranties hereunder, and Party C shall perform its obligations as a guarantor in compliance with applicable domestic and overseas laws.

 

4.2

In the event that Party A opts not to make the conversion under Article 2.2, and if Party B becomes unable to repay the Loan principal and interest accrued thereon when due and the Parties fail to agree on extending the term of the Loan, Party C shall be liable to make the repayment for Party B. Party A will accept repayment by Party C in cash or such other assets as otherwise agreed by the Parties.

Article 5    Other Agreements, Warranties and Undertakings

 

5.1

The Parties agree that Party A will designate relevant fund(s) under its actual management or control and relevant individual(s) who will follow and perform Party A’s directions and act in concert with Party A to perform this Agreement. The Parties will otherwise agree upon matters such as the lender of the Loan, the holder of equity interest in the case of conversion, or the recipient of principal and interest in the event that the right of conversion is not exercised.

 

5.2

The offshore fund lent by Party A to Party B derives from legal sources and can be legally applied towards the granting of the Loan.

 

5.3

Party A will provide full support to Party B with respect to the Next Round of Financing to the extent that the valuation of Party B thereunder is reasonable.

 

5.4

Representations and Warranties of Party B

 

5.4.1

Party B shall use the Loan for the purposes agreed hereunder and shall not change the purposes of Loan without consents of Party A and Party B.

 

3


5.4.2

Party B has full and independent legal status and capacity to execute, deliver and perform this Agreement and has obtained all the necessary internal authorizations and approvals. The execution of, and the performance of the obligations under, this Agreement by Party B will not violate any laws, regulations or government orders, or conflict with any contract or agreement to which Party B is a party, or require any prior consent of any third party except for the filing and registration required for the conversion requested by Party A.

 

5.4.3

Party C warrants that all information and materials provided by it to Party A are true, accurate and complete and are free of any fraudulent records, misstatements or misrepresentations or material omissions.

Article 6    Miscellaneous

 

6.1

The Parties agree that from the completion date of conversion registration under Article 3 hereof, Party A is entitled to any accumulated but undistributed profits of Party B.

 

6.2

The Parties agree that all terms of this Agreement and all information obtained from the other Parties hereunder are confidential and that each Party is obliged to keep such information confidential. No confidential information may be disclosed to third party unless otherwise agreed by the Parties, required by relevant regulator according to applicable laws or disclosed to the employees or intermediaries engaged by each Party.

 

6.3

Upon the effectiveness of this Agreement, each Party shall perform its obligations hereunder. In the event of non-performance or partial performance by any Party of its obligations hereunder that thereby causes any economic losses of the non-defaulting Party, the non-defaulting Party may hold the defaulting Party liable for any actual economic losses caused.

 

6.4

This Agreement shall come into force upon being signed and affixed with official seals by the Parties and their legal or authorized representatives.

 

6.5

Unless otherwise agreed, no Party shall assign, transfer or allege to assign all or any of its rights, interests, liabilities or obligations hereunder without written consent of the other Parties.

 

6.6

Any dispute arising from or in relation to this Agreement shall be settled through friendly consultation, failing which will allow any Party to submit the dispute to the International Chamber of Commerce (“ICC”) for arbitration in Shanghai in accordance with the then prevailing arbitration rules of the ICC. The arbitration award shall be final and binding upon the Parties.

 

6.7

No change, amendment or supplement may be made to this Agreement unless a written agreement is executed by the Parties. Such written agreement shall form an integral part hereof and have the same legal effect as this Agreement. In the event of any conflict between the said written agreement and this Agreement, the written agreement shall prevail.

 

4


6.8

This Agreement is made in three (3) originals of equal legal effect, with each of Party A, Party B and Party C holding one.

(The remainder of this page is intentionally left blank)

 

5


(Signature page of the Framework Agreement on Convertible Loan and no context on this page)

 

Party A: Jiaxing Zhijun Investment Management Co., Ltd.
Legal or Authorized Representative
Signature:  

/s/ Feng Guo

Name:   Feng GUO
Party B: AnPac Bio-Medical Science Co., Ltd
Authorized Representative
Signature:  

/s/ Chris Chang Yu

Name:   Chris Chang YU
Party C: Chris Chang YU
Signature:  

/s/ Chris Chang Yu

Name:   Chris Chang YU
Date:   October 30, 2019

 

6

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated September 20, 2019 (except Notes 10, 18 and 19, as to which the date is November 15, 2019), in the Registration Statement (Form F-1 No. 333-234408) and the related Prospectus of AnPac Bio-Medical Science Co., Ltd. dated November 15, 2019.

/s/ Ernst & Young Hua Ming LLP

Shanghai, the People’s Republic of China

November 15, 2019

Exhibit 99.2

 

LOGO

LEGAL OPINION

 

To:

AnPac Bio-Medical Science Co., Ltd.

801 Bixing Street, Bihu County

Lishui, Zhejiang Province 323006

People’s Republic of China

November 15, 2019

Dear Sir/Madam:

 

1.

We are lawyers qualified in the People’s Republic of China (the “PRC”) and are qualified to issue opinions on the PRC Laws (as defined in Section 4). For the purpose of this legal opinion (this “Opinion”), the PRC does not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan.

 

2.

We act as the PRC counsel to AnPac Bio-Medical Science Co., Ltd. (the “Company”), a company incorporated under the laws of the British Virgin Islands (the “BVI”), in connection with (a) the proposed initial public offering (the “Offering”) by the Company of American Depositary Shares (“ADSs”), representing certain ordinary share(s) of par value US$0.01 per share of the Company (together with the ADSs, the “Offered Securities”), in accordance with the Company’s registration statement on Form F-1, including all amendments or supplements thereto (the “Registration Statement”), filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) under the U.S. Securities Act of 1933, as amended, and (b) the Company’s proposed listing of the Offered Securities on the Nasdaq Global Market.

 

3.

In so acting, we have examined the Registration Statement, the originals or copies certified or otherwise identified to our satisfaction of documents provided to us by the Company and such other documents, corporate records, certificates, approvals and other instruments as we have deemed necessary for the purpose of rendering this opinion, including, without limitation, originals or copies of the agreements and certificates issued by PRC authorities and officers of the Company (“Documents”). In such examination, we have assumed the accuracy of the factual matters described in the Registration Statement and that the Registration Statement and other documents will be executed by the parties in the forms provided to and reviewed by us. We have also assumed the genuineness of all signatures, seals and chops, the authenticity of all Documents submitted to us as originals, and the conformity with the originals of all Documents submitted to us as copies, and the truthfulness, accuracy and completeness of all relevant factual statements in the Documents.

 

北京上海深圳广州武汉成都重庆青岛杭州南京东京香港伦敦纽约洛杉矶旧金山

Beijing • Shanghai • Shenzhen • Guangzhou • Wuhan • Chengdu • Chongqing • Qingdao • Hangzhou • Nanjing • Tokyo • Hong Kong • London • New York • Los Angeles • San Francisco


4.

The following terms as used in this Opinion are defined as follows:

 

“PRC Subsidiaries”    mean any and all PRC subsidiaries of the Company as listed in Schedule I hereto. “PRC Subsidiary” shall be construed accordingly.
“PRC Laws”    means any and all laws, regulations, statutes, rules, decrees, notices, and supreme court’s judicial interpretations currently in force and publicly available in the PRC as of the date hereof.
“Prospectus”    means the prospectus, including all amendments or supplements thereto, that forms part of the Registration Statement.

Capitalized terms used herein and not otherwise defined herein shall have the same meanings described in the Registration Statement.

 

5.

Based upon and subject to the foregoing, we are of the opinion that:

 

  (1)

Corporate Structure. The ownership structure of the PRC Subsidiaries is in compliance, and immediately after this Offering will comply, with the current PRC Laws. The descriptions of the corporate structure of the PRC Subsidiaries are true and accurate and nothing has been omitted from such descriptions which would make the same misleading in any material respects.

The statements set forth under the caption “Risk Factors—Risks Related to Doing Business in China—Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, which may impose new burdens on us” in the Registration Statement are fair and accurate summaries in all material respects of the matters described therein, and nothing has been omitted from such summaries that would make the same misleading in any material respects.

 

  (2)

Taxation. The statements set forth under the caption “Taxation” in the Registration Statement, insofar as they constitute statements of PRC law, are accurate in all material respects and such statements constitute our opinion. We do not express any opinion herein concerning any law other than PRC law.

 

  (3)

Enforceability of Civil Procedures. We have advised the Company that there is uncertainty as to whether the courts of the PRC would: (i) recognize or enforce judgments of United States courts obtained against the Company or directors or officers of the Company predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or (ii) entertain original actions brought in each respective jurisdiction against the Company or directors or officers of the Company predicated upon the securities laws of the United States or any state in the United States.

 

2


We have further advised the Company that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between the PRC and the country where the judgment is made or on principles of reciprocity between jurisdictions. The PRC does not have any treaties or other form of reciprocity with the United States or the BVI that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against the Company or the Company’s directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether a PRC court would enforce a judgment rendered by a court in either of the BVI or the United States. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against the Company in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. However, it will be difficult for U.S. shareholders to originate actions against the Company in the PRC in accordance with the PRC Laws because the Company is incorporated under the laws of the BVI and it will be difficult for U.S. shareholders, by virtue only of holding the Company’s ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

(4)

Statements in the Prospectus. The statements in the Prospectus under the headings “Prospectus Summary”, “Risk Factors”, “Use of Proceeds”, “Corporate History and Structure”, “Dividend Policy”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Regulation”, “Related Party Transactions”, “Taxation”,“Legal Matters” and “Enforceability of Civil Procedures” (other than the financial statements and related schedules and other financial data contained therein, as to which we express no opinion), to the extent such statements relate to matters of the PRC Laws or documents, agreements or proceedings governed by the PRC Laws, are true and accurate in all material respects, and fairly present and fairly summarize in all material respects the PRC Laws, documents, agreements or proceedings referred to therein, and we have no reason to believe there has been anything omitted from such statements which would make the statements, in light of the circumstance under which they were made, misleading in any material respects.

 

6.

Our opinions above are subject to the following qualifications:

 

  (a)

Our opinions relate only to the PRC Laws and we express no opinion as to any other laws and regulations. There is no guarantee that any of the PRC Laws, or the interpretation thereof or enforcement therefor, will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective effect.

 

  (b)

Our opinions are intended to be used in the context which is specifically referred to herein and each section should be looked on as a whole regarding the same subject matter and no part shall be extracted for interpretation separately from our opinions.

 

3


  (c)

Our opinions are subject to the effects of (i) certain legal or statutory principles affecting the enforceability of contractual rights generally under the concepts of public interest, national security, good faith and fair dealing, applicable statutes of limitation, and the limitations by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditor’s rights generally; (ii) any circumstance in connection with formulation, execution or performance of any legal documents that would be deemed materially mistaken, clearly unconscionable or fraudulent; (iii) judicial discretion with respect to the availability of injunctive relief, the calculation of damages, and the entitlement of attorneys’ fees and other costs; and (iv) the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in connection with the interpretation, implementation and application of relevant PRC Laws.

This opinion letter is rendered to you for the purpose hereof only, and save as provided herein, this Opinion shall not be quoted nor shall a copy be given to any person (apart from the addressee) without our express prior written consent except where such disclosure is required to be made by applicable law or is requested by the SEC or any other regulatory agencies.

We hereby consent to the use of this Opinion in, and the filing hereof as an exhibit to, the Registration Statement and the reference to our name under the headings “Enforceability of Civil Liabilities” and “Legal Matters” and elsewhere in the Registration Statement. In giving such consent, we do not thereby admit that we fall within the category of the person whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the regulations promulgated thereunder.

[The remainder of this page is intentionally left blank.]

 

4


[Signature Page]

 

Yours faithfully,

/s/ Zhong Lun Law Firm

Zhong Lun Law Firm


SCHEDULE I

PRC SUBSIDIARIES

 

1.

AnPac Bio-Medical Technology (Lishui) Co., Ltd. (“安派科生物医学科技(丽水)有限公司”in Chinese);

 

2.

Changwei System Technology (Shanghai) Co., Ltd. (“昌微系统科技(上海)有限公司”in Chinese);

 

3.

Changhe Bio-Medical Technology (Yangzhou) Co., Ltd. (“昌和生物医学科技(扬州)有限公司”in Chinese);

 

4.

AnPac Bio-Medical Technology (Shanghai) Co., Ltd. (“安派科生物医学科技(上海)有限公司 ”in Chinese);

 

5.

Penghui Health Management (Shanghai) Co., Ltd. (“鹏晖健康管理(上海)有限公司”in Chinese);

 

6.

Shanghai Xinshenpai Technology Co., Ltd. (“上海新申派科技有限公司”in Chinese);

 

7.

Lishui AnPac Medical Laboratory Co., Ltd. (“丽水安派科医学检验所有限公司”in Chinese);

 

8.

Shiji (Hainan) Medical Technology Co., Ltd. (“世济(海南)医学技术有限公司”in Chinese);

 

9.

Shanghai Muqing AnPac Health Technology Co., Ltd. (“上海慕清安派科健康科技有限公司”in Chinese); and

 

10.

Shenzhen Anchun Bio-Medical Technology Co., Ltd. (“深圳市安纯生物医学科技有限公司”in Chinese).