ITEM 3.
KEY INFORMATION
A.
[Reserved]
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Risks Related
to Our Business
Risks Related to Our CDA E-Commerce Food Businesses
There are doubts about our company’s ability to continue
as a going concern.
Our company’s independent
auditors have raised doubts about our ability to continue as a going concern. There can be no assurance that sufficient funds that will
be required during the next year or thereafter will be generated from operations or that funds will be available from external sources,
such as securities, debt or equity financing or other potential sources. We intend to overcome the circumstances that impact our ability
to remain a going concern through a combination of new sources of revenues, with interim cash flow deficiencies being addressed through
additional financing. We anticipate raising additional funds through public or private financing, securities financing and/or strategic
relationships or other arrangements in the near future to support our business operations; however, we may not have commitments from
third parties for a sufficient amount of additional capital. We cannot be certain that any such financing will be available to us on
acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Our ability
to obtain additional funding will determine if we can continue as a going concern. Failure to secure additional financing in a timely
manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and share price
and require us to curtail or cease operations, sell off assets, seek protection from creditors through bankruptcy proceedings, or otherwise.
Furthermore, additional equity financing may be dilutive to the holders of our shares, and debt financing, if available, may have onerous
terms. including restrictive covenants. Any additional financing could have a negative effect on our shareholders.
We have incurred losses each year since
our inception, we expect to continue to incur losses for the foreseeable future, and we may not be able to achieve or maintain profitability.
We have incurred losses each year
since our inception. For the years ended December 31, 2020, 2021 and 2022, we incurred net losses of RMB80.6 million, RMB120.1
million and RMB103.6 million (US$15.0 million), respectively. As of December 31, 2022, we had an accumulated deficit of RMB 577.5
million (US$ 83.7 million). To the date of this annual report, we have financed our operations primarily with proceeds from equity and
debt offerings, borrowings, and loans from related parties. We have devoted and expect to continue to devote substantially all of our
resources to the research, development and commercialization of our CDA technology, device and test. We expect to continue to incur losses
for the foreseeable future. We cannot predict the extent of these future losses, or when we may achieve profitability, if at all. If we
are unable to generate sufficient revenue from our business and control our costs and expenses to achieve and maintain profitability,
the value of your investment in us could be negatively affected.
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:
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increase our sales and marketing efforts to drive market adoption of our cancer screening and detection tests and address competitive developments; |
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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; |
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acquire or invest in technologies or other food service businesses; |
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seek regulatory and marketing approvals for our cancer screening and detection tests and devices; |
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conduct research studies for our CDA test and any additional cancer screening and detection tests; |
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maintain, expand and protect our intellectual property portfolio; |
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hire and retain additional personnel; |
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develop, acquire and improve operational, financial and management information systems, including personnel to support our business activities and help us comply with our obligations as a public company; |
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add equipment and physical infrastructure to support our businesses; and |
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finance general and administrative expenses. |
We will be required to obtain
further funding through public or private equity offerings, debt financings or other sources. Accordingly, our shareholders’ ownership
interest will be diluted, Further financing may not be available to us on acceptable terms, or at all. If we fail to raise capital as
and when needed it would have a negative impact on our financial condition and our ability to pursue our business strategy. To the extent
that we raise additional capital through the sale of equity or convertible debt, and the terms of such securities may include liquidation
or other preferences that adversely affect shareholder rights. Debt financing and equity financing, if available, may involve agreements
that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions
or capital expenditures.
Our principal sources of liquidity
have been cash generated from financing and operating activities. As of December 31, 2022, we had RMB1.9 million (US$0.3 million) of cash
and cash equivalents and a working capital deficit of RMB28.6 million (US$4.1 million). For the years ended December 31, 2020, 2021 and
2022, we incurred losses of RMB 80.6 million, RMB120.1 million and RMB103.6 million (US$15.0 million), respectively. For the year ended
December 31, 2022, we incurred RMB55.1 million (US$8.0 million) of negative cash flows from operations. The recent resurgence of COVID-19
and lockdown policies in Shanghai, China also has negative impact on our operation. The above-mentioned facts raise substantial doubt
about the Group’s ability to continue as a going concern.
In assessing our liquidity,
we monitor and analyze our cash on-hand, our ability to generate sufficient revenue sources in the future, and our operating and capital
expenditure commitments. With respect to capital funding requirements, we budgeted capital spending based on ongoing assessments of needs
to maintain adequate cash. We intend to finance our future working capital requirements and capital expenditures from financing activities
until our operating activities generate positive cash flows, if ever. We expect to engage in continuous capital financing through debt
or equity issuances to support our working capital requirements.
In December 2022 and January
2023, the Company signed definitive investment agreements with several third-party investors. The investors agreed to purchase 33,171,421
newly issued Class A ordinary shares of the Company at a price of US$0.175 per ordinary share or, for a total purchase price of approximately
US$5.8 million (RMB40.0 million). The Company received approximately US$5.1 million (RMB 35.3 million) by April 22, 2023.
In March 2023, the Company
signed definitive investment agreements with several shareholders, whereby the investors agreed to purchase an aggregate of 16,666,665
Class A ordinary shares at a price of US$0.30 per ordinary share for a total purchase price of $5,000,000 (RMB34,486,000). The Company
has not received any proceeds from these agreements.
On April 6, 2023, the Company
completed its sale to institutional investors a total of 12,500,000 Class A ordinary shares, pre-funded warrants exercisable for 2,500,000
Class A ordinary shares, issuable to investors whose purchase of American Depositary Shares and warrants exercisable for 750,000 ADSs.
The purchase price of each pre-funded warrant is equal to the price per one ADS, minus $0.0001, and the exercise price of each pre-funded
warrant will equal $0.0001 per share. The pre-funded warrants are immediately exercisable and may be exercised at any time until exercised
in full. The warrants are immediately exercisable, will expire five (5) years from the original issuance date and have an exercise price
of $4.00 per ADS. The Company also issued warrants exercisable for 37,500 ADSs to the sole placement agent with the placement agent, with
an exercise price of $4.80 per ADS (the “Placement Agent Warrants”), pursuant to a placement agency agreement (the “Placement
Agency Agreement”) dated March 31, 2023. Other than in respect of the exercise price, the Placement Agent Warrants have terms identical
to the pre-funded warrants. The Company received of approximately US$3.0 million from this investment.
As of December 31, 2022,
we had short-term debt of RMB5.0 million (US$0.7 million). However, our estimate as to how long we expect these financial resources to
be sufficient to fund our operations is based on assumptions that may prove to be wrong. Further, changing circumstances, some of which
may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. Going forward, we expect
to need additional fundraising if our cash flows generated from operations do not increase substantially. Our present and future funding
requirements will depend on many factors, including:
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the scope, progress, timing, costs and results of the development of our CDA technology and our other products; |
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the costs of expanding our e-commerce business; |
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our rate of progress in, and costs of the sales and marketing activities associated with, encouraging adoption of our cancer screening and detection tests; |
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our rate of progress in, and cost of research and development activities associated with, our CDA test, any additional cancer screening and detection tests and other tests; |
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the impact of competing technological and market developments; |
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costs related to entering the U.S. market; |
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the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; |
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the costs, timing and outcome of obtaining regulatory approvals and changes in regulatory policies or laws that may affect our operations; and |
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the costs of operating as a public company. |
Material weaknesses in our internal control
over financial reporting have been identified, and if we fail to implement and maintain an effective system of internal controls over
financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
As a result of the initial
public offering we have become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the Nasdaq Stock Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls
and procedures and internal controls over financial reporting. Commencing with our year ended December 31, 2021, we must perform
system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness
of our internal controls over financial reporting in our Form 20-F filing for that year, as required by Section 404 of
the Sarbanes-Oxley Act. In addition, when we cease to be an “emerging growth company” as the term is defined in the Jumpstart
Our Business Startups Act, our independent registered public accounting firm may be required to attest to and report on the effectiveness
of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not
effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent
registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied
with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the
relevant requirements differently from us. This will require that we incur substantial additional professional fees and internal costs
to expand our accounting and finance functions and that we expend significant management efforts. We may experience difficulty in meeting
these reporting requirements in a timely manner.
In the course of preparing
and auditing our consolidated financial statements for the year ended December 31, 2022, we identified three material weaknesses
in our internal control over financial reporting, the material weaknesses identified were (i) lack of accounting staff and resources
with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) lack of financial reporting policies
and procedures to establish formal risk assessment process and internal control framework; and (iii) deficiencies noted in (a) IT policy;
(b) risk and vulnerability assessment. (c) program change and security patch management; (d) backup and recovery management; (e) audit
trail and separation of duty management; (f) password management. For details, see “Item 15. Controls and Procedures—Internal
Control Over Financial Reporting.” However, we cannot assure you that all these measures will be sufficient to remediate our material
weakness in time, or at all.
To remedy our identified
material weaknesses, we have started to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring
additional qualified accounting and financial reporting personnel with U.S. GAAP and SEC reporting experience, (ii) obtaining advisory
services from professional consultants with experience in the requirements of the Sarbanes Oxley Act of 2002 and internal audit guidance
on SEC reporting, (iii) expanding the capabilities of our existing accounting and financial reporting personnel through continuous
training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (iv) developing,
communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for our recurring transactions
and period-end closing processes, and (v) establishing effective monitoring and oversight controls for non-recurring and complex
transactions to ensure the accuracy and completeness of our company’s consolidated financial statements and related disclosures.
However, these measures have not been fully implemented and we concluded that the material weakness in our internal control over financial
reporting has not been remediated as of December 31, 2022. We will continue to implement measures to remediate the material weaknesses.
In addition, our internal
control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud will be detected.
Impairment charges
for goodwill, indefinite-lived intangible assets or other long-lived assets could adversely affect our financial condition and results
of operation.
We review our amortizable
intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. We test
goodwill and other indefinite-lived intangible assets for impairment at least annually, or more frequently if events or changes in circumstances
indicate an asset may be impaired. Relevant factors, events and circumstances that affect the fair value of goodwill and indefinite-lived
intangible assets may include external factors such as macroeconomic, industry, and market conditions, as well as cost factors, overall
financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in
share price. We may be required to record a significant charge in our consolidated financial statements during the period in which any
impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations.
Impairment analysis requires
significant judgment by management and the fair value of goodwill, indefinite-lived intangible assets or other long-lived assets are
sensitive to changes in key assumptions used in the projected cash flows, which include forecasted revenues and perpetual growth rates,
among others, as well as current market conditions in both the United States and globally, all of which were unfavorably impacted by
the COVID-19 pandemic. To the extent that business conditions deteriorate further, or if changes in key assumptions and estimates differ
significantly from management’s expectations, it may be necessary to record additional future impairment charges, which could be
material. For more information on our goodwill impairment assessment and related impairment charge, see Note 9 - Goodwill and
Acquired Intangible Assets in our consolidated financial statements of this Annual Report.
We face risks related to natural disasters,
health epidemics, civil and social disruption and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to social
and natural catastrophic events that are beyond our control, such as natural disasters, health epidemics, and other catastrophes, which
may materially and adversely affect our business. Since December 2019, there has been an outbreak of a novel strain of coronavirus
(COVID-19) in China and around the world. COVID-19 is considered to be highly contagious and poses a serious public health threat. The
World Health Organization labeled the coronavirus a pandemic on March 11, 2020, given its threat beyond a public health emergency
of international concern that the organization had declared on January 30, 2020. In response to this pandemic, China, the United
States and many other countries and jurisdictions have taken, and may continue to adopt, additional restrictive measures to contain the
virus’ spread, such as quarantines, travel restrictions and work from home policies. These measures have slowed down the development
of the Chinese economy and the U.S. economy and adversely affected the global economic conditions and financial markets. We currently
derive all our revenues in China and we have one laboratory in the United States. The outbreak of this virus caused wide-ranging business
disruptions and traffic restrictions in China and the United States in 2020, and with its continued spread globally, the virus’
adverse impact on business activities, travels and overall GDP in China, the United States and other parts of the world has been unprecedented
and is expected to continue in the foreseeable future. While the Chinese government’s efforts have slowed down the virus’
spread, there has been resurgences in China from time to time, particularly in winter and spring. As the pandemic expands globally, the
world economy is suffering a noticeable slowdown. Commercial activities throughout the world have been and could continue to be curtailed
with decreased consumer spending, business operation disruptions, interrupted supply chains, difficulties in travel, and reduced workforces.
As a result of the pandemic
of COVID-19 in China, the United States and the world, our operations have been, and may continue to be, adversely impacted by disruptions
in business activities, commercial transactions and general uncertainties surrounding the duration of the outbreaks and the various governments’
business, travel and other restrictions. These adverse effects could include our ability to market and conduct our tests in China, commercialize
our tests in the United States and carry out research studies and activities in China and the United States. In addition, our business
operations could be disrupted if any of our employees is suspected of contracting the coronavirus or any other epidemic disease, since
our employees could be quarantined and/or our offices be shut down for disinfection. Although we have validated a COVID-19 antibody
test using Roche’s FDA authorized equipment, we have not begun to commercialize our offering of this test and we cannot guarantee
the market acceptance of and demand for this test. We have no control over the development of the COVID-19 situations in China, the United
States or around the world and therefore cannot assure you that we will be able to maintain a revenue growth in future periods.
Resurgence of COVID-19 and
followed lock-down policies in some cities could cut the demand and revenue depending on length of lock-down. Starting March 27, 2022,
the lockdown policy in Shanghai has forced us to temporarily halt operations in our Shanghai office. Most of the CDA tests are performed
in our subsidiary located in Lishui, Zhejiang, which is not impacted by the resurgence of COVID-19. However, the close of our Shanghai
office caused delay in the issuance and delivery of test reports to our customers, which will delay our revenue recognition in such period.
The downturn brought by and the duration of the coronavirus pandemic is difficult to assess or predict and the actual effects will depend
on many factors beyond our control, including the increased world-wide spread of COVID-19 and the relevant governments’ actions
to contain COVID-19 or treat its impact. While China, the U.S. and many other countries have been administering COVID-19 vaccines, it
remains uncertain whether and when the vaccines will be able to effectively contain the pandemic. The extent to which COVID-19 continues
to impact our results remains uncertain, and we are closely monitoring its impact on us. Our business, results of operations, financial
condition and prospects could be adversely affected directly, as well as to the extent that the coronavirus or any other epidemic harms
the Chinese and the United States’ economies in general.
Our businesses
may be affected by the impacts of unfavorable geopolitical events or other market disruptions on consumer confidence and spending patterns.
Our net sales, profit, cash
flows and future growth may be affected by negative local, regional, national or international political or economic trends or developments
that reduce consumers’ ability or willingness to spend, including the effects of national and international security concerns such
as war, terrorism or the threat thereof. The Russian invasion of Ukraine in February 2022 and the financial and economic sanctions and
other measures imposed by the European Union, the United States, and other countries and organizations in response thereto is creating,
and may continue to create, market disruption and volatility and instability in the geopolitical environment. The extent to which this
conflict escalates to other countries and the resulting impact on the global market remains uncertain. We are monitoring the conflict,
but do not, and cannot, know if this situation will result in broader economic and security concerns or in material implications for
our business. These events could have a material adverse effect on our customers, our business partners and our third-party suppliers.
We have a limited amount
of financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is limited.
In order to continue to pursue
our acquisition strategy, we may be required to obtain additional financing. We may obtain such financing through a combination of traditional
debt financing and/or the placement of debt and equity securities. We may finance some portion of our future acquisitions by either issuing
equity or by using shares of our common stock for all or a portion of the purchase price for such businesses. In the event that our common
stock does not attain or maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our
common stock as part of the purchase price for the sale of their businesses, we may be required to use more of our cash resources, if
available, in order to maintain our acquisition program. If we do not have sufficient cash resources, we will not be able to complete
acquisitions and our growth could be limited unless we are able to obtain additional capital through debt or equity financings. The terms
of our credit facility require that we obtain the consent of our lenders prior to securing additional debt financing. There could be circumstances
in which our ability to obtain additional debt financing could be constrained if we are unable to secure such consent.
To the extent
we make any material acquisitions, our earnings may be adversely affected by non-cash charges relating to the amortization of intangible
assets.
Under applicable accounting
standards, purchasers are required to allocate the total consideration paid in a business combination to the identified acquired assets
and liabilities based on their fair values at the time of acquisition. The excess of the consideration paid to acquire a business over
the fair value of the identifiable tangible assets acquired must be allocated among identifiable intangible assets including goodwill.
The amount allocated to goodwill is not subject to amortization. However, it is tested at least annually for impairment. The amount allocated
to identifiable intangible assets, such as customer relationships and the like, is amortized over the life of these intangible assets.
We expect that this will subject us to periodic charges against our earnings to the extent of the amortization incurred for that period.
Because our business strategy focuses, in part, on growth through acquisitions, our future earnings may be subject to greater non-cash
amortization charges than a company whose earnings are derived solely from organic growth. As a result, we may experience an increase
in non-cash charges related to the amortization of intangible assets acquired in our acquisitions. Our financial statements will show
that our intangible assets are diminishing in value, even if the acquired businesses are increasing (or not diminishing) in value.
We have granted, and may continue to grant,
stock incentive awards, which may result in increased share-based compensation expenses.
As of December 31, 2022, options to purchase 4,986,606 Class A ordinary
shares were outstanding, consisting of (i) options to purchase 2,334,906 Class A ordinary shares held by our directors, officers and employees,
and (ii) options to purchase 2,651,700 Class A ordinary shares held by non-employees. In March 2023, our broad of directors approved our
2023 Share Incentive Plan (the "2023 Plan"). The maximum number of ordinary shares that may be issued under the 2023 Plan is
13,000,000 Class A ordinary shares to our directors, officers, employees and consultants to incentivize their performance and align their
interests with ours. Any future grants will result in more stock-based compensation expense and additional dilution.
We believe the granting of
stock incentive awards is of significant importance to our ability to attract and retain our management, employees and consultants, and
we will continue to grant stock incentive awards to our management, employees and consultants in the future. As a result, our expenses
associated with share-based compensation may increase, which may have an adverse effect on our results of operations. In addition, the
granting, vesting and exercise of the awards under these stock incentive plans will have a dilutive effect on your shareholding in our
company.
We rely on technology in our businesses
and any cybersecurity incident, other technology disruption or delay in implementing new technology could negatively affect our business
and our relationships with customers.
We use technology in our
business operations, and our ability to serve customers most effectively depends on the reliability of our technology systems. Our Clients
use our software to place orders and we use software and other technology systems, among other things, to process clients’ orders,
to make purchases, to manage warehouses and to monitor and manage our business on a day-to-day basis. Further, our business involves
the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’
and suppliers’ personal information, private information about employees, and financial and strategic information about us and
our business partners.
These technology systems
are vulnerable to disruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures,
security breaches, espionage, cyber-attacks, viruses, theft and inadvertent releases of information. Any such disruption to these software
and other technology systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise
perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or
intellectual property, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers,
potential liability and competitive disadvantage, any or all of which could potentially adversely affect our customer service, decrease
the volume of our business and/or result in increased costs and lower profits.
A significant breach of our
cybersecurity infrastructure may result from actions by our employees, suppliers, third-party administrators, or unknown third parties
or through cyber-attacks. The risk of a breach can exist whether software services are in our technology systems or are in cloud-based
software services. Breaches have occurred, and may occur again, in our systems and in the systems of our suppliers and third-party administrators.
Any such breach could result in operational impairments, significant harm to our reputation and financial losses.
A significant breach could
affect our data framework or cause a failure to protect the personal information of our customers, suppliers or employees, or sensitive
and confidential information regarding our business and could give rise to legal liability and regulatory action under data protection
and privacy laws. Any such breach of our or our suppliers’ cybersecurity infrastructure could have a material adverse effect on
our business, results of operations and financial condition.
Further, as we pursue our
strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, we are also expanding
and improving our information technology, resulting in a larger technological presence and corresponding exposure to cybersecurity risk.
If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable
to such risks. Information technology systems continue to evolve and, in order to remain competitive, we need to implement new technologies
in a timely and efficient manner. Investments will continue to be made in attracting, retaining, and training our human capital to remain
current on the ever-changing industry best practices related to information security. If our competitors implement new technologies more
quickly or successfully than we do, such competitors may be able to provide lower cost or enhanced services of superior quality compared
to those we provide, which could have an adverse effect on our results of operations.
We may be subject to litigation and other
claims and legal proceedings, and may not always be successful in defending ourselves against these claims or proceedings.
We are subject to lawsuits
and other claims in the ordinary course of our business. We have been, and may in the future be, subject to lawsuits and other legal
proceedings brought by our customers, competitors, employees, business partners, investors, other shareholders of the companies we invest
in, or other entities against us, in matters relating to intellectual property rights, contractual disputes, competition claims and employment
disputes, among others. We may also be subject to regulatory proceedings, such as any non-compliance with licensing requirements, advertising
practices, and protection of data privacy of the tested individuals. We may not be successful in defending ourselves, and the outcomes
of these lawsuits and proceedings may be unfavorable to us. Lawsuits and regulatory proceedings against us may also generate negative
publicity that significantly harms our reputation, which may adversely affect our customer base, market position and our relationships
with our research partners and other business partners. In addition to the related costs, managing and defending litigation and other
legal proceedings and related indemnity obligations can significantly divert our management’s attention from operating our business.
We may also need to pay damages or settle lawsuits or other claims with a substantial amount of cash, negatively affecting our liquidity.
As a result, our business, financial condition and results of operations could be adversely affected.
We have limited business insurance coverage.
Our business insurance is
limited, and we do not carry business interruption insurance to cover our operations. We have determined that the costs of insuring for
related risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical. Any
uninsured damage to our facilities or technology infrastructures or disruption of our business operations could require us to incur substantial
costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.
Our business has
been affected and may in the future be affected by steps taken by the Chinese government to address the COVID-19 pandemic.
We purchase a portion of
our inventory directly or indirectly from Chinese suppliers. In addition, our R&D center is located in China. Beginning with the
outbreak of the COVID-19 pandemic in 2020, quarantines, travel restrictions, and the closure of stores and business facilities have been
imposed in China as part of the government’s “zero-COVID” policy to limit the impact of the pandemic, and these measures
were not relaxed until the beginning of 2023. If the PRC government reinstitutes policies that have been relaxed, or institutes new restrictive
policies, we may not be able to procure certain inventory items from our suppliers, we may experience further supply chain bottlenecks
and price increases, or we could have temporary disruptions in the function of our R&D center, any of which could adversely impact
our business.
Risks Related to Our
CDA Business
We are a development-stage
biotechnology company with a limited operating history, which makes it difficult to evaluate our prospects and may increase the probability
that we will not be successful.
We commenced our operations
in 2010. We achieved commercialization of our CDA test and started generating revenue in China in 2015; we currently do not have commercial
operations in the U.S. We are a development-stage biotechnology company with a limited operating history, and our history may not provide
a meaningful basis for you to evaluate our business, financial performance and prospects. Furthermore, we may not have sufficient experience
or resources to address the risks frequently encountered by development-stage biotechnology companies, which include our potential failure
to:
| ● | achieve and maintain profitability; |
| ● | acquire and retain customers and increase
adoption of our cancer screening and detection tests—including primarily our CDA test
and combination tests (namely a combination of our CDA test and, on an auxiliary basis, biomarker-based
or ct-DNA cancer screening and detection tests)—by physicians, key opinion leaders,
or KOLs (including research scientists and doctors in the U.S. who are willing to validate
our tests after research), patients, hospitals, medical institutions, healthcare payers and
others in the medical community; |
| ● | commercialize
and/or increase the market adoption for our other products, such as a COVID-19 antibody test
and our ADME (AnPac Defense Medical Examination) immunology test, and extend the use of our
CDA technology to screen pre-cancer diseases and increase its adoption by the medical community; |
| ● | respond
to competitive market conditions; |
| ● | attract,
train, motivate and retain qualified personnel; |
| ● | protect
our proprietary technologies and intellectual property rights; |
| ● | secure
a stable supply of blood samples to support our research and clinical studies; |
| ● | keep
up with evolving industry standards and market developments; |
| ● | obtain
and maintain the regulatory licenses, certifications, and approvals required for us to further
market our cancer screening and detection tests and commercialize our CDA device in China
and to commercialize our tests and CDA device in the United States; |
| ● | increase
the awareness of our tests and protect our reputation; |
| ● | maintain
adequate control of our operational costs; and |
| ● | manage
our relationships with our research partners. |
If
we are unsuccessful in addressing any one or more of these risks, they could adversely affect our business, financial condition and results
of operations and increase the probability that we will not be successful.
Our success depends heavily on the success
of our CDA technology and related cancer screening and detection test.
We derive our revenue primarily
from our CDA-based tests, which depend on our CDA technology. If we obtain relevant approvals from the NMPA to sell our CDA device, we
also anticipate generating revenue from the sales of our CDA device. We believe that our commercial success will depend upon our ability
to achieve and maintain market acceptance of our current and future cancer screening and detection tests, which will depend on a number
of factors, including:
| ● | our
ability to further validate and improve the clinical utility and superiority of our CDA technology
by increasing its sensitivity and specificity and through research studies and accompanying
publications; |
| ● | the
timing and scope of additional approvals from the NMPA for our CDA device and test and our
ability to maintain these approvals; |
| ● | acceptance
of our CDA test by physicians, KOLs, patients, hospitals, medical institutions, healthcare
payers and others in the medical community; |
| ● | our
ability to obtain the Class III medical device registration certificate from the NMPA
for our CDA device and enter and develop the China hospital market for our CDA device and
test; |
| ● | sufficient
coverage and reimbursement by third-party payers for our services, which may depend on multiple
factors such as the enforceability of relevant laws that mandate the coverage of cancer or
pre-cancer disease screening; |
| ● | our
ability to maintain and expand our customer base in China, especially among insurance companies,
corporate customers and the hospital market; |
| ● | our
sales and marketing capabilities, including our success in expanding our sales and marketing
team and establishing our own sales network in China; |
| ● | the
amount and nature of competition from other early cancer screening and detection products
and procedures; |
| ● | our
ability to obtain regulatory approvals for our U.S. laboratories to conduct commercial tests
and successfully penetrate the U.S. market; and |
| ● | negative
publicity regarding our or our competitors’ tests and technologies resulting from defects
or errors. |
If we are unsuccessful in
addressing these or other factors that might affect the market acceptance of our tests, our business and results of operations will suffer.
Our ability to grow our CDA business is substantially
dependent on our ability to penetrate the Chinese hospital market.
In China, we currently can
only conduct our cancer screening and detection tests on our devices in our own certified laboratories. Given these restrictions, our
customer base is primarily direct customers such as corporations and life insurance companies, as well as sales agents such as health
management companies and medical device dealers. China’s largest market for cancer screening and detection tests is the hospital
market, in which patients go to Chinese hospitals for cancer screening and other medical tests. Currently we cannot conduct our tests
in hospitals. We have applied for an NMPA Class III medical device registration certificate for our CDA devices to assist in multi-cancer
diagnosis. If we receive this certificate, together with an updated medical device manufacture license, we would be permitted to place
our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the
purposes of assisting in physicians’ diagnosis of specified multiple cancers. We expect to receive the Class III license by
the end of the first quarter of 2024. Even if we obtain the certificate and license, we will need to successfully market our CDA device
and test to Chinese hospitals. Our ability to grow our China business depends substantially on our ability successfully to penetrate
the Chinese hospital market, and we cannot assure you as to when or whether we will be able to do so.
Our plans to enter the
U.S. market with our CDA technology may not be successful.
Currently, we conduct commercial
operations only in China with respect to our CDA technology, and the substantial majority of our business, assets, management and employees
are located in China. We have been making efforts to enter the U.S. market. We commenced operations of our new laboratory in Philadelphia,
Pennsylvania with the completion of our facility renovation and first phase equipment installation in July 2020. We obtained a CLIA
Certificate of Registration for this laboratory in August 2020, and accreditation by the College of American Pathologists, or CAP,
and a Certificate of Accreditation under the Clinical Laboratory Improvement Amendments of 1988, or CLIA for this new laboratory. Our
U.S. operations currently include collaborating with U.S. health organizations to conduct research tests of our CDA technology, planning
to commercialize our CDA tests.
Although our strategy is to
expand our U.S. operations and eventually commence commercial sales of our CDA-based tests and other tests (such as COVID-19 antibody
tests) in the United States, this strategy is subject to a number of risks and uncertainties, including:
| ● | our
ability to secure research agreements with reputable U.S. hospitals, medical institutions
and other health organizations to conduct research studies for our test; |
| ● | our
ability to obtain sufficient blood samples for our planned research tests; |
| ● | the
substantial costs and time required for U.S. research tests and clinical studies; |
| ● | positive
outcomes of our U.S. research tests sufficient to support the clinical validity, safety,
and effectiveness of our tests in the U.S. market; |
| ● | U.S.
federal and state regulatory risks, including our ability to commence marketing of our CDA
test as a laboratory developed test, or LDT, without premarket clearance, market authorization
or approval from the United States Food and Drug Administration, or the FDA, our ability
to comply with all applicable laws and other regulations, and costs and timing of obtaining
relevant approvals; |
| ● | development
of a U.S. infrastructure, including sales and marketing resources, sufficient to commercialize
our test; |
| ● | substantial
competition in the U.S. cancer screening and detection market, including from companies with
substantially greater resources than we have; and |
| ● | market
acceptance of our test in the U.S. |
Our ability to successfully
address these factors and penetrate the U.S. market, as well as the costs and timing of these efforts, are highly uncertain. We expect
that our commercial activities and revenues will continue to be derived solely from China for the foreseeable future.
The cancer detection business is subject to
rapid change, and other companies or institutions may develop and market novel or improved early cancer screening and detection methods,
which may make our CDA technology less competitive or obsolete.
Our CDA-based tests depend
on the effectiveness of our CDA technology, and we may be unable to maintain the competitiveness of this technology. Our industry is
characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements
and evolving industry standards, all of which could make our current CDA-based test obsolete. In recent years, there have been numerous
advances in technologies relating to the diagnosis and treatment of cancer. We must continuously enhance our CDA technology and develop
new tests to keep abreast of evolving standards of early cancer screening and detection. Other companies and institutions may possess
significantly greater financial and other resources and research and development capabilities than we do. These other companies and institutions
may devote significant resources to develop new methods of detecting cancers and pre-cancer symptoms, and these methods and related tests
could represent significant competition for our CDA technology and cancer screening and detection test, or even render our CDA technology
obsolete.
We may be unable to compete
effectively against our competitors because their products and services may be superior. They may also have more expertise, experience,
financial resources or stronger business relationships in developing and marketing their products and services, more mature technologies
and products, greater market adoption and greater brand recognition than we do. Further, even if we do develop new marketable tests or
services, our current and future competitors may develop tests and services that are more commercially attractive than ours and they
may bring those tests and services to market sooner than we are able to.
Our operating results
may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall
below expectations or any guidance we may provide.
Our operating results may
fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to
a variety of factors, many of which are outside of our control, including:
| ● | the
level of demand for our cancer screening and detection tests, which may vary significantly; |
| ● | our
entry into the e-commerce food distribution business; |
| ● | the
timing and cost of, and level of investment in, research, development, regulatory approval
and commercialization activities relating to our CDA technology and our cancer screening
and detection tests and device, which may change from time to time; |
| ● | the
volume, customer mix and product mix for our cancer screening and detection tests and e-commerce
revenues; |
| ● | the
introduction of new cancer screening and detection tests and services by us or others in
our industry; |
| ● | expenditures
that we may incur to acquire, develop or commercialize our e-commerc business and additional
tests, devices and technologies; |
| ● | coverage
and reimbursement policies with respect to our cancer screening and detection tests and tests
that compete with our tests; |
| ● | changes
in government regulations or in the status of our regulatory approvals or applications; |
| ● | future
accounting pronouncements or changes in our accounting policies; and |
| ● | general
market conditions and other factors, including factors unrelated to our operating performance
or the operating performance of our competitors. |
The cumulative effects of
the factors discussed above could result in large fluctuations and unpredictability in our annual operating results. As a result, comparing
our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication
of our future performance.
If our cancer screening and detection or other
tests or our competitors’ comparable tests do not meet customer expectations, our operating results, reputation and business could
suffer.
Our success depends on the
market’s confidence in our ability to provide reliable, high-quality cancer screening and detection tests and other tests. We believe
that our customers are likely to be particularly sensitive to defects or errors in our tests, in particular if our tests fail to accurately
detect the risk of pre- and early-stage cancers from blood samples, and we cannot guarantee that our tests will meet their expectations.
We may be subject to legal claims arising from any defects or errors in our tests. Furthermore, if comparable tests offered by competing
companies fail to perform to expectations, consumers may have lower confidence in cancer screening and detection tests in general. As
a result, the failure of our tests or our competitors’ tests to perform as expected could significantly impair our operating results,
business prospects and reputation.
We do not carry product
liability or professional liability insurance. If we were to be sued for product liability or professional liability, we could face substantial
liabilities that exceed our resources.
We could face product liability
claims if someone alleges that our cancer screening and detection tests or other tests gave inaccurate or misleading information regarding
the patient’s risk of cancer or otherwise failed to perform as designed. A claimant could allege that our test results caused unnecessary
treatment or other costs or resulted in the patient missing the best opportunity or timing for treatment. A patient could also allege
other mental or physical injury or that our testing provided inaccurate or misleading information concerning the screening and detection,
assistance in diagnosis, prognosis or recurrence of, or available therapies for, a cancer or other diseases. We may also be subject to
liability for errors in, a misunderstanding of or inappropriate reliance upon, the information we provide in the ordinary course of our
business activities. Product liability or professional liability claims could result in substantial damages and be costly and time-consuming
for us to defend and could divert our management’s attention.
We do not carry product liability
or professional liability insurance. Even if we purchase these kinds of insurance, the insurance may not fully protect us from the financial
impact of defending against product liability or professional liability claims. Any product liability or professional liability claim
brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage. Additionally,
any product liability or professional liability lawsuit could damage our reputation, or cause our research partners to terminate existing
agreements and cause potential research partners to seek other partners, or cause us to lose our current or potential customers. Any
of these developments could adversely impact our results of operations, business prospects and financial condition.
We may be subject to
liability claims for defective services provided by third-party physical checkup centers, which could harm our reputation and adversely
impact our results of operations.
In addition to our cancer
screening and detection tests, we also provide annual physical checkup packages to our customers. We typically outsource the physical
checkup services in these packages (other than cancer screening and detection tests) to third-party physical checkup centers. As a result,
the administration of the physical checkup services by these third parties may subject us to litigation and liability for personal damages
to consumers. Potential judgments, settlements or costs relating to these claims, complaints or lawsuits could subject us to significant
fees and costs in defending ourselves, adversely affecting our results of operations. In addition, our business, reputation and growth
prospects could suffer if we face negative publicity in connection with these liability claims.
We may be unable to support
demand for our cancer screening and detection tests and manage our future growth effectively, which could make it difficult to execute
our business strategy.
Since our inception, we have
experienced rapid growth, and we anticipate further growth in our business operations. Our growth could strain our organizational, administrative
and operational infrastructure. As the sales volume of our cancer screening and detection tests grows, we will face increased demands
on our capacity and efficiency for sample intake, testing results analysis and other laboratory operations, quality control, customer
service, and general workflow management processes. To effectively manage our future growth, we plan to continue to improve our technology,
as well as our operational, financial and management controls. We also plan to hire, train and manage additional qualified scientists,
laboratory technicians and sales and customer service personnel. We will also need to maintain the quality and expected turnaround time
of our tests. The time and resources required for these improvements, and failure to achieve them in a timely and effective manner, could
adversely affect our operations, making it difficult for us to execute our business strategy.
We have limited selling
and marketing resources and limited sales, marketing, customer support, manufacturing and commercial laboratory experience, which may
restrict our success in commercializing our cancer screening and detection tests.
To grow our business as planned,
we must expand our sales, marketing, customer support, manufacturing and commercial laboratory management capabilities, which will require
developing and administering our commercial infrastructure and/or collaborative commercial arrangements and partnerships. We have limited
experience in these respects, and we may encounter difficulties in retaining and managing the specialized workforce that these activities
require. For example, our customer base is large and diverse, which requires us to retain a sales team with established industry expertise
and experience. We rely on third-party suppliers for the supply of blood samples for our tests and for reagents that we use in the auxiliary
biomarker-based tests that form part of our combination tests. We engaged third parties to conduct substantially all of the biomarker-based
tests as part of our combination tests in 2018. We later gradually phased out this outsourcing arrangement beginning in 2019 and now
perform our combination tests primarily in-house. We also engage third parties to conduct physical checkups. We also rely on contract
manufacturers that manufacture key components of our CDA device. While we primarily rely on our own sales and marketing personnel to
market our tests, we also engage sales agents, including companies we invested in. However, we may not be able to effectively manage
and maintain our relationships with these third parties, including ensuring their compliance with our controls and procedures. Our future
growth will also impose significant added responsibilities on our management. If we fail to meet these demands, it would negatively affect
our business growth and profitability. We may seek to partner with others to assist us with our sales, marketing and manufacturing functions.
However, we may be unable to find appropriate third parties that meet our requirements, in a timely manner or on terms acceptable to
us. In addition, our third-party business partners may not perform as we expect or our arrangements with them may otherwise prove to
be detrimental to our results. Our third-party arrangements may also be terminated prematurely, including due to factors out of our control.
As a result of such developments, our business and prospects may be harmed.
If we are unable to attract
and retain qualified key management, scientists, staff and consultants, our ability to implement our business plan may be adversely affected.
We are highly dependent upon
certain of our key management, scientists, staff and consultants, particularly Dr. Chris Yu, our founder, co-Chairman and co-Chief
Executive Officer (“CEO”). Dr. Chris Yu resigned from his position as sole CEO of the Company and Chairman of the Board
of Directors (the “Board”) on April 6, 2022 and was re-appointed as co-chairman of the Board and co-CEO of the Company
on May 7, 2022. He resigned as the co-chairman of the Board on October 3, 2022 but continued to serve as the co-CEO of the Company.
Each of our key management and scientific personnel may terminate his or her employment with us. Our success is also largely attributable
to the qualified and experienced key management and scientific personnel that we have been able to train, attract and retain. If we lose
any of our key management and scientific personnel, we may be unable to find replacements suitable to us. The loss of their services
could significantly delay or prevent our achievement of our technology development, sales and other business objectives. We do not carry
any key-man life insurance. In addition, we face intense competition for qualified individuals from numerous biotechnology and pharmaceutical
companies, universities, governmental entities and other research institutions. Our limited operating history and the uncertainties attendant
to being a development-stage biotechnology company with limited capital resources could limit our ability to attract and retain personnel.
We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability
to implement our business plan.
If we are unable to effectively
protect our intellectual property, our business would be harmed.
We rely on patent protection
as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary
devices, tests and technologies, all of which provide limited protection and may not adequately protect our rights. If we fail to effectively
protect and/or maintain our patented devices, tests and technologies, our competitive position and prospects could be adversely affected.
Furthermore, we could incur substantial litigation costs in our attempts to recover or restrict use of our patents and other intellectual
property.
We cannot assure investors
that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will
take for such patents to be issued, if at all. It is possible that, for any of our patents that have been issued or that may be issued
in the future, our competitors may design their products around our patented technologies. Further, we cannot assure you that other persons
will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid, enforceable, and/or
infringed. We cannot guarantee you that we will be successful in defending challenges made against our patents and patent applications.
Any successful third-party challenge or challenges to our patents could result in the unenforceability or invalidity of these patents,
or these patents being interpreted narrowly and/or in a manner adverse to our interests. Our ability to establish or maintain a technological
or competitive advantage over our competitors and/or market entrants may be diminished because of these uncertainties. For these and
other reasons, our intellectual property may not provide us with any competitive advantage. For example:
| ● | we
might not have been the first to make the inventions claimed or disclosed by our pending
patent applications or issued patents; |
| ● | we
might not have been the first to file patent applications for these inventions. To determine
the priority of these inventions, we may have to participate in interference proceedings
or derivation proceedings declared by the United States Patent and Trademark Office, which
could result in substantial costs to us, and could possibly result in a loss or narrowing
of our patent rights. We cannot assure you that our patent applications or granted patents
will have priority over any other patent or patent application involved in such a proceeding,
or will be held valid as an outcome of the proceeding; |
| ● | other
persons may independently develop similar or alternative products and technologies or duplicate
any of our products and technologies, which can potentially impact our market share and revenue,
regardless of whether our intellectual property rights are successfully enforced against
these other persons; |
| ● | it
is possible that our pending patent applications will not result in granted patents, and
even if these pending patent applications are issued as patents, they may not provide intellectual
property protection of commercially viable products or product features, may not provide
us with any competitive advantages, or may be challenged and invalidated by third parties,
patent offices, and/or the courts; |
| ● | we
may be unaware of or unfamiliar with prior art and/or interpretations of prior art that could
potentially impact the validity or scope of our patents or pending patent applications, or
patent applications that we intend to file; |
| ● | we
take efforts and enter into agreements with employees, consultants, collaborators, and advisors
to confirm ownership and chain of title in intellectual property rights. However, an inventorship
or ownership dispute could arise that may permit one or more third parties to practice or
enforce our intellectual property rights, including possible efforts to enforce rights against
us; |
| ● | we
may elect not to maintain or pursue intellectual property rights that, at some point in time,
may be considered relevant to or enforceable against a competitor; |
| ● | we
may not develop additional proprietary products and technologies that are patentable, or
we may develop additional proprietary products and technologies that are not patentable; |
| ● | the
patents or other intellectual property rights of others may have an adverse effect on our
business; and |
| ● | we
apply for patents relating to our devices, tests and technologies, as we deem appropriate.
However, we or our representatives or their agents may fail to apply for patents on important
devices, tests and technologies in a timely fashion or at all, or we or our representatives
or their agents may fail to apply for patents in potentially relevant jurisdictions. |
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.
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.
If our laboratories and
other facilities become damaged or inoperable, our ability to conduct our laboratory analysis and our research and development efforts
may be jeopardized.
We currently derive substantially
all of our revenue from cancer screening and detection tests conducted at our laboratory located in Lishui, Zhejiang Province, China.
We also intend to sell our CDA device in China after obtaining relevant approvals from the NMPA. We use our own facilities in Lishui
to assemble our CDA device, in addition to engaging third-party contract manufacturers to manufacture its key components. In the United
States, we intend to perform all our research and commercial tests in our new laboratory in Philadelphia, Pennsylvania. Our facilities
and equipment, or those of our third-party contract manufacturers, could be harmed or rendered inoperable
by natural or man-made disasters, including fire, earthquake, power loss, communications failure or terrorism. These types of developments
could render it difficult or impossible for us to operate our cancer screening and detection tests and assemble our device for
some period of time. If we are unable to perform our tests or to reduce the backlog of analysis that could develop if our facilities
are inoperable, for even a short period of time, it could result in a loss of customers or harm to our reputation, and we may be unable
to regain those customers or repair our reputation. We have purchased property insurance, but not any business interruption insurance.
Damages to, or interruptions in the operations of, our laboratories and other facilities could have a material adverse impact on our
results of operations and financial condition. Furthermore, our facilities and the equipment we use to perform our research and development
work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming and expensive to rebuild
our facilities and purchase our equipment, to locate and qualify a new facility or equipment or to license or transfer our proprietary
technology to a third-party, particularly in light of licensure and accreditation requirements. Even in the unlikely event that we are
able to find a third party with such qualifications to enable us to conduct our test, we may be unable to negotiate commercially reasonable
terms.
Security threats to our
information technology infrastructure could expose us to liability and damage our reputation and business.
Because our testing services
and research and development activities enable us to access customers’ and research partners’ proprietary information, it
is essential to our business strategy that our information technology infrastructure remains secure and is perceived by our customers
and research partners to be secure. Despite our security measures, we may face cyber-attacks that attempt to penetrate our network security,
sabotage or otherwise disable our research, tests and services, misappropriate our or our customers’ and research partners’
proprietary information, which may include personally identifiable information, or cause interruptions of our internal systems
and services. We have not purchased any cyber insurance. Any cyber-attacks could negatively affect our reputation, damage our network
infrastructure and our ability to deploy our products and services, harm our relationship with customers and research partners that are
affected, and expose us to significant financial liabilities.
We depend on third-party
suppliers, sales agents, service providers and research partners for different aspects of our CDA business.
We depend on third
parties for different aspects of our CDA business, including supplying blood samples for our research studies and reagents required
for biomarkers used in our combination tests, performing a portion of auxiliary biomarker-based tests in our combination tests,
sales of our cancer screening and detection tests to our customers,
and collecting blood samples for our commercial cancer screening and detection tests. Selecting, managing and supervising
these third-party suppliers, sales agents and service providers requires significant resources and expertise. Poor performance by
these third parties, including their failure to provide services or products according to applicable legal and regulatory
requirements, the terms of our contracts or otherwise below standard, could significantly and negatively affect the quality of our
cancer screening and detection tests and damage our reputation. Decreases in the level of sales agents’ purchases of tests
from us for resale to the end-customers could adversely affect our revenue growth. In addition, the service or cooperative
agreements we have with third-party suppliers, sales agents and service providers are subject to a term, and are not on an exclusive
basis. If these third parties do not continue to maintain or expand their cooperation with us, we would be required to seek new
suppliers and sales agents, which could cause delays in services to us and negatively affect the quality and availability of our
cancer screening and detection tests. Any of the above factors could adversely impact our results of operations and financial
position.
In
addition, certain of our research partners, which are primarily renowned hospitals and medical institutions, collaborate with us and
provide blood samples that we use to conduct various research studies. These partners may cease cooperation with us in the future, especially
if they enter into similar agreements or arrangements with our competitors. If we are unable to readily access sufficient blood
samples to conduct our commercial tests and research studies, we may be unable to compete effectively with other laboratories that have
greater access to blood samples, and our business, financial condition and results of operations may be harmed.
We rely on third-party contract manufacturers
for the manufacturing of key components of our CDA devices.
We
design and configure all of the key components of our CDA device and have outsourced the manufacturing of these components of our CDA
devices to third-party contract manufacturers. Our revenue is generated primarily from our CDA tests conducted using our CDA devices.
Our contract manufacturers may fail to deliver these key components for reasons beyond our control. For example, they may encounter financial
difficulties or experience disruptions in their manufacturing operations due to equipment breakdowns, labor disputes or shortages, raw
material shortages, cost increases or other similar reasons. If they fail to timely deliver those key components for us to assemble our
CDA device or maintain the quality of their products, our ability to conduct our commercial CDA-based tests could be adversely affected.
Currently, we do not have any long-term or exclusive supply contracts with any of our contract manufacturers. Our contract manufacturers
may cease to provide us with the key components of our CDA devices. Since qualifying a new contract manufacturer could be costly and
time-consuming, the termination of a contract manufacturer could cause disruption to our business and adversely impact our results of
operations.
We rely on commercial
courier delivery services to transport blood samples to our laboratory facilities in a timely and cost-efficient manner, and if these
delivery services are disrupted, our business will be harmed.
Our
business depends on our ability to quickly and reliably deliver test results to our customers. We rely on commercial courier delivery
services to transport blood samples to our laboratory facilities timely and cost efficiently. Blood samples are typically received within
a few days in China for analysis in our laboratories. Disruptions in third-party delivery service, whether due to labor disruptions,
bad weather, natural disaster, health epidemics, terrorist acts or threats or for other reasons, could adversely affect specimen integrity
and our ability to process blood samples and conduct tests in a timely manner and to service our customers satisfactorily, and ultimately
our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable
terms, our operating results may be adversely affected.
Risks Related to Our
E-Commerce Food Business
We are in the early stages of development
of our e-commerce food-related business and have limited operating history on which you can base an investment decision.
We have historically been
a biotechnology company focused on early cancer screening and detection. We recently entered into the fast-growing Asian e-commerce food
business in the U.S. We intend to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently and
in the future to provide one-stop fulfillment services from food sourcing to last-mile delivery. As a result, we may encounter many expenses,
delays, problems, and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that we
will successfully develop or acquire a significant base of customers, operate profitably, or that we will have adequate working capital
to fund our operations or meet our obligations as they become due.
Our recently acquired operations
are subject to all of the risks inherent in the initial expenses, challenges, complications, and delays frequently encountered in connection
with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties
frequently encountered by companies attempting to develop new markets. Despite best efforts, we may never overcome these obstacles to
achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability
to successfully acquire businesses on terms that will be commercially viable for us. There can be no assurance that our efforts will
be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that we will not lose our
entire investment.
The food service
industry is characterized by low margins, and periods of significant or prolonged inflation or deflation will affect our product and
operational costs, which may negatively impact our profitability.
The foodservice distribution
industry is characterized by relatively high inventory turnover with relatively low profit margins. Volatile food costs have a direct
impact on our industry. Recently, there have been significantly elevated commodity and supply chain costs including the cost of labor,
sourced goods, energy, fuel, packaging materials and other inputs necessary for the distribution and production of our products, and
elevated levels of inflation which may continue or worsen in 2023.
Periods of significant product
cost inflation or deflation may adversely affect our results of operations if we are unable to pass on all or a portion of such product
cost increases to our customers in a timely manner. In addition, periods of rapidly increasing inflation may adversely affect our business
due to the impact of such inflation on discretionary spending by consumers and our limited ability to increase prices in the current,
highly competitive environment.
Unfavorable macroeconomic
conditions in the U.S. may adversely affect our business, financial condition and results of operations.
Our operating results are
substantially affected by the operating and economic conditions in the regions in which we operate. Economic conditions can affect us
in the following ways:
| ● | A reduction in
discretionary spending by consumers could adversely impact sales of Chinese/Asian restaurants
and supermarkets, and their purchases from us. Future economic conditions affecting disposable
consumer income, such as employment levels, business conditions, changes in housing market
conditions, the availability of consumer credit, inflation, interest rates, tax rates and
fuel and energy costs, could reduce overall consumer spending; |
| ● | Food cost and fuel
cost inflation experienced by consumers can lead to reductions in the frequency of and the
amount spent by consumers for food away from home purchases, which could negatively impact
our business by reducing demand for our products; |
| ● | Heightened uncertainty
in the financial markets negatively affects consumer confidence and discretionary spending,
which can cause disruptions with our customers and suppliers; and |
| ● | Liquidity issues
and the inability of our customers to consistently access credit markets to obtain cash to
support their operations can cause temporary interruptions in our ability to conduct day-to-day
transactions involving the collection of funds from such customers. |
The geographic concentration
of our operations in the United States creates an exposure to economic conditions in the United States and any financial downturn in
the United States could materially adversely affect our financial condition and results of operations.
Competition may
increase intensively in the future, which may adversely impact our margins and ability to retain customers, and make it difficult to
maintain our market share, growth rate and profitability.
The foodservice distribution
industry in the United States is fragmented and highly competitive, with local, regional, multi-regional distributors, and specialty
competitors. However, we believe that the market participants serving Chinese restaurants and supermarkets are highly fragmented. Currently,
we face competition from numerous competitors focusing on the niche market serving Chinese/Asian restaurants and supermarkets. However,
with the growing demand for Chinese cuisines, other competitors may begin operating in this niche market in the future. Those potential
competitors include: (i) national and regional foodservice distributors, (ii) local wholesalers and brokers, (iii) food retailers, and
(iv) farmers’ markets. The national and regional distributors are experienced in operating multiple distribution locations and
expanding management, and they have greater marketing and financial resources than we do. Even though they currently offer only a limited
selection of Chinese and Asian specialty foods, they may be able to devote greater resources to sourcing, promoting and selling their
products if they choose to do so. Conversely, the local wholesalers and brokers are small in size with a deep understanding of local
preferences, but their lack of scale results in high risk and limited growth potential.
If more competitors enter
this market segment aiming to serve Chinese/Asian restaurants and supermarkets in the future, our operating results may be negatively
impacted through a loss of sales, reduction in margins from competitive price changes, and/or greater operating costs, such as marketing
costs, due to the increase of competition.
Increased commodity
prices and availability may impact profitability.
Many of our products include
ingredients such as wheat, corn, oils, sugar, and other commodities. Commodity prices worldwide have been increasing. While commodity
price inputs do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our
vendors to seek price increases from us. We may not be able to mitigate vendor efforts to increase our costs, either in whole or in part.
In the event we are unable to mitigate potential vendor price increases, we may in turn consider raising our prices, and our customers
may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may affect our gross
margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.
We may not be
able to fully compensate for increases in fuel costs when fuel prices experience high volatility, and our operating results would be
adversely affected.
Volatile fuel prices have
a direct impact on the industry. We require significant quantities of fuel for delivery vehicles and are exposed to the risk associated
with fluctuations in the market price for fuel. The price and supply of fuel can fluctuate significantly based on international, political
and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting
Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns. The
cost of fuel affects the price paid by us for products, as well as the costs we incur to deliver products to the customers. There is
no guarantee that we will be able to pass along a portion of increased fuel costs to our customers in the future. The conflict in Ukraine
led to a significant increase in fuel prices. If fuel costs remain elevated or increase further in the future, we may experience difficulties
in passing all or a portion of these costs along to our customers, which may have a negative impact on our results of operations.
Disruption of
relationships with vendors could negatively affect our business. Suppliers may increase product prices, which could increase our product
costs.
We purchase our food items
and related products primarily from third-party suppliers. Although our purchasing volume can provide benefits when dealing with suppliers,
suppliers may not provide the products and supplies needed by us in the quantities and at the prices requested. The cancellation
of our supply arrangement with any of our suppliers or the disruption, delay and/or inability to supply the requested products by our
suppliers could adversely affect our sales. If our suppliers fail to comply with food safety or other laws and regulations, or face allegations
of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially
reasonable terms.
In addition, we purchase seasonal
Chinese vegetables and fruits from farms and other vendors. Increased frequency or duration of extreme weather conditions could impair
production capabilities, disrupt our supply chain or impact demand for our products. Input costs could increase at any point in time
for a large portion of the products that we sell for a prolonged period. Our inability to obtain adequate supplies of food items and
related products as a result of any of the foregoing factors or otherwise could mean that we are unable to fulfill our obligations to
customers, and customers may turn to other distributors.
The purchase prices of our
products vary from time to time, which is subject to market conditions and negotiation with our suppliers. The prices of some of our
products, especially seasonal products, such as vegetables and fruits, have significant fluctuation. We may not always be able to mitigate
the impact of these price fluctuations, and our performance results could be adversely affected by such fluctuations.
As a foodservice distributor,
it is necessary for us to maintain an inventory of products that may have declines in product pricing levels between the time we purchase
the product from suppliers and the time we sell the product to customers, which could reduce the margin on that inventory, adversely
affecting our results of operations.
We are dependent
upon the timely delivery of products from our vendors. Prolonged diminution of global supply chains may impact the availability and price
stability of future food supplies, which may in turn adversely impact our business.
The global supply chain, ranging
from consumer goods, electronics, and industrial raw materials to food supplies, was negatively impacted by the COVID-19 pandemic, shipping
bottlenecks, and rapidly rising freight costs. We procure the majority of our food supply domestically, which includes certain imported
products we purchase from domestic brokers. Food production is widely dispersed throughout the U.S. and we depend on producers of food
and restaurant supply products to timely deliver these components of our inventory in quantities sufficient to meet customer demand.
Any disruptions or delays in our supply chains as a result of labor shortages, commodity shortages, or inefficiencies in distribution
or logistical services could cause delays in the shipment or delivery of our products to our customers. Any prolonged diminution of global
supply chains may impact the availability and price stability of future food supplies, which may in turn adversely impact our business.
Our relationships with customers may
be materially diminished or terminated. The loss of customers could adversely affect our business, financial condition, and results of
operations.
We would like to establish
long-standing relationships with our customers. However, those customers could unilaterally terminate their relationship with us or materially
reduce the amount of business they conduct with us at any time. Our customers may shift their purchase orders from us to other competitors
due to market competition, change of customer requirements and preferences, or because of the customer’s financial condition. There
is no guarantee that we will be able to maintain relationships with any of our customers on acceptable terms, or at all. The loss of
a number of customers could adversely affect our business, financial condition, and results of operations.
We may fail to
increase or maintain the highest margin portions of our business, including sales to restaurant and supermarket customers.
Our most profitable customers
are independent restaurants and supermarkets. Our ability to continue to gain market share of independent restaurant and supermarket
customers is critical to achieving increased operating profits. Changes in the buying practices of independent restaurant and supermarket
customers, including their ability to require us to sell to them at discounted rates, or decreases in our sales to this type of customer
could have a material negative impact on our profitability.
Changes in consumer
eating habits could materially and adversely affect our business, financial condition, and results of operations.
We provide foodservice distribution
to Chinese/Asian restaurants, primarily Chinese takeout restaurants, which focus on serving Chinese food to non-Chinese Americans and
to Asian supermarkets. Changes in consumer eating habits (such as a decline in consuming food away from home, a decline in portion sizes,
or a shift in preferences toward western foods) could reduce demand for our products. Consumer eating habits could be affected by a number
of factors, including attitudes regarding diet and health or new information regarding the health effects of consuming certain foods.
If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio,
and we may experience higher costs and/or supply shortages associated with our efforts to accommodate those changes as our suppliers
adapt to new eating preferences. Additionally, changes in consumer eating habits may result in the enactment or amendment of laws and
regulations that impact the ingredients and nutritional content of our food products, or laws and regulations requiring us to disclose
the nutritional content of our food products. Compliance with these laws and regulations, as well as others regarding the ingredients
and nutritional content of food products, may be costly and time-consuming. We cannot make any assurances regarding our ability to effectively
respond to changes in consumer culture preference, health perceptions or resulting new laws or regulations or to adapt our product offerings
to trends in eating habits.
We engage in transactions
with related parties and such transactions present possible conflicts of interest that could have an adverse effect on us.
We acquire services from related
parties and provide service to related parties. These related-party transactions create the possibility of conflicts of interest with
regard to our management, including that:
| ● | we may enter into
contracts between us, on the one hand, and related parties, on the other, that are not as
a result of arm’s-length transactions; |
| ● | our executive officers
and directors that hold positions of responsibility with related parties may be aware of
certain business opportunities that are appropriate for presentation to us as well as to
such other related parties and may present such business opportunities to such other parties; |
| ● | our executive officers
and directors that hold positions of responsibility with related parties may have significant
duties with, and spend significant time serving, other entities and may have conflicts of
interest in allocating time; and |
| ● | such conflicts
could cause an individual in our management to seek to advance his or her economic interests
or the economic interests of certain related parties above ours. Further, the appearance
of conflicts of interest created by related-party transactions could impair the confidence
of our investors. Our Special Transactions Review Committee regularly reviews these transactions.
Notwithstanding this, it is possible that a conflict of interest could have an adverse effect
on our business, financial condition and results of operations. |
For more information on our
related party transactions, see Note 16 - Related Party Transactions in our consolidated financial statements in this
Annual Report on Form 20-F.
We may be unable
to protect or maintain our intellectual property, which could result in customer confusion, a negative perception of our brand and adversely
affect our business.
We believe that our intellectual
property has substantial. In particular, our “Fresh2” logo is valuable assets that reinforce our customers’ favorable
perception of our products. Failure to protect our trademark rights could cause customer confusion or negatively affect customers’
perception of our brand and products, and eventually adversely affect our sales and profitability.
If we are unable
to renew or replace our current leases on favorable terms, or any of our current leases are terminated prior to expiration of their stated
terms, and we cannot find suitable alternate locations, our operations and profitability could be negatively impacted.
We currently have leases for
some of our warehouses. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable
alternate location, and our ability to negotiate favorable lease terms for additional locations, could depend on conditions in the real
estate market, competition for desirable properties, our relationships with current and prospective landlords, and/or other factors that
are not within our control. Any or all of these factors and conditions could negatively impact our growth and profitability.
Failure to retain
our senior management and other key personnel may adversely affect our operations.
Our success is substantially
dependent on the continued service of our senior management and other key personnel. These executives have been primarily responsible
for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture,
and our reputation with suppliers and consumers. The loss of the services of any of these executives and other key personnel could have
a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely
basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause our
stock price to decline. The loss of key employees could negatively affect our business.
If we are unable
to attract, train and retain employees, we may not be able to grow or successfully operate our business.
The foodservice distribution
industry is labor intensive. Our success depends in part upon our ability to attract, train and retain a sufficient number of employees
who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business
partners and customers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external
factors, including the availability of a sufficient number of qualified persons in the work force of the regions in which we are located,
unemployment levels within those regions, prevailing wage rates, changing demographics, health and other insurance costs and changes
in employment legislation.
In the event of increasing
wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service
to suffer, while increasing our wages could cause our profits to decrease. If we are unable to hire and retain employees capable of meeting
our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material
increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.
Changes in and
enforcement of immigration laws could increase our costs and adversely affect our ability to attract and retain qualified employees.
Federal and state governments
from time to time implement immigration laws, regulations or programs that regulate our ability to attract or retain qualified foreign
employees. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs
and make our hiring process more cumbersome or reduce the availability of potential employees. Although we have implemented, and
are in the process of enhancing, procedures to ensure our compliance with the employment eligibility verification requirements, there
can be no assurance that these procedures are adequate and some of our employees may, without our knowledge, be unauthorized workers.
The employment of unauthorized workers may subject us to fines or civil or criminal penalties, and if any of our workers are found to
be unauthorized, we could experience adverse publicity that negatively impacts our brand and makes it more difficult to hire and keep
qualified employees. We may be required to terminate the employment of certain of our employees who are determined to be unauthorized
workers. The termination of a significant number of employees may disrupt our operations, cause temporary increases in our labor costs
as we train new employees and result in adverse publicity. Our financial performance could be materially harmed as a result of any of
these factors.
Potential labor
disputes with employees and increases in labor costs could adversely affect our business.
A considerable amount of our
operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage
and benefit costs. As a result, we are exposed to risks associated with a competitive labor market. Rising health care costs and the
nature and structure of work rules will always be important issues. Any work stoppages or labor disturbances as a result of employee
dissatisfaction with their current employment terms could have a material adverse effect on our financial condition, results of operations
and cash flows. We also expect that in the event of a work stoppage or labor disturbance, we could incur additional costs and face increased
competition.
If we fail to
comply with requirements imposed by applicable law and other governmental regulations, we could become subject to lawsuits, investigations
and other liabilities and restrictions on our operations that could significantly and adversely affect our business.
We are subject to regulation
by various federal, state, and local governments, applicable to food safety and sanitation, ethical business practices, securities, transportation,
minimum wage, overtime, other wage payment requirements, employment discrimination, immigration, and human health and safety. While we
attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws
and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws,
regulations or interpretations of these laws and regulations. If we fail to comply with applicable laws and regulations, we may be subject
to investigations, criminal sanctions or civil remedies, including fines, injunctions, and prohibitions on exporting. The cost of compliance
or the consequences of non-compliance, including debarments, could have an adverse effect on our results of operations. In addition,
governmental units may make changes in the regulatory frameworks within which we operate that may require us to incur substantial increases
in costs in order to comply with such laws and regulations.
If the products
distributed by us are alleged to have caused injury or illness, or to have failed to comply with governmental regulations, we may need
to recall our products and may experience product liability claims.
We, like any other foodservice
distributor, may be subject to product recalls, including voluntary recalls or withdrawals, if the products we distribute are alleged
to have caused injury or illness, to have been mislabeled, misbranded, or adulterated or to otherwise have violated applicable governmental
regulations. We may also choose to voluntarily recall or withdraw products that we determine do not satisfy our quality standards, whether
for taste, appearance, or otherwise, in order to protect our brand and reputation. Any future product recall or withdrawal that results
in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation, and/or lost sales due to the
unavailability of the product for a period of time, could materially adversely affect our results of operations and financial condition.
We also face the risk of exposure
to product liability claims in the event that the use of products sold by us are alleged to have caused injury or illness. We cannot
be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims
or lawsuits relating to such matters. Further, even if a product liability claim is unsuccessful or is not fully pursued, the negative
publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and
potential customers and our corporate and brand image.
The U.S. government
is currently imposing increased tariffs on certain products imported into the U.S., including products imported from China, which may
have an adverse impact on our future operating results.
We sell our products based
on the cost of such products plus a percent markup. The U.S. government is currently imposing and proposing increased tariffs on certain
products imported into the U.S., including products imported from China. Some of our imported products and imported products purchased
from domestic brokers may be subject to these increased tariffs and accordingly, our purchase costs will be increased. We may determine
to increase our sales prices in order to pass these increased costs to our customers. In the event we determine to take such action,
our customers may reduce their orders from us, which could negatively affect our profitability and operating results.
Risks Relating to Government Regulations in
the PRC
The filing with the CSRC is required in
connection with our follow-on overseas offerings under PRC law, and we cannot predict whether or for how long we will be able to complete
such filing.
On February 17, 2023,
the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and five supporting
guidelines, or, collectively, the Trial Measures, which came into effect on March 31, 2023.
The Trial Administrative
Measures establish a new filing-based regulation to overseas offerings of stocks, depository receipts, convertible corporate bond, or
other equity securities, and overseas listing of these securities for trading, by domestic companies. According to the Trial Administrative
Measures, an overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. According
to the Trial Administrative Measures, an issuer like us is required to submit the filing with respect to its follow-on offering
within three business days after completion of such follow-on offering. The Trial Administrative Measures also sets forth certain
regulatory red lines for overseas offerings and listings by domestic enterprises and additional reporting obligations for listed companies
in the case of material changes. Any failure to perform such filing or reporting procedure would subject us to administrative penalties
by the CSRC which could harm our reputation and may adversely affect our results of financial condition. For more details of the Trial
Administrative Measures, please refer to “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations
Relating to Overseas Securities Offering and Listing.”
Furthermore, on February 24,
2023, the CSRC released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities
Offering and Listing by Domestic Enterprises, or, the Confidentiality Provisions, which came into effect on March 31, 2023. Pursuant
to the Confidentiality Provisions, any future inspection or investigation conducted by overseas securities regulator or the relevant competent
authorities on our PRC domestic companies with respect to our overseas issuance and listing shall be carried out in the manner in compliance
with PRC laws and regulations.
It is uncertain whether
we can, or how long it will take us to, complete such filing procedures and any such filing could be rescinded or rejected. Any failure
to obtain or delay in completing such filing procedures for our overseas offerings, or a rescission of any such filing if completed by
us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC filing for our overseas offerings.
Any uncertainties or negative publicity regarding such requirement could materially and adversely affect our business, prospects, financial
condition, reputation, and the trading price of our ADSs.
As a biotechnology company, we are required
to comply with extensive regulations and obtain and maintain a number of permits and licenses to carry on our business in China; future
government regulation may place additional burdens on our efforts to commercialize our cancer screening and detection tests and device.
As a biotechnology company,
we are subject to extensive government regulation and supervision in China. Violation of applicable laws and regulations may materially
and adversely affect our business. For example, we are required to obtain a medical institution practice license from the PRC National
Health Commission, or the NHC, for our laboratories to conduct cancer screening and detection tests in China. We also need to obtain
a medical device manufacture license and a medical device registration certificate from the NMPA for the manufacturing and commercial
use and sale of our CDA device.
Each of our current NHC medical
institution practice licenses and our NMPA Class II medical device manufacture license and registration certificate has a five-year
term. We are applying for a Class III medical device registration certificate from the NMPA. After we obtain this license, we will
apply to update our medical device manufacture license to include the manufacture of Class III medical devices. In December 2021,
our first-Class III medical device, a medical device for lung cancer assisting in diagnosis utility, has successfully passed rigorous
tests at a medical device testing lab designated by NMPA. The medical device is planned to start clinical trial in selected hospitals
in late second quarter of 2023. If we are unable to renew our existing licenses and certificates or obtain the Class III medical
device license or update our medical device manufacture license, or obtain or renew any other material permits or approvals required
for our operations, we may be unable to continue to sell our cancer screening and detection tests or to commercialize our CDA device
in China and, as a result, our business may be adversely affected.
In addition, China’s
regulatory framework governing biotechnology companies is subject to change and amendment from time to time. Any such change or amendment
could materially and adversely impact our business, financial condition and prospects. The PRC government has introduced various reforms
to the Chinese healthcare system in recent years and may continue to do so, with an overall objective of expanding basic medical
insurance coverage and improve the quality and reliability of healthcare services. The specific regulatory changes under the reforms
still remain uncertain. The implementing measures to be issued may not be sufficiently effective to achieve the stated goals, and as
a result, we may not be able to benefit from these reforms to the level we expect, if at all. Moreover, the reforms could give rise to
regulatory developments, such as more burdensome administrative procedures, which may have an adverse effect on our business and prospects.
If we are unable to maintain our medical
device or laboratory related licenses and certificates, our growth strategy may be compromised.
Pursuant to the Regulation
on the Supervision and Administration of Medical Devices as amended by the PRC State Council in December 2020, which came into
effect in June 2021, medical devices are classified into three classes according to their risk levels. Class II medical devices
are medical devices with moderate risks that must be strictly controlled and regulated to ensure their safety and effectiveness. Class III
medical devices are medical devices with relatively high risks that must be strictly controlled and regulated through special measures
to ensure their safety and effectiveness. In addition, the Measures for the Supervision and Administration of the Operation of Medical
Devices, issued on March 10, 2022, regulate entities that engage in business activities involving medical devices in the PRC in
accordance with the medical devices’ risk levels. The Class II medical device registration certificate and the Class III
medical device registration certificate are required for an entity to conduct business activities involving these medical devices.
We have obtained the Class II
medical device registration certificate from the NMPA, which allows us to conduct our tests in our licensed laboratories. To perform our
CDA test outside of our laboratories and market them to Chinese hospitals, in December 2018, we applied for a Class III medical
device registration certificate from the NMPA for our CDA device. We expect to receive Class III license by the end of the first
quarter of 2024. In August, 2021, the Company filed a second class III medical device license application with 11 types of cancer auxiliary
diagnosis utility with NMPA, which includes lung, esophageal, gastric, rectal, colon, liver, breast, cervical, thyroid, pancreatic and
brain cancers. After we obtain this license, we will update our medical device manufacture license, which we believe is a relatively straightforward
procedure. However, there is no assurance that we will receive this NMPA approvals on a timely basis, or at all. If we fail to maintain
and renew our Class II medical device registration certificate or if we are unable to obtain the Class III medical device license
and update our medical device manufacture license, our ability to grow our business could be adversely affected.
We
believe our NHC medical institution practice license and NMPA Class II medical device registration certificate and manufacture license
are effective and cover our current commercialized CDA test, which provides a cancer risk assessment. However, the PRC laws and regulations
governing cancer screening and detection devices and tests are subject to uncertainties and regulatory discretion, including changes
in interpretation and application, such as in respect of restrictions on foreign investments in clinical laboratories. There is also
a risk that the relevant regulatory authorities could disagree with our assessment of the commercial activities permitted by our
certificates and licenses. For more information on this, see “Item 4. Information on the Company—B. Business Overview—PRC
Regulations—Other Significant PRC Regulations Affecting Our Business Activities in China.” Moreover, if we begin to commercialize
our CDA test for other purposes such as assisting in diagnosis, prognosis and recurrence, this regulatory uncertainty and risk would
be greater. If the relevant regulatory authorities were to assert that our current or future commercial cancer screening and detection
tests were not permitted by our licenses or revoke any of our NMPA or NHC licenses and certificates and require us to take remedial actions
to their satisfaction, or if we were unable to obtain amended or additional required licenses or approvals, then our business and financial
results would be adversely affected.
We are subject to ongoing obligations and
continued regulatory review and to future changes in laws, regulations or enforcement policies in China.
We are subject to ongoing
obligations and continued regulatory review in relation to our laboratories and our medical devices. Even if the NMPA grants our application
for a Class III medical device registration certificate and allows us to update our medical device manufacture license accordingly,
or if we successfully maintain and renew our Class II medical device manufacture license and registration certificate, our CDA device
will be subject to extensive and ongoing regulatory requirements.
In addition, there could
be a subsequent discovery of previously unknown problems with our device (including problems with third-party manufacturers or manufacturing
processes) or failure to comply with existing or future regulatory requirements (including in respect of our conducting of cancer screening
and detection tests). For example, if we were found to have conducted any of these tests in premises other than a licensed laboratory,
we could be subject to confiscation of revenue from the relevant tests as well as other penalties. For more information on this, see
“Item 4. Information on the Company—B. Business Overview—PRC Regulations—Regulation on Medical Devices and
Medical Institutions—Medical Institutions Laws and Regulations.” Any government investigation of alleged violations of law
could require us to expend significant time and resources and could result in adverse government actions (including penalties on us)
and negative publicity on our brand.
Moreover, laws, regulations
and enforcement policies in China, including those regulating medical institutions, devices and supplies, are evolving. Changes in these
areas could impose more stringent requirements on us, including fines or other penalties, and increase our compliance and other operating
costs. Changes in government regulations could also prevent, limit or delay regulatory approvals in relation to our CDA device. If we
are unable to maintain regulatory compliance, any regulatory approval that has been obtained may be lost and we may not be able to achieve
or sustain profitability. In addition, regulatory changes may relax certain requirements that could benefit our competitors or lower
market entry barriers and increase competition. Further, regulatory agencies in China may periodically, and sometimes abruptly, change
their enforcement practices. Any litigation or governmental investigation or enforcement proceedings against us in China may be protracted
and may result in substantial costs and diversion of resources and management attention, negative publicity, damage to our reputation
and decline in the price of our ADSs.
Food-related businesses in the PRC are required to comply
with food safety laws and food related regulations.
The PRC Regulation for the
Implementation of the Food Safety Law, or the Regulation of Food Safety Law was amended on December 1, 2019. The Regulation of Food Safety
Law outlines detailed rules for monitoring and assessment of food safety risk, food safety standards, food production and food business,
food inspection, food import and export and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food
safety law may result in severe administrative and criminal penalties imposed on us, as well as its legal representatives, senior management
in charge, directly accountable person-in-charge and other directly accountable employees. If any penalties imposed on our company could
negatively affect our business operations and have a material adverse impact on our reputation.
Concerns regarding the quality
or safety of food products or the food supply chain, even if factually incorrect or based on isolated incidents, could cause consumers
to avoid purchasing certain products from us, or to seek alternative food sources. If any report linking us to food contamination, food
tampering, mislabeling, or other food safety issues could adversely impact our business and prospect may be materially and adversely
affected.
Any lack of requisite approvals, licenses,
permits or filings or failure to comply with any requirements of PRC laws, regulations and policies may materially and adversely affect
our daily operations and hinder our growth.
The e-commerce food-related
business is subject to comprehensive government regulations and supervisions, and we are required to hold or apply for various permits,
licenses or filings for conducting our business covering various business type, such as hot or cold food production, food sale or food
distribution. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations.” As of the date
of this annual report, we have not obtained and will apply for licenses and permits that are necessary for our business operation, which
is subject to regulatory approvals.
As the online industry is still
evolving in China, new laws and regulations may be adopted from time to time and regulators may interpret existing laws and regulations
differently from what they do now to require additional licenses and permits other than those we currently have, and to address new issues
that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current
and any future PRC laws and regulations applicable to online businesses. If the PRC government considers that we were operating without
the proper approvals, licenses, filings, registration or permits or promulgates new laws and regulations that require additional approvals
or licenses or impose additional restrictions on the operation of any part of our business, it has the power, among other things, to levy
fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions
on the affected portion of our business. Any of these and other regulatory actions by the PRC governmental authorities, including issuance
of official notices, change of policies, promulgation of regulations and imposition of sanctions, may adversely affect our business and
have a material and adverse effect on our results of operations. In addition, if we were to use new or additional domain names to conduct
our business, we would have to apply for the same set of government authorizations or amend the current ones. There is no assurance that
we will be able to complete such procedures timely.
In addition to licenses, filings,
registration and permits, laws and regulations may require e-commerce operators to take measures to protect consumer rights. Failure
to do so may subject the e-commerce operators to rectification requirements and penalties. If the government authorities deem that we
fail to meet such requirements, we may receive warnings, be ordered to make rectifications, or subject to other administrative sanctions
that may have material adverse effect on our business, financial condition and our results of operations.
The absence of patent linkage, patent term
extension and data and market exclusivity for NMPA-approved medical products could increase the risk of early generic competition against
our tests in China.
The
life of a patent and the protection it affords are limited under PRC law. Currently, while certain foreign laws regulate patent term
extension, patent linkage to products to delay generic entry, or extension of data exclusivity (often referred to as regulatory exclusivity)
in certain circumstances, China does not have any effective law or regulation in these aspects. Chinese regulators have set out
a framework for delaying generic launches by adding patent linkage and data exclusivity into the Chinese regulatory regime, as well as
for establishing a pilot program for patent term extension. However, these measures will require the adoption of specific regulations.
In October 17, 2020, the Standing Committee of the National People’s Congress amended The Patent Law of the PRC, which came
into effect in June 2021. The Patent Law of the PRC provides for the mechanism of compensation for the patent term in the case of
any unreasonable delay. If we are unable to obtain patent term extension or if such extension is shorter in length than requested, our
competitors may obtain approval of competing products prior to or following our patent expiration, and our business, financial condition,
results of operations and prospects could be materially harmed.
Any change in the regulations governing
the use of personal data in China, which are still under development, or any data leakage or unauthorized use of data by third parties
could adversely affect our business and reputation.
We provide early cancer screening
and detection services to tens of thousands of individuals in China. As a result, we have access to these tested individuals’ personal
data, including their age, gender, disease status and medical records. We use this personal data internally to expand our test database
and improve the clinical utility of our CDA technology. Any such unauthorized access, loss, or dissemination of information could result
in legal claims, proceedings or liability under PRC laws and regulations that protect the privacy of personal data. The Civil Code
of the PRC which was promulgated in May 28, 2020 and came into effect on January 2021, provides for the protection of personal
data. And The Personal Information Protection Law of the PRC, as adopted on August 20, 2021 and came into force on November 1,
2021, provides detailed regulations governing the collection and use of personal data. Other than the requirements for non-tampering
with any personal data collected or retained, we believe that there is no PRC legal restriction on our internal use of such data. Any
change in the regulatory regime in this regard could potentially affect our ability with regard to the collection and use of these personal
data, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Moreover, we may not be able
to prevent third parties from illegally obtaining and misappropriating personal data of the tested individuals that we collect. Concerns
about data leakage or unauthorized use of data by third parties, even if unfounded, could damage our reputation and negatively affect
our results of operations.
Our e-commerce business
has a R&D center in China, which is facing various risks.
Our e-commerce business has
a R&D center in China, which may subject us to the following risks:
| ● | Regulatory
Risks: Our R&D center in China is subject to various laws and regulations, including
those related to data privacy, intellectual property, and export control. Any failure to
comply with these regulations could result in fines, legal action, and reputational damage. |
| ● | Political
Risks: Our R&D center in China may be affected by changes in the political landscape,
including trade disputes, changes in government policies and regulations, and geopolitical
tensions. These factors could lead to increased costs, supply chain disruptions, and decreased
revenue. |
| ● | Human
Resources Risks: Our R&D center in China may be subject to human resources risks, including
labor disputes, talent shortages, and changes in labor laws and regulations. These factors
could lead to increased costs, supply chain disruptions, and reputational damage. |
| ● | Economic
Risks: Our R&D center in China is subject to the overall economic conditions of the markets
we operate in. Any downturn in the economy could lead to decreased revenue, increased costs,
and operational challenges. |
Our e-commerce food
business plans to source goods globally, including from China, which has inherent risks.
Importing food from China
has various inherent risks, including:
| ● | Quality
Control Risks: Products imported from China may be subject to quality control issues due
to differences in manufacturing standards and regulations between China and our home country.
Any failure to identify or address these issues could lead to reputational damage, product
recalls, and decreased revenue. |
| ● | Logistics
Risks: Importing goods from China may be affected by logistics risks, including delays in
shipping, customs clearance, and transportation issues. These factors could lead to supply
chain disruptions, increased costs, and decreased revenue. |
| ● | Currency
Risks: Importing goods from China may be subject to currency risks, including fluctuations
in exchange rates. These factors could lead to increased costs and decreased revenue. |
| ● | Political
Risks: Importing goods from China may be affected by changes in the political landscape,
including trade disputes, changes in government policies and regulations, and geopolitical
tensions. These factors could lead to increased costs, supply chain disruptions, and decreased
revenue. |
| ● | Regulatory
Risks: Importing goods from China may be subject to various laws and regulations, including
those related to trade, customs, and product safety. Any failure to comply with these regulations
could result in fines, legal action, and reputational damage. |
Risks Relating
to Government Regulations in the United States
Our biotechnology business is heavily regulated,
and changes in regulations or violations of regulations may, directly or indirectly, reduce our revenue, adversely affect our results
of operations and financial condition and harm our business.
The
U.S. life sciences industry is highly regulated, and the regulatory environment in which we operate may change significantly and adversely
to us in the future. Areas of the regulatory environment that may affect our ability to conduct business in the United States
include federal and state laws relating to:
| ● | laboratory
testing, including the CLIA and state laboratory licensing laws; |
| ● | the
development, testing, use, distribution, promotion and advertising of research services,
kits and clinical diagnostics, including certain LDTs which are regulated by the FDA under
the U.S. Federal Food, Drug, and Cosmetic Act, or the FDCA; |
| ● | test
ordering, documentation of tests ordered, billing practices and claims payment under the
U.S. Centers for Medicare & Medicaid Services, or CMS, and the enforcement of those
laws and regulations by the U.S Department of Justice and the U.S. Department of Health and
Human Services, or HHS, Office of the Inspector General; |
| ● | medical
device and in vitro diagnostic, or IVD, clearance, marketing authorization or approval; |
| ● | FDA’s
policy of enforcement discretion to not regulate the majority of LDTs as IVDs; |
| ● | laboratory
anti-mark-up laws (which are laws or regulations that can limit the prices of medical tests); |
| ● | the
handling and disposal of medical and hazardous waste; |
| ● | fraud
and abuse laws such as the U.S. Federal False Claims Act, or FCA, the Federal Health Care
Program Anti-Kickback Statute, or AKS, the Criminal Health Care Fraud Statute and Stark Law
(defined below), and state equivalents; |
| ● | Occupational
Safety and Health Administration rules and regulations; |
| ● | the
Health Insurance Portability and Accountability Act of 1996, or HIPAA, and other U.S. federal
and state medical data privacy and security laws; |
| ● | the
Genetic Information Non-discrimination Act and similar state laws; and |
| ● | coverage
and restrictions on coverage and reimbursement for research services, kits, clinical diagnostics
and cellular therapies and Medicare, Medicaid, other governmental payers and private insurers
reimbursement levels. |
In particular, the laws,
regulations and policies governing the marketing of an LDT and clinical diagnostic tests and services are extremely complex, and in many
instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Among other things, pursuant
to the FDCA and its implementing regulations, the FDA regulates the research, design, testing, manufacturing, safety, labeling, storage,
recordkeeping, premarket clearance, authorization or approval, marketing and promotion and sales and distribution of medical devices
in the United States to ensure they are safe and effective. Medical devices are defined by
the FDCA to include, among other things, instruments and in vitro reagents or other similar or related articles, which are intended for
use in the diagnosis of disease or other conditions. In addition, the FDA regulates the import and export of medical devices. Most LDTs,
however, are not currently regulated as medical devices under FDA’s current regulatory framework, although components of
LDTs, including, for example, instruments, reagents, and sample collection devices, may be regulated as medical devices. If we are subject
to these FDA requirements and do not comply, or later become subject to these requirements and fail to adequately comply, our business
operations may be harmed. These requirements may additionally cause delays in our ability to market and sell our products or services,
which may, directly or indirectly, reduce our revenue, adversely affect our results of operations and financial condition and harm our
business.
We plan to market our CDA test initially
as an LDT, and future changes in the FDA’s regulation of LDTs could subject our operations to much more significant regulatory
requirements.
We
plan to initially market our CDA test in the United States as an LDT. LDTs have generally been considered to be tests that are designed,
developed, validated and used within a single laboratory. The FDA has historically exercised a policy of enforcement discretion with
respect to LDTs, whereby the FDA does not actively enforce its medical device regulatory requirements for these tests. In October 2014,
the FDA issued two draft guidance documents stating that it intended to modify its policy of enforcement discretion with respect to LDTs
in a risk-based manner consistent with the existing classification of medical devices. The FDA halted finalization of the draft guidance
documents in November 2016 to allow for further public discussion of an appropriate oversight approach to LDTs and to give congressional
authorizing committees the opportunity to develop a legislative solution. In January 2017, FDA issued a discussion paper laying
out key elements of a possible revised future LDT regulatory framework. On August 19, 2020, HHS rescinded all guidance documents
and informal policy statements that FDA had previously issued concerning LDTs, and announced that FDA would no longer require premarket
authorization for LDTs unless the FDA engaged in notice-and-comment rulemaking. On November 15, 2021, the U.S. Department of Health and
Human Services withdrew the policy that directed FDA not to enforce premarket review requirements for LDTs. HHS no longer has a policy
on LDTs that is separate from FDA’s longstanding approach in this area. The former FDA Commissioner and the Director of the Center
for Devices and Radiological Health, or CDRH, have expressed significant concerns regarding disparities between LDTs and IVDs that have
been reviewed and cleared, authorized or approved by the FDA. The FDA has also determined that certain LDTs do not qualify for enforcement
discretion because these tests pose higher risk to the public health. If we market our test initially as an LDT in the United States
and the FDA were to determine that our test is not within the enforcement discretion policy for LDTs for any reason, including as a result
of new rules, policies or guidance, or due to changes in law, our laboratory and test may become subject to extensive FDA requirements
or otherwise impact our business. These types of changes could reduce our revenue or increase our costs and adversely affect our business,
prospects, results of operations or financial condition. If required, the regulatory marketing authorization process required to bring
our LDT into compliance may involve, among other things, successfully completing additional clinical validations and submitting to and
obtaining from the FDA pre-market clearance (510(k)), authorization for a de novo petition, or approval of a Premarket Approval Application,
or PMA. Furthermore, legislative proposals could create new or different regulatory and compliance burdens on us and could have a negative
effect on our ability to keep products on the market or develop new products, which could have a material effect on our business. In
the event that we market our test initially as an LDT in the United States and then the FDA requires marketing authorization of our LDT
in the future, the FDA ultimately may not grant any clearance, authorization or approval requested by us in a timely manner, or at all.
Our proprietary CDA device is an analytical
instrument used as part of our CDA test, which may increase our risk that the FDA concludes that our test does not qualify as an LDT.
While
the FDA has historically exercised enforcement discretion over the majority of LDTs, there are certain factors that have led to increased
regulatory oversight. One such factor is the use of customized equipment and reagents. If the FDA were to conclude that our CDA device
requires clearance, market authorization, or approval to be used as part of an LDT, it could prevent us from being able to offer our
test. Even if we submit our CDA device for clearance, authorization, or approval, the FDA ultimately may not grant such clearance, authorization
or approval requested by us in a timely manner, or at all.
Failure to comply with U.S. federal or
state laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority or accrediting body,
could cause us to lose the ability to perform testing in the United States, experience disruptions to our business, or become subject
to administrative or judicial sanctions.
We
are subject to CLIA, a U.S. federal law that regulates clinical laboratories that perform testing on specimens derived from humans for
the purpose of providing information for the diagnosis, prevention or treatment of disease. Any testing subject to CLIA regulation
must be performed in a CLIA-certified laboratory. CLIA certification is also required in order for us to be eligible to bill U.S. state
and federal healthcare programs, as well as commercial payers, for our tests. We have commenced operations of our new laboratory
in Philadelphia, Pennsylvania with the completion of our facility renovation and first phase equipment installation in July 2020.
We obtained a CLIA Certificate of Registration for this laboratory in August 2020. We have also accredited by CAP, and have obtained
a CLIA Certificate of Accreditation for this laboratory. To maintain our CAP accreditation and CLIA certification, we are subject to
survey and unannounced inspection every two years.
We are required to maintain
a Pennsylvania clinical laboratory license for our Philadelphia laboratory to conduct testing. In addition, some other states may require
our Philadelphia laboratory to be licensed there in order to accept blood samples from those states or may have such requirements in
the future. To maintain our state licenses, we may be subject to survey and inspection.
Failure to comply with applicable
clinical laboratory certification and licensure requirements, including proficiency testing, may result in a range of enforcement actions,
including suspension, limitation or revocation of our CAP accreditation, CLIA certificates and/or state licenses, imposition of a directed
plan of corrective action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval
to receive Medicare and Medicaid payment for its services. Any of these enforcement actions or our failure to renew our CLIA certificates,
a state license or other accreditation could have a material adverse effect on our business, financial condition and results of operations.
Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in
doing so.
If we are unable to obtain or maintain
regulatory clearance or approvals in the United States, or if we experience delays in receiving clearance or approvals, our growth strategy
may not be successful.
In the United States, we
plan to initially offer our CDA test for clinical use as an LDT in our laboratory in Philadelphia, Pennsylvania. Because we developed
this test and will offer this test solely for use within our laboratory, we believe that we may market the test as an LDT. Under current
FDA policies, the FDA does not enforce its premarket clearance or approval requirements for certain LDTs before commercialization. The
FDA could disagree with this assessment, however, in which case we would be required to obtain clearance, authorization, or approval
for our device and/or test to continue marketing.
A key element of our
longer term business strategy is to place our CDA device in other laboratories to broaden access to our technology and increase demand
for our tests and any future tests that we may develop. In order to distribute our cancer screening and detection test and device outside
of our laboratory, we will need to obtain FDA clearance, authorization, or approval for our test and device.
The FDA regulates medical
devices, including IVDs, that are sold and distributed in U.S. interstate commerce. Unless an exemption applies, generally, before a
new medical device or a new use for a medical device may be sold or distributed in the United States, the medical device must receive
either a 510(k) premarket notification clearance, de novo marketing authorization, or a PMA approval from the FDA. As a result,
before we can market or distribute our device and test in the United States for use by other clinical testing laboratories, we must first
obtain 510(k) clearance, de novo marketing authorization, or PMA approval from the FDA. We are pursuing obtaining LDT for our CDA
test at our Philadelphia, PA laboratory. Once we have received LTD status for our CDA test, we plan to offer commercial CDA tests at
our Philadelphia, PA laboratory. Once we apply, we may not receive the FDA clearance, marketing authorization, or approval for the commercial
use of our CDA device and test on a timely basis, or at all.
The FDA can delay, limit
or deny clearance, authorization or approval of a device for many reasons, including:
| ● | inability
to demonstrate to the satisfaction of the FDA that the products are safe or effective for
their intended uses; |
| ● | the
FDA’s disagreement with the design, conduct or implementation of the clinical studies
or the analysis or interpretation of data from preclinical studies, analytical studies or
clinical studies; |
| ● | serious
and unexpected adverse device effects experienced by participants in clinical studies; |
| ● | the
data from preclinical studies, analytical studies and clinical studies may be insufficient
to support clearance, authorization or approval, where required; |
| ● | the
inability to demonstrate that the clinical and other benefits of the device outweigh the
risks; |
| ● | an
advisory committee, if convened by the FDA, may recommend against approval of a PMA or other
application or may recommend that the FDA require, as a condition of approval, additional
preclinical studies or clinical studies, limitations on approved labeling or distribution
and use restrictions, or even if an advisory committee, if convened, makes a favorable recommendation,
the FDA may still not approve the product; |
| ● | the
FDA may identify deficiencies in our marketing application, and in our or our suppliers’
manufacturing processes, facilities or analytical methods; |
| ● | the
potential for policies or regulations of the FDA to change significantly in a manner rendering
clinical data or regulatory filings insufficient for clearance, authorization or approval;
and |
| ● | the
FDA may audit clinical study data and conclude that the data are not sufficiently reliable
to support a PMA application. |
There
are numerous FDA personnel assigned to review different aspects of marketing submissions, and uncertainties can be presented by their
ability to exercise judgment and discretion during the review process. During the course of review, the FDA may request or require additional
data and information, and the development and provision of these data and information may be time-consuming and expensive. The
process of obtaining regulatory clearances, authorizations or approvals to market a medical device can be costly and time-consuming,
and we may not be able to obtain these clearances, authorizations or approvals on a timely basis or at all for our proposed products.
If we are unable to achieve clearance or approval or if other laboratories do not accept our device and test, our ability to grow our
business could be compromised.
Clinical studies involve a lengthy and
expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
In
order to receive FDA clearance, marketing authorization, or approval for the commercialization of our CDA test and/or device in the United
States, we must conduct, at our own expense, extensive analytical testing and clinical studies to demonstrate safety and effectiveness
of our device and test for the intended indication of use. Clinical testing is expensive, can take many years to complete, if at
all, and its outcome is uncertain. Failure can occur at any time during the clinical study process. Also, our CDA device and test may
not prove to be safe and efficacious in the clinical studies, and they may not meet all the applicable regulatory requirements needed
to receive FDA clearance, authorization, or approval. The results of our clinical studies may not support the clinical validation needed
to offer our cancer screening and detection test in the U.S. In addition, clinical claims for our CDA test that are supported by the
clinical studies results may not be commercially viable.
If we receive FDA clearance, marketing
authorization, or approval of our CDA device and test, we will continue to be subject to extensive FDA regulatory oversight.
Medical devices are subject
to extensive regulation by the FDA in the United States. If our CDA device is cleared, authorized, or approved by the FDA, we will need
to comply with the applicable regulatory requirements and our failure to do so could result in enforcement action by the FDA or state
agencies. Any of these enforcement actions could also result in higher than anticipated costs or lower than anticipated sales and have
a material adverse effect on our reputation, business, results of operations and financial condition.
We also cannot predict the
likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action in
the United States. For example, the U.S. has taken several executive actions, including the issuance of a number of executive orders,
that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and
oversight activities such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications.
It is difficult to predict how these executive actions will be implemented and the extent to which they will affect the FDA’s ability
to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight
and implementation activities in the normal course, our business may be negatively impacted.
Our employees may engage in misconduct
or other improper activities, including non-compliance with regulatory standards and requirements, and insider trading.
We
are exposed to the risk of fraud or other misconduct by our employees. Misconduct by our employees could include intentional failures
to comply with the regulations of the FDA or non-U.S. regulators, to comply with healthcare fraud and abuse laws and regulations
in the United States and abroad, or to report financial information or data accurately or to disclose unauthorized activities to us.
In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended
to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit
a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.
Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in
regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our employees,
but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are
instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition
of significant civil, criminal and administrative penalties, including, without limitation, damages, monetary fines, individual imprisonment,
disgorgement of profits, possible exclusion from participation in Medicare, Medicaid and other U.S. federal healthcare programs, contractual
damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject
to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment or restructuring
of our operations, which could have a significant impact on our business. Whether or not we are successful in defending against such
actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending
ourselves against any of these claims or investigations.
If we fail to comply with
healthcare laws and regulations, we could face substantial enforcement actions, including civil and criminal penalties and our business,
operations and financial condition could be adversely affected.
We could be subject to healthcare
fraud and abuse laws and patient privacy laws of both the U.S. federal government and the states in which we conduct our business. The
laws include, but are not limited to:
| ● | the
AKS, which prohibits, among other things, persons from soliciting, receiving or providing
remuneration, directly or indirectly, to induce either the referral of an individual for
an item or service or the purchasing or ordering of a good or service, for which payment
may be made under U.S. federal healthcare programs such as the Medicare and Medicaid programs; |
| ● | the
FCA which prohibits, among other things, individuals or entities from knowingly presenting,
or causing to be presented, claims for payment from Medicare, Medicaid, or other payers that
are false or fraudulent, and which may apply to entities like us which provide coding and
billing information to customers; |
| ● | HIPAA,
which prohibits executing a scheme to defraud any healthcare benefit program or making false
statements relating to healthcare matters and which also imposes certain requirements relating
to the privacy, security and transmission of individually identifiable health information;
and |
| ● | state
law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims
laws which may apply to items or services reimbursed by any third-party payer, including
commercial insurers, and state laws governing the privacy and security of health information
in certain circumstances, many of which differ from each other in significant ways and often
are not preempted by U.S. federal laws, thus complicating compliance efforts. |
If
our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may
be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations.
Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our
business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations
of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant legal expenses and divert management’s attention from the operation of our business.
Moreover, achieving and sustaining compliance with applicable U.S. federal and state privacy, security and fraud laws may prove costly.
Our collection, use and disclosure of individually
identifiable information, including health and/or employee information, is subject to U.S. state, federal, and foreign privacy and security
regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant
liability or reputational harm.
The privacy and security
of personally identifiable information stored, maintained, received or transmitted, including electronically, is a major issue in the
United States and abroad. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own
posted privacy policies, legal standards for privacy, including but not limited to “unfairness” and “deception,”
as enforced by the U.S. Federal Trade Commission and state attorneys general, continue to evolve, and any failure or perceived failure
to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose customers, which
could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the
wake of revelations about the activities of various government agencies and in the number of private privacy-related lawsuits filed against
companies. Concerns about our practices with regard to the collection, use, retention, disclosure or security of personally identifiable
information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our
reputation and harm our business.
Numerous U.S. federal and
state laws and regulations govern the collection, dissemination, use and confidentiality of personally identifiable health information,
or PHI, including state privacy and confidentiality laws (including state laws requiring disclosure of breaches); U.S. federal and state
consumer protection and employment laws; HIPAA; and European and other foreign data protection laws. These laws and regulations are increasing
in complexity and number, may change frequently and sometimes conflict.
HIPAA establishes a set of
national privacy and security standards for the protection of individually identifiable health information, including PHI by health plans,
healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically, or covered entities, and
their business associates, which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve
creating, receiving, maintaining or transmitting PHI.
Penalties for violations
of these laws vary. For instance, penalties for failure to comply with a requirement of HIPAA and the Health Information Technology for
Economic and Clinical Health Act, or HITECH, vary significantly, and can include civil monetary penalties of up to $60,226 per violation,
not to exceed $1.80 million per calendar year for each provision that is violated. A single breach incident can result in findings
of violations of multiple provisions, leading to possible civil penalties in excess of $1.80 million in a single year. Violations
of HIPAA may also result in criminal penalties. For example, a person who knowingly obtains or discloses individually identifiable health
information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. In certain circumstances,
criminal fines up to $250,000 per violation and/or up to ten years’ imprisonment may be imposed. The criminal penalties increase
if the wrongful conduct involves false pretenses or the intent to sell, transfer, or use identifiable health information for commercial
advantage, personal gain, or malicious harm. Responding to government investigations regarding alleged violations of these and other
laws and regulations, even if ultimately concluded with no findings of violations or no penalties imposed, can consume company resources
and impact our business and, if public, harm our reputation.
Further,
various states, such as California and Massachusetts, have implemented similar privacy laws and regulations that impose restrictive requirements
regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are
not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state
laws are more protective, we may have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators,
some of these state laws also afford private rights of action to individuals who believe their personal information has been misused.
The interplay of U.S. federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex
compliance issues for us and our clients and potentially exposing us to additional expense, adverse publicity and liability. Further,
as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information
expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with
the enhanced protection of certain types of sensitive data, such as PHI, or personally identifiable information along with increased
customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand
for our services, reduce our revenue and/or subject us to additional liabilities.
We may be exposed to liabilities under
the United States Foreign Corrupt Practices Act, or FCPA, and Chinese anti-corruption laws, and any determination that we have violated
these laws could have a material adverse effect on our business or our reputation.
We
are subject to the FCPA. The FCPA generally prohibits us from making improper payments to non-U.S. officials for the purpose of obtaining
or retaining business. We are also subject to the anti-bribery laws of China. Our current customers include state-owned enterprises
and, after we obtain the Class III medical device registration certificate, we plan to sell our CDA tests and devices to hospitals
in China, many of which are state-owned. As a result, we may engage with Chinese officials or persons of equivalent status during the
ordinary course of our business. We do not fully control the interactions that our employees and sales agents have with those officials
or persons, and they may try to increase sales volumes of our tests through means that constitute violations of the FCPA, the PRC anti-bribery
laws or other related laws. As our business expands, the applicability of the FCPA and other anti-bribery laws to our operations will
increase. Our procedures and controls to monitor anti-bribery compliance may fail to protect us from reckless or criminal acts committed
by our employees or sales agents. If we, due to either our own deliberate or inadvertent acts or those of others, fail to comply with
applicable anti-bribery laws, our reputation could be harmed and we could incur criminal or civil penalties, other sanctions and/or significant
expenses, which could have a material adverse effect on our business, including our financial condition, results of operations, cash
flows and prospects.
Risks Relating to Doing
Business in China
The new business requires us to maintain
food safety and quality globally, including in China. Any failure to maintain food safety and quality could adversely impact our reputation,
results of operations and financial performance.
The PRC Regulation for the
Implementation of the Food Safety Law, or the Regulation of Food Safety Law was amended on December 1, 2019. The Regulation of Food Safety
Law outlines detailed rules for monitoring and assessment of food safety risk, food safety standards, food production and food business,
food inspection, food import and export and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food
safety law may result in severe administrative and criminal penalties imposed on us, as well as its legal representatives, senior management
in charge, directly accountable person-in-charge and other directly accountable employees. Penalties imposed on our company could negatively
affect our business operations and have a material adverse impact on our reputation.
In addition, regarding the
quality or safety of food products or the food supply chain of our new business, even if factually incorrect or based on isolated incidents,
could cause consumers to avoid purchasing certain products from us, or to seek alternative food sources. If there is any report linking
our new business to food contamination, food tampering, mislabeling, or other food safety issues could adversely impact sales and our
business and prospect may be materially and adversely affected.
We may be adversely affected by the complexity,
uncertainties and changes in PRC laws and regulations of E-Commence and Internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
As online business is evolving
rapidly in China, new laws and regulations may be adopted from time to time to require us to obtain additional licenses and permits or
to comply with new regulatory requirements. The PRC government authorities may continue to promulgate new laws, regulations and rules
governing the e-commerce industry, tighten enforcement of existing laws, rules and regulations, and impose additional requirements and
other obligations on our business.
For example: In August 2018,
the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019.
The E-Commerce Law imposes a number of new requirements and obligations on e-commerce platform operators. As no detailed interpretation
and implementation rules have been promulgated, it remains uncertain how the newly adopted E-Commerce Law will be interpreted and implemented.
We will adopt a series of measures to comply with such requires under the E-Commerce Law.
We have to assure that our
new business operations meet the requirements under the E-Commerce Law in all respects. Otherwise, if the PRC governmental authorities
determine that we are not in compliance with all the requirements under the E-Commerce Law and other applicable laws and rules, we may
be subject to fines and/or other sanctions. Substantial uncertainties exist regarding the interpretation and implementation of PRC laws
and regulations applicable to online businesses.
In addition, the PRC government
extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to,
companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation
and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions
or omissions may be deemed to be in violation of applicable laws and regulations.
For example: in November 2016,
the Standing Committee of the National People’s Congress promulgated the Cyber Security Law, which requires, among others, that
network operators take security measures to protect the network from unauthorized interference, damage and unauthorized access and prevent
data from being divulged, stolen or tampered with. Network operators are also required to collect and use personal information in compliance
with the principles of legitimacy, properness and necessity, and strictly within the scope of authorization by the subject of personal
information unless otherwise prescribed by laws or regulations. Significant capital, managerial and human resources are required to comply
with legal requirements, enhance information security and to address any issues caused by security failures. On June 10, 2021, the
Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect in September 2021.
The Data Security Law, among others, provides for data security and privacy obligations on entities and individuals carrying out data
processing activities, introduces a data classification and hierarchical protection system based on the importance of data in economic
and social development, as well as the degree of harm it will cause to nation security, public interests, or legitimate rights and interests
of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used, provides for a national
security review procedure for those data activities which may affect national security and imposes export restrictions on certain data
and information. The Civil Code promulgated in 2020 also provides specific provisions regarding the protection of personal information.
The Cyber Security Law,
the Data Security Law and the Civil Code are relatively new and subject to interpretation by the regulators. The interpretation and application
of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have
created substantial uncertainties regarding our new businesses and activities of internet businesses in China. We cannot assure that
we will obtain all the approvals, permits or licenses or filings required for conducting our business in China or will be able to maintain
our existing licenses or obtain new ones. Any lack of requisite approvals, licenses or permits applicable to our business or any failure
to comply with applicable laws or regulations may have a material and adverse impact on our new business, financial condition and results
of operations.
We are subject to many of the economic
and political risks associated with emerging markets due to our operations in China. Changes in China’s economic, political or
social conditions or government policies and the current tensions in international economic relations could have an adverse effect on
our business and operations.
Most of our assets and operations
are located in China, the world’s largest emerging market. In light of our operations in an emerging market, we may be subject
to risks and uncertainties including fluctuations in GDP, unfavorable or unpredictable treatment in relation to tax matters, expropriation
of private assets, exchange controls, restrictions affecting our ability to make cross-border transfer of funds, regulatory proceedings,
inflation, currency fluctuations or the absence of, or unexpected changes in, regulations and unforeseeable operational risks. Accordingly,
our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic
and social conditions in China. The Chinese economy differs from the economies of most developed countries in many respects, including
the level of government involvement, level of development, growth rate, control of foreign exchange, allocation of resources, evolving
regulatory system and lack of sufficient transparency in the regulatory process.
The economies of emerging
markets are typically more vulnerable to market downturns and economic slowdowns elsewhere in the world. While the Chinese economy has
experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy,
and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese
government or in the laws and regulations in China could have a material adverse effect on China’s overall economic growth. Such
developments could adversely affect our business and operating results, lead to a reduction in demand for our cancer screening and detection
test and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect
on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations that are applicable to us.
Recent statements by the
PRC government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign
investments in China-based issuers. The PRC government recently initiated a series of regulatory actions and made a number of public
statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities
in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure,
adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. On February 17,
2023, the China Securities Regulatory Commission (the “CSRC”) issued the Trial Administrative Measures of Overseas Securities
Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively,
the “New Administrative Rules Regarding Overseas Listings”), which came into force on March 31, 2023. According to the New
Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities
in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. According
to the Trial Administrative Measures, Article 2, where a domestic company seeks to directly offer and list securities in overseas markets,
the issuer shall file with the CSRC and where a domestic company seeks to indirectly offer and list securities in overseas markets, the
issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial
public offerings or listings in overseas markets shall be filed with the CSRC within three (3) working days after the relevant application
is submitted overseas. If an issuer offers securities in the same overseas market where it has previously offered and listed securities
subsequently, filings shall be made with the CSRC within three (3) working days after the offering is completed. According to the Trial
Administrative Measures Article 22, upon occurrence of any material event, such as change of control, investigations or sanctions imposed
by overseas securities regulatory agencies or other relevant competent authorities, change of listing status or transfer of listing segment,
or voluntary or mandatory delisting, after an issuer has offered and listed securities in an overseas market, the issuer shall submit
a report thereof to CSRC within three (3) working days after the occurrence and public disclosure of such event. Further, according to
the Trial Administrative Measures Article 21, an overseas securities company that serves as a sponsor or lead underwriter for overseas
securities offering and listing by domestic companies shall file with the CSRC within 10 working days after signing its first engagement
agreement for such business, and submit to the CSRC, no later than January 31 each year, an annual report on its business activities
in the previous year associated with overseas securities offering and listing by domestic companies. If an overseas securities company
has entered into engagement agreements before the effectuation of the Trial Administrative Measures and is serving in practice as a sponsor
or lead underwriter for overseas securities offering and listing by domestic companies, it shall file with the CSRC within 30 working
days after the Trial Administrative Measures take effect. On February 24, 2023, the CSRC promulgated the Provisions on Strengthening
Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality
and Archives Administration Provisions”), which also became effective on March 31, 2023. The Confidentiality and Archives Administration
Provisions set out rules, requirements and procedures relating to provision of documents, materials and accounting archives for securities
companies, securities service providers, overseas regulators and other entities and individuals in connection with overseas offering
and listing, including without limitation to, domestic companies that carry out overseas offering and listing (either in direct or indirect
means) and the securities companies and securities service providers (either incorporated domestically or overseas) that undertake relevant
businesses shall not leak any state secret and working secret of government agencies, or harm national security and public interest,
and a domestic company shall first obtain approval from competent authorities according to law, and file with the secrecy administrative
department at the same level, if it plans to, either directly or through its overseas listed entity, publicly disclose or provide any
documents and materials that contain state secrets or working secrets of government agencies. Working papers produced in the Chinese
mainland by securities companies and securities service providers in the process of undertaking businesses related to overseas offering
and listing by domestic companies shall be retained in the Chinese mainland. Where such documents need to be transferred or transmitted
to outside the Chinese mainland, relevant approval procedures stipulated by regulations shall be followed. While we believe we do not
involve leaking any state secret and working secret of government agencies, or harming national security and public interest in connection
with provision of documents, materials and accounting archives, there is uncertainty how the new provisions will be interpreted and implemented
in the future, and we may be required to perform additional procedures in connection with the provision of accounting archives after
the Confidentiality and Archives Administration Provisions come into effect. Any failure by us to fully comply with new regulatory requirements
may significantly limit or completely hinder our ability to offer or continue to offer our ADSs or our other securities, cause significant
disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results
of operations and cause our ADSs or such other securities to significantly decline in value or become worthless.
Recently
there have been heightened tensions in economic relations between the United States and China. The U.S. government has recently imposed,
and proposed to impose additional, new or higher tariffs on products imported from China to penalize China for what it characterizes
as unfair trade practices. China has responded by imposing largely commensurate tariffs on products imported from the United States.
The lasting impact of these trade conflicts on the PRC economy remains uncertain. As a biotechnology company with operations
primarily based in China as well as the United States, our plan to commercialize our CDA test in, and export our CDA device to, the United
States after obtaining relevant approvals from the FDA could be adversely affected by these or future trade developments. In addition,
political tensions between the United States and China have escalated due to, among other things, the COVID-19 outbreak, sanctions imposed
by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of
the PRC, and the U.S. sanctions on a number of Chinese entities and relevant individuals. Rising political tensions could reduce levels
of trade, investment, technological exchange and other economic activities between the two major economies, which would have a material
adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material
adverse effect on our business, financial condition and results of operations.
Uncertainties with respect to China’s
legal system could have a material adverse effect on our business and operations.
We
conduct our businesses in China primarily through our PRC subsidiaries. Our operations in China are governed by PRC laws and regulations.
Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil
law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited
precedential value. The PRC legal system is evolving rapidly, and the interpretation of many laws, regulations and rules may contain
inconsistencies, and the enforcement of these laws, regulations and rules involves uncertainties.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court
proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms,
it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially
and adversely affect our business and results of operations. Furthermore, the PRC legal system is based, in part, on government policies
and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result,
we may not always be aware of any potential violation of these policies and rules. Such unpredictability towards our contractual, property
and procedural rights could adversely affect our business and impede our ability to continue our operations.
PRC regulations of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offshore equity and debt offerings
to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
We are an offshore holding
company conducting our operations in China through our PRC subsidiaries. We may make loans to our PRC subsidiaries or we may make additional
capital contributions to our wholly foreign-owned subsidiaries in China. Any loans by us to our wholly foreign-owned subsidiaries in
China to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the PRC State Administration
of Foreign Exchange, or SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity
and self-use within its business scope.
In March 2015, SAFE
promulgated the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested
Enterprises, or SAFE Circular 19, which took effect and replaced certain previous SAFE regulations from June 1, 2015. SAFE further
promulgated the Circular of the SAFE on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital
Accounts, or SAFE Circular 16, which took effective on June 9, 2016 and, among other things, amended certain provisions of SAFE
Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of Renminbi capital converted from foreign currency-denominated
registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business
scope, or to provide loans to persons other than affiliates, unless otherwise permitted under its business scope. SAFE Circular 19 and
SAFE Circular 16 may limit our ability to transfer the net proceeds from our offshore equity and debt offerings to our PRC subsidiaries
and convert the net proceeds into RMB.
In light of the various requirements
imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that
we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if
at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our wholly foreign-owned subsidiaries
in China. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries when needed.
If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our offshore
equity and debt offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and
adversely affect our liquidity and our ability to fund and expand our business.
Our business benefits from certain financial
incentives and discretionary policies granted by local governments. Expiration of, or changes to, these incentives or policies would
have an adverse effect on our results of operations.
In
the past, local governments in the PRC granted certain financial incentives from time to time to our PRC subsidiaries as part of their
efforts to encourage the development of local businesses. The timing, amount and criteria of government financial incentives are
determined within the sole discretion of the local government authorities and cannot be predicted with certainty before we actually receive
any financial incentive. We generally do not have the ability to influence local governments in making these decisions. Local governments
may decide to reduce or eliminate incentives at any time. In addition, some of the government financial incentives are granted on a project
basis and subject to the satisfaction of certain conditions, including completion of the specific project therein. We cannot guarantee
that we will satisfy all relevant conditions, and if we do not, we may be deprived of the relevant incentives. We cannot assure you of
the continued availability of the government incentives currently enjoyed by us. Any reduction or elimination of incentives would have
an adverse effect on our results of operations. Government grants and subsidies we recognized for the years ended December 31,
2020, 2021 and 2022 was RMB7.5 million, RMB0.6 million and RMB0.9 million (US$0.1 million), respectively.
Under the PRC Enterprise Income Tax Law,
or the EIT Law, we may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax
consequences to us and our non-PRC shareholders or ADS holders, and have a material adverse effect on our results of operations and the
value of your investment.
Under
the EIT Law and its implementation rules, an enterprise established outside China may be considered as a PRC resident enterprise provided
that its “de facto management body” is located within China. According to the implementation rules, “de facto management
body” is interpreted as a body that exercises substantial and overall management and control over the business, personnel,
accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation, or the SAT, issued the Circular
of the SAT on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance
With the De Facto Standards of Organizational Management, or SAT Circular 82,
which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled
enterprise incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises
or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s
general position on how “de facto management body” rule should be applied in determining the tax resident status of
all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise
group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject
to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the
day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters
are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting
books and records, company seals, and board and shareholder minutes, are located or maintained in China; and (iv) at least 50% of
voting board members or senior executives habitually reside in China.
According
to these rules and regulations, we may be considered as a PRC resident enterprise by the PRC tax authorities for tax purposes and
a number of unfavorable tax consequences could follow. However, the tax resident status of an enterprise is subject to determination
by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management
body.” If the PRC tax authorities determine that we are a PRC resident
enterprise for enterprise income tax purposes, we will be subject to PRC tax at a rate of 25% on our worldwide income, which could materially
reduce our net income, and we may be required to withhold tax from dividends we pay at a rate of 10% in case to non-PRC enterprise shareholders
(including ADS holders) or 20% in case to non-PRC individual shareholders (including ADS holders); in addition, gains realized on the
sale or other disposition of our ordinary shares or ADSs may be subject to PRC tax, at a rate of 10% in case of non-PRC enterprise shareholders
(including our ADS holders) or 20% in case of non-PRC individual shareholders (including ADS holders), if such dividends or gains are
deemed to be from PRC sources. Any such PRC tax liability may be reduced under an applicable tax treaty. However, it is unclear
whether non-PRC shareholders (including our ADS holders) of our company would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the
returns on your investment in the ADSs.
We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
In February 2015, the
SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises,
or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also transactions involving
transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice
7 provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings
and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts
an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas
holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity that directly owns the taxable
assets, may report such indirect transfer to the relevant tax authority. Using a “substance over form” principle, the PRC
tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to
PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable
taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee
may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the transfer by any non-resident enterprise
of ADSs of our company acquired and sold on public securities markets.
In October 2017, the
SAT issued the Public Notice on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice
37, which took effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare
the tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay the tax due within required time limits,
and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority. If the
non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so, it shall be deemed
that such enterprise has paid the tax payable in time.
We face uncertainties on
the reporting and consequences of future private equity financing transactions, share exchanges or other transactions involving the transfer
of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises
with respect to a filing or the transferees with respect to withholding obligation and request our PRC subsidiaries to assist in the
filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or
being taxed under SAT Public Notice 7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with them
or to establish that we should not be taxed under these regulations, which may have a material adverse effect on our financial condition
and results of operations.
Fluctuations in exchange rates could adversely
affect our business and the value of our securities.
Changes in the value of the
RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political
and economic conditions. Since July 2005, the RMB is no longer pegged to the U.S. dollar, and the RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Any significant revaluation of the RMB may have a material
adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our shares in U.S. dollar terms.
For example, to the extent that we need to convert U.S. dollars we receive from any equity or debt offerings into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely,
if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our ordinary shares or for other business purposes,
appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
Governmental control of currency conversion
may limit our ability to utilize our cash balance effectively and affect the value of your investment.
The PRC government imposes
controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China.
We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our holding company incorporated in
the BVI primarily relies on dividend payments from our PRC subsidiaries to fund our cash and financing requirements. Under existing PRC
foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural
requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations
of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate
government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses
such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated
from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside
China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
In light of the flood of
capital outflows, the PRC government may from time to time impose more restrictive foreign exchange policies and increase scrutiny of
major outbound capital movements. More restrictions and substantial vetting processes may be required by SAFE or other government authorities
to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion restrict access to
foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders, including holders of our ADSs.
PRC laws and regulations have more complex
procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth
through acquisitions in China.
PRC laws and regulations,
such as the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, Anti-Monopoly
Law of the PRC and the Rules of the PRC Ministry of Commerce, or the MOFCOM, on Implementation of the Security Review System of
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Rules, established additional procedures
and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex,
including requirements in some instances that the MOFCOM be notified in advance of any change of control transaction in which a foreign
investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where offshore
companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also
require certain merger and acquisition transactions to be subject to merger control review or security review.
According to these laws and
regulations, a security review is required for mergers and acquisitions by foreign investors having “national defense and security”
concerns, and for mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises
that have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction.
The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
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 Companies, or the Stock Option Rules. Under the Stock Option Rules and other relevant rules and
regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with
SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain
a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected
by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its
participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise
of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required
to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan,
the PRC agent or the overseas entrusted institution or other material changes. Certain of our directors, executive officers, employees
and consultants who are PRC residents may participate in our 2019 Plan, and therefore are subject to these regulations. Failure of these
PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also
limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute
dividends to us, or otherwise materially adversely affect our business.
In addition, the SAT has
issued certain circulars concerning employee share incentives. Under these circulars, our employees working in the PRC who exercise share
options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file
documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes
of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according
to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.
Our business and our profitability may
be negatively affected by the rising labor costs and potential obligations to make additional contributions of social insurance premium
and housing funds.
In recent years, labor
costs in China have continued to increase, driven by increased inflation, as well as enactment of new labor laws. As a result, we expect
our labor costs, including wages and employee benefits, to continue to increase in the foreseeable future. Unless we are able to pass
on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results
of operations may be adversely affected.
In addition, we are required
by PRC laws and regulations to participate in various employee social security plans that are organized by municipal and provincial governments,
including housing, pension, medical insurance, work-related injury insurance, employment injury insurance, maternity insurance and unemployment
insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries,
bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. The relevant
government agencies may examine whether an employer has made adequate payments of these requisite statutory employee benefits, and those
employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We have historically
failed to promptly make social insurance and housing fund contributions in full with respect to our employees. If the relevant PRC authorities
determine that we shall make supplemental social insurance and housing fund contributions, and that we are subject to fines and legal
sanctions, our business, financial condition and results of operations may be adversely affected.
If for any reason we were to fail to meet
the audit requirements of the HFCAA for two consecutive years, we may be prohibited from listing our securities on a national
securities exchange, including Nasdaq, or on over-the-counter markets in the United States, which could adversely affect the market price
of our Common Stock and our ability to raise capital.
In recent years, the U.S.
Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed
companies with significant operations in mainland China and with auditors located in mainland China. For example, PCAOB inspections of
auditors located in mainland China and Hong Kong have at times identified deficiencies in those auditors’ audit procedures and
quality control procedures, and limitations on the ability of the PCAOB to inspect or investigate auditors in mainland China or Hong
Kong could deprive investors of the benefits of PCAOB inspections, which could adversely affect the ability of companies using such auditors
to access U.S. capital markets.
As part of the continued
focus on access to audit and other information for companies with substantial operations in China, in December 2020, the United States
enacted the Holding Foreign Companies Accountable Act (the “HFCAA”), which requires the SEC to identify issuers that
have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority
in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). Under the HFCAA, as amended in December
2022, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for two consecutive years, the SEC is required to
prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the
jurisdiction of the SEC to regulate, including over-the-counter markets in the United States.
In 2021, the PCAOB issued
a Determination Report, which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms
headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. In December 2022,
the PCAOB vacated its determination that it was unable to inspect and investigate PCAOB-registered public accounting firms in mainland
China. As a result, until such time as the PCAOB issues a new determination, the SEC has determined that there are no issuers currently
at risk of having their securities subject to a trading prohibition under the HFCAA.
Our
auditor prior to January 12, 2023, Friedman LLP, or Friedman, and current auditor, Marcum Asia CPAs LLP (“Marcum Asia”), the
independent registered public accounting firms that issue the audit reports included elsewhere in this annual report, as auditors of companies
that are traded publicly in the United States and firms registered with the PCAOB, have been subject to laws in the United States pursuant
to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Both Friedman and
Marcum Asia have been inspected by the PCAOB on a regular basis, with the last inspection in 2020. Neither Friedman nor Marcum Asia is
subject to the determinations announced by the PCAOB on December 16, 2021. The PCAOB is expected to continue to demand complete access
to inspections and investigations against accounting firms headquartered in mainland China and Hong Kong in the future and states that
it has already made plans to resume regular inspections in early 2023 and beyond. Each year, the PCAOB will determine whether it can inspect
and investigate completely accounting firms headquartered in mainland China and Hong Kong. Furthermore, the Accelerating HFCA Act, which
requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within two years, may result in the delisting
of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time. Our securities may be prohibited
from trading if our auditor cannot be fully inspected. While the Company’s auditor is based in the U.S. and is registered with PCAOB
and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect or investigate completely the
Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such inability could cause trading
in the Company’s securities to be prohibited under the Accelerating HFCA Act, and ultimately result in a determination by a securities
exchange to delist the Company’s securities. If trading in our ADS is prohibited under the Accelerating HFCA Act in the future because
the PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq may determine to delist our ADS.
A termination in the trading of our securities or any restriction on the trading in our securities would be expected to have a negative
impact on the Company as well as on the value of our securities.
We have had a history of losses and our
ability to grow sales and achieve profitability are unpredictable.
As of December 31 2022, we had an accumulated deficit of 577.5 million
(USD83.7 million) and incurred net losses of RMB 120.1 million and RMB103.6 million (US$15.0 million) in the year ended December 31, 2021
and 2022, respectively. Our ability to achieve profitable operations depends on many factors, which include:
|
● |
successfully implementing our business strategy; |
|
● |
increasing revenues; and |
There can be no assurance
that we will be able to successfully implement our business plan, meet our challenges and become profitable in the future.
The impairment of intangible assets and
goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity
When we acquire a business, a substantial portion of the purchase price
of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated
to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. The
current accounting standards require that goodwill and intangible assets should be deemed to have indefinite lives, which should be tested
for impairment at least annually (or more frequently if impairment indicators arise). Other intangible assets are amortized over their
useful lives. For the year ended December 31, 2022, we recorded impairment losses of RMB 20.7 million (US$3.0 million).
Future declines in the results
of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future.
We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result
in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase
the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire
balance of our goodwill based on the quantitative assessment performed.
Changes in the political and economic policies
of the PRC government or in relations between China and the United States or other governments may materially and adversely affect our
business, financial condition, and results of operations and may result in our inability to sustain our growth and expansion strategies.
Due to our operations in
China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic,
political, legal and social conditions in the PRC or changes in government relations between China and the United States or other governments.
There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties,
government regulations and tariffs. China’s economy differs from the economies of other countries in many respects, including with
respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources.
While China’s economy has experienced significant growth over the past four decades, growth has been uneven across different regions
and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide
the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. In
addition, in the past the Chinese government implemented certain measures, including interest rate increases, to manage the pace of economic
growth and prevent the economy from overheating. These measures may cause decreased economic activity in China, which may adversely affect
our business and results of operations.
Additionally, the Chinese
government has published new policies that significantly affect certain industries such as the education and internet industries, and
we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could require
us to obtain additional permission from Chinese authorities to continue to operate our business in China, which may adversely affect
our business, financial condition and results of operations.
Furthermore, statements made
by the Chinese government have indicated an intent to increase the government’s oversight and control over offerings of companies
with significant operations in China that are to be conducted in foreign markets.
Adverse changes in economic and political
policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect
our business.
Substantially all of our
business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s
economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement,
level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China.
The PRC government has implemented various measures to encourage economic development and guide the allocation of resources.
Risks Relating
to Our ADSs
The Nasdaq Capital Market imposes listing
standards on our ADSs that we may not be able to fulfill, thereby leading to a possible delisting of our ADSs.
As a listed Nasdaq Capital
Market company, we are subject to rules covering, among other things, certain major corporate transactions, the composition of our Board
of Directors and committees thereof, minimum bid price of our ADSs and minimum stockholders equity. In order to comply with the minimum
bid price rule, in November 2022 we adopted an ordinary share / ADS ratio change from one (1) Class ‘A’ ordinary being equal
to one (1) ADS to 20 Class ‘A’ ordinary shares being equal to one (1) ADS.
On January 13, 2023, we
received a Staff determination letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC notifying us of the
Staff’s determination to delist our ADSs from The Nasdaq Capital Market due to our failure to comply with the minimum $2.5
million stockholders’ equity requirement for continued listing on The Nasdaq Capital Market unless we timely request a hearing
before a Nasdaq Hearings Panel. We timely requested a hearing, which stayed any delisting or suspension action relating to our ADSs
through the hearing, which took place in March. On March 22, 2023, we were notified by the Nasdaq Hearing Panel that our request for continued listing on The Nasdaq Capital Market was granted, subject to the requirement that we
demonstrate on or before July 12, 2023 our compliance with the shareholder equity requirement, as outlined in Listing Rule
5550(b)(1) (the “Equity Rule”). The Panel advised that July 12, 2023 represents the full extent of the Panel’s
discretion to grant continued listing while the Company is non-compliant.
Previously in 2022, we
had received two additional Staff determination letters from the Listing Qualifications Department of Nasdaq notifying us of the
Staff’s determination to delist our ADSs for our failure to comply with the continued listing requirements of the Nasdaq
Capital Market. After hearings held with respect to the Staff’s determinations, we in each instance received the determination
from Nasdaq Hearing Panel that we had regained compliance with the requirements to remain listed on The Nasdaq Capital Market.
If our ADSs were to be de-listed,
selling our ADSs could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be
delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our ADSs are delisted, broker-dealers
have certain regulatory requirements imposed upon them, which may discourage broker-dealers from effecting transactions in our ADSs, further limiting the liquidity thereof. These factors could result in lower prices for our ADSs and/or limit an investor’s
ability to execute a transaction. In addition, a delisting could also greatly impair our ability to raise additional necessary capital
through equity or debt financing and could lead to significant dilution to our stockholders caused by our issuing equity in financing
or other transactions at a price per share significantly below the then market price.
The
trading price of our ADSs may be volatile regardless of our operating performance.
The
trading price of our ADSs could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry
factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in
China that have listed their securities in the United States. Furthermore, the stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These
broad market and industry factors may materially reduce the market price of our ADSs, regardless of our operating performance. In addition
to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations,
including the following:
| ● | variations
in our revenues, earnings and cash flow; |
| ● | announcements
of new investments, acquisitions, business partnerships or joint ventures by us or our competitors; |
| ● | announcements
of new test and service offerings, solutions and expansions by us or our competitors; |
| ● | failure
on our part to realize monetization opportunities as expected; |
| ● | changes
in financial estimates by securities analysts; |
| ● | detrimental
adverse publicity about us, our technology, our tests or our industry; |
| ● | additions
or departures of key personnel; |
| ● | release
of lock-up or other transfer restrictions on our outstanding equity securities or sales of
additional equity securities; |
| ● | regulatory
developments affecting us or our industry; and |
| ● | potential
litigation or regulatory investigations. |
Any of these factors may
result in large and sudden changes in the volume and price at which our ADSs will trade, and you may not be able to sell your shares
at prices you deem acceptable. In the past, shareholders of public companies have often brought securities class action suits against
those companies following periods of instability in the market price of their securities. If we were involved in a class action suit,
it could divert a significant amount of our management’s attention and other resources from our business and operations and require
us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether
or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully
made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition
and results of operations.
Our dual-class share structure with different
voting rights will limit your ability to influence our corporate matters and could discourage others from pursuing any change of control
transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
As of March 31, 2023, our
issued ordinary shares consisted of 108,068,440 Class A ordinary shares (excluding treasury shares and shares reserved for potential
conversion of convertible dentures) and 3,573,100Class B ordinary shares. In respect of matters requiring the votes of shareholders,
holders of Class A ordinary shares will be entitled to one (1) vote per share, while holders of Class B ordinary shares
will be entitled to ten (10) votes per share. Each Class B ordinary share is convertible into one Class A ordinary share
at any time by its holder, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder to any person or entity who is not an affiliate
of the holder, or upon a change of ultimate beneficial ownership of the holder of any Class B ordinary share to any person or entity
who is not an affiliate of the holder, such Class B ordinary shares will be automatically and immediately converted into the same
number of Class A ordinary shares. We sold Class A ordinary shares represented by our ADSs in our initial public offering.
All of the issued and outstanding
ordinary shares held by Dr. Chris Chang Yu through CRS Holdings Inc. and a portion of our ordinary shares held by Zhangjiang
GU KE Company Limited and Zhijun Sihang Holdings Limited, respectively, have been re-designated as Class B ordinary shares. Dr. Chris
Chang Yu, Zhangjiang GU KE Company Limited and Zhijun Sihang Holding Limited beneficially owned approximately 20.68%, 2.44% and 1.72%,
respectively, of the aggregate voting power of our company as of the date of this annual report, due to the disparate voting powers associated
with our dual-class share structure. As a result of the dual-class share structure and the concentration of ownership, these holders
of Class B ordinary shares will have considerable influence over matters such as decisions regarding change of directors, mergers,
change of control transactions and other significant corporate actions. They may take actions that are not in the best interest of us
or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which
could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale
of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters
and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A
ordinary shares and ADSs may view as beneficial
Share ownership has remained as of the
date of this annual report, and will remain, concentrated in the hands of our principal shareholders and management, who are and will
continue to be able to exercise a direct or indirect controlling influence on us.
Our directors, officers
and current five percent or greater shareholders and affiliated entities together beneficially owned approximately 40.77% of
the voting power of our ordinary shares issued and outstanding as of the date of this annual report, and this concentration of share
ownership will remain in the foreseeable future. As a result, these shareholders, acting together, have significant influence over
all matters that require approval by our shareholders, including the election of directors and approval of significant corporate
transactions. Corporate action might be taken even if other shareholders oppose them. This concentration of ownership might also
have the effect of delaying or preventing a change of control of our company that other shareholders may view as beneficial.
If securities or industry analysts do not
publish research about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs
and trading volume could decline.
The trading market for our
ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts
who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover
us, or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market
price or trading volume for our ADSs to decline.
Substantial future sales or perceived potential
sales of ADSs in the public market, including upon the exercise of vested options and conversion of convertible securities, could cause the price of ADSs to decline.
Sales of substantial
amounts of our ADSs, including upon the exercise of vested options and conversion of convertible debentures that we have issued, in
the public market or at a discount to the market price, or the perception that these sales could occur, could adversely affect the
market price of our ADSs and could materially impair our ability to raise capital through offerings of equity securities or
securities convertible into or exchangeable for equity securities in the future. The ADSs sold in our initial public offering are
freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders
may be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities
Act and any applicable lock-up agreements. As of April 28, 2023, there were 148,130,095 ordinary shares outstanding (consisting of
(i) 144,556,995 Class A ordinary shares, which included 1,322,853 escrow shares reserved for potential conversion of
convertible debentures and (ii) 3,573,100 Class B ordinary
shares. Sales of substantial amounts of ADSs in the public market or the conversion of convertible securities, or the
perception that these sales or conversions could occur, could adversely affect the market price of our ADSs.
Our memorandum and articles of association
contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
Our memorandum and articles
of association contain provisions which may have the effect of limiting the ability of others to acquire
control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our
shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking
to obtain control of our company in a tender offer or similar transaction. Our dual-class voting structure gives disproportionate voting
power to the holders of our Class A and Class B ordinary shares. Our board of directors has the authority, without further
action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges,
and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights,
voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our
ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent
a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred
shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially
and adversely affected.
As we do not expect to pay dividends in
the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.
We currently intend to retain
most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we
do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source
for any future dividend income. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price
appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased
the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
You may not receive dividends or other
distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make
them available to you.
The depositary of the ADSs
has agreed that if it or the custodian receives any cash dividends or other distributions on Class A ordinary shares or other deposited
securities underlying the ADSs, it will pay them to you after deducting its fees and expenses pursuant to the deposit agreement. You
will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary
or the custodian is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders
of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration
under the Securities Act of 1933 but that are not properly registered or distributed under an applicable exemption from registration.
The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of
certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such
property. We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other securities
received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A
ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A
ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause
a material decline in the value of the ADSs.
The voting rights of holders of ADSs are
limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying
Class A ordinary shares which are represented by your ADSs.
Holders of ADSs do not have
the same rights as our registered shareholders. As a holder of our ADSs, you do not have any direct right to attend general meetings
of our shareholders or to cast any votes at such meetings. You are only able to exercise the voting rights which are carried by the underlying
Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the
provisions of the deposit agreement. Under the deposit agreement, you may vote by giving voting instructions to the depositary. If we
instruct the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far
as is practicable, to vote the underlying Class A ordinary shares represented by your ADSs in accordance with your instructions.
If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you
give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A
ordinary shares represented by your ADSs unless you withdraw the shares, and become the registered holder of such shares prior to the
record date for the general meeting. Under our M&A, the minimum notice period required to be given by our company to our registered
shareholders to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance
notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend
the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general
meeting. In addition, under our amended and restated articles of association, for the purposes of determining those shareholders who
are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record
date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing
the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so
that you would not be able to attend the general meeting or to vote directly. If we instruct the depositary to ask for your instructions,
the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that
you will receive the voting materials in time to ensure that you can instruct the depositary how to vote the underlying Class A
ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting
instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right
to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted
as you requested.
You may experience dilution of your holdings
due to the inability to participate in rights offerings.
We may, from time to time,
distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute
rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt
from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities
Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights
to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file
a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared
effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings
as a result.
You may be subject to limitations on transfer
of your ADSs.
Your ADSs are transferable
on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient
in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including
in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of
ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays.
The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the
depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law
or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with
the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.
Your rights to pursue claims against the
depositary as a holder of ADSs are limited by the terms of the deposit agreement.
The deposit agreement governing
the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be
submitted to the U.S. federal or state courts in the City of New York have non-exclusive jurisdiction to hear and determine claims arising
under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of
any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including
any claim under the U.S. federal securities laws.
If we or the depositary opposed
a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances
of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute
jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United
States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including
under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute
jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right
to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult
legal counsel regarding the jury waiver provision before investing in the ADSs.
If you or any other holders
or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement
or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to
a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary.
If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the
applicable trial court, which would be conducted according to different civil procedures and may result indifferent outcomes than a trial
by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury
trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement
with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial
owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and
regulations promulgated thereunder.
We are subject to liability risks stemming
from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company, and the ability
of U.S. authorities to bring actions against us or our management may also be limited.
We are a business
company incorporated under the laws of the British Virgin Islands. We conduct substantially all of our operations in China and
substantially all of our assets are located in China, the world’s largest emerging market. In addition, certain of our
directors and executive officers reside within China for a significant portion of a year or are PRC nationals and a substantial
portion of their assets are within China. As a result, it could be difficult or impossible for you to bring an action against us or
against these individuals in the United States in the event that you believe that your rights have been infringed under the United
States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British
Virgin Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and
officers. In addition, due to jurisdictional limitations, matters of comity and various other factors, the SEC, Department of
Justice and other U.S. authorities may be limited in their ability to take enforcement actions, including in instances of fraud,
against us or our directors and officers in China. In addition, shareholder claims that are common in the United States, including
class action securities law and fraud claims, generally uncommon in China. For example, in China, there are significant legal and
other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect
to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities
regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory
cooperation with the securities regulatory authorities in the U.S. have not been efficient in the absence of mutual and practical
cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no
overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of
the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or
individual may provide the documents and materials relating to securities business activities to overseas parties.
In addition, BVI companies
may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which
any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the
rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. For more information,
see “Item 10—B. Memorandum and Articles of Association—Differences in Corporate Law—Shareholders’
Suits”. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain
liability provisions of U.S. securities law, and to impose liabilities against us, in original actions brought in the BVI, based on certain
liability provisions of U.S. securities laws that are penal in nature. There is no statutory enforcement in the BVI of judgments obtained
in the United States, although the courts of the BVI will in certain circumstances recognize such a foreign judgment and treat it as
a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary. This
means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
Lastly, under the provisions
of the BVI Act, the memorandum and articles of association of a company are binding as between the company and its members and between
the members. In general, members are bound by the decision of the majority or special majorities as set out in the articles of association
or in the Act. As for voting, the usual rule is that with respect to normal commercial matters members may act from self-interest
when exercising the right to vote attached to their shares.
If the majority members have
infringed a minority member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action.
The BVI Act provides that any member of a company is entitled to payment of the fair value of his shares upon dissenting from certain
matters. For more information, see “Item 10—B. Memorandum and Articles of Association—Differences in Corporate
Law—Shareholders’ Suits.”
Generally any other claims
against a company by its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights
as members as established by the company’s memorandum and articles of association, which are more limited than the rights afforded
investors under the laws of many states in the United States.
You may have difficulty enforcing judgment
against us or our directors and officers.
We are a BVI holding company
and most of our assets are located outside of the United States. In addition, certain of our directors and executive officers are residents
of the PRC, and substantially all of their assets and our assets are located in the PRC. As a result, you may not be able to effect service
of process upon us or these directors and executive officers, or to enforce against them judgments obtained in courts in the United States
in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the BVI and of China may render you unable to enforce a judgment against our
assets or the assets of our directors and officers.
We will incur increased costs as a result
of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We are a public company and
expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of
2002, as well as rules subsequently implemented by the SEC and the Nasdaq, impose various requirements on the corporate governance
practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an
“emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting
and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor
attestation requirement under Section 404 in the assessment of the emerging growth company’s ICFR. The JOBS Act also permits
an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We have elected to take advantage of such extended transition period for complying with new or revised accounting standards
as required when they are adopted for public companies.
We may take advantage of
the aforesaid exemptions for so long as we remain an emerging growth company until the fifth anniversary from the date of our initial
listing. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial
management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the
SEC. For example, as a result of becoming a public company, we may need to increase the number of independent directors and will need
to adopt policies regarding internal controls and disclosure controls and procedures. In addition, operating as a public company makes
it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we may incur additional
costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve
on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and
regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing
of such costs.
We are a foreign private issuer within
the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic
public companies.
Because we are a foreign
private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United
States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of
quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating
the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections
of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders
who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic
information under Regulation FD.
We are required to file an
annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results
on a quarterly basis through press releases, distributed pursuant to the rules and regulations of Nasdaq Stock Market LLC.
Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information
we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with
the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available
to you, were you investing in a U.S. domestic issuer.
There can be no assurance that we will
not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could subject
U.S. Holders of our Class A ordinary shares or ADSs to adverse U.S. federal income tax consequences.
A non-U.S. corporation will
be a PFIC, if, in any particular year, either (i) 75% or more of its gross income for such year consists of certain types
of “passive” income or (ii) the average percentage of the value of its assets that produce or are held for the
production of passive income, based on the average of four quarterly testing dates, is at least 50% (the “asset test”). Because
the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets may change, it
is possible that we may be a PFIC in the current or a future year. In particular, because the value of our assets for purposes of
the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause
us to become a PFIC.
If we are a PFIC in any taxable year,
a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased
U.S. federal income tax on gain recognized on the sale or other disposition of our Class A ordinary shares or ADSs and on the receipt
of distributions on our Class A ordinary shares or ADSs to the extent such gain or distribution is treated as an “excess distribution”
under the U.S. federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are
a PFIC for any year during which a U.S. Holder holds our Class A ordinary shares or ADSs, we will generally continue to be
treated as a PFIC for all subsequent years during which such U.S. Holder holds our Class A ordinary shares or ADSs, unless
we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621. See “Item 10.
Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company
Status” for more details regarding the foregoing.
ITEM 4. INFORMATION
ON THE COMPANY
A.
History and Development of the Company
We began our operations by
incorporating AnPac Bio-Medical Science Co., Ltd., or AnPac Bio, in January 2010 as a British Virgin Islands, or BVI, business
company limited by shares under the BVI Business Companies Act. On May 9, 2023, we changed our name to Fresh2
Group Limited to reflect our entry into the Asian e-commerce food business in the U.S.
In March 2010, we established
Changhe Bio-Medical Technology (Yangzhou) Co., Ltd., or AnPac Yangzhou, as our wholly foreign owned subsidiary in the PRC to market
and sell our cancer screening and detection tests and conduct biology related research and development activities.
In March 2011, we established
Changwei System Technology (Shanghai) Co., Ltd., or AnPac Changwei, as our wholly foreign owned subsidiary in the PRC as our global
research and development center.
In October 2012, we
established AnPac Bio-Medical Technology (Lishui) Co., Ltd. or AnPac Lishui, as our wholly foreign owned subsidiary in the PRC as
our headquarters and to manufacture our CDA devices.
In October 2013, we
established Shanghai Xinshenpai Technology Co., Ltd., or Shanghai Xinshenpai, as our wholly owned subsidiary in the PRC to market
and sell our cancer screening and detection tests. In December 2020, we wound up Shanghai Xinshenpai.
In April 2014, we established
AnPac Bio-Medical Technology (Shanghai) Co., Ltd., or AnPac Shanghai, as our wholly owned subsidiary in the PRC to market and sell
our cancer screening and detection tests.
In September 2015, we
established AnPac Technology USA Co., Ltd., or AnPac US, as our wholly owned subsidiary in the United States to conduct research
studies and clinical studies for our research on cancer screening and detection tests.
In July 2016, we established
Lishui AnPac Medical Laboratory Co., Ltd., or Lishui Laboratory, as our wholly owned subsidiary in the PRC to conduct cancer screening
and detection tests.
In November 2017, we
established Shiji (Hainan) Medical Technology Limited, or Shiji Hainan, as our wholly owned subsidiary in the PRC, which we acquired
from third parties to conduct cancer screening and detection tests.
In May 2018, we established
Penghui Health Management (Shanghai) Co., Ltd., or Penghui Health Management, as our wholly owned subsidiary in the PRC to market
and sell our cancer screening and detection tests. In December 2020, we wound up Penghui Health Management.
In March 2019, we established
Shanghai Muqing AnPac Health Technology Co., Ltd., or Shanghai Muqing, as our 51% owned subsidiary in the PRC to conduct cancer
screening and detection tests.
On August 15, 2021,
we completed a step acquisition of 40% equity interest in Anpai (Shanghai) Healthcare Management and Consulting Co., Ltd. (“Anpai
Shanghai”), consisting of an acquisition of 40% equity interest of Anpai Shanghai acquired from Dr. Chris Chang Yu for a consideration
of RMB 8.5 million approved by the Board of Directors (the “Board”), and an investment of 20% equity interest in Anpai Shanghai
which the Group has already held prior to August 15, 2021. Anpai Shanghai is engaged in mainly provides physical examination services
and other health consulting services in PRC.
On May 4, 2022, the Nasdaq
Hearings Panel has granted the request of the Company to transfer its shares from the Nasdaq Global Market to Nasdaq Capital Market,
effective at the open of trading on May 6, 2022.
We recently entered into
the fast-growing Asian e-commerce food business in the U.S.
In October 2022, we established
Fresh2 Technology to be the umbrella organization for this business. A team with extensive experience in the field was assembled to drive
the project forward.
On January 28, 2023, we entered
into an agreement with GISN (HK) LIMITED (“GISN”) to purchase 100% of the issued and outstanding equity interest of GISN,
a technical solution and outsourcing consulting services provider focused on the digital, internet and Web 3 business transformation
for start-ups and traditional enterprises to provides expertise in the development of e-commerce businesses.
On February 7, 2023, we entered
into an agreement with Fresh2 Ecommerce Inc. to purchase 100% of the issued and outstanding equity interest in such company and expect
to expand its reach in the US food market, targeting supermarkets.
On March 31, 2023, we entered
into an Asset Purchase Agreement (the “EZ Agreement”) with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce
company in the foodservice industry, through which we will acquire certain fixed assets of Easy Hundred and Easy Hundred’s intellectual
property relating to ez100, 2Supply and 100WAY. Pursuant to the EZ Agreement, we agreed to purchase the intellectual property relating
to ez100, 2Supply and 100WAY and certain fixed assets for the consideration of $8,149,595, payable in the form of $730,000 in cash and
17,665,702 Class ‘A’ ordinary shares of the Company. The initial closing of the transaction took place on March 31, 2023.
Our principal executive offices
are located at 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China. Our telephone number
at this address is +86-578-2051-666. Our registered office in the BVI is located at the office of Maples Corporate Services (BVI) Limited
at Kingston Chambers, P.O. Box 173, Road Town, Tortola, BVI. Our agent for service of process in the United States is Fresh2 Group
Inc, located at 1411 Broadway FL16 STE 24, New York NY 10018.
Investors should submit any
inquiries to the address and telephone number of our principal executive offices. Our main website is www.anpacbio.com and https://fresh2.co/. The information
contained on our website is not a part of this annual report.
The SEC maintains an
Internet site (http://www.sec.gov) that contains our reports, proxy statements, and other information that we have submitted electronically with the SEC.
B.
Business Overview
We are a biotechnology company
focusing on early cancer screening and detection. We market and sell a multi-cancer screening and detection test that uses our innovative,
patented CDA technology and our proprietary CDA device. In addition to early cancer screening and detection, our CDA technology has demonstrated
potential to assist physicians in cancer diagnosis, prognosis and recurrence.
Our CDA technology provides
a comprehensive platform, on which we have developed our CDA test and our proprietary CDA device. Our CDA test can detect and assess
an individual’s overall cancer risk with high accuracy, including early stage cancer. We also offer combination tests that combine
our CDA test with auxiliary tests based on other cancer screening and detection technologies to detect the risk of specific cancer types.
We have historically primarily combined our CDA test with the biomarker-based test in our combination tests. We began offering a new
combination test product named APCS in the second quarter of 2020, which combines our CDA test with the ct-DNA test. When we refer to
our technology or tests as a “cancer screening and detection” technology or test, we refer to the detection and assessment
of the risk of cancer occurrence, not to cancer diagnosis.
Our CDA technology focuses
on biophysical properties in human blood. Recent studies have shown that there is a correlation between certain biophysical properties,
including acoustical, electrical, magnetic, nano-mechanical and optical properties, and cancer occurrence. These studies have revealed
that biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell
growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties’ physical expressions
of information in the blood can indicate risks of pre-cancerous states and cancers. These biophysical signals change over time as cancer
occurs, progresses or regresses. Our proprietary CDA device uses an integrated sensor system to detect certain biophysical signals in
blood samples. After collecting data on these signals, we use our CDA technology and proprietary algorithm to measure and analyze these
signals at multiple biological levels (including the protein, cellular and molecular levels) and with multiple parameters (including
the overall CDA value, the PTF value and the CTF value). According to Frost & Sullivan, we are one of the first biotechnology companies
worldwide to focus on the detection and measurement of cancers’ biophysical properties. In our industry and related research fields,
our CDA technology, as well as CTCs, ct-DNA, exosome, mRNAs and other emerging technologies, are known as “next-generation”
cancer screening and detection technologies.
Our CDA technology provides
a highly accurate, early-stage risk assessment of the occurrence of cancer. As of December 31, 2022, our CDA technology had been shown
in numerous retrospective validation studies to be able to detect the risk of 26 cancer types with high sensitivity and specificity rates.
These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. Our CDA
technology requires only a standard blood sample from a tested individual, which minimizes the inconvenience and invasive procedures
and avoids the harmful side effects that are inherent to many other technologies.
We have established a test
database that as of December 31, 2022 consisted of over 280,095 blood samples of various age, sex and disease groups. Our database includes
approximately 239,759 samples from our commercial CDA-based tests and approximately 44,653 samples from our research studies. We believe
that we rank among the leaders of companies offering next-generation early cancer screening and detection technologies in terms of the
total volume of commercial and clinical samples for cancer screening and detection and in terms of the volume of commercial cancer screening
and detection tests conducted.
In late February 2023 we received the first payment from a Malaysian
customer who had signed a US$1.5 million purchase contract for our Model AP9080 cancer detection devices. The Model AP9080 cancer detection
device is based on our patented, novel multi-cancer testing technology named Cancer Differentiation Analysis Technology (CDA). This was
the first major sale of our cancer detection device into the Southeast Asia region and marks our entry into the global cancer detection
equipment market, as well as confirmation of our novel technology, reputation, and capability to penetrate the vast global market for
cancer detection.
We are continuing our multi-year
and multi-cancer test follow-up study in the PRC. As of Feb 22, 2023, the study has enrolled over 18,000 individuals from a general population
of 230,000 persons located in China. The test subjects were tested using our CDA method. We believe that the study is one of the largest
multi-year and multi-cancer follow-up studies in the world. The multi-year study fully validated that the CDA method is a multi-cancer
detection method which is capable of detecting multiple cancer types with statistical significance. We believe that the CDA method may
become a cost effective, multi-cancer screening method.
We have established two clinical
laboratories in China and one clinical laboratory in the U.S. Our principal laboratory is a licensed biomedical clinical laboratory located
in Lishui, Zhejiang Province, China, where we perform our commercial CDA-based tests (including our CDA tests and combination tests),
as well as a variety of other tests (including immunological and biochemical tests). Our laboratory in Haikou, Hainan Province, China
is a licensed genomics clinical laboratory where we perform gene sequencing tests. In addition to these two clinical laboratories, we
also have a research and development center located in Shanghai, China, where we develop our next-generation cancer screening and detection
technology and tests. In the United States, we obtained a CLIA Certificate of Registration for our laboratory in Philadelphia, Pennsylvania.
We have applied for a Pennsylvania state laboratory permit and plan to seek accreditation from CAP for this new laboratory. Our Philadelphia
laboratory is equipped to perform our CDA tests and biochemical tests. The biochemical tests are cancer tumor biomarker tests. We plan
to also conduct COVID-19 antibody tests in these two laboratories. We have entered into research agreements with U.S. universities and
academic medical centers and are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other
health organizations, to conduct research studies on our CDA technology. Our Philadelphia laboratory is currently conducting research
using the CDA technology and plans to conduct a correlation study with another qualified laboratory to validate a COVID-19 antibody test
using Roche’s FDA authorized equipment.
We performed our first commercial CDA-based test in China in 2015 and
have generated revenue since then. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold were
41,354 in 2020, 38,628 in 2021 and 30,390 in 2022. In mid-2020, we launched two new products, including our ADME immunology test and APCS
cancer screening and detection test (which is included in our combination tests). Our revenue from sales of cancer screening and detection
tests amounted to RMB18.5 million in 2020, RMB 14.9 million in 2021 and RMB 8.1 million (US$1.2 million) in 2022. We have not as yet commenced
marketing our CDA test as a laboratory developed test.
We recently entered into
the fast-growing Asian e-commerce food business in the U.S. In October 2022, we established Fresh2 Technology to be the umbrella organization
for this business. A team with extensive experience in the field was assembled to drive the project forward. In February 2023, we acquired
Fresh2 Ecommerce (“Fresh2”) and expect to expand its reach in the US food market, targeting supermarkets. This acquisition
is expected to accelerate the development of a B2B e-commerce platform for Asian food products. The acquisition of GISN (HK) LIMITED
(“GISN”), a technical solution and outsourcing consulting services provider focused on the digital, internet and Web 3 business
transformation for start-ups and traditional enterprises in late January 2023 provides expertise in the development of e-commerce businesses.
In March 2023, we entered into an Asset Purchase Agreement (the “EZ Agreement”) with Easy Hundred Inc. (“Easy Hundred”),
a U.S.-based e-commerce company in the foodservice industry, through which we will acquire certain fixed assets of Easy Hundred and Easy
Hundred’s intellectual property, including a full set of e-commerce platform source codes, covering websites, apps, and management
systems.
We believe that we have built
a core R&D team and have a comprehensive B2B e-commerce platform. We intend to assist supermarket operators and restaurant owners
in selecting food suppliers more efficiently and in the future to provide one-stop fulfillment services from food sourcing to last-mile
delivery. In the future, the Company intends to assist supermarket operators and restaurant owners in selecting food suppliers more efficiently
and expects to be able to provide one-stop fulfillment services from food sourcing to last-mile delivery.
Our CDA Technology
Our
CDA technology provides an innovative and comprehensive platform for us to develop multi-cancer screening and detection tests with high
sensitivity, specificity and cost-efficiency.
Principal Mechanism
Focus on Biophysical Properties
Our CDA technology is a liquid-based
technology. The critical difference between our CDA technology and other liquid-based cancer screening and detection technologies is
that our technology focuses on biophysical properties rather than conventional biochemical or genomic properties. Specifically, our CDA
technology is based on the correlations between biophysical properties and cancer occurrence. Recent studies have shown that there is
a correlation between certain biophysical properties and cancer occurrence. These studies have revealed that certain biophysical properties
could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis
(cancerous growth), which may lead to cancer occurrence. Biophysical properties exist in all human beings, including healthy individuals,
and the signals they express can be detected before a tumor has formed. Biophysical properties increase or decrease progressively in
a statistically significant way from healthy state to non-cancerous disease, pre-cancer disease, early- and late-stage cancer states.
The change in biophysical properties is a potential cause for the loss of immunity and increased occurrence of cancer. On the other hand,
the strength of biophysical signals expressed by these biophysical properties—which our CDA technology is designed to detect—increase
progressively from healthy through late-stage cancer states.
We have collected testing
data on 26 types of cancer, including data on biophysical properties measured in multiple serial samples collected from the same person
over time and corresponding pathological data. Our proprietary algorithm is based on this database, and it uses the testing data collected
by our CDA device to determine the PTF value, CTF value and overall CDA value of a blood sample. The overall CDA value determined through
our test factors in the PTF and CTF value, as well as other biophysical property characteristics of the blood sample. The overall CDA
value, as the principal parameter for our CDA technology, is proportional to the cancer risk.
Based on the progressive
changes of biophysical properties and their signals from healthy through late-stage cancer states, we believe that our CDA technology
is ideally suited for early cancer screening and detection, as well as assistance in cancer diagnosis, prognosis and reoccurrence. Through
tracking CDA values, we can obtain both static and dynamic (progression) of information on cancer risk.
Multi-level and Multi-parameter
Our CDA technology is designed
to analyze biophysical properties that potentially influence body functions at multiple biological levels, including cellular, protein
and molecular levels. By comparison, some other liquid-based cancer screening and detection technologies are based on detection signals
that exist at only one of the cellular, protein and molecular levels—for example, conventional biomarkers at the protein level
and CTCs at the cellular level. As a result of this multi-level analysis, we believe that our CDA technology is more comprehensive and
that it can provide more dimensions of information, potentially making it more accurate in detecting cancers.
Our CDA technology quantitatively
measures biophysical properties that are collectively possessed by a biological specimen. These properties may vary by health status
at the cellular, protein and molecular levels. At the cellular level, biophysical properties may not only change with a cell’s
surface properties, but they may also alter when interactions occur between cells (for example, intercellular repulsions and attractions)
as well as possibly cell-to-cell signaling. At the protein and molecular levels, certain biophysical properties may modify proteins’
surface phases and structures and affect the molecular mechanism that maintains the nuclear and genomic integrity of normal cells. Shifts
and aberrations in these biophysical properties may potentially lead to alterations in cell interactions and possibly affect functioning
and replication of DNA. These shifts and aberrations could therefore cause increased mistakes in gene replications and even increased
frequency of gene mutations that result in various diseases, including cancer. In addition, different cancers may share certain common
biophysical properties, and our CDA technology captures and quantifies the biophysical signals of malignant cells that are in general
distinct from those in normal cells. As a result of these measurements, our CDA technology can detect the risk of multiple cancers in
one test. In contrast, certain other liquid-based cancer signals only exist at one of the above three levels (cellular, protein or molecular)
and normally a specific signal corresponds to only one cancer. For instance, AFP tumor marker, a protein biomarker, is typically used
to screen exclusively for liver cancer; and PSA, another protein biomarker, is typically only used to detect prostate cancer.
Our CDA technology, together
with our CDA device, deploys various measurement parameters, primarily PTF, CTF and CDA values, by detecting certain biophysical properties
in blood. After testing a blood sample, our CDA device generates a series of testing data, including the PTF value, the CTF value and
the overall CDA value. The PTF value refers to the measured level of protein cancer-related factor in the blood. The CTF value refers
to the measured level of cellular cancer-related factors in the blood. Using our proprietary algorithm, we arrive at the overall CDA
value based on the PTF and CTF values, as well as other biophysical property characteristics of the blood. This overall CDA value is
the principal analysis parameter that we use to assess an individual’s overall cancer risk. Based on the results of these parameters,
we assess the risk of cancer to be low (normal), medium or high.
Analytical Validation
We have conducted numerous
research studies on our CDA technology’s utility and accuracy. Since 2015, we have completed 25 research studies on our CDA technology
with hospitals and medical institutes in China. Among them, the results of 18 research studies on which we collaborated with five Chinese
hospitals and medical institutes have been published at ASCO annual meetings, a famous international medical journal Expert Review of
Molecular Diagnostics and other medical conferences and in medical journal supplements. We have also completed an additional ten unpublished
research studies with nine hospitals and medical institutes in China. As of March 31, 2023, we had tested more than 281,994 blood
samples collected from various age, sex and disease groups, including over 237,206 samples from our commercial CDA-based tests and over
44,788 samples from our research studies.
Our research studies have
demonstrated that our CDA technology can detect the risk of multiple cancers with high sensitivity and specificity rates. We have used
meta-analysis to analyze the resulting data of all completed research studies for a specific cancer type up to December 31, 2022
and calculated our CDA technology’s sensitivity and specificity rates for that cancer type. Meta-analysis is a statistical analysis
of a large collection of analysis results from individual studies for the purpose of integrating the findings. The following table sets
forth the sensitivity and specificity rates of our CDA technology in detecting 26 cancers based on our completed research studies up to
December 31, 2022:
| |
Aggregate | | |
| | |
| | |
|
Cancer Type | |
Sample Size | | |
Sensitivity | | |
Specificity | | |
Publication Information(1) |
Lung Cancer | |
| 2,277 | | |
| 82.4 | % | |
| 83.0 | % | |
2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 (co-author: Cancer Hospital of Chinese Academy of Medical Sciences); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University); 2015 Annual Congress of Chinese Thoracic Society; 2017 ASCO Annual Meeting, J Clin Oncol 35, e23131, 2017 (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University); 2019 ASCO Annual Meeting, J Clin Oncol 37, e20673, 2020 (co-authors: Shanghai Changhai Hospital and Lishui Central Hospital) |
Cerebral Cancer | |
| 93 | | |
| 89.2 | % | |
| 89.9 | % | |
2019 ASCO Annual Meeting, J Clin Oncol 37, 2019 (suppl; abstr 2040) |
Nasopharyngeal Cancer | |
| 188 | | |
| 86.6 | % | |
| 89.1 | % | |
N/A |
Oral Cancer | |
| 60 | | |
| 78.3 | % | |
| 90.8 | % | |
N/A |
Laryngeal Cancer | |
| 61 | | |
| 93.4 | % | |
| 88.0 | % | |
N/A |
Thyroid Cancer | |
| 39 | | |
| 100.0 | % | |
| 83.6 | % | |
N/A |
Esophageal Cancer | |
| 2,253 | | |
| 85.8 | % | |
| 93.0 | % | |
2015 ASCO Annual Meeting, J Clin Oncol 33, e15059, 2015 (co-author: Shanghai Changhai Hospital); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and Fudan University Shanghai Cancer Center); 2017 Gastrointestinal cancers Symposium (San Francisco), J Clin Oncol 35, 2017 (suppl 4S; abstract 42) |
Lymphoma | |
| 528 | | |
| 87.1 | % | |
| 92.4 | % | |
N/A |
Breast Cancer | |
| 493 | | |
| 74.6 | % | |
| 92.2 | % | |
2015 San Antonio Breast Cancer Symposium(10.1200/JCO.2015.33.28_Suppl.13) |
Liver Cancer | |
| 804 | | |
| 92.3 | % | |
| 93.2 | % | |
2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 and e22171, 2015 (co-author: Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University) |
Bile Duct Cancer | |
| 26 | | |
| 87.5 | % | |
| 94.0 | % | |
N/A |
Gallbladder Cancer | |
| 28 | | |
| 100.0 | % | |
| 63.4 | % | |
N/A |
Pancreatic Cancer | |
| 162 | | |
| 89.3 | % | |
| 90.6 | % | |
N/A |
Gastric Cancer | |
| 1,438 | | |
| 88.7 | % | |
| 93.8 | % | |
N/A |
Kidney Cancer | |
| 55 | | |
| 88.9 | % | |
| 77.7 | % | |
N/A |
Bladder Cancer | |
| 29 | | |
| 72.4 | % | |
| 88.3 | % | |
N/A |
Colon Cancer | |
| 884 | | |
| 89.4 | % | |
| 91.2 | % | |
2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 (co-author: Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University); 2017 Gastrointestinal cancers Symposium (San Francisco), J Clin Oncol 35, 2017 (suppl 4S; abstract 564) |
Rectum Cancer | |
| 653 | | |
| 89.2 | % | |
| 88.0 | % | |
N/A |
Duodenal Cancer | |
| 32 | | |
| 84.4 | % | |
| 87.5 | % | |
N/A |
Prostatic Cancer | |
| 46 | | |
| 90.7 | % | |
| 93.2 | % | |
N/A |
Cervical Cancer | |
| 401 | | |
| 87.0 | % | |
| 90.2 | % | |
2020 Shenzhen New Horizons in Cancer Research |
Ovarian Cancer | |
| 474 | | |
| 90.5 | % | |
| 90.1 | % | |
2020 Shenzhen New Horizons in Cancer Research |
Uterine Cancer | |
| 164 | | |
| 87.2 | % | |
| 92.3 | % | |
N/A |
Leukemia | |
| 196 | | |
| 77.6 | % | |
| 88.0 | % | |
N/A |
Bone Cancer | |
| 12 | | |
| 91.7 | % | |
| 91.0 | % | |
N/A |
Skin Cancer | |
| 18 | | |
| 88.9 | % | |
| 93.7 | % | |
N/A |
| (1) | For each specific cancer type shown in the
table above, the references in this column “Publication Information” indicate
the medical conferences and medical journal supplements where we have published any research
results for that cancer type up to December 31, 2022, while “N/A” means
that none of our completed research studies of that cancer type had been published up to
December 31, 2022. |
Early Cancer Screening and Detection
Research studies
A
number of our research partners, including hospitals and medical institutions in China, have validated our CDA technology’s ability
to detect the risk of multiple cancers. This validation has been done through their un-blinding of our single- or double-blinded testing
results for tested individuals in their institutions. Single-blinded test refers to the testing process in which we do not know, but
our research partners know, about the pathological or clinical information of the tested samples or the makeup of the patient and control
groups during the course of testing. By comparison, in double-blinded tests, neither us nor our research partners have this information
until the un-blinding step. Un-blinding refers to the disclosure of the previously withheld information to us by our research partners
in single-blinded tests, or the publication of this information by a third-party study administrator or by our research partners after
they otherwise acquire the information. Set forth below are several representative examples of validation studies on our CDA technology
that we have completed with Chinese hospitals:
| ● | Shanghai Changhai Hospital |
Since
2015, we have cooperated with Shanghai Changhai Hospital to research various cancers, including lung cancer. We have published six papers
under this project. The latest paper was published at the 2019 ASCO Annual Meeting. In this study, 832 blood samples collected
from patients with non-small cell lung cancer, or NSCLC, and 642 blood samples from healthy individuals (as the control group) were tested
using our CDA technology. The results indicated that our CDA technology had good sensitivity and specificity rates even for lung cancer
at stage I—85.2% and 93.0%, respectively.
| ● | A Cancer Hospital in Beijing |
This hospital is one of the
first hospitals that has cooperated with us in conducting research studies. At the 2015 ASCO Annual Meeting, we published a paper evaluating
our multi-level, multi-parameter CDA detection method for digestive system cancer diagnosis based on one of our joint research studies
with this hospital. Although the sample size was limited, this was the earliest paper comparing our CDA technology with conventional
biomarkers.
In this study, the hospital
collected blood samples from nine HCC patients and six colorectal cancer patients, as well as from a control group of 20 healthy individuals.
These blood samples were tested by both our CDA technology and methods based on conventional biomarkers, including AFP and carcinoembryonic
antigen, or CEA. The results showed that there was a significant statistical difference in the measured overall CDA value between each
of the HCC and colorectal cancer patient groups and the control group. Specifically, in the HCC group, our CDA technology had a sensitivity
rate of 77.0% compared to the AFP-based method’s 33.0%, while the specificity rates of both methods were similar. In the colorectal
cancer group, our CDA technology had a sensitivity rate of 83.0% compared to the CEA-based method’s 33.0%, while the specificity
rates of both methods were similar.
| ● | Lishui Central Hospital, the Fifth Affiliated Hospital of
Wenzhou Medical University |
We have collaborated with
Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University, or Lishui Central Hospital, primarily in liver
and lung cancer studies. We published two papers, one on HCC and one on NSCLC, at the 2015 ASCO Annual Meeting.
In the HCC study, blood samples
were collected from 485 HCC patients, 64 cirrhosis patients and 44 patients with benign liver diseases, or BLD, as well as from a control
group of 75 healthy individuals. All the samples were tested using our CDA technology. The results indicated that there was a significant
statistical difference in the measured overall CDA value between the HCC patient group and each of the control, BLD, and cirrhosis groups.
In the NSCLC study, three
groups of blood samples were tested using our CDA technology, which included 383 samples collected from NSCLC patients, 103 samples from
patients with non-cancerous lung diseases and a control group of 149 healthy individuals. The results indicated that our CDA technology
can detect NSCLC with the sensitivity of 87.7% and specificity of 79.9%.
| ● | Shanghai Jiao Tong University School of Medicine |
A two-stage study to evaluate
the value of CDA test was conducted and is still going.
The first stage of a cross-sectional
study included 75,942 healthy individuals in routine health checkup and the second stage of a prospective population-based cohort which
included 1,957 healthy community members. Forty-eight and ten cancer cases were identified among cross-sectional study and prospective
population-based cohort, respectively. Using a pre-determined cutoff, we found that the CDA test could differentiate blood samples between
healthy and cancer individuals with >93% specificity and >55% sensitivity in both studies.
With high specificity and
moderate sensitivity of CDA test, the study indicates that CDA can analyze biophysical properties in the blood to rapidly and reliably
screen healthy individuals from cancer patients in a health checkup setting where most individuals are healthy or with average risk of
cancer.
We have completed an initial
data analysis on a multi-year lung cancer prognosis clinical trial carried out in Shanghai ChangHai Hospital in which CDA data were collected
on lung cancer patients though after cancer diagnosis, surgery, cancer treatment including drug treatment and, for some individuals,
remission. The analysis showed that there is a strong correlation (statistically significant correlation) between CDA values and patient
responses to treatment. It demonstrated that CDA technology has the potential to be a viable method for prognosis of cancer treatment.
The above-mentioned results were also reported in a poster paper at 2022 American Association for Cancer Research (AACR) Conference in
April, 2022.
Follow-up phone consultations
We conduct follow-up phone
consultations with individuals for whom we have conducted commercial CDA-based tests, to validate our CDA technology’s utility
in detecting the risk of cancer. These individuals were generally asymptomatic at the time they took our tests. We began our first follow-up
call in 2017 and plan to do these follow-up phone consultations for five years. We have obtained preliminary results from this initiative.
We typically call a tested
individual for the first time within 15 days (for individuals with high-risk results), three months (for those with medium risk
results) or six months (for those with low-risk results), after issuing a cancer risk assessment report for a tested individual.
We also have subsequent phone consultations with the tested individuals on an annual basis. During these consultations, our customer support
and service personnel typically ask the tested individuals with medium or high risks of cancer about, among other things, their health
conditions, whether or not they have taken follow-up checkup tests as we suggested in the cancer risk assessment reports, and the relevant
follow-up diagnoses or test results, if any. As of April 15, 2023, we had contacted over 31,376 tested individuals, of whom 18,306 individuals
gave us substantive feedback regarding their health conditions and disease development, and among them, 1,101 were previously tested as
having high risk of cancer, 172,050 with medium risk of cancer and the rest with low risk of cancer. Based on the feedback from these
calls, 2,882 of the tested individuals had been diagnosed with various major diseases or cancers by third-party hospitals and medical
institutions within two years of taking our CDA-based tests, including 252 cases with cancers, 1,470 with pre-cancer diseases or
benign tumors, and 1,160 with major non-cancerous diseases. All of these 22,882 individuals were previously tested as having medium or
high risk of cancer. Among those 1,101 and 15,050 individuals tested with high and medium risk of cancer, respectively, 252 (or 22.8%)
and 2,630 (or 17.5%) had been diagnosed with cancers, pre-cancer diseases or major non-cancerous diseases, respectively. As it may take years
for diseases to progress into cancers or pre-cancer or major non-cancerous diseases, we expect that the percentage of cancer occurrence
among these 18,306 cases will likely increase over time.
In addition, based a preliminary
data analysis by a research partner in early December 2020 of the data of our follow-up phone consultations with over 13,000 individuals
as of June 30, 2020, the initial results indicated that over 20 types of pre-cancer diseases were diagnosed at hospitals or physical
testing centers following the individuals’ initial screening utilizing our CDA technology. Of the over 13,000 individuals included
in the preliminary data analysis, we screened out pre-cancer cases at roughly 4.5 times of cancer cases.
Assistance in Diagnosis, Prognosis and
Recurrence
Assistance in diagnosis
Oncologists typically use
tissue biopsy as the “gold standard” method for cancer diagnosis, and they also utilize multiple technologies to provide
multi-dimensional input to a cancer diagnosis. These technologies can be used for “assistance in diagnosis” because they
provide input complementary to pathologic information drawn from a tissue biopsy, which helps physicians to ensure that their cancer
diagnoses are comprehensive and unbiased. For example, a CT scan, in conjunction with the detection of CEA and other tumor markers, is
often used to assist in diagnosing lung cancer.
Since 2015, we have collaborated
with third-party oncologists and hospitals in utilizing our CDA technology to assist in the diagnosis of multiple cancer types in a number
of research studies. These research studies are designed to evaluate the performance of our CDA technology in predicting cancer occurrence
in a population with cancer symptoms or abnormal test results. To date, ten of these studies have been published at ASCO annual meetings
and other medical conferences and medical journal supplements. The results of these studies demonstrated our CDA technology’s effectiveness
in assisting in the diagnosis of multiple cancers—particularly lung and esophageal cancers. For example, in our joint study on
NSCLC with Shanghai Changhai Hospital in 2017 (2017 ASCO Annual Meeting; J Clin Oncol 35, e23131, 2017), our CDA technology successfully
detected NSCLC with sensitivity of 68.7%, higher than those of CT scans for all NSCLC stage groups. This indicates that compared to a
CT scan, our CDA test provides more accurate and reliable diagnostic information and data for oncologists in diagnosing lung cancer.
In another study with Shanghai
Changhai Hospital in 2015 (2015 ASCO Annual Meeting; J Clin Oncol 33, e15059, 2015), our CDA technology detected esophageal cancer with
relatively high sensitivity of 70.0% and specificity of 90.0%. These results indicated our CDA technology’s effectiveness in assisting
in the diagnosis of esophageal cancer.
Prognosis and recurrence
Prognosis refers to an assessment
of whether and how a patient responds to cancer treatment. Effective prognostic tools can help oncologists dynamically monitor cancer
treatment progression, make necessary and timely adjustments to cancer treatment, and correctly predict a patient’s treatment outcome,
such as the survival rate—the percentage of people in a patient group who will be alive for a period of time, the survival
time—life expectancy after diagnosis, and whether or not they will go into remission. In some circumstances, prognosis can be effective
even before the cancer treatment starts. Recurrence means return of cancer after the patient has been treated and has gone into remission and happens more frequently for certain cancer types. Patients who have gone into remission have a substantially higher risk of cancer
recurrence than the general population. It is therefore important to have technologies to detect cancer recurrence timely, cost-effectively
and without side effects. Because biophysical properties in the blood increase or decrease progressively in a statistically significant
way from healthy state to late-stage cancer states, we believe that our CDA technology can be used for prognosis of cancer treatment
outcomes and for detecting the risk of cancer recurrence.
In a study published at the
2016 ASCO Annual Meeting (2016 ASCO Annual Meeting, J Clin Oncol 34, 2016 (suppl; abstr e23176)), we investigated our CDA technology’s
potential for breast cancer prognosis by testing the blood samples collected from three breast cancer patients. The CDA data for each
patient’s blood samples were grouped into three categories, namely before, during and after any post-operative treatment. Two of
these patients showed favorable responses to the post-operative treatment and their average overall CDA values declined after the treatment.
The third patient did not respond well to the post-operative treatment and their average overall CDA values remained high after the treatment.
These results indicated that our CDA technology may be useful for monitoring a breast cancer patient’s response to the post-operative
treatment, although this utility of our CDA technology needs more validation studies.
Since 2015, we have been
working with multiple hospitals in China, including Shanghai Changhai Hospital, Lishui Central Hospital, a cancer hospital in Beijing
and a cancer center in Shanghai, in a number of research studies. These studies are designed to explore our CDA technology’s effectiveness
as a prognostic tool for lung cancer treatment.
In one of these studies in
2016, we collaborated with Shanghai Changhai Hospital and tested and collected the overall CDA values from 86 lung cancer patients. These
patients were divided into two groups: the “good prognosis” group (with each member having an overall CDA value below 47)
and the “bad prognosis” group (those with values above 47). We predicted that the “good prognosis” group would
have a higher survival rate than that of the “bad prognosis” group due to their relatively low overall CDA values. After
the grouping, both groups went through chemotherapy to treat their lung cancers. Two years after the chemotherapy, the survival
rate of the “bad prognosis” group dropped below 50%, while that of the “good prognosis” group stayed at the level
of 75%. The differences in those two outcomes are statistically significant and meaningful. The results of this clinical study demonstrate
our CDA technology’s strong ability in predicting the outcome of lung cancer treatment and validate that it can predict treatment
outcomes even before the treatment starts.
The following graph provides
a comparison of the predicted progression-free survival rates (the percentage of the measured population that did not demonstrate
worsening in their condition over a specified period), or PFS, for those two lung cancer patient groups in this study.
In another study, we tracked
a number of patients throughout their approximately three years of cancer treatment. The following graph illustrates the changes
of a representative patient’s CDA values throughout the tracking period.
CDA in Long-Term Cancer Monitoring (Stage IIA
with Surgery)
This patient is a middle-aged
man diagnosed with a stage IIA lung cancer. As illustrated in the graph above:
| ● | At the beginning of the tracking
period, namely Day zero, the patient’s overall CDA value was relatively high, which
corroborated the oncologist’s diagnosis that the individual had a cancer; |
| ● | From Day 7 to Day 28, as the cancer
treatment progressed, the patient’s overall CDA value, as well as PTF and CTF values,
continued dropping; |
| ● | After his surgery (around Day 52)
and during his chemo-therapy treatment, the patient’s overall CDA value dropped below
the cut-off value, indicating that by that time, the patient’s stage IIA lung cancer
had been effectively controlled and he went into remission; |
| ● | However, after a period of remission
(around Day 212), the patient’s overall CDA value went up again, which predicted a
recurrence of cancer. Shortly after this uptick in the overall CDA value, the oncologists
diagnosed that the patient’s cancer had come back and further spread to the liver,
corroborating our CDA test’s prediction; |
| ● | Subsequently, the patient went through
chemotherapy for liver cancer. Following this treatment (around Day 277), the patient showed
an overall CDA value below the cut-off value, indicating that the patient responded positively
to the chemotherapy and went into remission again; and |
| ● | From Day 383 to Day 904, the patient’s
overall CDA value, as well as PTF and CTF values, remained relatively low, indicating that
he was in remission. This was also confirmed by the oncologists’ clinical observations. |
To
summarize, this representative example has shown that our CDA test can (i) dynamically monitor a patient’s treatment progression,
indicating when the cancer is under control (namely, when the overall CDA value drops below the cut-off value) and when the patient enters
the remission phase (namely, after the overall CDA value stays below the cut-off value for a period of time); and (ii) correctly
predict cancer recurrence ahead of time (namely, when the overall CDA value resurges and exceeds the cut-off value).
Our CDA Device
Our
proprietary CDA device, which we designed in-house and is covered by numerous patents, is used to conduct cancer screening and detection
tests based on our proprietary CDA technology. This device uses an integrated, multi-level and multi-parameter sensor system to detect
multiple biophysical properties in one single blood test. We believe that we are one of the first biotechnology companies worldwide
to use such a sensor system to detect cancers’ biophysical properties.
Working Mechanism
Our CDA device consists of
a blood sample input unit, a sample transport unit, a sample mixing chamber, a testing unit and a data storage unit. Because our CDA
technology detects biophysical properties, our CDA device’s sensors play a dominant role in biophysical signal detection.
Our CDA device uses a microfluidic
device, which is connected to a fluid delivery line inside the testing unit. This microfluidic device contains three primary components:
micro-channels, micro-sensors and measurement instruments with automated data recording capabilities. After a blood sample goes into
the micro-channels of the microfluidic device, the sensors will probe the blood and measure the relevant data. The measurement instrument
that interfaces with the sensors applies a constant input to the blood and records the corresponding biophysical responses as a function
of time. The resulting raw data contains both dynamic and static information, which is fed into our proprietary algorithm for further
analysis.
Our CDA device is much less
costly to manufacture than the equipment used by many of our competitors, especially the complex and expensive gene sequencing machines
used in ct-DNA-based tests and micro-electrical mechanical devices used in CTC-based tests. As a result, we can offer our customers cancer
screening and detection tests with high accuracy at prices significantly lower than many of our competitors’ tests.
Operation
Our
CDA device is a fully-automated system requiring minimal human involvement. After collecting blood samples from the individuals, all
our testing personnel needs to do is to properly place these blood samples on the test-tube racks and station the racks inside
the sample input unit of our device. Our device will then automatically complete the subsequent test as programmed, including:
| ● | heating the blood samples to prepare
them for testing; |
| ● | deploying multiple sensors inside
the microfluidic device to detect relevant biophysical properties in each blood sample and
obtain multi-level information; |
| ● | discharging the tested blood samples
and cleaning the used test tubes; and |
| ● | transferring the testing data collected
by the microfluidic device (including PTF and CTF values) to the computer connected to our
CDA device, which will process this testing data with our proprietary algorithm and convert
it into an overall CDA value. A series of CDA itemized values will also be generated, if
we conduct biomarker-based tests in combination with our CDA test while offering our cancer-positioning
services. |
Based on the resulting CDA
values, our professionals can assess a tested individual’s likelihood of having or developing cancers and issue the corresponding
cancer risk assessment report.
We design and configure all
the key components of our CDA device and outsource production of these components to a number of qualified contract manufacturers. We
assemble these components into our CDA devices in-house. We have implemented a strict selection process for our contract manufacturers
and evaluate our contract manufacturers’ qualifications on an ongoing basis. We do not disproportionately rely on any particular
contract manufacturer and have not entered into any long-term or exclusive supply contract with any of them. For our CDA device, we obtained
a Class II medical device manufacture license in June 2013 (renewed in 2018) and a Class II medical device registration
certificate April 2015 from the NMPA, Zhejiang Branch. These licenses, along with our clinical laboratory license, allow us to manufacture
our device in Lishui, Zhejiang and use the device commercially in our licensed clinical laboratories in China. While conducting the final
assembly, testing and packaging of our devices at our plant in Lishui, Zhejiang Province, we thoroughly inspect the key components of
our devices sourced from contract manufacturers and closely follow applicable PRC regulations and recognized international quality control
standards.
Our CDA-based Tests
Unlike conventional cancer
screening and detection approaches such as imaging technology and tissue biopsy, our CDA test uses liquid-based technology to detect
the risk of cancer and non-cancerous diseases based on our CDA technology. It is minimally invasive, side effect-free and highly automated.
Because it focuses on changes in cancer-related biophysical properties as a disease progress, we believe that our CDA test can be used
for multiple purposes, including early cancer screening and detection, as well as assistance in cancer diagnosis, prognosis and recurrence.
We maintain a comprehensive
and flexible test menu to meet different customers’ needs. Our CDA test can detect and assess an individual’s overall risk
of having or developing cancer, and we deliver a cancer risk assessment report as the final product of this test. This report presents
the analytical parameters that our CDA test uses, including the PTF, CTF and overall CDA values. We set cut-off values for the PTF, CTF
and overall CDA values based on the pathological data from our retrospective validation studies and the intended cancer screening and
detection objectives. PTF or CTF values in excess of the specified cut-off values indicate a risk of cancer. In addition, we set two
cut-offs to divide the overall CDA value into three categories: low risk (healthy), medium risk and high risk. These values, collectively,
indicate a tested individual’s overall risk level of having or developing cancer, without identifying the specific types of cancer
that the individual may have. For tested individuals with medium or high cancer risks as indicated by the overall CDA value, we normally
suggest in our reports that they get follow-up medical examinations on the relevant organs.
In addition to our CDA test,
a tested individual can pay a premium for our combination tests, which also include cancer-positioning services to identify the specific
type(s) of cancer that he or she has a medium or high risk of having or developing. Our combination tests combine our CDA tests
and, on an auxiliary basis, biomarker-based or ct-DNA cancer screening and detection tests performed either by us or by third-party clinical
laboratories that we engage. These combination tests typically use two cubic centimeters of blood from the tested individual to perform
our CDA test, three cubic centimeters of blood to perform the biomarker-based test and ten cubic centimeters of blood to perform the
ct-DNA test. In the combination tests our CDA technology plays a dominant role in identifying the risk of cancer, while biomarkers or
ct-DNA provide auxiliary information on the types of cancer that may be involved. We integrate the results of these separate tests using
our proprietary algorithm and translate them into a series of itemized CDA values. We then analyze these itemized CDA values to identify
the cancer type(s) that a tested individual has a medium or high risk of having or developing. These identified cancer types and
the tested individual’s corresponding risk levels of having or developing them will also be included in that individual’s
cancer risk assessment report.
We offer standardized CDA-based
tests (with or without cancer positioning services). Generally, the more cancer types a standardized test with cancer positioning services
can identify, the higher it is priced. In each standardized test with cancer-positioning services, the specific cancer types that can
be identified vary between males and females. For instance, our popular CDA six-cancer test with positioning services identifies lung,
liver, stomach and colon cancers for both genders, as well as rectal and prostate cancers for males and breast and ovarian cancers for
females.
Commercialization
China
In China, we have established clinical laboratories in Lishui, Zhejiang
Province and Haikou, Hainan Province. We obtained the medical institutional practice license from the NHC in 2016 and 2015, respectively,
for these two laboratories to conduct medical tests, each for a five-year term. Our Lishui laboratory conducts substantially all of our
commercial CDA-based tests (including our CDA tests and combination tests), as well as a variety of other tests (including immunology
and biochemical tests). In 2020, we launched our ADME immunology test and APCS cancer screening and detection test (which combines our
CDA test with the ct-DNA test and is a type of combination test). Both of these new tests are conducted at our Lishui laboratory. We performed
our first commercial CDA-based test in 2015 and have generated revenue in China for four consecutive years. The number of our commercial
CDA-based tests we sold were 41,354 in 2020, 38,628 in 2021 and 30,390 in 2022.
In addition to our CDA-based tests, we design annual physical checkup
plans for certain of our corporate and life insurance company customers as value-added services and to facilitate these customers to procure
physical checkup services from third-party physical checkup service providers. We also sell annual physical checkup packages to our customers,
which are designed to include our CDA-based tests as part of the physical checkup services. We outsource a substantial portion of these
checkup services in these packages to qualified physical checkup institutions. For the year ended December 31, 2022, we had completed
total sales of RMB 1.6 million physical checkup packages.
We have been piloting our
genomics tests in our Haikou laboratory operated by our subsidiary Shiji Hainan, which we acquired in November 2017. Our genomics
tests primarily consist of genetic testing for the purpose of targeted therapy selection and pharmacogenomics, and ct-DNA mutation testing
for multiple purposes, including early cancer screening and detection and prognosis.
Supported by our diverse
tests and services, we intend to further expand our customer base in China. To achieve this objective, we plan to market our tests to
Chinese hospitals. In December 2018, we applied to the NMPA for a Class III medical device registration certificate for our
CDA device to assist in multi-cancer diagnosis. We expect that it would take us at least three years to obtain this registration
certificate. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture
of Class III medical devices. With these Class III medical device licenses, we will be permitted to place our devices within
Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting
in physicians’ diagnosis of specified multiple cancers. We expect our business in China to expand substantially following the commencement
of this commercial cooperation with Chinese hospitals.
United States
In the United States, we
have established a CLIA and CAP certified clinical laboratory in Philadelphia, Pennsylvania. We are currently permitted to conduct our
CDA test for research use in the United States. To commercialize our CDA test in the United States, we intend to initially market it
to U.S. customers as a Laboratory Developed Test (LDT). As an LDT, we do not expect that our CDA test will require premarket clearance,
market authorization, or approval from the FDA prior to marketing. We may begin marketing our test as soon as we complete our validation
studies Under CLIA, CAP, and state licensing requirements, and obtain any state laboratory licenses
or other approvals that we are required to hold (with the exception of New York State) to offer our CDA test in the corresponding states.
These studies are designed to demonstrate the analytical and clinical performance of the test. For more information about the state laboratory
license for New York State and its application process, see “Item 4. Information on the Company—B. Business Overview—U.S.
Regulations—Federal and State Laboratory Licensing Requirements.” We have entered into research agreements with U.S. universities
and academic medical centers, and we are in discussions with U.S. hospitals, medical institutions, CROs, managed care companies and other
health organizations, to conduct research studies on our CDA technology in the U.S.
In addition, we have validated
under CLIA, CAP guidelines, six cancer biomarkers and a COVID-19 antibody test using Roche’s FDA approved Cobas platform and
assay but we have not begun to commercialize the test.
Research and Development
The development of our CDA
technology and device (together with our proprietary algorithm) is largely attributable to our integrated research and development team
that comprises talent from both China and the United States. In our research and development center based in Shanghai, we conduct various
ongoing research studies on our CDA technology and continue to improve our CDA device.
We believe that our research
and development team possess industry-leading expertise in the early cancer screening and detection field. As of December 31,
2022, this team had 21 members, including four with M.D. degrees and three with Ph.D. degrees. Our research and development team has
a multi-disciplinary background, and most members of this team specialize in areas related or helpful to the development of our CDA technology
and device, including mechatronics, physics, biomedical science or computer science. Our co-founder, Dr. Chris Chang Yu, our vice
president in charge of R&D, Mr. Xuedong Du, and our chief medical officer, Dr. He Yu, have led our research and development
team since our inception, leveraging their multi-disciplinary expertise and industry experience. These key members have spearheaded our
research and development team in achieving a number of technological breakthroughs, including the design and fabrication of the microfluidic
device—the key functioning component of our CDA device—and the testing of multiple cancers in a single blood test. Since
2015, our research and development team had published 15 articles on ASCO and other medical conferences and medical journal supplements
to demonstrate our CDA technology’s clinical utility.
Our joint technical
paper on novel Cancer Differentiation Analysis (CDA) Technology for multi-cancer screening with multiple leading medical institutions
was accepted and published online on November 30, 2021 by the Expert Review of Molecular Diagnostics, a peer-reviewed international
medical journal that has an impact factor of 5.2.
At the 113th Annual Meeting
of the American Association for Cancer Research (AACR) held during April 8 to 13, 2022, Fresh 2 Group presented and published the
paper “CDA Technology Based on Innovative Biophysics” in the form of a poster. A Novel Bio-Physical Based CDA Approach to
Lung Cancer Therapeutic Response. The co-authors of the paper are the State Key Laboratory team from the School of Life Sciences of Fudan
University, a well-known university in China, and the excellent medical team from Shanghai Changhai Hospital.
We have invested significantly
in research and development since our inception. Our research and development expenses were RMB11.6 million, RMB16.2 million and RMB9.5
million (US$1.4 million) in the years ended December 31, 2020, 2021 and 2022, respectively.
Our Ongoing Research Studies on CDA Technology
In
recent years, we have collaborated with a number of Chinese hospitals and medical institutions in conducting clinical studies on
our CDA technology. These collaborations have enabled us to validate the effectiveness and utility of our CDA-based test in a clinical
setting, explore new applications of our CDA technology, and provide us access to clinically well-characterized patient data. In addition,
we have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S.
hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our
CDA technology in the United States. Currently, our ongoing clinical studies on our CDA technology mainly focus on: (i) improving
our CDA technology’s utility in detecting early-stage cancers with high incidences in China and the United States, as well as certain
cancer types that have been considered difficult for liquid-based technology to detect; (ii) exploring this technology’s potential
to dynamically monitor cancer progression and for assistance in cancer diagnosis, prognosis and recurrence; (iii) expanding this
technology’s application to different oncological areas, including veterinary cancer screening and detection; and (iv) validating
this technology’s ability to detect the risk of major non-cancerous diseases. The following table summarizes our ongoing research
studies on CDA technology.
| |
| |
| |
Estimated | | |
|
Commencement Date | |
Research Partner | |
Cancer Type | |
| Sample
Size | | |
Study Purpose |
September 2019 | |
University of Pittsburgh Medical Center | |
esophageal cancer | |
| 100 | | |
for early cancer screening and detection |
August 2019 | |
University of Pittsburgh Medical Center | |
gynecologic cancers | |
| 40 | | |
for early cancer screening and detection |
May 2019 | |
A university in Shanghai | |
multiple cancers (with no specification of cancer types) | |
| 15,000 | | |
for early cancer screening and detection, as well as assistance in diagnosis, prognosis and recurrence |
July 2017 | |
A cancer center in Shanghai | |
multiple cancers (with no specification of cancer types) | |
| 200 | | |
for early cancer screening and detection |
July 2017 | |
University of California, Davis | |
sarcoma and carcinoma cancer | |
| 186 | | |
for CDA technology’s application to canine cancer areas |
May 2017 | |
Shanghai Changhai Hospital | |
lung and esophageal cancer | |
| 5,000 | | |
for early cancer screening and detection |
May 2017 | |
A hospital in Shanghai | |
lung, colorectal, gastric, breast and pancreatic cancers | |
| 1,600 | | |
for assistance in diagnosis, prognosis and recurrence, as well as early cancer screening and detection |
These ongoing research studies
can be categorized into the following three groups by study purpose:
Studies for Early Cancer Screening and
Detection
Our current ongoing research
studies in collaboration with Shanghai Changhai Hospital are based on our research agreement dated April 2017. These research studies
are designed to validate our CDA technology for the screening and detection of early-stage lung and esophageal cancers. According to
Frost & Sullivan, in 2018 there were approximately 867,500 and 271,600 new incidences of lung cancer and esophageal cancer in
China, respectively, and lung cancer ranked first among the five most frequent cancers in China. These two cancers are also generally
considered difficult for liquid-based technologies to detect with high accuracy, according to Frost & Sullivan. In this project,
Shanghai Changhai Hospital is required to provide us with approximately 5,000 blood samples for research studies. Certain preliminary
published testing results have shown that our CDA technology can detect the risk of NSCLC with a sensitivity rate of 85.2% and a specificity
rate of 93.0% (2019 ASCO Annual Meeting; J Clin Oncol 37, e20673, 2019).
We and a cancer center in
Shanghai executed a research project agreement in July 2017. In this ongoing research project, this cancer center is required to
provide us with approximately 200 blood samples for the research study to validate our CDA technology’s ability to detect the risk
of multiple cancer types. These cancer types include certain cancers that are generally considered difficult for liquid-based technologies
to detect, such as esophageal cancer.
We also entered into a
research project agreement with a university in Shanghai in May 2019. In this ongoing research project, this university will
provide us with approximately 15,000 blood samples for our research studies for multiple purposes, including early cancer screening
and detection of multiple cancer types (including lung and esophageal cancers), as well as assistance in diagnosis, prognosis and
recurrence. A population-based cohort study, the Prospective Population-based Cohort Study (the “PPCS”) was designed to
further explore the performance of CDA test. Eligible participants were aged over 40 years and recruited from five communities
in Changning District, Shanghai, China. Participants with a confirmed history of cancer at enrollment were excluded. As of
December 31, 2022, a total of 1,957 participants were enrolled in the study, and all participants had a CDA test at baseline,
with no further series of tests were performed.
Studies for Assistance in Diagnosis, Prognosis and Recurrence
Since
May 2017, we have been working with a hospital in Shanghai on a research study on our CDA technology primarily for
assistance in diagnosis, prognosis and recurrence. Under this ongoing study, this hospital is expected to provide us with
approximately 1,600 blood samples. As December 31, 2022, 249 blood samples are collected from patients diagnosed with different
subtypes of lung, colorectal, gastric, breast and pancreatic cancers and at different stages of cancer development. By analyzing the
pre- and post-treatment CDA values of these patients, we have found correlations between the changes in a patient’s CDA values
and the cancer treatment that the patient has received.
Studies for CDA Technology’s Application to Different
Oncological Areas
We
have been collaborating with the Department of Veterinary Medicine of the University of California, Davis in a study on early cancer
screening for canines. Through this study, we plan to expand the application of our CDA technology to veterinary cancer screening
and detection.
Studies for Major Non-Cancerous Disease Detection
In addition to the above
ongoing studies on our CDA technology’s applications in oncological areas, we are also conducting research on our CDA technology’s
ability to detect the risk of pre-cancer diseases and various major non-cancerous diseases, including lung diseases (such as pneumonia
and tuberculosis), type II diabetes, heart diseases (such as heart failure and arrhythmia), liver diseases (such as cirrhosis and hepatitis),
gastric diseases (such as gastritis and gastric polyp) and biliary diseases (such as calculus of bile duct and cholecystolithiasis).
Our preliminary research studies indicate that our CDA technology is able to distinguish individuals with some major non-cancerous diseases
from the control group and the cancer group. More studies and further analysis of the study results are needed to validate our findings
on our CDA technology’s utility in these major non-cancer areas.
Our Research on Improving our CDA Device
We
have conducted substantial research to increase the operational efficiency of our CDA device and, in turn, improve our CDA test’s
signal-to-noise ratio to further elevate its accuracy. Our current research in this aspect primarily focuses on enabling our device to
improve our CDA technology’s ability to identify cancer types, our CDA technology’s signal-to-noise ratio and its testing
throughput. For the new device, we have finished design taping out, silicon processing and packaging, and now the device is under effectiveness
and reliability assessment.
Sales and Marketing
We currently sell our cancer
screening and detection tests only in China. We sell our tests primarily to our customers directly, as well as through our sales agents
such as health management companies and medical device dealers. We select our sales agents based on their reputation, market coverage,
sales experience and the size of their sales force, and we generally conduct credit assessments of our sales agents.
We set the prices of our
tests primarily based on the numbers of cancers that they test. However, we do not set the resale prices for our tests, which our sales
agents typically have the sole discretion to determine. We typically give our corporate customers and sales agents a credit term of one
to three months for the payments.
Our marketing is focused
on expanding the market awareness of our cancer screening and detection test and continuously growing our customer base. We primarily
deploy our own sales and marketing personnel to market our tests. As of December 31, 2022, we had 9 sales and marketing personnel.
In addition to conducting direct sales to our existing customers, our sales and marketing personnel prepare and deliver our brochures
and product presentations to potential customers and attend academic conferences and industrial exhibitions to advertise our CDA technology
and tests. Our sales and marketing personnel are generally well trained and educated about the complexities of our tests, and they typically
have extensive experience in the cancer early screening and detection field or other medical areas. As our business grows, we plan to
build up our sales and marketing team and strengthen our own sales network in China.
We also use sales agents
to promote our tests. By referring our tests to their customers and inviting us to deliver product presentations at their promotional
events, our sales agents have connected us with their quality customers and enabled us to utilize their network resources for marketing
purpose.
Our Customers
We believe that our cancer
screening and detection tests have significant market potential in China, as there is strong demand among China’s large, aging
population for early cancer screening and detection services. Our existing customer base in China consists primarily of life insurance
companies and other large corporations. Generally, they are frequent and high-volume users of our cancer screening and detection tests,
because they provide our tests to their individual customers as value-added services or to their employees as benefits. While the majority
of our sales has come from our direct sales to our customers, we expect that a significant portion of our sales will continue to be generated
through our sales agents.
We believe our customer base
provides a meaningful opportunity for our further growth. In addition, we believe an expansion in our customer base will encourage the
market acceptance of our CDA technology and raise the public’s awareness of our brand. We plan to acquire additional customers
for our CDA-based tests through the annual physical checkup packages we offer. In addition, we plan to further develop our non-CDA cancer
screening and detection tests using other technologies, including expanding the genomics tests we currently conduct at our Haikou laboratory.
After obtaining the Class III medical device registration certificate and updating our medical device manufacture license, we expect
to provide our tests to more individual customers through Chinese hospitals.
Customer Support and Service
We
maintain a dedicated team to provide customer support and service for our CDA-based tests. This Shanghai-based team is primarily responsible
for operating our service hotline to answer customers’ questions regarding their test results and our cancer risk assessments.
In addition, this team periodically conducts follow-up phone consultations with the tested individuals to check their current health
conditions, diagnosis results and disease development. These consultations provide us valuable feedback to validate our CDA technology
utility in detecting the risk of cancer.
Supply Chain and Quality Control
We devote significant attention
to ensuring the accuracy and reliability of our cancer screening and detection tests. We have established a comprehensive quality control
system for our tests in accordance with applicable PRC regulations and recognized international quality control standards.
Blood samples for our commercial
CDA-based tests are typically delivered to us by a third-party commercial courier. We have also engaged third-party nursing service providers
to collect blood samples on our behalf for our commercial cancer screening and detection tests. These service providers are generally
responsible for any physical harm caused by the nurses to the tested individuals during the blood collection process. In addition, our
research partners are responsible for collecting and delivering blood samples for our research studies. As the quality of blood samples
directly affects the accuracy of our tests, we have designed a set of standardized blood sample collection and delivery procedures, including
those for sample labeling, preservation and transportation. We require the commercial courier company, nurses and our research partners
to follow these standardized procedures to minimize the risks of human errors and sample contamination. During the testing process, we
strictly control the temperature and humidity in our laboratories. We carefully preserve the blood samples in a temperature-controlled
environment. We also use control samples to ensure that our tests are properly performed and the test results are reliable. After the
testing process, our designated personnel will verify the testing results before issuing the cancer risk assessment reports to our customers.
In addition, because our CDA technology focuses on biophysical signals, our blood samples can remain stable for testing purpose for up
to seven days.
We use a relatively small
amount of reagents in our biomarker-based cancer screening and detection tests, which are part of our combination tests. We source these
reagents from two third-party suppliers. We do not have an exclusive supply agreement with the supplier. The supplier typically engages
commercial courier services to deliver the reagents. In addition, we outsourced substantially all the biomarker-based tests in 2017 and
2018 to two third-party clinical laboratories on a non-exclusive basis. These two laboratories are responsible for conducting the biomarker-based
tests and delivering the test results to us for our data consolidation using our algorithm. These two laboratories are obligated to keep
confidential all documents relating to the tested samples and the test results. We phased out this outsourcing arrangement in 2019 and
are performing our combination tests entirely in-house.
As early detection of cancer
may lead to decreased morbidity with improved survival, more and more biotechnology companies have focused on the immense market opportunities
it represents and are attempting to enter the space.
Biotechnology companies worldwide
currently use various technologies for early cancer screening and detection. We believe that none of these technologies has yet acquired
a dominant market position. As a novel cancer screening and detection technology that focuses on biophysical properties in blood, our
CDA technology faces competition primarily from conventional biomarker-based technologies and other next-generation cancer screening
and detection technologies, including those based on CTCs and ct-DNA. Recent major advances in CTC- and ct-DNA-based technologies have
introduced the possibility of using either or both as tests to screen for cancer, and they have made the possibility for simultaneous
screening for multiple primary cancers particularly attractive.
Our major competitors include
biotechnology companies that conduct cancer screening and detection using next-generating technologies, such as BGI in China and GRAIL,
Guardant Health, and Exact Sciences worldwide. All of these competitors’ cancer screening and detection technologies target CTCs
and/or genomics such as ct-DNA, cf-DNA and cf-RNA, as opposed to the biophysical properties that our CDA technology focuses on.
We believe that our competitive
advantages include the cost-efficiency, high testing accuracy, and broad test coverage of our CDA-based tests, our expansive patent portfolio
and our large proprietary test database. However, many of our competitors have more expertise, experience and financial resources, stronger
business relationships in developing and marketing their products, more mature technologies and products, greater market adoption among
physicians and patients and others in the medical community, broader test menus, larger test databases, or greater brand recognition
than we do. We also cannot assure you that our CDA technology will not become obsolete if we cannot keep pace with constantly changing
technologies in the cancer screening and detection market.
Intellectual Property
Intellectual property rights
are fundamental to our business, and we devote significant time and resources to their development and protection. We rely on a combination
of patent, trade secret and trademark laws, as well as confidentiality agreements, to establish and protect our proprietary rights. We
do not rely on third-party licenses of intellectual property when developing our CDA technology and CDA device.
We have developed an early
and strong patent position related to our CDA technology, and we continuously seek patent coverage over its new applications. As of March 31,
2023, we had filed 260 patent applications globally; among them, 155 patents had been granted, including 22 patents granted in the United
States, 68 in greater China (including eight in Taiwan), and 65 in other countries and regions. Our granted patents are expected to expire
between 2031 and 2037. As of the same date, we also had 105 pending patent applications, consisting of 27 in the United States, 36 in
greater China (including one in Taiwan), 32 in other countries and regions, and four patent cooperation treaty, or PCT, applications.
Our patents and patent applications
broadly cover apparatus and methods for detecting diseases at early stages, and they strategically encompass the important specific embodiments
of these apparatus and methods. They generally fall into the following categories:
| ● | those relating to our CDA technology,
including claims directed to methods for identifying and measuring various biophysical properties
in blood samples and methods for detecting major cancer types and/or non-cancerous diseases,
such as methods for detecting multiple cancers in a single blood test; |
| ● | those relating to our CDA device,
including claims directed to its key components, such as the microfluidic device; and |
| ● | those relating to the multi-level,
multi-parameter concept underlying our CDA technology, as well as our non-CDA early cancer
screening and detection technologies, apparatus and methods. |
According to our public searches,
some of our patents, including our newly issued U.S. patents, have been cited by patent examiners and third parties (including a number
of well-known global corporations and Fortune 50 companies).
Our agreements with our employees
generally include assignment provisions, providing that all patents, copyrights and other intellectual property rights arising from the
course of their employment with us or their using our facilities belong to us, and the employee-inventors are required assign to us all
and any of their rights and title to the relevant granted patents or patent applications. In addition, we also try to protect our trade
secrets and know-how through confidentiality agreements and non-disclosure provisions in our other agreements with persons who have access
to them, such as our employees, consultants and research partners.
As of March 31, 2023,
we held 28 trademarks in greater China, and nine trademarks and three pending trademark applications in the US. In addition, as of the
same date, we had 19 domain names.
As of March
31, 2023, we had filed 237 patent applications globally; among these, 142 patents have been granted, including 65 in greater China (including
eight in Taiwan) and 20 in the United States, and 95 patent applications were pending in China, the United States and other countries
and regions. Our patent applications broadly cover apparatus and methods for early stage disease detection, and they strategically encompass
important specific embodiments of these apparatus and methods.
Our E-Commerce Food Business
The market
The Asian food supply
sector is rapidly expanding, presenting what we believe is a significant market opportunity. In the US, the restaurant ingredient
supply market is valued at $300 billion annually. The annual market for Asian food ingredients in the US is valued at $18 billion.
We believe that despite the industry's size, there is still ample room for growth and optimization within the Asian food supply
chain in the United States.
Business development
In October 2022, we established
Fresh2 Technology as the umbrella organization for our new B2B food market business in the US. We assembled a team with extensive experience
in the field to drive the project forward.
In February 2023, we acquired
Fresh2 Ecommerce (“Fresh2”) to expand our reach in the US food market, targeting supermarkets. This acquisition is expected
to accelerate the development of a B2B e-commerce platform for Asian food products. The acquisition of GISN in late January 2023 brought
in expertise in the development of e-commerce businesses. GISN is a highly-qualified service provider with extensive experience in transitioning
traditional operations to digital models from a technological perspective.
On March 31, 2023, we entered
into an asset purchase agreement with Easy Hundred Inc. (“Easy Hundred”), a U.S.-based e-commerce company in the foodservice
industry, through which we will acquire certain fixed assets intellectual property relating to ez100, 2Supply and 100WAY. The intellectual
property includes a full set of e-commerce platform source codes, covering websites, apps, and management systems.
Our operations
Fresh2's business operations
are built around an advanced e-commerce platform that will connect food suppliers and supermarket operators and restaurant owners in the
US. Our platform includes mobile applications and a website, providing clients with convenient access to a wide range of high-quality
Asian food and foodservice products and ingredients. As of April 2023, our sales reached approximately $200K, a strong indication of the
potential of our business model. We believe that our focus on creating a user-friendly and streamlined experience for clients has been
a key factor in driving sales. In addition to our online platform, we also have a dedicated sales team that actively engages with potential
clients throughout the US. Our business operations are optimized for efficiency, sustainability and scalability, enabling us to achieve
our vision of transforming the Asian food supply chain industry in the US.
Our goal is to assist supermarket
operators and restaurant owners in selecting food suppliers more efficiently and to provide one-stop fulfillment services from food sourcing
to last-mile delivery. We intend to construct a B2B e-commerce platform and food supply chain network for Asian food products in the US,
connecting food suppliers and supermarket operators and restaurant owners, and creating an internet ecosystem for the Asian food industry.
Our vision is to disrupt the
Asian food supply chain industry in the US through the implementation of an advanced e-commerce platform. Our aim is to provide an unparalleled
experience for clients, connecting them with top suppliers and offering a wide range of high-quality Asian food ingredients and products
at competitive prices. We intend to streamline and optimize the entire supply chain, creating a more efficient and sustainable system
that will benefit all stakeholders, including clients, suppliers, and the industry at large.
We believe that the traditional
food supply industry is ripe for disruption, and Fresh2's advanced e-commerce platform is poised to lead the charge. Our disruptive business
model will make it easier for clients to source products directly from suppliers, reducing the need for intermediaries and allowing for
greater transparency in the supply chain. The e-commerce platform provides real-time data and analytics, empowering businesses to make
data-driven decisions and improve their operations. In contrast, traditional food supply companies are limited by their reliance on outdated
systems and processes that can be both time-consuming and expensive.
Our goal is to build
long-lasting partnerships and transform the industry by becoming the go-to provider of high-quality Asian food ingredients and
products. The team at Fresh2 consists of experienced professionals using cutting-edge technology, who are committed to delivering
exceptional products.
Legal Proceedings
On September 2, 2022,
three investors (the “Plaintiffs”) in the Company’s May 2022 private placements filed an action against the Company
in the State of Delaware Court of Chancery, Chen Wenge, et al. v. Fresh2 Group Limited, C.A. No. 2022-0779-PAF (the “Action”).
The Plaintiffs sued the Company for breaches of the investment agreements of May 2022. The Plaintiffs claimed that the entry into
certain investment agreements and a merger agreement breached or would breach the terms of the plaintiffs’ (and several other investors’)
securities purchase agreements, including a right of first refusal and a prohibition against certain acquisitions and changes of business.
The Court issued a temporary restraining order concerning enforcement of the private placements on September 3, 2022, amended the
temporary restraining order on September 9, 2022, and further amended the temporary restraining order on September 23, 2022
(“TRO”). In order to settle the Action, on October 15, 2022, the Company entered into Stock Repurchase Agreement with
the Plaintiffs and all other investors in the May 2022 private placements with the original investment of $3 million, who beneficially
owned an aggregate of 12,492,283 ordinary shares (“Shares”) of the Company and warrants to purchase a total of 2,475,000
ordinary shares at various exercise prices (the “Warrants,” together with the Shares, the “Securities”), for
total consideration of $1.5 million. The Company fully settled the Action by October 27, 2022. In connection with the settlement,
by November 7, 2022, Yuyang Cui and Jiawen Kang resigned from the Board of Directors and Yuyang Cui resigned as co-CEO of the Company.
The related warrants bought back were fully canceled and the ordinary shares bought back become the Company’s treasury shares.
We may be subject to legal
proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential
outcomes, their existence alone may have an adverse material impact on us because of diversion of management time and attention as well
as the financial costs related to resolving such disputes. Neither we nor any of our directors or executive officers are currently a
party to, nor is any of our properties the subject of, any material legal or arbitration proceedings.
See “Item 5. Operating
and Financial Review and Prospects—A. Operating Results—Key Components of Results of Operations—Revenues” for
a breakdown of our net revenues by category of activity.
We do not expect our operating
results and operating cash flows to be subject to seasonal variations. This pattern may change, however, as a result of growth, new market
opportunities or new product introductions.
PRC Regulations
In
China, we are subject to a variety of PRC laws, rules and regulations affecting many aspects of our business. This section summarizes
the principal PRC laws, rules and regulations that we believe are relevant to our business and operations.
Regulations
Relating to Overseas Securities Offering and Listing
On February 17, 2023, CSRC
released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and its five ancillary guidelines,
or the Trial Administrative Measures, which become effective on March 31, 2023. The Trial Administrative Measures stipulate that, PRC
domestic companies that seek to offer and list securities in overseas markets, either through direct or indirect means, are required to
complete the filing procedure with the CSRC. According to the Trial Administrative Measures, the issuer or its affiliated domestic company,
is required to file with the CSRC: (i) with respect to its initial public offering and listing and its subsequent securities offering
in an overseas market different from the market where it has listed, within three business days after its submission of listing application
documents to the relevant regulator in the place of intended listing, (ii) with respect to its follow-on offering in the
same overseas market where it has listed, within three business days after completion of such follow-on offering, (iii) with
respect to listing by means of single or multiple acquisitions, share swap, transfers of shares and similar transactions, within three
business days after its initial filing of the listing application or the first public announcement of the transaction, as case may be.
The Trial Administrative Measures also explicitly forbid overseas offering and listing, if any of the following is applicable: (i) that
is explicitly prohibited by specific laws and regulations, (ii) that constitutes threat to or endanger national security as reviewed and
determined by competent departments of the State Council, (iii) the PRC domestic company, its controlling shareholders or actual controllers
are involved in certain criminal crimes such as corruption, bribery, embezzlement, misappropriation of property or undermining the order
of the socialist market economy during the latest three years, (iv) the PRC domestic company is currently under investigations for suspicion
of criminal offenses or major violations of laws and regulations, and no conclusion has yet been made thereof; or (v) there are material
ownership disputes over equity held by the PRC domestic company’s controlling shareholder(s) or by other shareholder(s) that are
controlled by the controlling shareholder(s) and/or actual controller. Furthermore, an issuer is required to report to the CSRC within
three business days after occurrence of any the following events: (i) its change of control; (ii) its being subject to investigation
or sanctions by any overseas securities regulators or overseas authorities; (iii) its change of listing status or listing segment;
(iv) voluntary or mandatory delisting; and (v) material change of its principal business operations to the extent that it ceases
to be subject to the filing requirements of the Trial Administrative Measures. Failure to comply with the filing requirements may result
in an order of rectification, a warning and fines up to RMB10 million to the non-compliant domestic companies, and the
directly responsible persons of the companies will be warned and fined between RMB500,000 and RMB5 million. If the controlling shareholder
and the actual controller of the non-compliant companies organizes or instigates the breach, they will be fined between RMB1 million
and RMB10 million.
On February 24, 2023, CSRC
released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering and
Listing by Domestic Companies, or the Confidentiality and Archives Administration Provisions, which will take effect on March 31, 2023.
The Confidentiality and Archives Administration Provisions stipulate that, if domestic companies offer the securities in overseas market,
domestic companies and securities companies and securities service institutions providing relevant services shall strictly comply with
the relevant laws and regulations of PRC, enhance the legal awareness of protecting state secrets and archive administration, establish
and improve the system for confidentiality and archive work, take necessary measures to implement the obligations of confidentiality and
archive administration, and shall not divulge state secrets and work secrets of state organs or harm state and public interests.
Regulation on Medical Devices
and Medical Institutions
Medical Institutions Laws and Regulations
The Regulation on the Administration
of Medical Institutions as promulgated by the State Council of the PRC on February 1994 and revised in 2016 and 2022 provides the
requirements for the establishment and administration of medical institutions. The establishment of medical institutions must comply
with local governments’ plans for the establishment of medical institutions and the basic standards for medical institutions. To
establish a medical institution, an entity or individual shall be subject to the examination and approval of the health administrative
department of the local government at or above the county level and obtain the written approval for the establishment of medical institutions.
A medical institution providing relevant services must register and obtain a medical institution practice license. An entity or individual
that has not obtained a medical institution practice license may not carry out diagnosis or treatment activities. The revised Rules for
Implementation of the Administrative Regulation on Medical Institutions as promulgated by the NHFPC in February 2017 further regulates
the approval on establishment, registration, validation, naming and practice of medical institutions. Our PRC subsidiaries, Lishui Laboratory
and Shiji Hainan, obtained their medical institution practice licenses in 2021 and 2018, respectively.
The Regulation on the Administration
of Biosafety of Pathogenic Microorganism Laboratories as promulgated by the State Council of the PRC on November 2004 and revised
in 2016 and 2018 provides the requirements for the establishment and administration of Pathogenic Microorganism Laboratories. Pathogenic
Microorganism Laboratories refer to the laboratories engaged in research, teaching, testing and diagnosis related to pathogenic microorganisms
and microbial bacteria (viruses). The Pathogenic Microorganisms Laboratories are graded into four Grades, which are Grade I, Grade II,
Grade III and Grade IV, according to their biosafety protection level against pathogenic microorganisms and in accordance with the provisions
of the national standards for laboratory biosafety. The establishment, re-establishment and expansion of Grade I and Grade II pathogenic
microorganism laboratories shall be filed with the competent health department or veterinary department of the people's government of
a city divided into districts. Grade I and Grade II pathogenic microorganism laboratories shall not engage in experiments on highly pathogenic
microorganisms. Our PRC subsidiary, Lishui Laboratory, obtained its Grade II Pathogenic Microorganism Laboratory Record-filing Certificate
in 2022.
The Measures for the Administration
of Clinical Gene Amplification Testing Laboratories in Medical Institutions as promulgated by Ministry of Health in December 2010
provides the requirements for medical institutions to carry out clinical gene amplification test technique. Clinical gene amplification
testing laboratory refers to a laboratory that detects specific DNA or RNA by amplification and to perform disease diagnosis, treatment
monitoring and prognosis determination. The PRC Ministry of Health is responsible for supervising and administering clinical gene amplification
testing laboratories in medical institutions nationwide. The health administrative authorities at the provincial level are responsible
for supervising and administering clinical gene amplification testing laboratories in medical institutions within their respective administrative
regions. This regulation also provides the examination and establishment of clinical gene amplification testing laboratories, laboratory
quality management and laboratory supervision and management. Our PRC subsidiary, Shiji Hainan, obtained its Certificate of Clinical
Gene Amplification Testing Laboratory in 2016, and obtained its Qualified Certificate of Clinical Gene Amplification
Testing Laboratory in Quality Evaluation Activity from 2017 to 2020.
Medical Devices Administration Laws and Regulations
The Regulation on the Supervision
and Administration of Medical Devices as amended by the State Council in December 2020, which came into effect in June 2021,
regulates entities that engage in the research and development, production, operation, use as well as supervision and administration
of medical devices in the PRC. Medical devices are classified according to their risk levels. Class I medical devices are medical
devices with low risks, the safety and effectiveness of which can be ensured through routine administration. Class II medical devices
are medical devices with moderate risks, which are strictly controlled and administered to ensure their safety and effectiveness. Class III
medical devices are medical devices with relatively high risks, which are strictly controlled and administered through special measures
to ensure their safety and effectiveness. The evaluation of the risk levels of medical devices takes into consideration the expected
objectives, structural features, methods of use and other factors of medical devices.
The Measures for the Supervision
and Administration of the Manufacture of Medical Device as amended by NMPA in March 2022, which came into effect in May 2022,
regulates entities that engage in the manufacturing of medical devices in the PRC. The food and drug administration at or above the county
level regulates medical device manufacturing within its administrative region, including manufacturing related licensing and registration,
contract manufacturing and manufacturing quality controls.
The Measures for the Supervision
and Administration of the Operation of Medical Devices, as amended by NMPA in March 2022, which came into effect in May 2022,
regulates entities that engage in business activities involving medical devices in the PRC. Business activities involving medical devices
are regulated in accordance with the medical devices’ risk levels. No registration or license is required for business activities
involving Class I medical devices. Registration is required for business activities involving Class II medical devices. A license
is required for business activities involving Class III medical devices. Our PRC subsidiary, AnPac Lishui,
obtained its Class II medical device manufacture license and registration certificate for our CDA device in 2020.
Packaging of Medical Devices
The Administrative Rules on
Instruction Manuals and Labels of Medical Devices, as promulgated by the CFDA in 2014, provides the requirements for instruction manuals
and labeling of any medical device to be sold and used in the PRC. The information contained in the instruction manual and label of a
medical device must be scientific, authentic, complete, accurate and consistent with product characteristics. The information contained
in the instruction manual and label of a medical device must be consistent with the relevant information registered or filed for record.
The information contained in the label of a medical device must be consistent with the relevant information in its instructions.
Clinical Practice Reform
In
October 2017, the Chinese government announced an administrative reform of clinical trial institutions. Certification of clinical
trial institutions by the former CFDA and the former NHFPC is no longer required. Under this reform, a clinical trial institution can
be engaged by a drug and medical device registration applicant (i.e., a sponsor) to conduct a clinical study after it has been duly recorded
with the online platform designated by the NMPA. In November 2017, the CFDA and the NHFPC jointly released the Rules for Administration
of the Requirements for and Filing of Medical Devices Clinical Trial Institutions. These rules specify requirements for medical
devices clinical-trial institutions and filing procedures. Pursuant to these rules, medical devices clinical-trial institutions shall
meet the requirements of the Quality Management Standards for Medical Devices Clinical Trials including corresponding professional technical
level, organization and management capabilities and ethics review capability.
Regulation Related to Food Operation
In accordance with the PRC
Food Safety Law, promulgated on February 28, 2009 and latest amended on April 29, 2021, and the Implementation Regulations
of PRC Food Safety Law, issued on July 20, 2009 and latest amended on October 11, 2019 and effective on December 1, 2019,
with the purpose of guaranteeing food safety and safe guarding the health and life safety of the public, the PRC sets up a system of
the supervision, monitoring and appraisal on the food safety risks, compulsory adoption of food safety standards. To engage in food production,
sale or catering services, the business operators shall obtain a license in accordance with the laws and regulations. Furthermore, the
State Council implements strict supervision and administration for special categories of foods such as healthcare food, special formula
foods for medical purposes and infant formula. Violations of these law and measures may result in civil liabilities and administrative
penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as confiscation of tools, equipment,
raw materials and other articles used in the illegal food production or trading, or even criminal penalties.
The Administrative Measures
for Food Operation Licensing promulgated by the State Food and Drug Administration of the PRC, or the SFDA, on August 31, 2015 and
amended on November 17, 2017 and effective on the same day, regulates the food operation licensing activities, strengthens supervision
and management of food operation, and ensures food safety. Food operation operators shall obtain the food operation license, or the Food
Operation Permit, for each business venue where they engage in food operation activities. The food operation license is valid for five years.
Food operation operators shall properly keep their food operation licenses, and shall not forge, alter, resell, rent, lend, or transfer
any food operation licenses. Those who fail to obtain a food operation license and engage in food operation activities shall be punished
by the local food and drug administrative authorities at or above the county level according to these measures and PRC Food Safety Law.
In July 2016, the SFDA
promulgated the Measures for Investigation and Handling of Illegal Acts Involving Online Food Safety, which was amended on April 2,
2021, pursuant to which a third-party platform provider for online food trading in the PRC shall file a record with the food and drug
administration at the provincial level and obtain a filing number. Where an online food trading third-party platform provider fails to
complete such filing, the provider may be ordered to make rectifications and given a warning by the competent food and drug administration,
and failure to make such rectification may be subject to fines ranging from RMB5,000 to RMB30,000.
Regulation Related to E-commence and Online Trading
On August 31, 2018,
the National People’s Congress promulgated the PRC E-Commerce Law, which became effective on January 1, 2019, and aims to
regulate the e-commerce activities conducted within the territory of the PRC. Pursuant to the E-Commerce Law, an e-commerce platform
operator shall (i) collect, verify and register the truthful information submitted by the third-party merchants that apply for selling
products or providing services on its platform, including the identities, addresses, contacts and licenses, establish registration archives
and update such information on a regular basis; (ii) submit the identification information of the third-party merchants on its platform
to market regulatory administrative department in accordance with regulations and remind the third-party merchants to complete the registration
with market regulatory administrative department; (iii) submit identification information and tax-related information of the third-party
merchants on its platform to tax authorities in accordance with the laws and regulations regarding the administration of tax collection
and remind the individual third-party merchants to complete the tax registration; (iv) record and retain the information of the
products and services and the transaction information on its platform for no less than three years; (v) display the platform
service agreement and the transaction rules or links to such information on the homepage of the platform; (vi) display
the noticeable labels regarding the products or services provided by the platform operator itself on its platform, and take liabilities
for such products and services; (vii) establish a credit evaluation system, display the credit evaluation rules, provide consumers
with accesses to make comments on the products and services provided on its platform, and restrain from deleting such comments; and (viii) establish
intellectual property protection rules, and take necessary measures when any intellectual property rights holder notify the platform
operator that his intellectual property rights have been infringed.
An e-commerce platform operator
may be subject to warnings and fines up to RMB2,000,000 where it fails to take necessary measures when it knows or should have known
that the products or services provided by the third-party merchants on its platform do not meet the personal or property safety requirements
or such third-party merchants’ other acts may infringe on the lawful rights and interests of the consumers. In addition, an e-commerce
platform operator shall take joint liabilities with the relevant third-party merchants on its platform and may be subject to warnings
and fines up to RMB2,000,000 where it fails to take necessary measures, such as deleting and blocking information, disconnecting, or
terminating transactions and services, when it knows or should have known that the third-party merchants on its platform infringe any
intellectual property rights of any other third party. With respect to products or services affecting the consumers’ life and health,
if an e-commerce platform operator fails to verify the third-party merchants’ qualification or fails to fulfill its obligations
to safeguard the safety of consumers, which results in damages to the consumers, it shall take corresponding liabilities and may be subject
to warnings and fines up to RMB2,000,000.
On March 15, 2021, the
SAMR has issued the Measures for the Supervision and Administration of Online Transactions, or the Measures for Online Transaction, which
took effect on May 1, 2021. Measures for Online Transaction reinforces the operation requirements as provided under the PRC E-Commerce
Law and the principles of legality, rationality and necessity in the collection and use of the users’ information and disclosure
of the rules, purposes, methods and scopes of collection and use of user information specified in the Cyber Security Law. It also provides
that the business operator through online platform (i) shall not use false transactions, fabricated user review etc to conduct false
or misleading business promotion, so as to defraud or mislead consumers; (ii) shall not eliminate or restrict competition, damage
or ruin the competitor’s reputation; (iii) shall not force consumers to agree with the collection and use of their personal
information that is not directly related to such operator’s business activities by means of general authorization, default authorization,
bundling with other authorization, termination of installation and use.
Regulation Related to Internet Security and Privacy Protection
On May, 2020, the National
People’s Congress of the PRC approved the Civil Code of the PRC, which came into effect on January 1, 2021. Pursuant to the
Civil Code of PRC, the personal information of a natural person shall be protected by the law. Any organization or individual that need
to obtain personal information of others shall obtain such information legally and ensure the security of such information, and shall
not illegally collect, use, process or transmit personal information of others, or illegally purchase, sell, provide or make public personal
information of others.
On November 7, 2016,
the National People’s Congress Standing Committee promulgated the Cyber Security Law which came into effect on June 1, 2017
and applies to the construction, operation, maintenance and use of networks as well as the supervision and administration of cybersecurity
in China. The Cyber Security Law defines “networks” as systems that are composed of computers or other information terminals
and relevant facilities used for the purpose of collecting, storing, transmitting, exchanging and processing information in accordance
with certain rules and procedures. “Network operators,” who are broadly defined as owners and administrators of networks
and network service providers, are subject to various security protection-related obligations, including: (i) complying with security
protection obligations in accordance with tiered cybersecurity system’s protection requirements, which include formulating internal
security management rules and manual, appointing cybersecurity responsible personnel, adopting technical measures to prevent computer
viruses and cybersecurity endangering activities, adopting technical measures to monitor and record network operation status and cybersecurity
events; (ii) formulating cybersecurity emergency response plans, timely handling of security risks, initiating emergency response
plans, taking appropriate remedial measures and reporting to regulatory authorities; and (iii) providing technical assistance and
support for public security and national security authorities for protection of national security and criminal investigations in accordance
with the law. Network service providers who do not comply with the Cyber Security Law may be subject to fines, suspension of their businesses,
shutdown of their websites, and revocation of their business licenses.
On June 10, 2021, the
Standing Committee of the National People’s Congress promulgated the Data Security Law, which became effect in September 2021.
The Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities and
introduces a data classification and hierarchical protection system based on the importance of data in economic and social development,
as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals
or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection
measures is required to be taken for each respective category of data. For example, a processor of important data shall designate the
personnel and the management body responsible for data security, carry out risk assessments for its data processing activities and file
the risk assessment reports with the competent authorities. In addition, the Data Security Law provides a national security review procedure
for those data activities which affect or may affect national security and imposes export restrictions on certain data and information.
On August 20, 2021,
the Standing Committee of the National People’s Congress promulgated the PRC Personal Information Protection Law, which took effect
from November 1, 2021. Pursuant to the PRC Personal Information Protection Law, personal information refers to the information related
to an identified or identifiable individual recorded electronically or by other means, excluding the anonymized information, and processing
of personal information includes among others, the collection, storage, use, handling, transmission, provision, disclosure, deletion
of personal information. The PRC Personal Information Protection Law explicitly sets forth the circumstances where it is allowed to process
personal information, including (i) the consent from the individual has been obtained; (ii) it is necessary for the conclusion
and performance of a contract under which an individual is a party, or it is necessary for human resource management in accordance with
the labor related rules and regulations and the collective contracts formulated or concluded in accordance with laws; (iii) it
is necessary to perform statutory duties or statutory obligations; (iv) it is necessary to respond to public health emergencies,
or to protect the life, health and property safety of individuals in emergencies; (v) carrying out news reports, public opinion
supervision and other acts for the public interest, and processing personal information within a reasonable scope; (vi) processing
personal information disclosed by individuals or other legally disclosed personal information within a reasonable scope in accordance
with this law; or (vii) other circumstances stipulated by laws and administrative regulations.
On December 28, 2021,
the CAC, the NDRC, the MIIT, and several other administrations jointly promulgated the Cybersecurity Review Measures, or the Review Measures,
which became effective from February 15, 2022. The Review Measures, upon effective, will replace its previous version promulgated
on April 13, 2020. According to the Review Measures, (i) when the purchase of network products and services by a critical information
infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security,
a cybersecurity review shall be conducted pursuant to the Review Measures. The aforesaid operators shall file for a cybersecurity review
with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for
cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million
users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities
may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or
data processing activities affect or may affect national security.
Furthermore, on July 7,
2022, the CAC released the Measures on Security Assessment of Cross-border Data Transfer, which will take effect from September 1,
2022. Such measures requires that any data processor which exports personal information exceeding certain volume threshold under such
measures shall apply for security assessment by the CAC before transferring any personal information abroad, including the following
circumstances: (i) any important data will be provided overseas by a data processer; (ii) any personal information will be
provided overseas by an operator of critical information infrastructure or a data processor processing personal information of more than
one million individuals; (iii) any personal information will be provided overseas by a data processor processing the personal information
of more than 100,000 individuals or the sensitive personal information of more than 10,000 individuals on a cumulative basis since January 1
of the previous year; and (iv) other circumstances where the security assessment is required as prescribed by the CAC.
Other Significant PRC Regulations Affecting Our Business
Activities in China
Regulation on Foreign Investment
On March 15, 2019, the
National People’s Congress promulgated the PRC Foreign Investment Law, or the FIL, which came into effect on January 1, 2020
and replaces the trio of previous laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise
Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The FIL embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory
regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both
foreign and domestic investments. The Implementation Rules to the Foreign Investment Law were promulgated by the State Council on
December 26, 2019 and became effective on January 1, 2020. The FIL and its Implementation Rules, by means of legislation, have
established the basic framework for the access, promotion, protection and administration of foreign investment in view of investment
protection and fair competition.
On October 26,
2022, the Ministry of Commerce and the NDRC promulgated the Catalogue of Encouraged Industries for Foreign Investment (2022
Version), which came into effect on January 1, 2023, and replaced the previous Catalogue of Encouraged Industries for Foreign
Investment (2020 Version). In addition, according to the FIL, foreign investors shall not invest in any field with investment
prohibited by the negative list for foreign investment access. Foreign investors shall meet the investment conditions stipulated
under the negative list for any field with investment restricted by the negative list for foreign investment access. For the fields
not included in the negative list for foreign investment access, management shall be conducted under the principle of consistency
for domestic and foreign investment. On December 27, 2021 the MOFCOM and the NDRC jointly promulgated the Special Management
Measures (Negative List) (2021 Version) for the Access of Foreign Investment, or the 2021 Negative List, which became effective on
January 1, 2022 to amend the Catalogue and the previous negative list thereunder. Investment in medical institutions (such as
clinical laboratories) belongs to the “restricted” category. In particular, according to relevant PRC foreign investment
regulations, only domestic companies and foreign-invested joint ventures are allowed to hold an NHC medical institution practice
license. However, it is unclear under PRC law whether a subsidiary of a wholly foreign owned enterprise is eligible to hold this
license. We believe that the risks for the NHC medical institution practice license of each of our Lishui and Haikou
laboratories—subsidiaries of AnPac Lishui, a wholly foreign owned enterprise—being held invalid or revoked by the NHC is
remote, based on our confirmation with relevant regulatory authorities. However, we cannot assure you that the relevant regulatory
authorities would not change their interpretation or position regarding the relevant laws and regulations.
On March 15, 2019, the
National People’s Congress promulgated the PRC Foreign Investment Law, or the FIL, which came into effect on January 1, 2020
and replaces the trio of previous laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise
Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The FIL embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory
regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both
foreign and domestic investments. The Implementation Rules to the Foreign Investment Law were promulgated by the State Council on
December 26, 2019 and became effective on January 1, 2020. The FIL and its Implementation Rules, by means of legislation, have
established the basic framework for the access, promotion, protection and administration of foreign investment in view of investment
protection and fair competition.
On December 30, 2019,
MOFCOM and the State Administration for Market Regulation jointly promulgated the Measures for Information Reporting on Foreign Investment,
which became effective on January 1, 2020. Pursuant to these measures, where a foreign investor carries out investment activities
in China directly or indirectly, the foreign investor or the foreign-invested enterprise shall submit the investment information to the
competent commerce department.
PRC Regulation of Commercial Bribery
Medical device companies
involved in a criminal investigation or administrative proceedings related to bribery are listed in the Adverse Records of Commercial
Briberies by its provincial health and family planning administrative department. Pursuant to the Provisions on the Establishment of
Adverse Records of Commercial Briberies in the Medicine Purchase and Sales Industry, which became effective on March 1, 2014, provincial
health and family planning administrative departments formulate the implementing measures for establishment of Adverse Records of Commercial
Briberies. If a company is listed in the Adverse Records of Commercial Briberies for the first time, their products may not be purchased
by public medical institutions. A company will not be penalized by the relevant PRC government authorities merely by virtue of having
contractual relationships with sales agents or third-party promoters who are engaged in bribery activities, so long as such company and
its employees are not utilizing the sales agents or third-party promoters for the implementation of, or acting in conjunction with them
in, the prohibited bribery activities. In addition, a company is under no legal obligation to monitor the operating activities of its
sales agents and third-party promoters, and will not be subject to penalties or sanctions by relevant PRC government authorities as a
result of failure to monitor their operating activities.
PRC Regulation of Product Liability
In addition to the strict
new drug approval process, certain PRC laws have been promulgated to protect the rights of consumers and to strengthen the control of
medical products in the PRC. Under current PRC law, manufacturers and vendors of defective products in the PRC may incur liability for
loss and injury caused by such products.
Pursuant to the Civil Code
of the PRC promulgated on May 28, 2020, which came into effect on January 1, 2021, the manufacturer shall bear tort liability
where a defect of a product causes damage to another person. The infringed person may claim compensation from the manufacturer or the
seller of the product where a defect of a product causes damage to another person.
On February 22, 1993,
the Product Quality Law of the PRC, or the Product Quality Law, was promulgated to supplement the Civil Law of the PRC aiming to protect
the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control of the quality of products.
The Product Quality Law was revised by the Ninth National People’s Congress on July 8, 2000, by the Eleventh National People’s
Congress on August 27, 2009 and by the Thirteenth National People’s Congress on December 29, 2018. Pursuant to the revised
Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business
licenses revoked.
The Law of the PRC on the
Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and was amended on August 27, 2009
and October 25, 2013 to protect consumers’ rights when they purchase or use goods and accept services. All business operators
must comply with this law when they manufacture or sell goods and/or provide services to customers. Under the amendments made on October 25,
2013, all business operators must pay high attention to protecting customers’ privacy and strictly keeping confidential any consumer
information they obtain during their business operations. In addition, in extreme situations, pharmaceutical product manufacturers and
operators may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties.
PRC Tort Law
Under the Civil Code of the
PRC promulgated on May 28, 2020, which came into effect on January 1, 2021, where a defect of a product is caused due to the
fault of a transporter, a warehouse or any other third party, the manufacturer or the seller shall, after paying compensation, have the
right to claim the same from the third party. Where a product is found to be defective after it is put into circulation, the manufacturer
or the seller shall timely take such remedial measures as ceasing the sale, giving warning or recall the defective product. If any damage
is aggravated due to the manufacturer or the seller’s failure to take timely or effective remedial measures, the manufacturer or
the seller shall assume tort liability for the aggravated part of the damage. Where any manufacturer or seller produces or sells the
products despite knowing that they are defective or fails to take effective remedial measures as prescribed in the preceding paragraph,
thus causing death or serious damage to the health of another person, the infringed person shall have the right to claim appropriate
punitive damages.
Regulation on Intellectual
Property Rights
China has made substantial
efforts to adopt comprehensive legislation governing intellectual property rights, including patents, trademarks, copyrights and domain
names.
Patents
Patents in the PRC are principally
protected under the Patent Law of the PRC, which was promulgated by the Standing Committee of NPC on March 12, 1984 and of which the most
recent amendment took effect from June 1, 2021. The duration of a patent right is either 10 years or 20 years from the date of application,
depending on the type of patent right. The Patent Law of the PRC and its implementation rules provide for three types of patents, namely,
“invention”, “utility model” and “design”. Invention patents are valid for twenty years, while design
patents and utility model patents are valid for ten years, from the date of application. The Chinese patent system adopts a “first-to-file”
principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to
the person who files the application first. To be patentable, invention or utility models must meet three criteria: novelty, inventiveness
and practicability. A third party must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use
constitutes an infringement of the patent rights.
Copyrights
Copyrights in the PRC, including
copyrighted software, are principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright
Law, promulgated in September 1990, implemented in June 1991, amended in October 2001, February 2010 and November 2020, and effective
on June 1, 2021 the term of protection for copyrighted software is 50 years. The Regulation on the Protection of the Right to Communicate
Works to the Public over Information Networks, as most recently amended on January 30, 2013, provides specific rules on fair use, statutory
license, and a safe harbor for use of copyrights and copyright management technology and specifies the liabilities of various entities
for violations, including copyright holders, libraries and Internet service providers.
Trademarks
Registered trademarks are
protected under the Trademark Law of the PRC, which promulgated on April 23, 2019 and effective on November 1, 2019, and related rules
and regulations. Trademarks are registered with the State Intellectual Property Office, formerly the Trademark Office of the SAIC. Where
registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary
examination and approval for use in the same or similar category of commodities or services, the application for registration of this
trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Names
Domain names are protected under the Administrative Measures on Internet
Domain Names promulgated by the MIIT on August 24, 2017 and effective as of November 1, 2017. Domain name registrations are handled through
domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
PRC Regulation on Data Protection
The Basic Standards for Clinical
Laboratories (for Trial Implementation) as promulgated by the NHFPC in 2016 provides that clinical laboratories must establish information
management and patient privacy protection policies. The Measures for the Administration of General Population Health Information (for
Trial Implementation) as promulgated by the NHFPC in 2014 sets forth the operational measures for patient privacy protection in medical
institutions. The measures regulate the collection, use, management, safety and privacy protection of general population health information
by medical institutions. Medical institutions are required to establish information management departments in charge of general population
health information and establish quality control procedures and relevant information systems to manage general population health information.
Medical institutions must adopt stringent procedures to verify the general population health data collected, timely update and maintain
the data, establish policies on the authorized use of general population health information, and establish safety protection systems,
policies, practice and technical guidance to avoid divulging confidential or private information.
PRC Regulation on Labor Protection
Under the Labor Law of the
PRC, effective on January 1, 1995 and subsequently amended on August 27, 2009 and December 29, 2018, the PRC Employment
Contract Law, effective on January 1, 2008 and subsequently amended on December 28, 2012 and the Implementing Regulations of
the Employment Contract Law, effective on September 18, 2008, employers must establish a comprehensive management system to protect
the rights of their employees, including a system governing occupational health and safety to provide employees with occupational training
to prevent occupational injury, and employers are required to truthfully inform prospective employees of the job description, working
conditions, location, occupational hazards and status of safe production as well as remuneration and other conditions as requested by
the Labor Contract Law of the PRC.
Pursuant to the Law of Manufacturing
Safety of the PRC effective on November 1, 2002 and amended on August 27, 2009, August 31, 2014 and June 10, 2021,
manufacturers must establish a comprehensive management system to ensure manufacturing safety in accordance with applicable laws, regulations,
national standards, and industrial standards. Manufacturers not meeting relevant legal requirements are not permitted to commence their
manufacturing activities.
Pursuant to the Administrative
Measures Governing the Production Quality of Pharmaceutical Products effective on March 1, 2011, manufacturers of pharmaceutical
products are required to establish production safety and labor protection measures in connection with the operation of their manufacturing
equipment and manufacturing process.
Pursuant to applicable PRC
laws, rules and regulations, including the Social Insurance Law, which became effective on July 1, 2011 and amended on December 29,
2018, the Interim Regulations on the Collection and Payment of Social Security Funds, which became effective on January 22, 1999
and amended on March 24, 2019, Interim Measures concerning the Maternity Insurance of Employees, which become effective on December 14,
1994, and the Regulations on Work-related Injury Insurance, which became effective on January 1, 2004 and was subsequently amended
on December 20, 2010, employers are required to contribute, on behalf of their employees, to a number of social security funds,
including funds for basic pension insurance, unemployment insurance, basic medical insurance, work-related injury insurance and maternity
insurance. If an employer fails to make social insurance contributions timely and in full, the social insurance collecting authority
will order the employer to make up outstanding contributions within the prescribed time period and impose a late payment fee at the rate
of 0.05% per day from the date on which the contribution becomes due. If such employer fails to make the overdue contributions within
such time limit, the relevant administrative department may impose a fine equivalent to one to three times the overdue amount
Regulations Relating to Foreign Exchange
Registration of Offshore Investment by PRC Residents
In
July 2014, SAFE issued the SAFE Circular 37, and its implementation guidelines. Pursuant to SAFE Circular 37 and its implementation
guidelines, PRC residents (including PRC institutions and individuals) must register with local branches of SAFE in connection with their
direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established or indirectly controlled
by PRC residents for the purposes of offshore investment and financing with their legally owned assets or interests in domestic enterprises,
or their legally owned offshore assets or interests. Such PRC residents are also required to amend their registrations with SAFE when
there is a change to the basic information of the SPV, such as changes of a PRC resident individual shareholder, the name or operating
period of the SPV, or when there is a significant change to the SPV, such as changes of the PRC individual resident’s increase
or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger, division of the SPV. Failure to comply
with the registration procedures set forth in the Circular 37 may result in restrictions being imposed on the foreign exchange activities
of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate, the
capital inflow from the offshore entities and settlement of foreign exchange capital, and may also subject relevant onshore company or
PRC residents to penalties under PRC foreign exchange administration regulations.
Regulations Relating to Employee Stock
Incentive Plan
In
February 2012, SAFE promulgated the Stock Option Rules. In accordance with the Stock Option Rules and relevant rules and
regulations, PRC citizens or non-PRC citizens residing in China for a continuous period of not less than one year, who participate
in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through
a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain procedures. We and
our employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who participate
in our stock incentive plan will be subject to such regulation. In addition, the SAT has issued circulars concerning employee share options
or restricted shares. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares vest,
will be subject to PRC individual income tax, or the IIT. The PRC subsidiaries of an overseas listed company have obligations to file
documents related to employee share options or restricted shares with relevant tax authorities and to withhold IIT of these employees
related to their share options or restricted shares. If the employees fail to pay, or the PRC subsidiaries fail to withhold, their IIT
according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities
or other PRC government authorities.
Regulations Relating to Dividend Distribution
The principal regulation
governing distribution of dividends paid by a PRC enterprise include Company Law of the PRC (1993), as amended in 1999, 2004, 2005,
2013, 2018 and 2021. The 2021 revision has not yet taken effect.
Under these laws and regulations,
foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10.0%
of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such
reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds. A PRC company is not permitted to
distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years
may be distributed together with distributable profits from the current fiscal year.
Regulations Relating to Foreign Exchange
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008.
Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit distributions and trade and
service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. However, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans.
In August 2008, SAFE
issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested
enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142
provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for
purposes within the business scope approved by the applicable government authority and may not be used for equity investments within
China. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital
of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may
not in any case be used to repay RMB loans if the proceeds of such loans have not been used. In March 2015, SAFE issued SAFE Circular
No. 19, which took effective and replaced SAFE Circular No. 142 on June 1, 2015. Although SAFE Circular No. 19 allows
for the use of RMB converted from the foreign currency-denominated capital for equity investments in China, the restrictions continue
to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for entrusted loans
or for inter-company RMB loans. SAFE promulgated the Notice of the SAFE on Reforming and Standardizing the Foreign Exchange Settlement
Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth
in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital
of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated
enterprises. Violations of SAFE Circular 19 or Circular 16 could result in administrative penalties.
In November 2012, SAFE
promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment and
amended on May 2015, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts (e.g., pre-establishment expenses accounts, foreign exchange capital
accounts and guarantee accounts), the reinvestment of lawful incomes derived by foreign investors in China (e.g. profit, proceeds of
equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange
as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require
SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before.
In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic
Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE
or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall
process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and
its branches.
In February 2015, SAFE
promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment which
took effect on June 1, 2015. The Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control
on Direct Investment delegates the authority to enforce the foreign exchange registration in connection with the inbound and outbound
direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration
procedures for inbound and outbound direct investment.
Regulations on Enterprise Income Tax
Pursuant to the EIT Law effective
as of January 2008 and as last amended in December 2018, the income tax rate for both domestic and foreign-invested enterprises
is 25% with certain exceptions. To clarify certain provisions in the EIT Law, the State Council promulgated the Implementation Rules of
the EIT Law in December 2007, which became effective in January 2008 and as amended in April 2019. Under the EIT Law and
the Implementation Rules of the EIT Law, enterprises are classified as either “resident enterprises” or “non-resident
enterprises.” Besides enterprises established within the PRC, enterprises established outside of China whose “de facto management
bodies” are located in China are considered “resident enterprises” and subject to the uniform 25% enterprise income
tax rate for their global income. In addition, the EIT Law provides that a non-resident enterprise refers to an entity established under
foreign law whose “de facto management bodies” are not within the PRC, but has an establishment or place of business in the
PRC, or does not have an establishment or place of business in the PRC but has income sourced within the PRC.
The Implementation Rules of
the EIT Law provide that since January 2008, an income tax rate of 10% shall normally be applicable to dividends declared to non-PRC
resident enterprise investors that do not have an establishment or place of business in the PRC, or have such establishment or place
of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends
are derived from sources within the PRC. The income tax on the dividends may be reduced pursuant to a tax treaty between China and the
jurisdictions in which the non-PRC shareholders reside.
Other PRC National- and Provincial-Level
Laws and Regulations
We are subject to changing
regulations under many other laws and regulations administered by governmental authorities at the national, provincial and municipal
levels, some of which are or may become applicable to our business. For example, regulations control the confidentiality of patients’
medical information and the circumstances under which patient medical information may be released for inclusion in our databases, or
released by us to third parties. These laws and regulations governing both the disclosure and the use of confidential patient medical
information may become more restrictive in the future.
We also comply with numerous
additional national and provincial laws relating to matters such as safe working conditions, manufacturing practices, environmental protection
and fire hazard control in all material aspects. We believe that we are currently in compliance with these laws and regulations; however,
we may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing
regulatory requirements or adoption of new requirements could therefore have a material adverse effect on our business, results of operations
and financial condition.
U.S. Regulations
Federal and State Laboratory Licensing
Requirements
Pursuant to the CLIA, a laboratory
that performs testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment
of disease, or the impairment of, or assessment of health must hold a certificate applicable to the complexity of the laboratory examinations
it performs, and it must comply with, among other things, standards covering operations, personnel, facilities administration, quality,
and proficiency testing, which are intended to ensure, among other things, that its clinical laboratory testing services are accurate,
reliable and timely. Laboratories performing high-complexity testing are required to meet more stringent requirements than laboratories
performing less complex tests. The CLIA requirements do not apply to research laboratories that test human specimens but do not report
patient specific results for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health
of individual patients. In order to offer our test in the United States, our laboratory must have the appropriate CLIA certification
and the applicable state licenses. A laboratory that has submitted its application but has not yet received CLIA certification, may be
issued a CLIA Certificate of Registration which allows the laboratory to perform testing while the laboratory’s survey and inspection
are pending. We obtained CAP accreditation and a CLIA Certificate of Accreditation for our San Jose laboratory in March 2020 but
we closed San Jose laboratory in June 2021 for cost saving and streamlining laboratory operation and management purposes. We obtained
a CLIA Certificate of Registration for our laboratory in Philadelphia, Pennsylvania in August 2020. CMS, the agency that oversees
CLIA, has deemed CAP standards to be equally or more stringent than CLIA regulations and has approved CAP as a recognized accrediting
organization. Inspection by CAP is performed in lieu of CMS inspections for accredited laboratories. to maintain and renew our CAP accreditation
and CLIA certification, we are subject to survey and inspection every two years to assess our laboratory’s compliance with
program standards. We also may be subject to additional unannounced inspections.
CLIA provides that a state
may adopt laboratory regulations with more stringent requirements than those under U.S. federal law, and a number of states have implemented
their own laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain
quality control procedures, facility requirements or prescribe record maintenance requirements.
We are required to maintain
a Pennsylvania state laboratory permit for our Philadelphia laboratory. The laboratory may also need to maintain licenses in other states
with requirements for non-resident laboratories in order to perform tests on samples from patients who reside in those states. For example,
in order to offer our test in New York, we must separately apply for a New York State clinical laboratory permit and approval of our
test in New York, which will require submission of validation data as well as information regarding the test methods, among other things.
Other states may currently have or adopt similar licensure requirements in the future. We will obtain any such necessary licenses before
offering our cancer screening and detection test in a state requiring non-resident laboratory licensure.
Failure to comply with CLIA
certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate
or license suspension, limitation, or revocation, directed plan of corrective action, on-site monitoring, civil monetary penalties, criminal
sanctions, and revocation of the relevant laboratory’s approval to receive Medicare and Medicaid payment for its services, as well
as significant adverse publicity.
Regulation of Laboratory Developed
Tests
LDTs have generally been
considered by the FDA to be tests that are designed, developed, validated and used within a single laboratory. The FDA has the authority
to regulate such tests as medical devices under the FDCA. However, the FDA historically has exercised its enforcement discretion and
not enforced applicable provisions of the FDCA and FDA regulations with respect to LDTs. However, in recent years, legislative and
administrative proposals addressing oversight of LDTs were introduced. For example, in 2014 the FDA issued two draft guidance documents
proposing a risk-based framework with respect to applying the FDA’s oversight over LDTs. The draft guidance documents stated that
the FDA intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing
classification of medical devices. Thus, the FDA planned to begin to enforce its medical device requirements, including premarket submission
requirements, on LDTs marketed without FDA premarket review and authorization. In November 2016, the FDA announced its intention
not to finalize the 2014 draft guidance documents to allow for further public discussion of an appropriate oversight approach to LDTs
and to give congressional authorizing committees the opportunity to develop a legislative solution. In January 2017, the FDA issued
a discussion paper on possible approaches to the regulation of LDTs. On August 19, 2020, HHS announced that the FDA would no
longer require premarket authorization for LDTs unless the FDA engaged in notice-and-comment rulemaking. HHS also rescinded all guidance
documents and informal policy statements that FDA had previously issued concerning LDTs. On November 15, 2021, the U.S. Department of
Health and Human Services withdrew the policy that directed FDA not to enforce premarket review requirements for LDTs. HHS no longer
has a policy on LDTs that is separate from FDA’s longstanding approach in this area.
We expect that new legislative
and administrative proposals regarding the oversight of LDTs will be introduced from time to time. It is possible that legislation could
be enacted into law or regulations or guidance could be issued by the FDA, which may result in new or increased regulatory requirements
for us to offer our tests as LDTs or to develop and introduce new tests as LDTs in the foreseeable future.
Although we believe we are
within the scope of the FDA’s policy for LDTs, the initial commercialization and continued commercial availability of an LDT is
subject to uncertainty given the FDA’s latitude in interpreting and applying its laws and policies. For example, FDA does not consider
tests to be subject to its LDT enforcement discretion if they are designed or manufactured completely, or partly, outside of the laboratory
that offers and uses them, or if they are offered “direct-to-consumer,” as opposed to being available to patients only when
prescribed by a health care provider. Even for tests that appear to fall within FDA’s previously stated enforcement discretion,
the FDA may decide to take action against certain LDTs on a case-by-case basis at any time if FDA views them as presenting a risk to
patients. The former FDA Commissioner and the Director of FDA’s CDRH have expressed significant concerns regarding potential disparities
in accuracy and quality between some LDTs and IVDs that have been reviewed and cleared, authorized or approved by FDA. In addition, the
U.S. Congress has been considering various legislative proposals that would reform FDA’s regulation of laboratory tests, and such
legislation might lead to heightened FDA scrutiny of LDTs, particularly new LDTs. Whether such legislation will be enacted and, if so,
what effect it may have on how FDA regulates laboratory tests, including LDTs, is unknown. If FDA disagrees with a laboratory test’s
LDT status, FDA may consider the test to be an unapproved medical device, may subject the company to FDA enforcement action, including,
without limitation, requiring the company to seek clearance, authorization or approval for the laboratory test.
Regulation of Medical Devices
A medical device is an instrument,
apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part,
or accessory which is: (i) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement
to them; (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention
of disease, in man or other animals; or (iii) intended to affect the structure or any function of the body of man or other animals,
and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals
and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. IVDs, are a type of medical
device and include reagents and instruments used in the diagnosis or detection of diseases, conditions or infections, including, without
limitation, the presence of certain chemicals, genetic information or other biomarkers. Predictive, prognostic and screening tests can
also be IVDs.
In the United States, medical
devices, including IVDs, are subject to extensive regulation by the FDA under the FDCA and its implementing regulations, and certain
other U.S. federal and state statutes and regulations. The laws and regulations govern, among other things, the design, manufacture,
storage, recordkeeping, approval, labeling, promotion, post-approval monitoring and reporting, distribution and import and export of
medical devices. Failure to comply with applicable requirements may subject a device and/or its manufacturer to a variety of administrative
sanctions, such as FDA refusal to approve pending PMAs, issuance of warning letters, mandatory product recalls, import detentions, civil
monetary penalties, and/or judicial sanctions, such as product seizures, injunctions, and criminal prosecution.
Device Classification
Under the FDCA, medical devices
are classified into one of three classes based on the risk associated with the device and the level of control necessary to provide a
reasonable assurance of safety and effectiveness. Class I devices are deemed to be low risk and are subject to the fewest regulatory
controls. Class III devices are generally the highest risk devices and are subject to the highest level of regulatory control to
provide reasonable assurance of the device’s safety and effectiveness. Class III devices must typically be approved by FDA
before they are marketed.
Most Class I devices
and a minority of Class II devices are completely exempt from premarket review by FDA. Most Class II and a minority of Class I
devices require 510(k) clearance. Devices that pose the highest risk, including life-sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a previously 510(k)-cleared device or a “pre-amendment” Class III
device in commercial distribution before May 28, 1976 for which PMA applications have not been called, are placed in Class III
requiring PMA approval. A novel device is placed in Class III by default, but it may be eligible to be placed in Class I or
Class II via “de novo” classification if it can be shown to pose only low to moderate risk with appropriate regulatory
controls.
The PMA approval pathway
requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The 510(k) clearance pathway is much
less burdensome and time-consuming than the PMA approval pathway. The de novo pathway has an enhanced burden compared to the 510(k) clearance
pathway but is much less burdensome than a PMA approval process.
The 510(k) Clearance Pathway
Under the 510(k) clearance
pathway, a device manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially
equivalent” to a legally marketed predicate device. A predicate device may be a previously 510(k) cleared device or a pre-amendment
device (unless the FDA has issued a regulation calling for PMA applications for this device type). To be “substantially equivalent,”
the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as
the predicate device or have different technological characteristics and be shown to be equally safe and effective and not raise different
questions of safety or effectiveness than the predicate device.
After the FDA accepts the
510(k) premarket notification, it begins a substantive review. By statute, the FDA is required to complete its review within 90 days
of receiving the 510(k) notification. As a practical matter, clearance often takes longer, typically ranging from three to nine months
or longer, and clearance is never assured. The FDA’s 510(k) review generally compares a proposed device to a predicate device
with respect to intended use and technology (design, materials, software, energy source, etc.). The information necessary to show substantial
equivalence will depend upon the differences between the proposed device and the predicate device, which may include bench, cadaver,
animal and/or clinical studies.
If the FDA agrees that the
proposed device is substantially equivalent to the predicate device, it will grant clearance to commercially market the device. Otherwise,
the device manufacturer must fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification
of the device through the de novo process.
After a device receives 510(k) clearance,
any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended
use, requires a new 510(k) clearance or could require reclassification through the de novo process or a PMA approval. The FDA requires
each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with
a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek
510(k) clearance, de novo classification, or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall
the modified device until 510(k) clearance, de novo classification, or PMA approval is obtained.
The De Novo Pathway
Devices of a new type that
the FDA has not previously classified based on risk are automatically classified into Class III, regardless of the level of risk
they pose. To avoid requiring PMA review of low- to moderate-risk devices classified in Class III by operation of law, the U.S.
Congress created the de novo pathway that allows the FDA to classify a low- to moderate-risk device not previously classified into Class I
or II.
Generally, a de novo petition
contains a device description, indications for use statement, proposed labeling, data/performance testing (such as bench testing and/or
clinical study data), the proposed classification, and a risk/benefit analysis. The risk/benefit analysis is the key element of a de
novo petition and typically includes a summary of the benefits of the device, a summary of the known and potential risks, any risk mitigations,
and an explanation of whether the benefits outweigh the risks.
The timing for review of
a de novo petition is less certain than a 510(k). FDA’ s goal is review 70% of de novo submissions received in fiscal year
2022 in 150 calendar days during which a submission is under review at the FDA. As a practical matter, de novo marketing authorization
often takes longer, ranging from a year or more, and marketing authorization is never assured due, in part, to stoppages of
FDA’s 150-day timeline while the applicant responds to deficiencies identified by FDA. If the FDA authorizes the de novo petition,
the device may be legally marketed and used as a predicate device for future 510(k) submissions. If the de novo petition is denied,
the device remains in Class III and a PMA approval may be required before the device may be legally marketed in the United States.
The PMA Approval Process
A device not eligible for
510(k) clearance or de novo classification must follow the PMA approval pathway, which requires proof of the safety and effectiveness
of the device to the FDA’s satisfaction. The cost of preparing and submitting a PMA is substantial. Under U.S. federal law, the
submission of most PMAs is additionally subject to a substantial annually-adjusted application user fee. For example, for fiscal year
2022, the user fee for an original PMA is $374,858. Satisfaction of FDA pre-market approval requirements typically takes years and
the actual time required may vary substantially based upon the type, complexity, and novelty of the device or disease.
A PMA application must provide
extensive preclinical and clinical trial data and also detailed information about the device and its components regarding, among other
things, device design, manufacturing and labeling. There is typically advisory panel review of the clinical data. The FDA typically conducts
a preapproval inspection of the manufacturer’s facilities and may also inspect the clinical trial documentation. FDA will not approve
a device unless compliance is shown with Quality System Regulation, or QSR, requirements, which impose elaborate testing, control, documentation
and other quality assurance procedures. During the review period, the FDA may also request additional information or clarification of
information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response
to deficiencies communicated by the FDA.
By statute, the FDA has 180 days
to review a filed PMA application, although the review more often occurs over a significantly longer period of time. If its evaluation
of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter. An approvable letter usually contains a
number of conditions that must be met in order to secure a final approval of the PMA application. When and if these conditions have been
fulfilled to the satisfaction of the FDA, the FDA will issue a PMA approval letter authorizing commercial marketing of the device, subject
to the conditions of approval and the limitations established in this approval letter, if any. If the FDA’s evaluation of a PMA
application or the relevant manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a not
approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval
may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA
application, or the PMA application is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain
and lengthy and a number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA
for marketing.
In approving a PMA application,
as a condition of approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant
conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the
clinical status of these patients when necessary to protect the public health or to provide additional or longer term safety and effectiveness
data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and
effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use.
Even after approval of a
PMA, new PMA applications or PMA supplements may also be required for modifications to any approved device, including modifications to
the manufacturing processes, device labeling and device design, based on the findings of post-approval studies. Supplements to a PMA
often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited
to that information needed to support the proposed change from the product covered by the original PMA.
Post-market FDA Regulation
After a medical device enters
commercial distribution, numerous regulatory requirements continue to apply. These include:
| ● | the
FDA’s QSR, which require manufacturers, including third-party manufacturers, to follow
stringent design, testing, production, control, supplier/contractor selection, complaint
handling, documentation and other quality assurance procedures during all aspects of the
manufacturing process; |
| ● | labeling
regulations, unique device identification requirements and FDA prohibitions against the promotion
of devices for uncleared, unapproved or off-label uses; |
| ● | advertising
and promotion requirements; |
| ● | restrictions
on sale, distribution or use of a device; |
| ● | PMA
annual reporting requirements; |
| ● | PMA
approval of product modifications, or the potential for new 510(k) clearances for certain
modifications to previously 510(k) cleared devices; |
| ● | medical
device reporting regulations, which require that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious injury if the malfunction
were to recur; |
| ● | medical
device correction and removal reporting regulations, which require that manufacturers report
to the FDA their field corrections and product recalls or removals if undertaken to reduce
a risk to health posed by the device or to remedy a violation of the FDCA; |
| ● | recall
requirements, including a mandatory recall if there is a reasonable probability that the
device would cause serious adverse health consequences or death; |
| ● | an
order of repair, replacement or refund; |
| ● | device
tracking requirements; and |
| ● | post-market
surveillance regulations, which apply when necessary to protect the public health or to provide
additional safety and effectiveness data for the device. |
The FDA has broad post-market
and regulatory enforcement powers. Medical device manufacturers are subject to unannounced inspections
by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations,
and these inspections may include the manufacturing facilities of suppliers. Failure to comply with applicable regulatory requirements
can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees
and civil penalties; unanticipated expenditures, repair, replacement, refunds, recall or seizure of our devices; operating restrictions,
partial suspension or total shutdown of manufacturing; the FDA’s refusal of our requests for 510(k) clearances, de novo classification,
or premarket approvals of new devices, new intended uses or modifications to existing devices; the FDA’s refusal to issue certificates
to foreign governments needed to export devices for sale in other countries; and withdrawing 510(k) clearances, de novo marketing
authorization, or premarket approvals that have already been granted; and criminal prosecution.
Emergency Use Authorization
In extraordinary circumstances,
such as the COVID-19 pandemic, the FDA may allow the use of unapproved medical devices, including laboratory tests, on an emergency basis
through what is known as an Emergency Use Authorization, or EUA. Throughout the COVID-19 public health emergency, FDA has issued guidance
documents for clinical laboratories and commercial manufacturers setting forth the FDA’s current thinking and approach to the offering
of tests for COVID-19.
When FDA grants emergency
authorization to a product, the EUA may include certain conditions for use of that product. For example, the EUA may include conditions
limiting who can distribute, administer, or use the product. Manufacturers may also be required to collect and report information regarding
the safety and effectiveness of the product once it is available in the market and being used for the emergency.
FDA has stated that laboratories
that are performing testing using EUA-authorized test kits from commercial manufacturers need not notify FDA of or obtain an EUA from
FDA for such testing. As an authorized laboratory, we must comply with the applicable regulatory requirements set forth in the EUA, including
labeling requirements and reporting any significant deviations from the established performance characteristics of the product to FDA.
The EUAs are only in effect
for the duration of the public health emergency as declared by the Secretary of the HHS. When the public health emergency is terminated,
we will not be able to continue to offer the COVID-19 antibody tests unless we or Roche has sought clearance or approval for the assay
and come into compliance with the QSR. We expect that HHS or FDA will institute a grace period or enforcement discretion period following
termination of the public health emergency for products on the market subject to an EUA.
Federal
and State Fraud and Abuse Laws
We are subject to U.S. federal
fraud and abuse laws such as the AKS, the U.S. federal prohibition against physician self-referral, or Stark Law, and the FCA. We are
also subject to similar state and foreign fraud and abuse laws.
The AKS prohibits knowingly
and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind,
in return for or to induce the referral of an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing
or ordering, any good, facility, item or service that is reimbursable, in whole or in part, under a U.S. federal healthcare program.
Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution
or other regulatory sanctions, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to
induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.
The Stark Law and similar
state laws prohibit physician referral of patients for designated health services payable by Medicare/Medicaid to entities with which
the physician or an immediate family member has a financial relationship (ownership/investment interest or compensation arrangement),
unless an exception applies.
Other U.S. federal fraud
and abuse laws to which we are subject include but are not limited to the U.S. federal civil and criminal false claims laws, including
the FCA, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false
or fraudulent claim for payment to the U.S. federal government, and the U.S. federal Civil Monetary Penalties Law, which prohibits, among
other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should
know that remuneration is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of
services reimbursable by Medicare or a state healthcare program, unless an exception applies. Under the FCA, private citizens can bring
claims on behalf of the government through qui tam actions. We must also operate within the bounds of the fraud and abuse laws of the
states in which we do business which may apply to items or services reimbursed by nongovernmental third-party payers, including private
insurers.
Efforts to ensure that our
business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs.
If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may
be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government-funded
healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future
earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to
resolve allegations of non-compliance with the law and the curtailment or restructuring of our operations, any of which could adversely
affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities
with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative
sanctions, including exclusions from government-funded healthcare programs.
HIPAA and HITECH
Under the administrative
simplification provisions of the HIPAA, as amended by HITECH, HHS issued regulations that establish uniform standards governing the conduct
of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information,
or PHI, used or disclosed by covered entities. Covered entities and business associates are subject to HIPAA and HITECH.
HIPAA and HITECH include
the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule covers the
use and disclosure of PHI by covered entities and business associates and generally prohibits the use or disclosure of PHI except as
permitted under the rule. The privacy rule also sets forth individual patient rights, such as the right to access or amend certain
records containing PHI, or to request restrictions on the use or disclosure of PHI. The security rule requires covered entities
and business associates to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI by
implementing administrative, physical and technical safeguards. Under HITECH’s breach notification rule, a covered entity must
notify individuals, the Secretary of the HHS, and in some circumstances, the media of breaches of unsecured PHI.
In addition, we may be subject
to state health information privacy and data breach notification laws, which may govern the collection, use, disclosure and protection
of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act,
which sets forth standards in addition to HIPAA and HITECH with which all California health care providers must abide. State laws may
be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from
each other, which may complicate compliance efforts.
Entities that are found to
be in violation of HIPAA as the result of a breach of unsecured PHI, a complaint about privacy practices or an audit by HHS, may be subject
to significant civil and criminal fines and penalties and/or additional reporting and oversight obligations if such entities are required
to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.
U.S. Healthcare Reform
In the United States, there
have been a number of legislative and regulatory changes at the U.S. federal and state levels which seek to reduce healthcare costs and
improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act, or the ACA, became law. This law substantially changed the way health care is financed
by both commercial payers and government payers, and significantly impacted our industry. Since 2016 there have been efforts to repeal
all or part of the ACA. For example, the Tax Cuts and Jobs Act, among other things, removed penalties for not complying with the ACA’s
individual mandate to carry health insurance. All or a portion of the ACA and related subsequent legislation may be modified, repealed
or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for
insured individuals and adversely affect our business.
The ACA contained a number
of provisions expected to impact our business and operations, some of which in ways we cannot currently predict, including those governing
enrollment in state and U.S. federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state
and U.S. federal health care programs and will result in the development of new programs.
The expansion in the government’s
role in the U.S. healthcare industry may result in decreased profits to us and lower reimbursement by payers for our tests, any of which
may have a material adverse impact on our business, financial condition, results of operations or cash flows.
In addition, other legislative
changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into
law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and,
due to subsequent legislative amendments to the statute, will remain in effect through 2029 unless additional legislative action is taken.
We anticipate there will
continue to be proposals by legislators at both the federal and state levels, and by regulators and commercial payers to reduce costs
while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be
able to charge for our tests, and the coverage of or the amounts of reimbursement available for our tests from payers, including commercial
payers and government payers.
Government Regulation
of Our e-Commerce Food Services Business
Legal compliance is important
to our operations food service operations. We are required to comply, and it is our policy to comply, with all applicable laws in the
jurisdictions in which we do business.
As a marketer and distributor
of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the
U.S. Food and Drug Administration (the “FDA”). The FDA regulates food safety and quality through various statutory and regulatory
mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis
and critical control point requirements for certain foods, and the food and color additive approval process. The agency also specifies
the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels,
regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable
probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to
the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard
Act and regulations promulgated by the USDA to interpret and implement these statutory provisions. The USDA imposes standards for product
safety, quality and sanitation through the federal meat and poultry inspection program. The USDA reviews and approves the labeling of
these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are
also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration
and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.
The recently published and
pending rules under the Food Safety Modernization Act (“FSMA”) will significantly expand food safety requirements, including
those of HF Group. Among other things, FDA regulations implementing the FSMA require us to establish and maintain comprehensive, prevention-based
controls across the food supply chain that are both verified and validated. The FSMA also imposes new requirements for food products
imported into the U.S. and provides the FDA with mandatory recall authority.
We are also subject to state
and local regulation through such measures as the licensing of our facilities; enforcement by state and local health agencies of state
and local standards for our products; and regulation of our trade practices in connection with the sale of our products. Our facilities
are subject to regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor. These regulations
require us to comply with certain manufacturing, health and safety standards to protect employees from accidents and to establish hazard
communication programs to transmit information on the hazards of certain chemicals which may be present in products that we distribute.
Our distribution facilities
must be registered with the FDA biennially and are subject to periodic government agency inspections by the FDA and USDA. Our facilities
are generally inspected at least annually by federal and/or state authorities. Further, we are required to establish communication programs
to transmit information about the hazards of certain chemicals present in some of the products we distribute.
Our business and employment
practices are also subject to regulation by numerous federal, state and local regulatory agencies, including, but not limited to, the
U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. Department of Transportation, as well as
its agencies, the Surface Transportation Board, the Federal Highway Administration, the Federal Motor Carrier Safety Administration,
and the National Highway Traffic Safety Administration, which collectively regulate our trucking business through the regulation of operations,
safety, insurance and hazardous materials. We must comply with the safety and fitness regulations promulgated by the Federal Motor Carrier
Safety Administration, including those relating to drug and alcohol testing and hours-of service. Such matters as weight and dimension
of equipment also fall under federal and state regulations. We also are subject to federal and state immigration laws, regulations and
programs that regulate our ability to hire or retain foreign employees. In addition, we are subject to the U.S. False Claims Act, and
similar state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention
of overpayments.
Our operations are also subject
to a broad range of U.S. federal, state, and local environmental laws and regulations, as well as zoning and building regulations. Environmental
laws and regulations cover a variety of procedures, including appropriately managing wastewater and stormwater; complying with clean
air laws, including those governing vehicle emissions; proper handling and disposal of solid and hazardous wastes; protecting against
and appropriately investigating and remediating spills and releases; and monitoring and maintaining underground and above ground storage
tanks for diesel fuel and other petroleum products. For the year ended December 31, 2022, the costs of managing our compliance with environmental
laws and regulations was nominal.
The U.S. Foreign Corrupt
Practices Act (“FCPA”) prohibits bribery of public officials to obtain or retain business in foreign jurisdictions. The FCPA
also requires us to keep accurate books and records and to maintain internal accounting controls to detect and prevent bribery and to
ensure that transactions are properly authorized. We have implemented appropriate policy and will continue to maintain a robust anti-corruption
compliance program applicable to our operations.
Holding Foreign Companies Accountable Act
In December 2021, the SEC
adopted rules (the “Final Rules”) to implement the Holding Foreign Companies Accountable Act (the “HFCAA”). The
HFCAA includes requirements for the SEC to identify issuers who file annual reports with audit reports issued by independent registered
public accounting firms located in foreign jurisdictions that the Public Company Accounting Oversight Board (“PCAOB”) is
unable to inspect or investigate completely because of a position taken by a non-U.S. authority in the accounting firm’s jurisdiction
(“Commission-Identified Issuers”). The HFCAA also requires that, to the extent that the PCAOB has been unable to inspect
an issuer’s independent registered public accounting firm for three consecutive years since 2021, the SEC shall prohibit the issuer’s
securities registered in the United States from being traded on any national securities exchange or over-the-counter markets in the United
States. In December 2022, the Accelerating Holding Foreign Companies Accountable Act amended the HFCAA to shorten the three-year period
to two years.
Under the Final Rules, the
SEC adopted submission and disclosure requirements by amending Form 10-K and other annual reporting forms and established procedures
to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA. Specifically, the Final
Rules require each Commission-Identified Issuer to submit documentation to the SEC annually on or before its annual report due date that
establishes that it is not owned or controlled by a government entity in its public accounting firm’s foreign jurisdiction and
require additional specified disclosures by “foreign issuers” as defined in Rule 3b-4 promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). The SEC identifies an issuer as a Commission-Identified Issuer after the issuer
files its annual report and on a rolling basis and will impose an initial trading prohibition on an issuer as soon as practicable after
it has been conclusively identified as a Commission-Identified Issuer for two consecutive years. To end an initial or subsequent trading
prohibition, a Commission-Identified Issuer must certify that it has retained a registered public accounting firm that the PCAOB has
determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements
that include an audit report signed by such a registered public accounting firm.
In August 2022, the PCAOB
signed a Statement of Protocol with the China Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance of
the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered
public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations
from September to November 2022, and in December 2022, the PCAOB announced that it has secured complete access to inspect and investigate
registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues
any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition
under the HFCAA.
Given that Marcum Asia
CPAs LLP, a New York-based independent accounting firm, serves as the principal accountant to audit our consolidated financial
statements to be filed with the SEC, and Friedman LLP, a New York-based independent accounting firm, served as the principal
accountant to audit our consolidated financials as of and for the two years ended December 31, 2020 and 2021, we believe we are
compliant with the HFCAA, which should preclude a finding by the SEC that we are a Commission-Identified Issuer and therefore the
delisting of our Common Stock from the Nasdaq Capital Market. For a detailed description of risks related to our doing business in
China and status under the HFCAA, see “Item 3. Key Information - Risk Factors - Risks Related to Our Doing Business in the
China”.
C. Organizational
Structure
The
following diagram illustrates our corporate structure, including our principal subsidiaries, as of the date of this annual report.
D.
Property, Plants and Equipment
Our China headquarters are
located in the Bihu Industrial Park in Lishui, Zhejiang Province. Our facilities for manufacturing our CDA device for our performance
of commercial CDA-based tests, our principle licensed clinical laboratory to conduct commercial CDA-based tests, as well as our warehouse
are all in our headquarters in Lishui. We own the premises of our Lishui headquarters, which have an aggregate floor area of approximately
5,126 square meters. We also own an additional approximately 203 square meters in Lishui and 157 square meters of office space in Yangzhou,
Jiangsu Province.
We currently lease several
properties with an aggregate floor area of approximately 1,200 square meters in Shanghai, where we operate our primary research and development
facilities. We also lease approximately 142 square meters of properties in Haikou, Hainan Province, primarily to operate our government-approved
clinical laboratory. Our leases for these properties vary in duration from one to three years.
In
the United States, we currently lease approximately 6,700 square feet of office space in Montgomery County, Pennsylvania as the premises
for our new CLIA-registered laboratory and U.S. headquarters, which we moved into in the second quarter of 2020. This lease has
a term of approximately ten years and we are entitled to early terminate the lease in approximately five years subject to certain
conditions. We also lease several office spaces and warehouse spaces in New York.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We are a BVI business company
limited by shares and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time,
and the BVI Business Companies Act (As Revised) (the “BVI Act”). The following are summaries of material provisions of our
Fifth Amended and Restated Memorandum and Articles of Association (“M&A”) in effect as of the date of this annual report
insofar as they relate to the material terms of our ordinary shares. This description is only a summary, does not purport to be complete
and is qualified by reference to the full text of the Fifth Amended and Restated Memorandum and Articles of Association, which are incorporated
by reference as exhibits to this annual report.
Memorandum
and Articles of Association
Objects and Purposes,
Register, and Shareholders. Subject to the BVI Act, the objects for which we are established are unrestricted. Our register of members will be maintained
by our share registrar, Maples Fund Services (Cayman) Limited. Under the BVI Act, a BVI company may treat the registered holder of a
share as the only person entitled to (a) exercise any voting rights attaching to the share, (b) receive notices, (c) receive
a distribution in respect of the share and (d) exercise other rights and powers attaching to the share. Consequently, as a matter
of BVI law, where a shareholder’s shares are registered in the name of a nominee, the nominee is entitled to receive notices, receive
distributions and exercise rights in respect of any such shares registered in its name. The beneficial owners of the shares registered
in a nominee’s name will therefore be reliant on their contractual arrangements with the nominee in order to receive notices and
dividends and ensure the nominee exercises voting and other rights in respect of the shares in accordance with their directions.
Directors’ Powers.
Under the BVI Act, subject to any modifications or limitations in a company’s M&A, a company’s business and affairs are
managed by, or under the direction or supervision of, its directors; and directors generally have all powers necessary to manage a company.
A director must disclose any interest he has on any proposal, arrangement or contract not entered into in the ordinary course of business
and on usual terms and conditions. An interested director may (subject to the M&A) vote on a transaction in which he has an interest.
In accordance with, and subject to, our M&A, the directors may by resolution of directors exercise all the powers of the company
to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the company or of
any third party.
Rights, Preferences
and Restrictions of Ordinary Shares. Subject to the restrictions described under the section titled “Dividend Policy”
above, our directors may (subject to the M&A) authorize dividends at such time and in such amount as they determine. In the event
of a liquidation or dissolution of the company, the holders of ordinary shares are (subject to the M&A) entitled to share ratably
in all surplus assets remaining available for distribution to them after payment and discharge of all claims, debts, liabilities and
obligations of the company and after provision is made for each class of shares (if any) having preference over the ordinary shares if
any at that time. There are no sinking fund provisions applicable to our ordinary shares. Holders of our ordinary shares have no pre-emptive
rights. Subject to the provisions of the BVI Act, we may, (subject to the M&A) with board or shareholders’ consent, repurchase
our ordinary shares provided always that the company will, immediately after the repurchase, satisfy the solvency test. The company will
satisfy the solvency test, if (i) the value of the company’s assets exceeds its liabilities; and (ii) the company is
able to pay its debts as they fall due.
In accordance with the BVI
Act:
| (i) | the
company may purchase, redeem or otherwise acquire its own shares in accordance with either
(a) Sections 60, 61 and 62 of the BVI Act (save to the extent that those Sections are
negated, modified or inconsistent with provisions for the purchase, redemption or acquisition
of its own shares specified in the company’s M&A); or (b) such other provisions
for the purchase, redemption or acquisition of its own shares as may be specified in the
company’s M&A. The company’s M&A provide that such Sections 60, 61 and
62 of the BVI Act do not apply to the company; and |
| (ii) | where
a company may purchase, redeem or otherwise acquire its own shares otherwise than in accordance
with Sections 60, 61 and 62 of the BVI Act, it may not purchase, redeem or otherwise acquire
the shares without the consent of the member whose shares are to be purchased, redeemed or
otherwise acquired, unless the company is permitted by the M&A to purchase, redeem or
otherwise acquire the shares without that consent; and |
| (iii) | unless
the shares are held as treasury shares in accordance with Section 64 of the BVI Act,
any shares acquired by the company are deemed to be canceled immediately on purchase, redemption
or other acquisition. |
Variation of the Rights
of Shareholders. As permitted by the BVI Act and our M&A, whenever the capital of our company is divided into different
classes, the rights attached to any such class may only be materially adversely varied with the consent in writing of the holders of
not less than two-thirds (2/3rds) of the issued shares of that class or with the sanction of a resolution of our shareholders passed
at a separate meeting of the holders of the shares of that class by the holders of not less than two-thirds (2/3rds) of the issued shares
of that class.
Ordinary Shares. Our
ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary
shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Our ordinary shares are issued
in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the BVI may freely
hold and vote their shares.
Conversion. Each
Class B ordinary share is convertible into one (1) Class A ordinary share at any time by the holder thereof. Class A
ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or
disposition of Class B ordinary shares by a holder thereof to any person other than holders of Class B ordinary shares or their
affiliates, or upon a change of ultimate beneficial ownership of the holder of any Class B ordinary share to any person or entity
who is not an affiliate of the holder, such Class B ordinary shares shall be automatically and immediately converted into the same
number of Class A ordinary shares.
Voting Rights. In
respect of all matters subject to a shareholders’ vote, each Class A ordinary share shall, on a poll, entitle the holder thereof
to one (1) vote per share and each Class B ordinary share shall entitle the holder to ten (10) votes per share on all
matters subject to vote at our general meetings. Our Class A ordinary shares and Class B ordinary shares vote together as a
single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Voting at any shareholders’
meeting is by show of hands unless a poll is (before or on the declaration of the result of the show of hands) demanded. A poll may be
demanded by the chairman of such meeting or any shareholder present in person or by proxy.
Shareholder Meetings. In
accordance with, and subject to, our M&A, (a) the chairman of our board of directors, or a majority of our directors (acting
by a resolution of the board), may call general meetings of our shareholders; and (b) upon the written request of shareholders entitled
to exercise thirty per cent (30%) or more of the voting rights in respect of the matter for which the meeting is requested, the directors
shall convene a meeting of shareholders. Under BVI law, the M&A may be amended to decrease but not increase the required percentage
to call a meeting above thirty per cent (30%). In accordance with, and subject to, our M&A, (a) the director convening a meeting
shall give not less than ten (10) days’ notice of a meeting of shareholders to those shareholders entitled to vote at the
meeting; (b) an annual general meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders
holding at least ninety-five per cent (95%) of the total votes attaching to all shares in issue and entitled to attend and vote at such
annual general meeting have agreed to waive notice of the meeting; and an extraordinary general meeting of shareholders held in contravention
of the requirement to give notice is valid if shareholders holding no less than two-thirds of total votes attaching to all shares in
issue and entitled to attend and vote at such extraordinary general meeting have agreed to waive notice of the meeting; (c) a meeting
of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy one or more shareholders
holding shares which carry in aggregate not less than a majority of all votes attaching to all shares in issue and entitled to vote at
such meeting, and (d) if within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall
be dissolved.
Dividends. Subject
to the BVI Act and our M&A, our directors may, by resolution, declare dividends at a time and amount as they think fit if they are
satisfied, based on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our
liabilities and we will be able to pay our debts as they fall due. There is no further BVI law restriction on the amount of funds which
may be distributed by us by dividend, including all amounts paid by way of the subscription price for ordinary shares regardless of whether
such amounts may be wholly or partially treated as share capital or share premium under certain accounting principles. Shareholder approval
is not (except as otherwise provided in our M&A) required to pay dividends under BVI law. In accordance with, and subject to, our
M&A, no dividend shall bear interest as against the company (except as otherwise provided in our M&A).
Disclosure of the SEC’s
Position on Indemnification for Securities Act Liabilities. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the
registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Transfer of Shares. Subject
to any applicable restrictions or limitations arising pursuant to (i) our M&A; or (ii) the BVI Act, any of our shareholders
may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our
directors may approve (such instrument of transfer being signed by the transferor and containing the name and address of the transferee).
Our directors may decline to register any transfer of shares which is not fully paid up or on which our company has a lien. In addition,
our directors may also decline to register any transfer of any shares unless (i) the instrument of transfer is lodged with our company,
accompanied by the relevant share certificate, (ii) the instrument of transfer is in respect of only one class of shares, (iii) the
instrument of transfer is properly stamped, if required, (iv) in the case of a transfer to joint holders, the number of joint holders
to whom the share is to be transferred does not exceed four, and (v) a fee of such maximum sum as The NASDAQ Capital Market may
determine to be payable, or such lesser sum as our board of directors may require, is paid to our company in respect thereof.
Differences
in Corporate Law
The BVI Act differs from
laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between
the provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers,
Consolidations and Similar Arrangements
The BVI Act provides for
mergers as that expression is understood under US corporate law. Common law mergers are also permitted outside of the scope of the BVI
Act. Under the BVI Act, two or more companies may either merge into one of such existing companies, or the surviving company, or consolidate
with both existing companies ceasing to exist and forming a new company, or the consolidated company. The procedure for a merger or consolidation
between our company and another company (which need not be a BVI company) is set out in the BVI Act. The directors of the BVI company
or BVI companies which are to merge or consolidate must approve a written plan of merger or consolidation which must also be authorized
by a resolution of members (and the outstanding shares of every class of shares that are entitled to vote on the merger or consolidation
as a class if the memorandum or articles of association so provide or if the plan of merger or consolidation contains any provisions
that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as
a class) of the shareholders of the BVI company or BVI companies which are to merge. A foreign company which is able under the laws of
its foreign jurisdiction to participate in the merger or consolidation is required by the BVI Act to comply with the laws of that foreign
jurisdiction in relation to the merger or consolidation. The BVI company must then execute articles of merger or consolidation, containing
certain prescribed details. The plan and articles of merger or consolidation are then filed with the Registrar of Corporate Affairs in
the BVI, or the Registrar. If the surviving company or the consolidated company is to be incorporated under the laws of a jurisdiction
outside BVI, it shall file the additional instruments required under Section 174(2)(b) of the BVI Act. The Registrar then (if
he or she is satisfied that the requirements of the BVI Act have been complied with) registers, in the case of a merger, the articles
of merger or consolidation and any amendment to the M&A of the surviving company and, in the case of a consolidation, the M&A
of the new consolidated company and issues a certificate of merger or consolidation (which is conclusive evidence of compliance with
all requirements of the BVI Act in respect of the merger or consolidation). The merger or consolidation is effective on the date that
the articles of merger or consolidation are registered by the Registrar or on such subsequent date, not exceeding thirty days, as
is stated in the articles of merger or consolidation but if the surviving company or the consolidated company is a company incorporated
under the laws of a jurisdiction outside the BVI, the merger or consolidation is effective as provided by the laws of that other jurisdiction.
As soon as a merger or consolidation
becomes effective (among other things), (a) the surviving company or consolidated company (so far as is consistent with its amended
memorandum and articles of association, as amended or established by the articles of merger or consolidation) has all rights, privileges,
immunities, powers, objects and purposes of each of the constituent companies; (b) the memorandum and articles of association of
any surviving company are automatically amended to the extent, if any, that changes to its amended memorandum and articles of association
are contained in the articles of merger; (c) assets of every description, including choses-in-action and the business of each of
the constituent companies, immediately vest in the surviving company or consolidated company; (d) the surviving company or consolidated
company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e) no conviction, judgment,
ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against
any shareholder, director, officer or agent thereof, is released or impaired by the merger or consolidation; and (f) no proceedings,
whether civil or criminal, pending at the time of a merger or consolidation by or against a constituent company, or against any shareholder,
director, officer or agent thereof, are abated or discontinued by the merger or consolidation, but: (i) the proceedings may be enforced,
prosecuted, settled or compromised by or against the surviving company or consolidated company or against the shareholder, director,
officer or agent thereof, as the case may be or (ii) the surviving company or consolidated company may be substituted in the proceedings
for a constituent company but if the surviving company or the consolidated company is incorporated under the laws of a jurisdiction outside
the BVI, the effect of the merger or consolidation is the same as noted foregoing except in so far as the laws of the other jurisdiction
otherwise provide.
The Registrar shall strike
off the register of companies each constituent company that is not the surviving company in the case of a merger and all constituent
companies in the case of a consolidation (save that this shall not apply to a foreign company).
If the directors determine
it to be in the best interests of us, it is also possible for a merger to be approved as a court approved plan of arrangement or as a
scheme of arrangement in accordance with (in each such case) the BVI Act. The convening of any necessary shareholders meetings and subsequently
the arrangement must be authorized by the BVI court. A scheme of arrangement requires the approval of 75% of the votes of the shareholders
or class of shareholders, as the case may be. If the effect of the scheme is different in relation to different shareholders, it may
be necessary for them to vote separately in relation to the scheme, with it being required to secure the requisite approval level of
each separate voting group. Under a plan of arrangement, a BVI court may determine what shareholder approvals are required and the manner
of obtaining the approval.
Shareholders’
Suits
Under the provisions of the
BVI Act, the memorandum and articles of association of a company are binding as between the company and its members and between the members.
In general, members are bound by the decision of the majority or special majorities as set out in the articles of association or in the
BVI Act. As for voting, the usual rule is that with respect to normal commercial matters members may act from self-interest when
exercising the right to vote attached to their shares.
If the majority members have
infringed a minority member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action.
A derivative action concerns the infringement of the company’s rights where the wrongdoers are in control of the company and are
preventing it from taking action, whereas a personal action concerns the infringement of a right that is personal to the particular member
concerned.
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:
| (c) | any
sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of
the assets or business of the company if not made in the usual or regular course of the business
carried on by the company but not including (i) a disposition pursuant to an order of
the court having jurisdiction in the matter; (ii) a disposition for money on terms requiring
all or substantially all net proceeds to be distributed to the members in accordance with
their respective interest within one year after the date of disposition; or (iii) a
transfer pursuant to the power of the directors to transfer assets for the protection thereof; |
| (d) | a
redemption of 10 per cent, or fewer, of the issued shares of the company required by the
holders of 90 percent, or more, of the shares of the company pursuant to the terms of
the BVI Act; and |
| (e) | an
arrangement, if permitted by the BVI High Court. |
Generally any other claims
against a company by its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights
as members as established by the company’s memorandum and articles of association.
The BVI Act provides that
if a company or a director of a company engages in, proposes to engage in or has engaged in, conduct that contravenes the BVI Act or
the memorandum or articles of association of the company, the BVI High Court may, on the application of a member or a director of the
company, make an order directing the company or director to comply with, or restraining the company or director from engaging in conduct
that contravenes the BVI Act or the memorandum or articles of association.
Indemnification
of Directors and Executive Officers and Limitation of Liability
BVI law does not limit the
extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent
any such provision may be held by the BVI High Court to be contrary to public policy (e.g. for purporting to provide indemnification
against the consequences of committing a crime). An indemnity will be void and of no effect and will not apply to a person unless the
person acted honestly and in good faith and in what he believed to be in the best interests of the company and, in the case of criminal
proceedings, the person had no reasonable cause to believe that his conduct was unlawful. Our M&A provide that every director and
officer of our company shall be indemnified against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities
incurred or sustained by such indemnified person, other than by reason of such indemnified person’s own dishonesty, willful default
or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in
the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing,
any costs, expenses, losses or liabilities incurred by such indemnified person in defending (whether successfully or otherwise) any civil
proceedings concerning our company or its affairs in any court whether in the British Virgin Islands or elsewhere. This standard of conduct
is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered
into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond
that provided in our M&A.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing
provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Directors’
Fiduciary Duties
Under Delaware corporate
law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components:
the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders,
all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts
in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation
and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by
the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and
in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by
evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director
must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of BVI law, directors
must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests.
This means that, strictly speaking, a director should not participate in a decision in circumstances where he has a potential conflict.
That is, he should declare his interest and abstain. The BVI Act provides that a director “shall, forthwith after becoming aware
of the fact that he is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board
of the company”. The failure of a director to so disclose an interest does not affect the validity of a transaction entered into
by the director or the company, provided that the director’s interest was disclosed to the board prior to the company’s entry
into the transaction or was not required to be disclosed (for example where the transaction is between the company and the director himself
or is otherwise in the ordinary course of business and on usual terms and conditions). Typically a company’s memorandum and articles
of association will allow a director interested in a particular transaction to vote on it, attend meetings at which it is considered,
and sign documents on behalf of the company which relate to the transaction.
Under the laws of the BVI,
a transaction entered into by the company in respect of which a director is interested will not be voidable by the company where the
members have approved or ratified the transaction in knowledge of the material facts of the interest of the director in the transaction,
or if the company received fair value for the transaction.
Broadly speaking, the duties
that a director owes to a company may be divided into two categories. The first category encompasses fiduciary duties, that is, the duties
of loyalty, honesty and good faith. The second category encompasses duties of skill and care. Each is considered in turn below.
A director’s fiduciary
duties can be summarized as follows:
| (a) | Bona
Fides: The directors must act bona fide in what they consider is in the best interests of
the company (or, if permitted as above, that company’s parent company). |
| (b) | Proper
Purpose: The directors must exercise the powers that are vested in them for the purpose for
which they were conferred and not for a collateral purpose. |
| (c) | Unfettered
Discretion: Since the powers of the directors are to be exercised by them in trust for the
company, they should not improperly fetter the exercise of future discretion. |
| (d) | Conflict
of Duty and Interest: as per the above. |
In addition to their fiduciary
duties a director has the duties of care, diligence and skill which are owed to the company itself and not, for example, to individual
members (subject to the limited exceptions as to enforcement on behalf of the company).
Shareholder
Action by Written Consent
Under the Delaware General
Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation.
As permitted by BVI law, our M&A provide that shareholders may approve corporate matters by way of a unanimous written resolution
signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting
being held.
Shareholder
Proposals
Under the Delaware General
Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with
the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized
to do so in the governing documents, but shareholders may be precluded from calling special meetings.
BVI law and our M&A provide
that upon the written request of shareholders entitled to exercise thirty per cent (30%) or more of the voting rights in respect of the
matter for which the meeting is requested, the directors shall convene a meeting of shareholders. As a BVI company, we are not obliged
by law to call shareholders’ annual general meetings.
Cumulative
Voting
Under the Delaware General
Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the representation of investors on a board of directors since
it permits the investor to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s
voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the
British Virgin Islands but our M&A does not provide for cumulative voting. As a result, our shareholders are not afforded any less
protections or rights on this issue than shareholders of a Delaware corporation.
Removal
of Directors
Under the Delaware General
Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of
the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our M&A, a director may
be removed from office, by a resolution of shareholders passed at a meeting of shareholders or by a written resolution passed by a least
fifty per cent (50%) of the votes of all shareholders of the company entitled to vote, notwithstanding any provision in the M&A or
in any agreement between such director and us.
Transactions
with Interested Shareholders
The Delaware General Corporation
Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected
not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested shareholder” for three years following the date that such person becomes an interested
shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s
outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make
a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things,
prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination
or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware
corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
British Virgin Islands law
has no comparable statute. As a result, we are not afforded the same statutory protections in the British Virgin Islands as we would
be offered by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions
between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best
interests of the company and not with the effect of constituting a fraud on the investors. See also “Shareholders’ Suits”
above. We have adopted a code of business conduct and ethics which requires employees to fully disclose any situations that could reasonably
be expected to give rise to a conflict of interest, and sets forth relevant restrictions and procedures when a conflict of interest arises
to ensure the best interest of the company.
Dissolution;
Winding Up
Under the Delaware General
Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding
100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved
by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate
of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
The liquidation of a BVI
company may be a voluntary solvent liquidation or a liquidation under the Insolvency Act. Where a company has been struck off the Register
of Companies under the BVI Act continuously for a period of seven years it is dissolved with effect from the last day of that period.
Voluntary
Liquidation
If the liquidation is a solvent
liquidation, the provisions of the BVI Act governs the liquidation. A company may only be liquidated under the BVI Act as a solvent liquidation
if it has no liabilities or it is able to pay its debts as they fall due and the value of its assets exceeds its liabilities. Subject
to the memorandum and articles of association of a company, a liquidator may be appointed by a resolution of directors or resolution
of members but if the directors have commenced liquidation by a resolution of directors the members must approve the liquidation plan
by a resolution of members save in limited circumstances.
A sole liquidator appointed after 1 January 2023 must be resident in
the BVI. An individual resident outside the BVI may be appointed to act as liquidator jointly with a BVI resident liquidator.
A liquidator is appointed
for the purpose of collecting in and realizing the assets of a company and distributing proceeds to creditors.
Liquidation under the Insolvency Act
The Insolvency Act governs
an insolvent liquidation. Pursuant to the Insolvency Act, a company is insolvent if: (a) it fails to comply with the requirements of
a statutory demand that has not be set aside pursuant to the Insolvency Act, or (b) execution or other process issued on a judgment,
decree or order of court in favor of a creditor of the company is returned wholly or partly unsatisfied, or (c) either the value of the
company’s liabilities exceeds its assets, or (d) the company is unable to pay its debts as they fall due. The liquidator must be
either the Official Receiver in BVI or a BVI licensed insolvency practitioner. An individual resident outside the BVI may be appointed
to act as liquidator jointly with a BVI licensed insolvency practitioner or the Official Receiver. The members of the company may appoint
an insolvency practitioner as liquidator of the company or the court may appoint an Official Receiver or an eligible insolvency practitioner.
The application to the court can be made by one or more of the following: (i) the company, (ii) a creditor, (iii) a member,
or (iv) the supervisor of a creditors’ arrangement in respect of the company, the Financial Services Commission and the Attorney
General in the BVI.
The court may appoint a liquidator
if:
| (a) | the
company is insolvent; |
| (b) | the
court is of the opinion that it is just and equitable that a liquidator should be appointed;
or |
| (c) | the
court is of the opinion that it is in the public interest for a liquidator to be appointed. |
An application under (a) above
by a member may only be made with leave of the court, which shall not be granted unless the court is satisfied that there is prima facie
case that the company is insolvent. An application under (c) above may only be made by the Financial Services Commission or the
Attorney General and they may only make an application under (c) above if the company concerned is, or at any time has been, a regulated
person (i.e. a person that holds a prescribed financial services license) or the company is carrying on, or at any time has carried on,
unlicensed financial services business.
Order of Preferential Payments upon Liquidation
Upon the insolvent liquidation
of a company, the assets of a company shall be applied in accordance with the following priorities: (a) in paying, in priority to
all other claims, the costs and expenses properly incurred in the liquidation in accordance with the prescribed priority; (b) after
payment of the costs and expenses of the liquidation, in paying the preferential claims admitted by the liquidator (wages and salary,
amounts to the BVI Social Security Board, pension contributions, government taxes) — preferential claims rank equally between
themselves and, if the assets of the company are insufficient to meet the claims in full, they shall be paid ratably; (c) after
the payment of preferential claims, in paying all other claims admitted by the liquidator, including those of non-secured creditors —
the claims of non-secured creditors of the company shall rank equally among themselves and if the assets of the company are insufficient
to meet the claims in full, such non-secured creditors shall be paid ratably; (d) after paying all admitted claims, paying any interest
payable under the BVI Insolvency Act; and finally (e) any surplus assets remaining after payment of the costs, expenses and claims
above shall be distributed to the members in accordance with their rights and interests in the company. Part VIII of the Insolvency
Act provides for various applications which may be made by a liquidator to set aside transactions which have unfairly diminished the
assets which are available to creditors.
The appointment of a liquidator
over the assets of a company does not affect the right of a secured creditor to take possession of and realize or otherwise deal with
assets of the company over which that creditor has a security interest. Accordingly, a secured creditor may enforce its security directly
without recourse to the liquidator, in priority to the order of payments described in the preceding paragraph. However, so far as the
assets of a company in liquidation available for payment of the claims of unsecured creditors are insufficient to pay the costs and expenses
of the liquidation and the preferential creditors, those costs, expenses and claims have priority over the claims of charges in respect
of assets that are subject to a floating charge created by a company and shall be paid accordingly out of those assets.
The court has authority to
order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do
so. Under the BVI Act and our articles of association, our company may be dissolved, liquidated or wound up by a resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware General
Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of
such class, unless the certificate of incorporation provides otherwise. Under British Virgin Islands law and our articles of association,
if our share capital is divided into more than one class of shares, the rights attached to any class may only be materially adversely
varied with the consent in writing of the holders of not less than two-thirds (2/3rds) of the issued shares of that class or with the
sanction of a resolution of our shareholders passed at a separate meeting of the holders of the shares of that class by the holders of
not less than two-thirds (2/3rds) of the issued shares of that class. The rights conferred upon the holders of the shares of any class
issued with preferred or other rights shall not, subject to any rights or restrictions for the time being attached to the shares of that
class, be deemed to be materially adversely varied by, inter alia, the creation, allotment or issue of further shares ranking pari passu
with or subsequent to them or the redemption or purchase of any shares of any class by the company. The rights of the holders of shares
shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred or other rights including, without
limitation, the creation of shares with enhanced or weighted voting rights.
Amendment of Governing Documents
Under the Delaware General
Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled
to vote, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, our M&A may be amended
by a resolution of shareholders or by a resolution of directors, save that no amendment may be made by a resolution of directors: (i) to
restrict the rights or powers of the shareholders to amend the memorandum or articles; (ii) to change the percentage of shareholders
required to pass a resolution of shareholders to amend the memorandum or articles; (iii) in circumstances where the memorandum or
articles cannot be amended by the shareholders; or (iv) to certain specified clauses of the articles of association.
Rights of Non-Resident or Foreign
Shareholders
There are no limitations
imposed by our M&A on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition,
there are no provisions in our M&A governing the ownership threshold above which shareholder ownership must be disclosed.
C.
Material Contracts
We have not entered into
any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information
on the Company—B. Business Overview”, “Item 7. Major Shareholders and Related Party Transactions—B. Related
Party Transactions,” or elsewhere in this annual report.
D.
Exchange Controls
See “Item 4. Information
on the Company—B. Business Overview—PRC Regulations—Other Significant PRC Regulations Affecting Our Business Activities
in China—Regulations Relating to Foreign Exchange.”
E.
Taxation
The following summary
of the material BVI, PRC and United States federal income tax consequences of an investment in our Class A ordinary shares or ADSs
is based upon laws and relevant interpretations thereof in effect as of the date of this registration statement, all of which are subject
to change. This summary does not deal with all possible tax consequences relating to an investment in our Class A ordinary shares
or ADSs, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the BVI,
the People’s Republic of China and the United States.
BVI Taxation
Our company and all dividends,
interest, rents, royalties, compensation and other amounts paid by our company to persons who are not resident in the BVI and any capital
gains realized with respect to any shares, debt obligations, or other securities of our company by persons who are not resident in the
BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance, succession
or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt
obligation or other securities of our company.
All instruments relating
to transfers of property to or by our company and all instruments relating to transactions in respect of the shares, debt obligations
or other securities of our company and all instruments relating to other transactions relating to the business of our company are exempt
from payment of stamp duty in the BVI. This assumes that our company does not hold an interest in real estate in the BVI.
There are currently no withholding
taxes or exchange control regulations in the BVI applicable to our company or its members.
People’s
Republic of China Taxation
Under the PRC EIT Law and
its implementation rules, an enterprise established outside the PRC with a “de facto management body” within the PRC is considered
a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define
the term “de facto management body” as the body that exercises full and substantial control over and overall management of
the business, production, personnel, accounts and properties of an enterprise. In April 2009, the SAT issued the Circular of the
SAT on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With
the De Facto Standards of Organizational Management, or SAT Circular 82, which provides certain specific criteria for determining whether
the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although
this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC
individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto
management body” test should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular
82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident
by virtue of having its “de facto management body” in the PRC only if all of the following conditions are met: (i) the
primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial
and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s
primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the
PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We do not believe that Fresh
2 Group meets all of the conditions above. Fresh 2 Group is a company incorporated outside the PRC. As a holding company, its key assets
are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board
of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities
outside of the PRC are not PRC resident enterprises, either. However, the tax resident status of an enterprise is subject to determination
by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
There can be no assurance that the PRC government will ultimately take a view that is consistent with ours.
If the PRC tax authorities
determine that Fresh2 Group is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding
tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident
enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition
of ADSs or Class A ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC
individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual
shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains,
it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear
whether non-PRC shareholders of Fresh 2 Group would be able to claim the benefits of any tax treaties between their country of tax residence
and the PRC in the event that Fresh 2 Group is treated as a PRC resident enterprise.
Provided that our BVI holding
company, Fresh2 Group, is not deemed to be a PRC resident enterprise, holders of our ADSs and Class A ordinary shares who are not
PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition
of our shares or ADSs. However, under SAT Public Notice 7 and SAT Public Notice 37, where a non-resident enterprise conducts an “indirect
transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by
disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee
or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such
indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Public Notice 7 and
SAT Public Notice 37, and we may be required to expend valuable resources to comply with SAT Public Notice 7 and SAT Public Notice 37,
or to establish that we should not be taxed under these circulars. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident
enterprises by their non-PRC holding companies.”
United States Federal Income Tax Considerations
The following is a summary
of material U.S. federal income tax considerations that are likely to be relevant to the purchase, ownership and disposition of our Class A
ordinary shares or ADSs by a U.S. Holder (as defined below).
This summary is based on
provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial interpretations
thereof, in force as of the date hereof. Those authorities may be changed at any time, perhaps retroactively, so as to result in U.S.
federal income tax consequences different from those summarized below.
This summary is not a comprehensive
discussion of all of the tax considerations that may be relevant to a particular investor’s decision to purchase, hold, or dispose
of Class A ordinary shares or ADSs. In particular, this summary is directed only to U.S. Holders that hold Class A ordinary
shares or ADSs as capital assets, and does not address particular tax consequences that may be applicable to U.S. Holders who may be
subject to special tax rules, such as banks, brokers or dealers in securities or currencies, traders in securities electing to mark to
market, financial institutions, life insurance companies, tax-exempt entities, regulated investment companies, entities or arrangements
that are treated as partnerships for U.S. federal income tax purposes (or partners therein), holders that own or are treated as owning
10% or more of our stock by vote or value, persons holding Class A ordinary shares or ADSs as part of a hedging or conversion transaction
or a straddle, or persons whose functional currency is not the U.S. dollar. Moreover, this summary does not address state, local or non-U.S.
taxes, the U.S. federal estate and gift taxes, the Medicare contribution tax applicable to net investment income of certain non-corporate
U.S. Holders, or alternative minimum tax consequences of acquiring, holding or disposing of Class A ordinary shares or ADSs.
For purposes of this summary,
a “U.S. Holder” is a beneficial owner of Class A ordinary shares or ADSs that is a citizen or resident of the United
States or a U.S. domestic corporation or that otherwise is subject to U.S. federal income taxation on a net income basis in respect of
such Class A ordinary shares or ADSs.
You should consult your
own tax advisors about the consequences of the acquisition, ownership and disposition of the Class A ordinary shares or ADSs, including
the relevance to your particular situation of the considerations discussed below and any consequences arising under non-U.S., state,
local or other tax laws.
ADSs
In
general, if you are a U.S. Holder of ADSs, you will be treated, for U.S. federal income tax purposes, as the beneficial owner of the
underlying Class A ordinary shares that are represented by those ADSs. References to “shares” below apply to both Class A
ordinary shares and ADSs, unless the context indicates otherwise.
Taxation of Dividends
Subject to the discussion
below under “Passive Foreign Investment Company Status,” the gross amount of any distribution of cash or property with respect
to our shares (including amounts, if any, withheld in respect of PRC taxes) that is paid out of our current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes) will generally be includible in your taxable income as ordinary dividend
income on the day on which you receive the dividend, in the case of Class A ordinary shares, or the date the depositary receives
the dividends, in the case of ADSs, and will not be eligible for the dividends-received deduction allowed to U.S. corporations under
the Code.
We do not expect to maintain
calculations of our earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders therefore should expect
that distributions generally will be treated as dividends for U.S. federal income tax purposes.
Subject to certain exceptions
for short-term and hedged positions, the dividends received by a non-corporate U.S. Holder with respect to the shares will be subject
to taxation at a preferential rate if the dividends are “qualified dividends.” Dividends paid on the shares will be treated
as qualified dividends if:
| ● | the
shares are readily tradable on an established securities market in the United States or we
are eligible for the benefits of a comprehensive tax treaty with the United States that the
U.S. Treasury determines is satisfactory for purposes of this provision and that includes
an exchange of information program; and |
| ● | we
were not, in the year prior to the year in which the dividend was paid, and are
not, in the year in which the dividend is paid, a PFIC. |
The ADSs are listed on the
NASDAQ Capital Market, and will qualify as readily tradable on an established securities market in the United States so long as they
are so listed. Based on our audited financial statements, the manner in which we conduct our business, and relevant market and shareholder
data, we do not believe we were a PFIC for U.S. federal income tax purposes with respect to our prior taxable year. In addition,
based on our audited financial statements, the manner in which we conduct our business, relevant market and shareholder data and our
current expectations regarding the value and nature of our assets, and the sources and nature of our income, we do not anticipate becoming
a PFIC for our current taxable year or in the foreseeable future. U.S. Holders should consult their own tax advisors regarding the
availability of the reduced dividend tax rate in light of their own particular circumstances.
Because the Class A
ordinary shares are not themselves listed on a U.S. exchange, dividends received with respect to Class A ordinary shares that are
not represented by ADSs may not be treated as qualified dividends. U.S. Holders should consult their own tax advisors regarding the potential
availability of the reduced dividend tax rate in respect of the Class A ordinary shares.
In the event that we are
deemed to be a PRC resident enterprise under the PRC EIT Law (see “Taxation—People’s Republic of China Taxation”),
a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our shares. In that case, we may, however, be eligible for
the benefits of the Agreement Between the Government of the United States of America and the Government of the People’s Republic
of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “Treaty”).
If we are eligible for such benefits, dividends we pay on our shares would be eligible for the reduced rates of taxation described above
(assuming we are not a PFIC in the year the dividend is paid or the prior year). Dividend distributions with respect to our
shares generally will be treated as “passive category” income from sources outside the United States for purposes of determining
a U.S. Holder’s U.S. foreign tax credit limitation. Subject to the limitations and conditions provided in the Code and the applicable
U.S. Treasury Regulations, a U.S. Holder may be able to claim a foreign tax credit against its U.S. federal income tax liability in respect
of any PRC income taxes withheld at the appropriate rate applicable to the U.S. Holder from a dividend paid to such U.S. Holder. Alternatively,
the U.S. Holder may deduct such PRC income taxes from its U.S. federal taxable income, provided that the U.S. Holder elects to deduct
rather than credit all foreign income taxes for the relevant taxable year. The rules with respect to foreign tax credits are
complex and involve the application of rules that depend on a U.S. Holder’s particular circumstances. Accordingly, U.S. Holders
are urged to consult their tax advisors regarding the availability of the foreign tax credit or the deductibility of foreign taxes under
their particular circumstances.
U.S. Holders that receive
distributions of additional shares or rights to subscribe for shares as part of a pro rata distribution to all our shareholders generally
will not be subject to U.S. federal income tax in respect of the distributions, unless the U.S. Holder has the right to receive cash
or property, in which case the U.S. Holder will be treated as if it received cash equal to the fair market value of the distribution.
Taxation of Dispositions of Shares
Subject to the discussion
below under “Passive Foreign Investment Company Status,” upon a sale, exchange or other taxable disposition of the shares,
U.S. Holders will realize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized
on the disposition and the U.S. Holder’s adjusted tax basis in the shares. Such gain or loss will be capital gain or loss, and
will generally be long-term capital gain or loss if the shares have been held for more than one year. Long-term capital gain realized
by a U.S. Holder that is an individual generally is subject to taxation at a preferential rate. The deductibility of capital losses is
subject to limitations.
Gain, if any, realized by
a U.S. Holder on the sale or other disposition of the shares generally will be treated as U.S. source income for U.S. foreign tax credit
purposes. Consequently, if a PRC tax is imposed on the sale or other disposition of the shares, a U.S. Holder who does not receive significant
foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of such PRC
tax. However, in the event that gain from the disposition of the shares is subject to tax in the PRC, and a U.S. Holder is eligible for
the benefits of the Treaty, such U.S. Holder may elect to treat such gain as PRC source gain under the Treaty. U.S. Holders should consult
their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of, the
shares.
Deposits and withdrawals
of Class A ordinary shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal
income tax purposes.
Passive Foreign Investment Company
Status
Special U.S. tax rules apply
to companies that are considered to be PFICs. We will be classified as a PFIC in a particular taxable year if, taking into account
our proportionate share of the income and assets of our subsidiaries under applicable “look-through” rules, either
| ● | 75 percent
or more of our gross income for the taxable year is passive income; or |
| ● | the
average percentage of the value of our assets that produce or are held for the production
of passive income is, based on the average of four quarterly testing dates, at least 50 percent
(the “asset test”). |
For this purpose, passive
income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a
trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, for
purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s
assets and receiving our proportionate share of the other corporation’s income. The asset test is generally applied using the fair
market values of a non-U.S. corporation’s assets but is applied using adjusted tax bases of the assets if the non-U.S. corporation
is a CFC and is not publicly traded for the year. We have been publicly traded since our initial public offering completed on February 3,
2020 and expect that we will be treated as publicly traded for all years after 2021. Accordingly, we believe that the PFIC
asset test should be applied using the fair market values of our assets. U.S. Holders should consult their own tax advisors regarding
the application of these rules and the appropriate valuation of our assets for purposes of the PFIC asset test, as well as the desirability
of making a mark-to-market election (discussed below).
Based on our audited financial
statements, the manner in which we conduct our business, relevant market and shareholder data and our current expectations regarding
the value and nature of our assets and the sources and nature of our income, we do not believe that we were a PFIC in our taxable year
ending December 31, 2022, and we do not anticipate becoming a PFIC for our current taxable year or in the foreseeable future.
However, because the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets
may change, it is possible that we may become a PFIC in the current or a future year. In particular, because the value of our assets
for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our
ADSs may cause us to become a PFIC for the current or subsequent taxable years.
In the event that we are
classified as a PFIC in any year during which a U.S. Holder holds our shares and such U.S. Holder does not make a mark-to-market
election, as described in the following paragraph, the U.S. Holder will be subject to a special tax at ordinary income tax rates on “excess
distributions,” including certain distributions by us (generally, distributions that are greater than 125% of the average annual
distributions received during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the
shares) and gain that the U.S. Holder recognizes on the sale or other disposition of our shares. The amount of income tax on any excess
distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were
earned ratably over the period that the U.S. Holder holds its shares. Further, if we are a PFIC for any year during which a U.S.
Holder holds our shares, we generally will continue to be treated as a PFIC for all subsequent years during which such U.S. Holder
holds our shares unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621.
Classification as a PFIC may also have other adverse tax consequences, including, in the case of individuals, the denial of a step-up
in the basis of his or her shares at death.
A U.S. Holder may be able
to avoid the unfavorable rules described in the preceding paragraph by electing to mark its ADSs to market, provided the ADSs are
treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded”
on a “qualified exchange or other market” (which includes the NASDAQ Capital Market). It should also be noted that it is
not currently intended that the Class A ordinary shares will be listed on any stock exchange. Consequently, a U.S. Holder that holds
Class A ordinary shares that are not represented by ADSs may not be eligible to make a mark-to-market election. If the U.S. Holder
makes a mark-to-market election, (i) the U.S. Holder will be required in any year in which we are a PFIC to include as ordinary
income the excess of the fair market value of its ADSs at year-end over the U.S. Holder’s basis in those ADSs and (ii) the
U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess of the U.S. Holder’s basis in its
ADSs over their fair market value at year-end, but only to the extent of the net amount previously included in income as a result
of the mark-to-market election. A U.S. Holder’s adjusted tax basis in its ADSs will be increased by the amount of any income inclusion
and decreased by the amount of any deductions under the mark-to-market rules. In addition, any gain the U.S. Holder recognizes upon the
sale of the U.S. Holder’s ADSs in a year in which we are PFIC will be taxed as ordinary income in the year of sale, and
any loss the U.S. Holder recognizes upon the sale will be treated as ordinary loss, but only to the extent of the net amount of previously
included income as a result of the mark-to-mark election.
A U.S. Holder that owns an
equity interest in a PFIC must annually file IRS Form 8621. A failure to file one or more of these forms as required may toll the
running of the statute of limitations in respect of each of the U.S. Holder’s taxable years for which such form is required
to be filed. As a result, the taxable years with respect to which the U.S. Holder fails to file the form may remain open to assessment
by the IRS indefinitely, until the form is filed.
If we are a PFIC for any
taxable year during which a U.S. Holder holds our shares and any of our non-U.S. subsidiaries is also a PFIC, such U.S. Holder will
be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC
rules. U.S. Holders should consult their own tax advisors about the possible application of the PFIC rules to any of our subsidiaries.
U.S. Holders should consult
their own tax advisors regarding the U.S. federal income tax considerations discussed above and the desirability of making a mark-to-market
election.
Foreign Financial Asset Reporting
Certain U.S. Holders that
own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of
the taxable year or $75,000 at any time during the taxable year are generally required to file an information statement along
with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets”
include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not
held in accounts maintained by financial institutions. The understatement of income attributable to “specified foreign financial
assets” in excess of U.S.$5,000 extends the statute of limitations with respect to the tax return to six years after the return
was filed. U.S. Holders who fail to report the required information could be subject to substantial penalties. Prospective investors
are encouraged to consult their own tax advisors regarding the possible application of these rules to their investment, including
the application of the rules to their particular circumstances.
Backup Withholding and Information
Reporting
Dividends paid on, and proceeds
from the sale or other disposition of, the shares that are paid to a U.S. Holder generally may be subject to the information reporting
requirements of the Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification
number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax.
The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or credit against the U.S. Holder’s
U.S. federal income tax liability, provided the required information is furnished to the IRS in a timely manner.
A holder that is not a U.S.
Holder may be required to comply with certification and identification procedures in order to establish its exemption from information
reporting and backup withholding.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to periodic
reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required
to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can
be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained
by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of documents, upon payment of a duplicating fee, by
writing to the SEC.
As a foreign private issuer,
we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements,
and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and
financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
However, we intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated
combined financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports
and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, if we so request, will mail to all record holders of ADSs the information contained in any notice of
a shareholders’ meeting received by the depositary from us.
I.
Subsidiary Information
For a listing of our subsidiaries,
see “Item 4. Information on the Company—C. Organizational Structure.”
J.
Annual Report to Security Holders
Not applicable.