Form 20-F
20-F 1 d799763d20f.htm FORM 20-F
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date of event requiring this shell company report
For the transition period from
to
Commission file number: 001-38877
Yunji Inc.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
15/F, South Building
Hipark Phase 2, Xiaoshan District
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Form 20-F
Hangzhou, Zhejiang, 310000
People’s Republic of China
(Address of principal executive offices)
Chen Chen, Chief Financial Officer
15/F, South Building
Hipark Phase 2, Xiaoshan District
Hangzhou, Zhejiang, 310000
People’s Republic of China
Phone: +86 571 8168-8920
Email: Rexchen@yunjiglobal.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
American depositary shares, each American
depositary share representing ten Class A
ordinary shares
Class A ordinary shares, par value US$0.000005
per share*
* Not for trading, but only in connection with the
listing on the Nasdaq Global Market of American
depositary shares.
Trading
Symbol
YJ
Name of Each Exchange
On Which Registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Market)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
report:
As of December 31, 2019, there were 2,129,405,572 ordinary shares outstanding, par value US$0.000005 per share, being the sum of 1,179,445,572 Class A
ordinary shares (excluding treasury shares), par value US$0.000005 per share and 949,960,000 Class B ordinary shares, par value US$0.000005 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
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Form 20-F
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act.
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
International Financial Reporting Standards as issued
by the International Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow.
Item 17
Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes
No
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Form 20-F
Table of Contents
TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING STATEMENTS
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III.
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
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109
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141
142
142
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143
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Unless otherwise indicated or the context otherwise requires, references in this annual report on Form 20-F to:
INTRODUCTION
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“ADRs” are to the American depositary receipts which may evidence the ADSs;
“ADSs” are to the American depositary shares, each of which represents ten Class A ordinary shares;
“buyer” in a given period are to a user who places at least one order on our platform during such period, regardless of whether any product in such
order is ultimately sold or delivered or whether any product in such order is returned;
“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
“Class A ordinary shares” are to our Class A ordinary shares of par value US$0.000005 per share;
“Class B ordinary shares” are to our Class B ordinary shares of par value US$0.000005 per share;
“GMV” are to the total value of all orders paid and shipped for merchandise sold on our platform, including the value of the merchandise sold as part
of the membership packages, as well as the VAT and tax surcharges paid, regardless of whether the merchandises are returned and without taking into
consideration any discounts and incentives. Our revenues recognized on a gross basis are net of the VAT and related tax surcharges paid, discounts
and incentives, the value of the merchandises returned, and any adjustments due to the timing difference between shipping and receipt, which are
included in the above GMV measure. Our revenues recognized on a net basis are net of the corresponding amount to be paid to the vendor, the
principal in the transaction, in addition to the items mentioned above, which are included in the above GMV measure;
“Jishang Preferred” are to Zhejiang Jishang Preferred E-Commerce Co., Ltd.;
“member” are to an individual who registers an account on our flagship Yunji app and satisfies certain requirements such as purchasing a membership
package or meeting certain other requirements;
“ordinary shares” are to our ordinary shares, par value US$0.000005 per share;
“our VIEs” are to Yunji Sharing Technology Co., Ltd., or Yunji Sharing, and Zhejiang Yunji Preferred E-Commerce Co., Ltd., or Yunji Preferred;
“our WFOE” are to Hangzhou Yunchuang Sharing Network Technology Co., Ltd.;
“repeat purchase rate” in a given period are calculated as the number of transacting members who purchased not less than twice divided by the total
number of transacting members during such period;
“RMB” and “Renminbi” are to the legal currency of China;
“SPUs” are to standard product units offered on our platform. The number of SPUs does not represent the number of distinct products offered on our
platform. We assign the same SPU to the same type of product without distinguishing product specifics such as colors and sizes;
“transacting member” in a given period are to a member who successfully promotes our products to generate at least one order or places at least one
order on our platform, regardless of whether any product in such order is ultimately sold or delivered or whether any product in such order is returned;
“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States;
“users” are to individuals who access our platform through our mobile apps or sharing interfaces, including our members;
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Form 20-F
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“Wuhan Yunteng” are to Wuhan Yunteng Logistics Co., Ltd.;
“Yunji Preferred” are to Zhejiang Yunji Preferred E-Commerce Co., Ltd.;
“Yunji Sharing” are to Yunji Sharing Technology Co., Ltd.;
“Yunji,” “we,” “us,” “our company” and “our” are to Yunji Inc., our Cayman Islands holding company and its subsidiaries, its consolidated variable
interest entities and the subsidiaries of the consolidated variable interest entities; and
“Zhejiang Jiyuan” are to Zhejiang Jiyuan Network Technology Co., Ltd.
Our reporting currency is the Renminbi because our business is mainly conducted in China and all of our revenues are denominated in Renminbi. This
annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of
Renminbi into U.S. dollars in this annual report is based on the exchange rate set forth in the H.10 statistical release of the Board of Governors of the
Federal Reserve System. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are
made at a rate of RMB6.9618 to US$1.00, the exchange rate in effect as of the end of December 31, 2019 as set forth in the H.10 statistical release of The
Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be,
converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency
reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
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Form 20-F
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that relate to our current expectations and views of future events. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different
from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private
Securities Litigations Reform Act of 1995.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,”
“plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our
current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and
financial needs. These forward-looking statements include statements relating to:
•
•
•
•
•
•
•
our mission, goals and strategies;
our future business development, financial conditions and results of operations;
the expected growth of the online retail industry in China;
our expectations regarding demand for and market acceptance of our products and services;
our expectations regarding our relationships with our members, users, suppliers, third-party merchants and other partners;
competition in our industry; and
relevant government policies and regulations relating to our industry.
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking
statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations.
Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key
Information – D. Risk Factors,” “Item 4. Information on the Company – B. Business Overview,” “Item 5. Operating and Financial Review and Prospects,”
and other sections in this annual report. You should read thoroughly this annual report and the documents that we refer to with the understanding that our
actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary
statements.
This annual report contains certain data and information that we obtained from various government and private publications. Statistical data in these
publications also include projections based on a number of assumptions. The online retail industry may not grow at the rate projected by market data, or at
all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of the ADSs. In addition,
the rapidly evolving nature of this industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future
condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may
differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this
annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should
read this annual report and the documents that we refer to in this annual report completely and with the understanding that our actual future results may be
materially different from what we expect.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
PART I.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
The following tables present the selected consolidated financial information for our company. The selected consolidated statements of
operations data for the years ended December 31, 2017, 2018, and 2019, selected consolidated balance sheets data as of December 31, 2018 and 2019 and
selected consolidated cash flows data for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited consolidated financial
statements, which are included in this annual report beginning on page F-1. The selected consolidated statement of operations data for the fiscal year ended
December 31, 2016, the selected consolidated balance sheet data as of December 31, 2016 and 2017 and the selected consolidated cash flow data for the
year ended December 31, 2016 are derived from our audited consolidated financial statements not included in this annual report. We have not included
financial information for the year ended December 31, 2015, as such information is not available on a basis that is consistent with the consolidated financial
information available for the years ended December 31, 2016, 2017, 2018 and 2019 and cannot be provided without unreasonable effort or expense. Our
consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America,
or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. The selected consolidated financial data should be
read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5.
Operating and Financial Review and Prospects” included elsewhere in this annual report.
Consolidated Statements of Operations Data:
Revenues:
Sale of merchandise, net
Membership program revenue
Marketplace revenue
Other revenues
Total revenues
Operating cost and expenses(1):
Cost of revenues
Fulfilment
Sales and marketing
Technology and content
General and administrative
Total operating cost and expenses
Other operating income
2016
RMB
1,129,053
155,391
—
—
1,284,444
(978,688)
(184,407)
(138,046)
(18,207)
(12,153)
(1,331,501)
—
4
2017
RMB
For the Year Ended December 31,
2018
RMB
(in thousands, except for per share data)
RMB
2019
US$
5,912,109
510,818
—
21,144
6,444,071
(5,172,842)
(569,410)
(707,735)
(58,159)
(50,153)
(6,558,299)
—
11,388,425
1,552,437
—
74,363
13,015,225
(10,706,596)
(1,162,051)
(955,128)
(143,645)
(147,208)
(13,114,628)
—
10,548,322
776,839
311,914
34,949
11,672,024
(9,249,474)
(965,883)
(1,187,462)
(315,167)
(277,487)
(11,995,473)
25,047
1,515,171
111,586
44,804
5,020
1,676,581
(1,328,604)
(138,741)
(170,568)
(45,271)
(39,859)
(1,723,043)
3,598
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Form 20-F
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Loss from operations
Financial income, net
Foreign exchange gain/(loss), net
Change in fair value of warrant liabilities
Other non-operating income, net
Loss before income tax expense, and equity in income of
affiliates, net of tax
Income tax benefit/(expense)
Equity in income/(loss) of affiliates, net of tax
Net loss
Less: net income attributable to non-controlling interests
shareholders
Net loss attributable to Yunji Inc.
Accretion on convertible redeemable preferred shares to
(47,057)
154
1,525
160
—
(45,218)
20,550
—
(24,668)
—
(24,668)
(114,228)
11,564
(7,444)
152
894
(109,062)
3,331
7
(105,724)
—
(105,724)
(99,403)
46,068
(685)
—
7,048
(46,972)
(12,346)
2,992
(56,326)
3,362
(59,688)
(298,402)
121,370
(12,397)
—
52,096
(137,333)
16,720
(3,221)
(123,834)
1,928
(125,762)
(42,864)
17,434
(1,781)
—
7,483
(19,728)
2,402
(463)
(17,789)
277
(18,066)
redemption value
(77,179)
(1,628,656)
(2,187,633)
(1,532,013)
(220,060)
Re-designation to Series A convertible redeemable preferred
shares from Initial Ordinary Shareholders’ contribution,
including beneficial conversion feature
Deemed dividend from preferred shareholders
Net loss attributable to ordinary shareholders
Net loss per share attributable to ordinary shareholders
Basic
Diluted
Net loss per ADS(2):
Basic and diluted
Weighted average number of ordinary shares used in
computing net loss per share:
Basic and diluted
Notes:
—
132
(101,715)
—
—
(1,734,380)
(60,796)
107
(2,308,010)
—
—
—
—
(1,657,775)
(238,126)
(0.08)
(0.08)
(0.01)
(1.37)
(1.37)
(0.14)
(1.98)
(1.98)
(0.20)
(0.91)
(0.91)
(0.09)
(0.13)
(0.13)
(0.01)
1,268,000,000
1,268,000,000
1,165,136,438
1,818,487,917
1,818,487,917
(1) Share-based compensation expenses were allocated as follows:
For the Year Ended December 31,
2019
2016
2017
RMB RMB
RMB
2018
RMB
in thousands)
(
3,192
4,434
41,932
4,742
54,300
29,884
10,562
79,011
8,740
128,197
US$
4,293
1,517
11,349
1,255
18,414
Sales and marketing
Technology and content
General and administrative
Fulfillment
Total
(2) Each ADS represents ten Class A ordinary shares.
5
—
—
—
—
—
144
98
1,545
221
2,008
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Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Inventories, net
Prepaid expenses and other current assets
Total assets
Accounts payable
Deferred revenue
Incentive payables to members
Refund payable to members
Other payable and accrued liabilities
Total liabilities
Total mezzanine equity
Total shareholders’ (deficit)/equity
Total liabilities, mezzanine equity and shareholders’ (deficit)/equity
Summary Consolidated Cash Flow Data:
Net cash generated from/(used in) operating activities
Net cash generated from/(used in) investing activities
Net cash generated from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of the year
2016
RMB
287,107
33,000
97,443
80,724
540,526
158,790
112,295
81,270
77,652
35,899
470,817
255,938
(186,229)
540,526
For the Year Ended December 31,
2017
RMB
2018
RMB
RMB
2019
US$
(in thousands)
328,741
663,780
332,778
226,098
1,673,161
770,025
323,551
239,840
147,943
81,377
1,671,064
1,920,698
(1,918,601)
1,673,161
883,369
1,519,146
774,736
1,099,394
428,322
675,543
567,432
410,439
3,302,199
3,918,799
741,959
1,432,274
181,828
546,975
384,486
421,945
26,883
396,024
349,111
197,962
1,837,540
3,115,206
—
4,914,048
(4,110,455) 1,464,659
3,302,199
3,918,799
126,888
111,284
61,524
81,507
474,332
106,576
26,118
55,228
3,862
50,147
263,947
—
210,385
474,332
For the Year Ended December 31,
2016
RMB
2017
RMB
2018
RMB
2019
RMB
US$
(in thousands)
119,538
3,002
123,915
6,367
252,822
34,985
287,807
699,582
(644,992)
26,255
(10,911)
69,934
287,807
357,741
883,037
(458,047)
747,921
34,594
1,207,505
357,741
1,565,246
(1,116,816)
(115,483)
623,406
11,390
(597,503)
1,565,246
967,743
(160,421)
(16,587)
89,547
1,636
(85,825)
224,833
139,008
We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance,
formulate financial projections, and make operating and strategic decisions:
For the Year Ended December 31,
2019
2018
2016
2.5
0.6
13.5
—
2017
16.9
2.3
75.8
—
23.2
6.1
153.4
—
22.5
9.6
166.6
34.6
Buyers (in millions)
Transacting members (in millions)
Orders fulfilled under merchandise sales business (in millions)
Orders fulfilled under marketplace business (in millions)
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Cumulative members (in millions)
B.
C.
D.
Capitalization and Indebtedness
Not applicable.
Reasons for the Offer and Use of Proceeds
Not applicable.
Risk Factors
Risks Related to Our Business and Industry
As of December 31,
2016
0.9
2017
2.9
2018
7.4
2019
13.8
Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will grow as rapidly as before, or at
all.
We commenced operations in 2015, and have a limited operating history. Our total revenues increased from RMB6,444.1 million in 2017 to
RMB13,015.2 million in 2018, but decreased to RMB11,672.0 million (US$1,676.6 million) in 2019. The decrease in total revenues in 2019 was primarily
due to a decrease in revenues from sales of merchandise as a result of an increase in the proportion of our business contributed from our marketplace
business platform, which was launched in the first quarter of 2019, whereby third-party merchants can sell products on our platform and pay us
commissions on their sales. Revenues generated under the marketplace business were recognized on a net basis, while revenues generated under our
merchandise sales business were recognized on a gross basis. The total orders we fulfilled under our merchandise sales business increased substantially from
75.8 million in 2017 to 153.4 million in 2018 and further increased to 166.6 million in 2019. The total orders fulfilled by third-party merchants in our
marketplace business in 2019 reached 34.6 million. However, our historical performance may not be indicative of our future growth or financial results. We
cannot assure you that we will be able to grow at the same rate as we did in the past, or avoid any decline in the future. Our growth may slow down or
become negative, and revenues may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer
spending, increasing competition, declining growth of our overall market or industry, the emergence of alternative business models, changes in rules,
regulations, government policies or general economic conditions. It is difficult to evaluate our prospects, as we may not have sufficient experience in
addressing the risks to which companies operating in rapidly evolving markets may be exposed. If our growth rate declines, investors’ perceptions of our
business and prospects may be materially and adversely affected and the market price of the ADSs could decline. You should consider our prospects in light
of the risks and uncertainties that companies with a limited operating history may encounter.
If we fail to maintain membership loyalty or sustain membership growth, or fail to maintain member relationships effectively and retain existing
members, our business and operating results may be materially and adversely affected.
We are a membership-based social e-commerce platform and therefore membership loyalty and growth are essential to our business. The
cumulative number of our members reached approximately 13.8 million as of December 31, 2019. The growth of our business depends on our ability to
maintain and increase the number of members on our platform and improve the level of their engagement. Previously, a user had to purchase a membership
package in order to become a member and enjoy membership benefits. In order to stimulate our users’ interest in transacting on our platform and attract
more members, in 2019, we provided each non-member user with a free three-month experiential period during which time the user had access to the full
spectrum of membership benefits. After the three-month experiential period, the user could become our member if he or she met a certain cumulative
spending threshold or certain other requirements during the experiential period or if he or she purchased one of our membership packages. Starting in
January 2020, we further refined our membership enrollment system by allowing any user to become a member and enjoy membership benefits free of
charge for one year by simply registering for an account on the Yunji app. If the user meets a certain cumulative spending threshold or certain other
requirements during the initial one-year period, the user may extend his or her membership for an extra year. We currently do not charge membership
renewal fees or periodic membership fees. We may decide to charge membership renewal fees or other type of fees in the future. Such change in practice
may negatively impact the membership loyalty and result in a decline in the level of engagement of our members. Damage to our reputation or our failure to
anticipate needs of and provide value-added services to our members, among other things, could also diminish membership loyalty and reduce activity of
members on our platform, which could cause our revenue and operating income to decline and negatively impact our profitability.
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Our membership growth depends on existing members to promote our products and invite new members through their social networks. Our
members may decide not to promote our products or invite new members at any time. To increase our revenue, we must increase the number of, or level of
activity of, our members. However, we may not be able to accurately predict how the number and level of activity of members may fluctuate, because we
outsource provision of member services to third-party service companies. We work with third-party service companies and enter into agreements with them
on an annual basis or for a longer term. These third-party service companies select service managers based on the standards we provide in our agreements
and they hire, train and compensate service managers to provide training to our members. However, we cannot guarantee service managers selected by these
third-party service companies will provide satisfactory performance. If the service managers fail to motivate our members or facilitate members’ product
sales, we may lose our existing members and the level of activity of members may reduce on our platform. Service managers may voluntarily terminate their
contracts with third-party service companies at any time. The loss of service managers or the loss of a significant number of members for any reason, could
negatively impact our business operations and impair our ability to attract new members. In addition, if our existing and new business opportunities and
incentives, products, services and other initiatives do not generate sufficient enthusiasm and economic incentive to retain our existing members or attract
new members on a sustained basis, our operating results could be adversely affected. As a result, in order to maintain our business growth in the future, we
need to increase our retention of existing members and continue to successfully attract additional members.
If we fail to anticipate user needs and provide products and services attractive to users, or fail to adapt our services or business model to changing user
needs, emerging industry standards or rapid technological evolution, or fail to provide products at a satisfactory quality to our users, our business may
be materially and adversely affected.
The e-commerce market in which we operate, and user needs and preferences are constantly evolving. As a result, we must continuously
respond to changes in the market and user demand and preferences to remain competitive, grow our business and maintain our market position. We intend to
further diversify our product and service offerings to contribute to our revenue sources in the future. We launched our marketplace business in the first
quarter of 2019 whereby third-party merchants can sell products on our platform and pay us commissions on their sales. New products and services, new
types of customers or new business models may involve risks and challenges we do not currently face. We continually introduce new sales format on our
platform to improve user engagement and our productivity. Any new initiatives may require us to devote significant financial and management resources
and may not perform as well as expected. Furthermore, we may have difficulty in anticipating user demand and preferences, and the products offered on our
platform may not be accepted by the market or be rendered obsolete or uneconomical. Therefore, any inability to adapt to these changes may result in a
failure to capture new members and other users or retain existing members and other users, the occurrence of which would materially and adversely affect
our business, financial condition and results of operations. In addition, if we are unable to provide products to users at a satisfactory quality, in a timely
manner, in sufficient quantities or at an acceptable cost, our business could be negatively impacted. We may also be subject to claims if our users are not
satisfied with the quality of the products or do not have satisfactory experiences in general.
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In addition, to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our platform.
The internet and the e-commerce markets are characterized by rapid technological evolution, changes in user requirements and preferences, frequent
introductions of new products, features and services embodying new technologies and the emergence of new industry standards and practices, any of which
could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop and adapt to new
technologies useful in our business, and respond to technological advances and emerging industry standards and practices, in particular with respect to
mobile internet, in a cost-effective and timely way. We cannot assure you that we will be successful in these efforts.
We will not be able to exert the same level of influence or control over members and service managers as we could if they were our employees, and we
may be subject to significant costs and reputational harm in the event our members violate any laws or regulations applicable to our operations.
Members and service managers, most of whom are also our members, are not our employees and do not enter into any employment contracts
with us. Accordingly, we are not in a position to provide the same level of control over and oversight of members and service managers as we would if they
were our employees. However, our members play an important role in promoting our products and inviting new members to our platform, including
promoting our products via live video broadcasts under the “Endorsement” section of our Yunji app and on our Yunji Endorsement app. Some members also
interact frequently with the users in their social network regarding our products and platform. Therefore, such users may associate the members with us and
hold us accountable for any misconduct by our members. Also, service managers provide services to our members and communicate with them on a regular
basis. The members they serve may view us as vicariously liable for any misconduct by service managers. We may be subject to lawsuits or reputational
harm if, for example, a member misrepresents the functionality or provides inaccurate information of our products through the member’s social network or
via the live video broadcasts they host, or a member or service manager conducts any wrongdoings or otherwise violates applicable laws. While we have
implemented policies and procedures designed to govern conduct of our members to comply with the regulatory regime in China and protect our goodwill,
including content control policies and live video broadcast standards, and the third-party service companies have adopted policies to regulate the conduct of
the service managers, there can be no assurance that members or service managers will comply with the policies and procedures. Violations by members or
service managers of applicable law or of the policies and procedures could reflect negatively on our products and operations and harm our business
reputation. While we have not experienced any significant problems affecting our products, operations or business reputation caused by violations by
members or service managers of the policies and procedures, we cannot assure you that we will not face such problems in the future.
Any harm to our Yunji brand or reputation may materially and adversely affect our business and results of operations.
We believe that the recognition and reputation of our Yunji (云集) brand among our members, other users, suppliers, third-party merchants
and other third-party service providers have contributed significantly to the growth and success of our business. Maintaining and enhancing the recognition
and reputation of our brand are critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to
maintaining and enhancing our brand and may negatively impact our brand if not properly managed. These factors include our ability to:
•
provide a superior shopping experience to our users;
• maintain and grow our member and user base and keep our community, members and other users highly engaged;
• maintain the popularity, attractiveness, diversity, quality and authenticity of our product offerings;
• maintain the efficiency, reliability and quality of our fulfillment services to our users;
• maintain or improve users’ satisfaction with our after-sale services;
•
•
increase brand awareness through marketing and brand promotion activities; and
preserve our reputation and goodwill in the event of any negative publicity on customer service, product quality, price or authenticity,
data privacy and security, our industry and other players within the industry or other issues affecting us or other social e-commerce and
e-commerce businesses in China.
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Public perception that non-authentic, counterfeit or defective goods are sold on our platform or that we or third-party service providers do not
provide satisfactory customer service, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our
brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new users or retain our current users. If
we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our platform, products and services, it may be
difficult to maintain and grow our member and user base, and our business and growth prospects may be materially and adversely affected.
If our business model were found to be in violation of applicable laws and regulations, our business, financial condition and results of operations would
be materially and adversely affected.
In August 2005, the State Council promulgated the Regulations on the Prohibition of Pyramid Selling, which prohibits individuals and entities
in China from engaging in pyramid selling. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Relating to
Pyramid Selling in the PRC.” In May 2017, we received a formal notice from the local Administration for Market Regulation in Hangzhou, which ruled that
our sales and marketing practice prior to February 2016 violated the Regulations on the Prohibition of Pyramid Selling and imposed a fine of approximately
RMB9.6 million (US$1.4 million). Since the early stage of our operations in 2015, the local governmental authorities in Hangzhou had been in discussion
with us on potential violation by our then-existing business model of the Regulations on the Prohibition of Pyramid Selling, and we have adjusted our
business practices since February 2016 to comply with the Regulations on the Prohibition of Pyramid Selling and other applicable regulations. We fully paid
the fine in June 2017. In December 2018, we and Han Kun Law Offices, our PRC legal counsel, consulted with the competent government authority in
Hangzhou, the district branch of the State Administration for Market Regulation, or the SAMR, having direct jurisdiction over our PRC entities that
currently operate our membership-based social e-commerce platform, and the government authority verbally confirmed that these entities have conducted
their business operations lawfully and none of these entities are in violation of the Regulations on the Prohibition of Pyramid Selling or any other applicable
laws. Based on our discussion with the competent government authorities and the advice of Han Kun Law Offices, we believe that our current business
model is not in violation of applicable PRC laws and regulations, including the Regulations on the Prohibition of Pyramid Selling. However, there is no
assurance that the competent governmental authorities in China that we communicated with will not change their views, or the other relevant government
authorities will share the same view as our PRC legal counsel, or they will find our business model not in violation of any applicable regulations, given the
uncertainties in the interpretation and application of existing PRC laws, regulations and policies relating to our current business model, including, but not
limited to, regulations regulating pyramid selling. Moreover, new laws, regulations or policies may also be promulgated in the future, and there is no
assurance that our current business model will be in full compliance with the new laws, regulations or policies. If our business model were to be found in
violation in the future, we will have to make adjustment to our business model or cease certain of our business operations, and the relevant governmental
authorities may confiscate any illegal gains and impose a fine, which would have a material and adverse impact on our business, financial condition and
results of operations.
Any change, disruption or discontinuity in the features and functions of major social networks in China could severely limit our ability to continue
growing our member and user base, and our business may be materially and adversely affected.
Our success depends on our ability to attract and retain new members and other users and expand our member and user base. We leverage
social networks in China as a tool for member and user acquisition and engagement. For example, we leverage social networks, such as WeChat, QQ and
Weibo, to enable members to share product information and their experiences with products on our platform to their friends, family and other social
contacts, who can purchase such products directly via the links shared by the members through social networks. A substantial portion of our member and
user traffic comes from such member recommendation through social networks. To the extent that we are banned from using some or all functions of such
social networks, or fail to leverage such social networks, our ability to attract or retain members and other users, and maintain an active community may be
severely harmed. If WeChat, QQ or Weibo changes its functions or support, such as charging fees for functions or support that is currently provided for free,
or stops offering its functions or support to us or discontinues its functions or support in general, we may not be able to locate alternative platforms of
similar scale to provide similar functions or support in a timely manner, or at all. Furthermore, we may fail to establish or maintain relationships with
additional social network operators to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of
our relationships with major social network operators may severely and negatively impact our ability to continue growing our user base, and any occurrence
of the circumstances mentioned above may have a material adverse effect on our business, financial condition and results of operations.
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We face intense competition. We may lose market share and users if we fail to compete effectively.
The e-commerce industry in China is intensely competitive. We compete to attract, engage and retain members, other users, orders, suppliers,
third-party merchants and other participants on our platform. Our current or potential competitors include all major e-commerce companies in China and
other internet companies in China that engage in social e-commerce businesses. See “Item 4. Information on the Company—B. Business Overview—
Competition.”
Our current or potential competitors may have longer operating histories, greater brand recognition, better relationships with supplier and
third-party merchants, larger customer bases, higher user activity and loyalty or greater financial, technical or marketing resources than we do. Our
competitors may leverage their brand recognition, experience and resources to compete with us in a variety of ways, including making investments and
acquisitions for the expansion of their product and service offerings. Some of our competitors may be able to secure more favorable terms from suppliers
and third-party merchants, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and
devote substantially more resources to their IT systems and technology than us. In particular, some of these competitors have substantially greater financial
resources that may allow them to initiate and sustain aggressive price competition and we experience increased competition when our competitors offer
discounts or clearance sale for various reasons. If we are unable to offer products on our platform at competitive prices, we may experience increased
negative pressure on pricing for our products and loss of users. Some of our competitors may also utilize social networks to attract users, which may divert
traffic or attention of our potential users. In addition, new and enhanced technologies may increase the competition in the e-commerce industry. Increased
competition may reduce our profitability, market share, user base and brand recognition. We cannot assure you that we will be able to compete successfully
against current or future competitors, and competitive pressures may have a material and adverse effect on our business, financial condition and results of
operations.
Any disruption to our IT systems could materially affect our ability to maintain the satisfactory performance of our IT systems and deliver consistent
services to our users.
The proper functioning of our IT systems is essential to our business. The satisfactory performance, reliability and availability of our IT
systems are critical to our success, our ability to attract and retain members and other users and our ability to maintain and deliver consistent services on our
platform. However, our technology infrastructure may fail to keep pace with increased sales on our platform, in particular with respect to our new product
and service offerings or in association with traffic and order surges during promotional events and holiday seasons, and therefore our users may experience
delays as we seek to source additional capacity, which would adversely affect our results of operations as well as our reputation.
Additionally, we must continue to upgrade and improve our technology infrastructure to support our business growth. However, we cannot
assure you that we will be successful in executing these system upgrades, and the failure to do so may impede our growth. We currently use cloud services
and servers operated by external cloud service providers to store our data, to allow us to analyze a large amount of data simultaneously and to update our
user database and profiles quickly. Any interruption or delay in the functionality of these external cloud service and server providers may materially and
adversely affect the operations of our business.
We may be unable to monitor and ensure high-quality maintenance and upgrade of our IT systems and infrastructure on a real-time basis, and
users may experience service outages and delays in accessing and using our platform to place orders. In addition, we may experience surges in online traffic
and orders associated with promotional activities and generally as we scale, which can put additional demand on our platform at specific times. Our
technology or infrastructure may not function properly at all times. Any system interruptions caused by telecommunications failures, computer viruses,
physical or electronic break-ins or other attempts to harm our systems could result in the unavailability or slowdown of our platform or reduced order
fulfillment performance, which in turn could reduce the volume of products sold and the attractiveness of product offerings on our platform. Any of such
occurrences could cause severe disruption to our daily operations. As a result, our reputation may be materially and adversely affected, our market share
could decline and we could be subject to liability claims. In addition, in order to ensure that our technology infrastructure can be comprehensively and
rapidly upgraded, we need to constantly enhance our technology. Otherwise, we face the risk of our technology infrastructure becoming unstable and
susceptible to security breaches, which we may be unable to identify or rectify rapidly and effectively. Such instability or susceptibility could create serious
challenges to the security and uninterrupted operation of our platform and services, which would materially and adversely affect our business
and reputation.
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We may face challenges in expanding our product offerings and optimizing our product mix.
Our platform carries a wide range of products including, among others, household goods, cosmetics, apparel, bags and cases, food and
beverage, childcare products, electronic appliances and fresh produce. Expansion into diverse new product categories and increase in number of products we
offer involve new risks and challenges. Our lack of familiarity with these products and lack of relevant user data relating to these products may make it
more difficult for us to anticipate user demand and preferences. We may misjudge user demand, resulting in inventory buildup and possible inventory write-
down. It may also make it more difficult for us to inspect and control quality and ensure proper handling, storage and delivery. We may experience higher
return rates on new products, receive more complaints from members and other users about them and face costly product liability claims, which would harm
our brand and reputation as well as our financial performance. Furthermore, we may not have much purchasing power in new categories of products and we
may not be able to negotiate favorable terms with suppliers and third-party merchants. We may need to price aggressively to gain market share or remain
competitive in new categories. It may be difficult for us to achieve profitability in the new product categories and our profit margin for these new product
categories, if any, may be lower than we anticipate, which would adversely affect our overall profitability and results of operations. We cannot assure you
that we will be able to recoup our investments in introducing these new product categories. In addition, some of our existing product categories may have
lower profit margins than others, and failure to grow our existing product categories with higher profit margins may adversely impact our overall
profitability and results of operations.
We have incurred net loss in the past and we may continue to experience losses in the future.
We incurred a net loss of RMB105.7 million, RMB56.3 million and RMB123.8 million (US$17.8 million) in 2017, 2018 and 2019,
respectively. In the years ended December 31, 2017 and 2018, our operating cash flow was positive, but in the year ended December 31, 2019, our operating
cash flow was negative. We cannot assure you that we will be able to generate net profits or positive cash flow from operating activities in the future. Our
ability to achieve and maintain profitability will depend in large part on our ability to, among other things, increase our number of members and other users,
grow and diversify our supplier and third-party merchant base, and optimize our cost structure. We may not be able to achieve any of the above. We intend
to continue to invest for the foreseeable future in the improvement of our fulfillment infrastructure and technology platform to support an even more
carefully curated selection of products and to offer additional value-added services. As a result of the foregoing, we believe that we may incur net losses in
the future.
If we fail to manage and expand our relationships with suppliers and third-party merchants, or otherwise fail to procure products at favorable terms,
our business, growth and profitability prospects may suffer.
We source products from third-party suppliers for our merchandise sales business. We also operate a marketplace business whereby third-
party merchants sell products on our platform. As of December 31, 2019, we had 2,279 suppliers and third-party merchants on our platform. Our suppliers
and third-party merchants include merchants of mainstream brands and emerging brands, and manufacturing partners we cooperate with. Maintaining strong
relationships with these suppliers and third-party merchants is important to the growth of our business. In particular, we depend significantly on our ability
to procure products from suppliers on favorable pricing terms and attract third-party merchants to offer their products on commercially attractive terms. We
typically enter into one-year framework agreements with our suppliers and third-party merchants on an annual basis, and these framework agreements do
not ensure the availability of products or the continuation of particular pricing practices or payment terms beyond the end of the contractual term. In
addition, our agreements with suppliers and third-party merchants typically do not restrict them from selling products to others or on other platforms. We
cannot assure you that our current suppliers and third-party merchants will continue to sell products to us or on our platform on commercially acceptable
terms, or at all, after the term of the current agreement expires. Even if we maintain good relations with our suppliers and third-party merchants, their ability
to supply products to us or on our platform in sufficient quantity and at competitive prices may be adversely affected by economic conditions, labor actions,
regulatory or legal decisions, natural disasters or other causes.
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In the event that we are not able to purchase products at favorable prices, our revenues and cost of sales may be materially and adversely
affected. In the event any brand owner does not have authority from the relevant manufacturer to sell certain products to us or on our platform, such brand
owner may cease selling such products to us or on our platform at any time. If our suppliers and third-party merchants cease to provide us with favorable
payment terms, our need for working capital may increase and our operations may be materially and adversely affected. We will also need to establish new
supplier and third-party merchant relationships to ensure that we have access to a steady supply of products on favorable commercial terms. If we are unable
to develop and maintain good relationships with suppliers and third-party merchants that would allow us to obtain a sufficient amount and variety of
authentic and quality products on acceptable commercial terms, it may inhibit our ability to offer sufficient products sought by our users, or to offer these
products at competitive prices. Any adverse developments in our relationships with suppliers and third-party merchants could materially and adversely
affect our business and growth prospects. In addition, as part of our growth strategy, we plan to further expand our product offerings. If we fail to attract
new suppliers and third-party merchants to sell their products to us or on our platform due to any reason, our business, growth and profitability prospects
may be materially and adversely affected.
Our operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services of, third-party
manufacturing partners.
We rely on third-party manufacturing partners to manufacture our private label products. Our ability to grow revenues in the future will
depend in part on our success in maintaining successful relationships with our manufacturing partners. As we do not enter into long-term contracts with
third-party manufacturing partners, they may decide not to accept our future orders on the same or similar terms, or at all. If a manufacturing partner decides
to substantially reduce its volume of supply to us or to terminate its business relationship with us, we may not be able to find a proper replacement in a
timely manner, or at all. This may negatively impact our revenues and adversely affect our reputation, causing a material adverse effect on our financial
condition, results of operations and prospects. In particular, a substantial portion of our GMV from private label products is generated from the sale of Solo
Life (素野). If there is any adverse change to the nature of our relationship with the manufacturer of Solo Life or if the manufacturer of Solo Life decides to
terminate its cooperation with us, the sale of our private label products and thus our results of operations may be negatively impacted. Moreover, some
manufacturing partners may not fully comply with certain laws and regulations, such as consumer protection, labor and environmental laws. If any of our
manufacturing partners is found to have violated laws and regulations in China, media reports on such violations may negatively affect our reputation and
image, resulting in material adverse impact on our business, financial condition and results of operations. In addition, while we provide the designs of our
products to the manufacturing partner, as well as guidance for manufacturing the products ordered by us, we do not have direct control over the
manufacturing partners. If any of them is involved in unauthorized production and sale of goods using our brand name, our reputation, financial condition
and results of operations may be materially adversely affected.
We and the third-party merchants in our marketplace business use third-party logistics service providers to deliver our orders. If these third-party
logistics service providers fail to provide reliable delivery services, our business and reputation may be materially and adversely affected.
We and the third-party merchants in our marketplace business cooperate with a number of third-party logistics service providers to deliver
products sold on our platform to end customers. Interruptions to or failures in these third parties’ delivery services could prevent the timely or proper
delivery of our products or may cause product damage or product loss during transit. These interruptions may be due to events that are beyond our control or
the control of these third-party logistics companies, such as inclement weather, natural disasters, health epidemics, transportation disruptions or labor unrest.
In addition, if our third-party logistics service providers fail to comply with applicable rules and regulations in China, our delivery services may be
materially and adversely affected. We may not be able to find alternative third-party logistics companies to provide delivery services in a timely and reliable
manner, or at all. Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or shut-down of the delivery
companies we engage to make deliveries, especially those local companies with relatively small business scales. If our products are not delivered in proper
condition or on a timely basis, our users may refuse to accept products purchased on our platform and lose confidence in our platform, and our business and
reputation could suffer.
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Furthermore, delivery personnel of contracted third-party logistics service providers act on our behalf and interact with our users personally.
We need to effectively manage these third-party logistics service providers to ensure the quality of customer services. We have in the past received user
complaints from time to time regarding our delivery and return and exchange services. Any failure to provide high-quality delivery services to our users
may negatively impact the shopping experience of our users, damage our reputation and cause us to lose users.
Our marketplace business is subject to risks associated with third-party merchants.
As of December 31, 2019, there were 1,411 third-party merchants under our marketplace business. We do not have as much control over the
storage and delivery of products sold on our online marketplace as we do over the products that we sell directly ourselves under our merchandise sales
business. With the exception of third-party merchants outside of China for whom we handle the logistics and delivery process within China, our third-party
merchants use their own facilities to store their products and their own or third-party delivery systems to deliver their products to our customers, which
makes it more difficult for us to ensure that our customers get the same high quality service for all products sold on our platform. If any third-party merchant
does not control the quality of the products that it sells on our platform, or if it does not deliver the products or delivers them late or delivers products that
are materially different from its description of them, or if it sells counterfeit or unlicensed products on our platform, or if it sells certain products without
licenses or permits as required by the relevant laws and regulations even though we have requested such licenses or permits in our standard form agreement
with third-party merchants, the reputation of our marketplace business and our Yunji brand may be materially and adversely affected and we could face
claims that we should be held liable for any losses. Moreover, despite our efforts to prevent it, some products sold under our marketplace business may
compete with the products we sell directly, which may cannibalize our merchandise sales business. In addition, the supplier relationships, customer
acquisition dynamics and other requirements for our marketplace business may not be the same as those for our merchandise sales operations, which may
complicate the management of our business. In order for our marketplace business to be successful, we must continue to identify and attract third-party
merchants, and we may not be successful in this regard.
Failure to deal effectively with any fictitious transactions or other fraudulent conduct that take place under our marketplace business would materially
and adversely affect our business, financial condition and results of operations.
We may face risks with respect to fraudulent activities under our marketplace business. Although we have implemented various measures to
detect and reduce the occurrence of fraudulent activities within our marketplace business, there can be no assurance that such measures will be effective in
combating fraudulent transactions or improving overall satisfaction among third-party merchants and customers. In addition to fraudulent transactions with
legitimate customers, merchants may also engage in fictitious or “phantom” transactions with themselves or collaborators in order to artificially inflate their
own ratings on our platform, reputation and search results rankings. This activity may harm other merchants by enabling the perpetrating merchant to be
favored over legitimate merchants, and may harm our customers by deceiving them into believing that a merchant is more reliable or trusted than the
merchant actually is. This activity may also result in inflated GMV from our marketplace business. Moreover, illegal, fraudulent or collusive activities by
our employees could also subject us to liability or negative publicity. Although we have internal controls and policies with regard to the review and approval
of sales activities and other relevant matters, we cannot assure you that such controls and policies will prevent fraud or illegal activity by our employees.
Negative publicity and user sentiment generated as a result of actual or alleged fraudulent or deceptive conduct on our platform or by our employees would
severely diminish consumer confidence in us, reduce our ability to attract new or retain current third-party merchants and customers, damage our reputation
and diminish the value of our brand, and materially and adversely affect our business, financial condition and results of operations.
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If we are unable to successfully manage our relationships with third-party service companies or third-party business process outsourcing companies
(BPOs), we may lose service managers or customer service representatives, or fail to provide superior customer services, which could negatively affect
our business and operations.
We maintain a limited number of our own employees for customer services and rely on third-party business process outsourcing companies
(BPOs) for outsourced customer services. Our customer service center in Hefei, Anhui Province provides real-time assistance to our users and it had 557
outsourced customer service representatives as of December 31, 2019. These outsourced customer service representatives may not have the same level of
commitment to our users or be as well-trained as our own employees and we have less control over the services provided by them than our own employees.
We typically enter into service agreements with third-party BPOs on an annual basis or for a longer term. In the event that one or more of these third-party
BPOs unexpectedly become unable or unwilling to provide some or all of these services to us, our own employees may not be able to provide the necessary
range of customer services. If these outsourced customer service representatives fail to perform in accordance with the terms of our agreements with third-
party BPOs or fail to provide satisfactory customer service, or if waiting times are too long due to the high volume of calls from users at peak times, we may
fail to meet user expectations and our brand and user loyalty may be adversely affected. Any negative publicity or poor feedback regarding our customer
service may harm our brand and reputation and in turn cause us to lose users and market share.
We outsource provision of member services to third-party service companies and they hire, train and compensate service managers at our
request. Service managers enter into service contracts with third-party service companies and are not our employees. We currently work with seven third-
party service companies and enter into agreements with them on an annual basis or for a longer term. These third-party service companies select service
managers based on the standards we provide in our agreements. While we may oversee the performance of service managers and request these third-party
service companies to replace service managers that do not meet our standards, management of service managers through third parties may not be as timely
and effective as were they our employees. If we are unable to enter into new agreements or extend existing agreements with these third-party service
companies on terms and conditions acceptable to us, we may lose service managers. We may not be able to find alternative third-party service companies to
provide similar services in a timely and reliable manner, or at all. Accordingly, our members may not receive sufficient training or support for promoting the
products sold on our platform and they may become less motivated to promote our products via their social networks. Any termination of our arrangements
with these third-party service companies, or their refusal to select service managers for us, could have a material adverse effect on our business, financial
condition and results of operations.
Failure to comply with the relatively new E-Commerce Law may have a material adverse impact on our business, financial conditions and results of
operations.
As the e-commerce industry is still evolving in China, new laws and regulations may be adopted from time to time to address new issues that
arise from time to time. 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 generally provides that e-commerce operators must obtain administrative licenses if
business activities conducted by the e-commerce operators are subject to administrative licensing requirements under applicable laws and regulations. In
addition, the E-Commerce Law imposes a number of obligations on e-commerce platform operators, including the obligations: (i) to verify and register
platform merchants, (ii) to ensure platform cybersecurity, including, but not limited to, data privacy, (iii) to ensure fair dealing and the legitimate rights and
interests of consumers on the platform, (iv) to publicize transaction information preservation and transaction rules, and (v) to protect intellectual properties.
See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Relating to E-Commerce” for further details. As the
E-Commerce Law is relatively new, no detailed interpretation and implementation rules have been promulgated, and it remains uncertain how the
E-Commerce Law will be interpreted and implemented. We cannot assure you that our current business operations satisfy the obligations provided under the
E-Commerce Law in all respects. If the PRC governmental authorities determine that we are not in compliance with all the requirements proposed under the
E-Commerce Law, we may be subject to fines and/or other sanctions.
The E-Commerce Law also imposes a requirement on operators of e-commerce platforms, such as our company, to assist in tax collection
with respect to income generated by sellers from transactions conducted on e-commerce platforms, including, among others, submitting to the tax authority
information on the identities of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement may
result in operators of e-commerce platforms being subject to fines and, in severe circumstances, suspension of business operations of e-commerce platforms.
Substantial uncertainties exist regarding the interpretation and implementation of the E-Commerce Law. We encourage and incentivize members to promote
the products on our platform. If the members were deemed to be selling our products on consignment basis, the PRC tax authorities may require our
members to make tax registration and request our assistance in these efforts, pursuant to the E-Commerce Law, and our members may be subject to more
stringent tax compliance requirements. Due to the lack of detailed interpretation and implementation rules, we are in discussion, from time to time, with the
relevant government authorities on how to comply with the requirements under the E-Commerce Law. The PRC government may adopt additional
requirements from time to time, and we may be requested by tax authorities to provide further assistance in the enforcement of tax regulations, such as
disclosure of transaction records and bank account information of the members, and withholding taxes for our members. If any of these were to occur, we
may lose our existing members or fail to attract new members and the level of activity of members may reduce on our platform. We may also incur
increased costs and expenses as a result. The tightened tax enforcement by PRC tax authorities in the e-commerce industry, such as imposition of reporting
or withholding obligations on operators of e-commerce platforms with respect to tax payable of merchants on e-commerce platforms, may have a material
and adverse effect on our business, financial condition and results of operations.
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If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
Our business, results of operations and financial condition depend in part on our ability to effectively manage our growth or implement our
growth strategies. As part of our business strategies, we plan to further improve our fulfillment infrastructure and technology platform and continue to
optimize our product offerings. We also intend to continue to invest significant resources in training, managing and motivating our workforce. In addition,
as we optimize our product offerings, we will need to work with new suppliers and third-party merchants efficiently and establish and maintain mutually
beneficial relationships with our existing and new suppliers and third-party merchants. We may have limited or no experience for certain new product
offerings, and our expansion into these new product offerings may not achieve broad user acceptance. In addition, these offerings may present new and
difficult technological or operational challenges, and we may be subject to claims if our users are not satisfied with the quality of the products or do not have
satisfactory experiences in general. To effectively manage the expected growth of our operations and personnel, we will need to continue to improve our
transaction processing, technological, operational and financial systems, policies, procedures and controls. All these endeavors involve risks and will require
significant managerial, financial and human resources. We cannot assure you that we will be able to effectively manage our growth or to implement all these
systems, procedures and control measures successfully or that our new business initiatives will be successful. If we are not able to manage our growth or
execute our strategies effectively, our expansion may not be successful and our business and prospects may be materially and adversely affected.
We may incur liability or become subject to administrative penalties for counterfeit or unauthorized products sold on our platform, or for products sold
on our platform or content posted on our platform that infringe on third-party intellectual property rights, or for other misconduct.
We sourced our products from 868 suppliers as of December 31, 2019. Third-party merchants under our marketplace business are separately
responsible for sourcing the products they sell on our platform. As of December 31, 2019, we had 1,411 third-party merchants on our online marketplace.
We have been and may continue to be subject to allegations and lawsuits claiming that products sold or listed on our platform are counterfeit, unauthorized,
illegal, or otherwise infringe third-party copyrights, trademarks and patents or other intellectual property rights, or that content posted on our user interfaces
or shared by members through their social networks contain misleading or inaccurate information on description of products and comparable prices.
Although we have adopted strict measures to protect us against these potential liabilities, including proactively verifying the authenticity and authorization
of products sold on our platform through conducting offline investigations and immediately removing any counterfeit or illegal products or misleading
information found on our platform, these measures may not always be successful or timely.
In the event that counterfeit, unauthorized or infringing products are sold on our platform or infringing or misleading content is posted on our
platform, we could face claims or be imposed with penalties. We have in the past received claims alleging the sales of defective, counterfeit or unauthorized
items on our platform. Irrespective of the validity of such claims, we could incur significant costs and efforts in either defending against or settling such
claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products.
Potential liabilities under PRC law for negligence in participating or assisting in infringement activities associated with counterfeit goods include
injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability. Moreover, such third-party claims
or administrative penalties could result in negative publicity and our reputation could be severely damaged. In addition, in the event that any of our suppliers
or third-party merchants fail to obtain proper authorization to sell certain products to us or on our platform, they may be prevented from selling products to
us or on our platform and we may become subject to claims or disputes alleging that some products are sold on our platform without proper authorization.
Any of these events could have a material and adverse effect on our business, results of operations or financial condition.
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Under our standard form agreements, we require suppliers and third-party merchants to indemnify us for any losses we suffer or any costs that
we incur due to any products we source from these suppliers or any products sold by these third-party merchants. However, not all of our agreements with
suppliers and third-party merchants have such terms, and for those agreements that have such terms, we may not be able to successfully enforce our
contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights. See “—Risks Related to Doing Business in
China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.”
If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.
The scale and business model of our merchandise sales business require us to manage a large volume of inventory effectively. We depend on
our demand forecasts for various kinds of products to make purchase decisions and to manage our inventory. Demand for products, however, can change
significantly between the time inventory is ordered and the date by which we hope to sell it. Demand may be affected by seasonality, new product launches,
changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer tastes with respect to our products and
other factors, and our users may not order products in the quantities that we expect. In addition, when we begin selling a new product, it may be difficult to
establish supplier relationships, determine appropriate product selection, and accurately forecast demand. The acquisition of certain types of inventory may
require significant lead time and prepayment and they may not be returnable. We do not have the right to return unsold items to some of our suppliers.
Our net inventories have fluctuated in recent periods, from RMB332.8 million as of December 31, 2017 to RMB675.5 million as of
December 31, 2018 and to RMB428.3 million (US$61.5 million) as of December 31, 2019. Our inventory turnover days were 15.0 days in 2017, 17.0 days
in 2018 and 21.5 days in 2019. The recent decrease in net inventories is primarily due to a portion of merchandise sales shifting to our recently launched
marketplace business platform under which substantially all of the third-party merchants handle the procurement, storage and management of their own
inventory. We may include more products in our inventory, which will make it more challenging for us to manage our inventory effectively and will put
more pressure on our warehousing system.
If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory
values, and significant inventory write-downs or write-offs. In addition, we may be required to lower sale prices in order to reduce inventory level, which
may lead to lower margins. High inventory levels may also require us to commit substantial capital resources, preventing us from using that capital for other
important purposes. If we underestimate demand for our products, or if our suppliers fail to supply quality products in a timely manner, we may experience
inventory shortages, which might result in missed sales, diminished brand loyalty and lost revenues, any of which could harm our business and reputation.
Any of the above may materially and adversely affect our results of operations and financial condition.
Failure to successfully manage our fulfillment infrastructure or any interruption in the operation of the warehouse facilities for an extended period may
negatively affect our business, prospects and results of operations.
We believe that our fulfillment infrastructure, consisting of strategically located warehouses and front distribution centers, is essential to our
success. In the first quarter of 2019, we launched our marketplace business, allowing third-party merchants to sell their products on our platform and pay
commissions on their sales to us. Unlike our merchandise sales business where we handle the fulfillment process for the products sold, substantially all of
the third-party merchants under our marketplace business handle the fulfillment logistics for their products sold on our platform, thereby lessening the
demand for expansion of our fulfillment infrastructure. We have started and will continue integrating and consolidating our warehouse facilities to enhance
the efficiency in fulfilling orders placed from all areas in China under our merchandise sales business. Our fulfillment network is complex and challenging
to operate. We cannot assure you that we will be able to lease suitable warehouse facilities on commercially acceptable terms or at all. We may not be able
to recruit a sufficient number of qualified employees in connection with managing our fulfillment infrastructure. In addition, the integration and
consolidation of our fulfillment infrastructure may strain our managerial, financial, operational and other resources. If we fail to manage such integration
and consolidation successfully, our business and results of operations may be materially and adversely affected. Even if we manage the integration and
consolidation of our fulfillment infrastructure successfully, it may not give us the competitive advantage that we expect if improved third-party fulfillment
services become widely available at reasonable prices to e-commerce platforms in China.
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In addition, our ability to process and fulfill orders accurately and provide high quality customer service depends on the smooth operation of
the warehouse facilities. In order to continually improve customer experience, we have started to self-operate some warehouse facilities. As of
December 31, 2019, we self-operated seven warehouses while the other warehouses we use were operated by third-party vendors. We provide our operating
standards under our operating agreements with third-party vendors and typically renew these agreements on an annual basis. Any decrease in the quality of
service offered by these third-party vendors will adversely affect our reputation and business operations. The warehouse facilities may be vulnerable to
damage caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake, health epidemics, human error and other events. If any of
the warehouse facilities were rendered incapable of operations, then we may be unable to fulfill our orders on a timely basis. For example, business
operations at warehouse facilities could be disrupted if any of the employees working therein are suspected of being infected with a novel strain of
coronavirus, now named as COVID-19, since it could require the employees to be quarantined and/or the facilities to be disinfected. We do not carry
business interruption insurance, and the occurrence of any of the foregoing risks could have a material adverse effect on our business, prospects, financial
condition and results of operations.
We may not be able to recoup the investments we make to improve our fulfillment and technology capabilities.
We have invested and will continue to invest in improving our fulfillment infrastructure and upgrading our technology platform. We expect to
continue to invest in our fulfillment and technology capabilities for a number of years. We also intend to continue to add resources to our fulfillment
infrastructure and technology platform as we focus on expanding our product selection and offering new services. We are likely to recognize the costs
associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more
slowly, than we expect. We may not be able to recover our capital expenditures or investments, in part or in full, or the recovery of these capital
expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge,
which could adversely affect our financial condition and results of operation.
If we fail to remediate our material weaknesses and 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.
For the fiscal year ended December 31, 2019, we are not required to provide a report of management on our internal control over financial
reporting and our independent registered public accounting firm is not required to conduct an audit of our internal control over financial reporting due to a
transition period established by rules of the Securities and Exchange Commission for newly public companies. In connection with the audits of our
consolidated financial statements as of and for the years ended December 31, 2017, 2018 and 2019, we and our independent registered public accounting
firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company
Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
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The material weaknesses that have been identified relate to (i) our lack of sufficient financial accounting staff and management with
appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial
statements and related disclosures under U.S. GAAP and SEC reporting and compliance requirements and (ii) our lack of sufficient documented financial
closing policies and procedures, especially those related to period end cut-off and accruals. The material weaknesses, if not remediated timely, may lead to
material misstatements in our consolidated financial statements in the future. Neither we nor our independent registered public accounting firm undertook a
comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our
internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent
registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.
Following the identification of the material weaknesses, we have taken measures and plan to continue to take measures to remediate these
deficiencies. See “Item 15. Controls and Procedures—Internal Control Over Financial Reporting.” However, the implementation of these measures may not
fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remediated. Our failure to
correct these deficiencies or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and impair our
ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control
over financial reporting could significantly hinder our ability to prevent fraud.
We are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we include a report
from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report
for the fiscal year ending December 31, 2020. In addition, beginning at the same time, our independent registered public accounting firm must attest to and
report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting
is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered
public accounting firm, after conducting its own independent testing, may issue an adverse report if it is not satisfied with our internal controls or the level at
which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as a public
company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable
future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may
identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal
control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an
ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective
internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would
likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of
operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to
increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations
and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.
Any lack of requisite approvals, licenses or permits applicable to our business or failure to comply with any requirements of PRC laws, regulations and
policies may have a material and adverse impact on our business, financial condition and results of operations.
Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the Ministry of
Commerce, or MOFCOM, the Ministry of Industry and Information Technology, or the MIIT, the SAMR, the State Internet Information Office, the
National Radio and Television Administration, or the NRTA, and other governmental authorities in charge of the relevant categories of products sold and
services provided by us. Together, these government authorities promulgate and enforce regulations that cover many aspects of our operation of social
e-c ommerce platform, including entry into this industry, the scope of permissible business activities, licenses and permits for various business activities, and
foreign investment. We are required to hold a number of licenses and permits for our business operations. Although we hold all material licenses and
permits that are necessary to our business, we have not obtained certain licenses, permits and filings for selling certain specific products or services on our
platform. See “Item 4. Information on the Company—B. Business Overview—Regulations—Licenses, Permits and Filings.” For example, we have not
obtained the internet audio-visual program transmission license for the audio-visual program services on our platform, for which we are not qualified to
apply according to current applicable laws and regulations, and the operation permit for publications. In addition we have not completed filing for selling
medical devices, distributing publications, providing live streaming services and selling food on our platform. We are in the process of applying for these
licenses, permits and filings as permitted by relevant laws, regulations and practice of relevant PRC governmental authorities.
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As of the date of this annual report, we have not received any notice of warning or been subject to penalties or other disciplinary actions from
relevant governmental authorities regarding our business operations without the required licenses, permits or filings. However, we cannot assure you that we
will not be subject to any penalties or disciplinary actions in the future. There exist substantial uncertainties with respect to interpretation and application of
existing PRC laws, regulations and policies, and new laws, regulations or policies regulating the internet industry may also be promulgated in the future,
which together result in substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses activities of, internet
businesses in China, including our social e-commerce platform.
We may be held liable for information or content displayed on, retrieved from or linked to our platform, or distributed to our users, and PRC authorities
may impose legal sanctions on us, including, in serious cases, suspending or revoking the licenses necessary to operate our platforms.
Some of our members engage in sales promotion activities through our live video broadcasts under the “Endorsement” section on our Yunji
app and on our Yunji Endorsement app and they interact and exchange information with our users and generate and distribute content. However, because a
majority of the communications on our platforms is conducted in real time, we are unable to verify the sources of all information posted thereon or examine
the content generated by our members and users before they are posted. We also allow users to upload user-generated content on our platform. It is possible
that activities of users or the content uploaded on our platform by users may engage in illegal, obscene or incendiary conversations or activities, including
inappropriate or illegal information or content that may be deemed unlawful under PRC laws and regulations or that may expose us to allegations by third
parties of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of third-party rights. When
users register on our platform, they agree to our standard agreement, under which they agree not to disseminate any content infringing on third-party
copyright on our platform. However, if any information or content on our platform is deemed illegal, obscene or incendiary, or if appropriate licenses and
third party consents have not been obtained, claims may be brought against us for defamation, libel, negligence, intellectual property rights or other rights
infringement, other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise accessed
through our platform. We also may face liability for intellectual property rights infringement, fraud, and other claims based on the nature and content of the
materials that are delivered, shared or otherwise accessed through or published on our platform. Under relevant PRC laws and regulations, online service
providers, which provide storage space for users to upload works, may be held liable for copyright infringement under various circumstances pursuant to
applicable PRC laws and regulations, including situations where the online service provider knows or should reasonably have known that the relevant
content uploaded or linked to on its platform infringes upon the copyright of others and the online service provider profits from such infringing activities. In
certain cases in China, the courts have found an online service provider to be liable for the copyrighted content posted by users which was accessible from
and stored on such provider’s servers. Defending any such actions could be costly and involve significant time and attention of our management and other
resources, and there can be no assurance that we will obtain final outcomes that are favorable to us. In addition, if it is found that we have not adequately
managed the information or content on our platform, PRC authorities may impose legal sanctions on us, including, in serious cases, suspending or revoking
the licenses necessary to operate our platform. As a result, our business, financial condition and results of operations may be materially and adversely
affected.
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Our success depends on the continuing efforts of our senior management and key employees. If our senior management is unable to work together
effectively or efficiently or if we fail to hire, retain and motivate key employees, our business may be severely disrupted.
Our success is significantly dependent upon the continued services of our management and other key employees. In particular, our founder
and chief executive officer, Mr. Shanglue Xiao, and other management members are critical to our vision, strategic direction, culture and overall business
success. If our senior management cannot work together effectively or efficiently, our business may be severely disrupted. If one or more of our senior
management were unable or unwilling to continue in their present positions, we might not be able to locate suitable or qualified replacements easily or at all,
and our business, financial condition and results of operations may be materially and adversely affected. If any of our senior management or key employees
joins a competitor or forms a competing business, we may lose users, suppliers, third-party merchants, know-how and key professionals and staff members.
Our senior management has entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute
arises between any of them and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable
to enforce such agreements at all.
The increasing scale of our business also requires us to hire and retain a wide range of capable and experienced personnel and technology
talents who can adapt to a dynamic, competitive and challenging business environment. Competition for talents is intense, and the availability of suitable
and qualified candidates in China is limited. Competition for talents could cause us to offer higher compensation and other benefits to attract and retain
them. Even if we were to offer higher compensation and other benefits, these individuals may not choose to join or continue to work for us. Any failure to
attract or retain key management and personnel could severely disrupt our business and growth.
We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if people or properties are
harmed by the products sold on our platform.
We sell products manufactured by third parties and third-party merchants sell their products on our platform. Some of the products sold on our
platform may be defectively designed or manufactured. Sales of such products could expose us to increasing liability associated with consumer protection
laws in those areas, including product liability or health and safety claims relating to personal injury or illness, death, or environmental or property damage,
and may require product recalls or other actions. Moreover, pursuant to applicable consumer protection laws in China, consumers or any third parties
subject to such injury or damage may bring claims or legal proceedings against the e-commerce platforms as sellers of such products. Although we would
have legal recourse against the manufacturer or third-party seller of such products, as applicable, under PRC law if the liabilities are attributable to the
manufacturer or third-party seller, attempting to enforce our rights against the manufacturer or third-party seller, as applicable, may be expensive, time-
consuming and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance in relation to most
of the products we sell. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial
condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could
have a negative impact on our reputation.
Our business generates and processes a large amount of data, and we are required to comply with PRC laws relating to data privacy and security. The
improper use or disclosure of data could have a material and adverse effect on our business and prospects.
Our business generates and processes a large quantity of data. We face risks inherent in handling and protecting large volume of data. In
particular, we face a number of challenges relating to data from transactions and other activities on our platform, including:
•
•
•
protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or
improper use by our employees;
addressing concerns related to privacy and sharing, safety, security and other factors; and
complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of
personal information, including any requests from regulatory and government authorities relating to this data.
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The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. We may be required by PRC
governmental authorities to share personal information and data that we collect to comply with PRC laws relating to cybersecurity. See “Item 4. Information
on the Company—B. Business Overview—Regulations—Regulations Relating to Internet Information Security and Privacy Protection.” All these laws and
regulations may result in additional expenses and obligations to us and subject us to negative publicity, which could harm our reputation and negatively
affect the trading price of our ADSs. There are also uncertainties with respect to how these laws will be implemented in practice. PRC regulators have been
increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater attention and focus from
regulators, and attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to
heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties,
fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected. In
addition, regulatory authorities around the world have recently adopted or are considering a number of legislative and regulatory proposals concerning data
protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations and application thereof could, in addition to the
possibility of fines, result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of
operations.
Failure to protect confidential information of our users and network against security breaches could damage our reputation and brand and
substantially harm our business and results of operations.
A significant challenge to the e-commerce industry is the secure storage of confidential information and its secure transmission over public
networks. A substantial amount of the orders and the payments for products offered on our platform are made through our mobile apps. In addition, all
online payments for our products are settled through third-party online payment services. We also share certain personal information about our users with
contracted third-party suppliers and logistics service providers, such as their names, addresses, phone numbers and transaction records. Maintaining
complete security for the storage and transmission of confidential information on our technology platform, such as user’s personal information, payment-
related information and transaction information, is essential to maintaining user confidence.
We have adopted security policies and measures, including encryption technology, to protect our proprietary data and user information.
However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a
compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or
other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold with respect to users on
our platform. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment
services through which some of our users may elect to make payment for purchases. The contracted third-party suppliers and logistics service providers we
use may also violate their confidentiality obligations and disclose or use information about our users illegally. Individuals or entities obtaining our users’
confidential or private information illegally may further engage in various other illegal activities using such information, which may cause losses to our
users and undermine their trust in our platform. We have received complaints from our users that their personal and transaction information has been leaked
and used by others to conduct fraud or other illegal activities, which resulted in losses to these users, and we have also been subject to negative publicity
relating to these incidents. We have examined our security system and measures after receiving the complaints, and believe that it is not us or our employees
who leaked the user information to others or any other reasons attributable to us and we should not be held liable for the losses suffered by the users in
accordance with the applicable PRC laws. To better protect the users on our platform, we have taken further measures to enhance our data protection
policies and measures, require contracted third-party suppliers and logistics service providers to comply with their confidentiality obligations, and alert our
users about the potential illegal activities associated with leakage of user information. There can be no assurance, however, that the measures we have taken
are sufficient and effective to ensure the confidentiality and integrity of our data and confidential user information stored or transmitted through our
platform. Any negative publicity on our platform’s safety or privacy protection mechanisms and policies, and any claims asserted against us or fines
imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and
results of operations. Any compromise of our information security or the information security measures of our contracted third-party suppliers or logistics
service providers or third-party online payment service providers could have a material and adverse effect on our reputation, business, prospects, financial
condition and results of operations.
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Form 20-F
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We rely on third-party online payment service providers for payment processing and escrow services on our platform. If these payment services are
restricted or curtailed in any way or become unavailable to us or our users for any reason, our business may be materially and adversely affected.
All online payments for products sold on our platform are settled through third-party online payment service providers. Our business depends
on the billing, payment and escrow systems of these payment service providers to maintain accurate records of payments of sales proceeds by users and
collect such payments. If the quality, utility, convenience or attractiveness of these payment processing and escrow services declines, or we have to change
the pattern of using these payment services for any reason, the attractiveness of our platform could be materially and adversely affected.
Business involving online payment services is subject to a number of risks that could materially and adversely affect third-party online
payment service providers’ ability to provide payment processing and escrow services to us, including:
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dissatisfaction with these online payment services or decreased use of their services by our users;
increasing competition, including from other established PRC internet companies, payment service providers and companies engaged in
other financial technology services;
changes to rules or practices applicable to payment systems that link to third-party online payment service providers;
breach of users’ personal information and concerns over the use and security of information collected from users;
service outages, system failures or failures to effectively scale the system to handle large and growing transaction volumes;
increasing costs to third-party online payment service providers, including fees charged by banks to process transactions through online
payment channels, which would also increase our costs of revenues; and
failure to manage funds accurately or loss of funds, whether due to employee fraud, security breaches, technical errors or otherwise.
Certain commercial banks in China impose limits on the amounts that may be transferred by automated payment from users’ bank accounts to
their linked accounts with third-party online payment services. We cannot predict whether these and any additional restrictions that could be put in place
would have a material adverse effect on our platform.
In addition, the commercial banks and third-party online payment service providers that we work with are subject to the supervision of the
People’s Bank of China, or the PBOC. The PBOC may publish rules, guidelines and interpretations from time to time regulating the operation of financial
institutions and payment service providers, which may in turn affect how they provide payment services to us. For example, in November 2017, the PBOC
published a notice, or the PBOC Notice, on the investigation and administration of illegal offering of settlement services by financial institutions and
payment service providers to unlicensed entities. The PBOC Notice intends to prevent unlicensed entities from using licensed payment service providers as
a conduit for conducting unlicensed payment settlement service business, to safeguard the fund security and information security. We launched the
marketplace business in the first quarter of 2019, and cooperate with third party online payment service providers and commercial bank to receive payment
from the buyers and distribute payment to third-party merchants and us. We believe our current cooperation with third party online payment service
providers and commercial bank are not in violation of the PBOC Notice. We will continue to expand cooperation with third-party online payment service
providers and commercial banks to cover all of our marketplace business and to support the new initiatives. We cannot assure you that the PBOC or other
governmental authorities will find our cooperation model with third-party online payment service providers and commercial banks with respect to the
marketplace business model to be in compliance with the PBOC Notice. If required by the PBOC or other relevant governmental authorities in the future,
we may need to adjust or suspend our cooperation model with third-party payment service providers, and be subject to fines and other sanctions.
In addition, we cannot assure you that we will be successful in entering into and maintaining amicable relationships with these online payment
service providers and commercial banks. Identifying, negotiating and maintaining relationships with these providers require significant time and resources.
Our current agreements with these service providers also do not prohibit them from working with our competitors. They could choose to terminate their
relationships with us or propose terms that we cannot accept. In addition, these service providers may not perform as expected under our agreements with
them, and we may have disagreements or disputes with such payment service providers, any of which could adversely affect our brand and reputation as
well as our business operations.
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Form 20-F
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Changes in our return and exchange policies may adversely affect our results of operations.
Pursuant to the Consumer Protection Law in China, as amended, except for certain types of products, such as custom-made goods, fresh and
perishable goods, consumers are generally entitled to return the products purchased within seven days upon receipt without giving any reasons. We have
adopted user-friendly return and exchange policies that make it convenient and easy for users to change their minds after completing purchases, including
allowing users to return products purchased within seven days upon receipt without giving any reasons. We may be required by new laws or regulations to
adopt new or amend existing return and exchange policies from time to time. These policies may subject us to additional costs and expenses which we may
not recoup through increased revenue. If our return and exchange policy is misused by a significant number of users, our costs may increase significantly
and our results of operations may be materially and adversely affected. If we revise these policies to reduce our costs and expenses, our users may be
dissatisfied, which may result in loss of existing users or failure to acquire new users at a desirable pace, which may materially and adversely affect our
results of operations.
Our use of some leased properties could be challenged by third parties or government authorities, which may cause interruptions to our business
operations.
Certain lessors of our leased properties have not provided us with their property ownership certificates or any other documentation proving
their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their
lessors or permits from the relevant government authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the
owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. We have not entered into
written contracts with our lessors for some of our leased properties and the lessors of such properties may claim to terminate our leases. We may not be able
to find alternative properties to lease in a timely and reliable manner, or at all. Some of the leased properties were also subject to mortgage at the time the
leases were entered into. If no consent had been obtained from the mortgage holder under such circumstances, the lease may not be binding on the transferee
of the property in the event that the mortgage holder forecloses on the mortgage and transfers the property to another party. In addition, a substantial portion
of our leasehold interests in leased properties have not been registered with the relevant PRC government authorities as required by PRC law, which may
expose us to potential fines if we fail to remediate after receiving any notice from the relevant PRC government authorities. We have subleased a portion of
our leased properties to our PRC subsidiaries, VIEs and their subsidiaries as well as other third parties.
As of the date of this annual report, we are not aware of any claims or actions being contemplated or initiated by government authorities,
property owners or any other third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use of
such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to
relocate the affected operations. In addition, we may become involved in disputes with the property owners or third parties who otherwise have rights to or
interests in our leased properties. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely
basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our use of such properties. As a result, our
business, financial condition and results of operations may be materially and adversely affected.
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Form 20-F
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Failure to renew our current leases or locate desirable alternatives for our leased properties could materially and adversely affect our business.
We lease properties for our offices and the warehouse facilities that we operate. We may not be able to successfully extend or renew such
leases upon expiration of the current term on commercially reasonable terms or at all, and may therefore be forced to relocate our affected operations. This
could disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of
operations. In addition, we compete with other businesses for premises at certain locations or of desirable sizes. As a result, even though we could extend or
renew our leases, rental payments may significantly increase as a result of the high demand for the leased properties. In addition, we may not be able to
locate desirable alternative sites for our current leased properties as our business continues to grow and failure in relocating our affected operations could
adversely affect our business and operations.
We have granted, and may continue to grant, options and other types of awards under our share incentive plan, which may result in increased share-
based compensation expenses.
We adopted a share incentive plan in 2017, which was amended and restated in its entirety in March 2019 and referred to as the 2019 Plan in
this annual report, for the purpose of granting share-based compensation awards to employees, directors, officers, consultants and other personnel to
incentivize their performance and align their interests with ours. We recognize expenses in our consolidated financial statements in accordance with U.S.
GAAP. Under the 2019 Plan, we are authorized to grant options, restricted shares, restricted share units and other types of awards. As of February 29, 2020,
the awards that had been granted to our directors, officers, employees, consultants and other personnel and remained outstanding included (i) 85,897,600
restricted share units, excluding restricted share units that were forfeited, cancelled, or vested after the relevant grant date, and (ii) options to purchase an
aggregate of 92,682,510 Class A ordinary shares, excluding options that were forfeited, cancelled, or exercised after the relevant grant date. In particular, on
May 3, 2019, we were authorized by our board of directors to grant stock options and restricted share units to non-employees under the 2019 Plan, and
granted options to purchase an aggregate of 10,409,050 Class A ordinary shares and 3,332,040 restricted share units to non-employees by batches during the
year ended December 31, 2019. See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—2019
Share Incentive Plan.” We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel
and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based
compensation may increase, which may have an adverse effect on our results of operations. We may re-evaluate the vesting schedules, lock-up period,
exercise price or other key terms applicable to the grants under our currently effective share incentive plans from time to time. If we choose to do so, we
may experience substantial change in our share-based compensation charges in the reporting periods.
Our results of operations are subject to seasonal fluctuations which could result in volatility or have an adverse effect on the market price of our ADSs.
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retail seasonality
patterns. For example, we generally experience less user traffic and purchase orders during the Chinese New Year holiday season in the first quarter of each
year. Furthermore, online sales in China are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce
companies in China hold special promotional campaigns on November 11 each year and we hold a special promotional campaign in the second quarter of
each year, both of which can affect our results for those quarters. The increase in our sales and marketing expenses in the third and fourth quarters of 2017
was mainly due to our increase in our brand and business promotion activities during these periods. The decrease in sales and marketing expenses from the
second quarter of 2018 to the third quarter of 2018 was mainly due to the decrease in member management fees we paid to the third-party service companies
for their product sales facilitation services during this period, which resulted from the decrease of revenues from the second quarter of 2018 to the third
quarter of 2018 due to seasonality. The decreases in our total revenues from quarter to quarter in 2019 was primarily due to continual decreases in revenues
from sales of merchandise as a result of continual increases in the proportion of our business contributed from our marketplace business platform from
quarter to quarter in 2019. Revenues generated under our marketplace business were recognized on a net basis, while revenues generated under our
merchandise sales business were recognized on a gross basis. Due to the foregoing factors, our financial condition and results of operations for future
quarters may continue to fluctuate and our historical quarterly results may not be comparable to future quarters. As a result, the trading price of our ADSs
may fluctuate from time to time due to seasonality.
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Future strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation and results of operations.
We may in the future enter into strategic alliances with various third parties to further our business purposes from time to time. Strategic
alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the
counterparty, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business.
We may have little ability to control or monitor their actions. To the extent the third parties suffer negative publicity or harm to their reputations from events
relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.
In addition, if we are presented with appropriate opportunities, we may invest in or acquire additional assets, technologies or businesses that
are complementary to our existing business. Future investments or acquisitions and the subsequent integration of new assets and businesses into our own
would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have
an adverse effect on our business operations. The costs of identifying and consummating investments and acquisitions may be significant. We may also
incur significant expenses in obtaining necessary approvals from relevant government authorities in China and elsewhere in the world. Acquired assets or
businesses may not generate the financial results we expect. In addition, investments and acquisitions could result in the use of substantial amounts of cash,
potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible
assets and exposure to potential unknown liabilities of the acquired business. The cost and duration of integrating newly acquired businesses could also
materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of
operations.
We may need additional capital, and financing may not be available on terms acceptable to us, or at all.
In the years ended December 31, 2017 and 2018, our operating cash flow was positive, but in the year ended December 31, 2019, our
operating cash flow was negative. It is possible that we will continue to have negative cash flow in the future. We believe that our current cash and cash
equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures
for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments,
including any changes in our account payable policy, marketing initiatives or investments we may decide to pursue. If these resources are insufficient to
satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could
result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating
and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at
all.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property as
critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention
assignment and non-compete agreements with our employees and others, to protect our proprietary rights. Although we are not aware of any copycat mobile
apps that attempt to cause confusion or diversion of traffic from us at the moment, we may become an attractive target to such attacks in the future because
of our brand recognition in the e-commerce industry in China. Despite these measures, any of our intellectual property rights could be challenged,
invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition,
there can be no assurance that (i) our application for registration of trademarks, patents, and other intellectual property rights will be approved, (ii) any
intellectual property rights will be adequately protected, or (iii) such intellectual property rights will not be challenged by third parties or found by a judicial
authority to be invalid or unenforceable. Furthermore, because of the rapid pace of technological change in our industry, parts of our business rely on
technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties
at all or on reasonable terms.
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It is often difficult to register, maintain and enforce intellectual property rights in China. Confidentiality, invention assignment and
non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we
may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Policing any unauthorized use of our
intellectual property is difficult and costly and the steps we take may be inadequate to prevent the infringement or misappropriation of our intellectual
property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of
our managerial and financial resources, and could put our intellectual property at risk of being invalidated or narrowed in scope. We can provide no
assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a meaningful recovery. In addition, our trade secrets may be
leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in maintaining, protecting or enforcing our
intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents,
copyrights or other intellectual property rights held by third parties. We have been, and from time to time in the future may be, subject to legal proceedings
and claims relating to the intellectual property rights of others. In addition, there may be other third-party intellectual property that is infringed by our
products, services or other aspects of our business. There could also be existing patents of which we are not aware that our products may inadvertently
infringe. We cannot assure you that holders of patents purportedly relating to some aspect of our technology platform or business, if any such holders exist,
would not seek to enforce such patents against us in China, the United States or any other jurisdictions.
In addition, we strive to closely monitor the products offered on our platform, and also require suppliers and third-party merchants to
indemnify us for any losses we suffer or any costs that we incur in relation to the products we source from such suppliers or the products offered by such
third-party merchants on our platform. However, we cannot be certain that these measures would be effective in completely preventing the infringement of
trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. Further, the application and interpretation of China’s
patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and we cannot assure you that PRC courts or
regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability
for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop
alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our
business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made
against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the
intellectual property in question. Finally, we use open source software in connection with our products and services. Companies that incorporate open
source software into their products and services have, from time to time, faced claims challenging the ownership of open source software and compliance
with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or
noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their
software to publicly disclose all or part of the source code to such software and make available any derivative works of the open source code on unfavorable
terms or at no cost. Any requirement to disclose our source code or pay damages for breach of contract could be harmful to our business, results of
operations and financial condition.
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We rely on proper operation and maintenance of our mobile platform and internet infrastructure and telecommunications networks in China. Any
malfunction, capacity constraint or operation interruption may have an adverse impact on our business.
Currently, substantially all of our sales of products are generated online through our mobile platform. Therefore, the satisfactory performance,
reliability and availability of our mobile platform are critical to our success and our ability to attract and retain users. Our business depends on the
performance and reliability of the internet infrastructure in China. The reliability and availability of our mobile platform depends on telecommunications
carriers and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are
unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated
as a result of our breach or otherwise, our ability to provide products and services could be adversely affected. Access to internet in China is maintained
through state-owned telecommunications carriers under administrative control, and we obtain access to end-user networks operated by such
telecommunications carriers and internet service providers to give users access to our mobile platform. The failure of telecommunications network operators
to provide us with the requisite bandwidth could also interfere with the speed and availability of our mobile platform. Service interruptions prevent users
from accessing our mobile platform and placing orders, and frequent interruptions could frustrate users and discourage them from attempting to place
orders, which could cause us to lose users and in turn suppliers and third-party merchants and harm our operating results.
We have limited insurance coverage, which could expose us to significant costs and business disruption.
We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased food safety insurance for our products. In
addition to providing social security insurance for our employees as required by PRC law, we also provide supplemental commercial medical insurance,
which covers life insurance, for our employees. We do not maintain business interruption insurance, nor do we maintain product liability insurance or
key-man life insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully
claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the
compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely
affected.
Our failure to comply with anti-corruption laws and regulations, or effectively control the corruptive activities of our employees, could severely damage
our reputation, and materially and adversely affect our business, financial condition, results of operations and prospects.
We are subject to risks in relation to actions taken by us or our employees that may constitute violations of the anti-corruption laws and
regulations. While we adopt strict internal procedures and work closely with relevant government agencies to assure compliance of our business operations
with relevant laws and regulations, our efforts may not be sufficient to ensure that we comply with relevant laws and regulations at all times or prevent
corruptive activities of our employees. If we or our employees violate any such laws, rules or regulations, we could be subject to fines and/or other
penalties. Our reputation, corporate image, and business operations may be materially and adversely affected if we or our employees engage in corruptive
activities or violate any anti-corruption laws or regulations or if we become the target of any negative publicity as a result of corruptive actions taken by us
or our employees, which may in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
We may increasingly become a target for public scrutiny, including complaints to regulatory agencies, which could severely damage our reputation and
materially and adversely affect our business and prospects. Negative media coverage or publicity of us, our management or our employees or public
dissemination of malicious assessments of our business could harm our reputation and cause us to lose market share, users and revenues and adversely
affect the price of our ADSs.
The high volume of transactions taking place on our platform as well as publicity about our business create the possibility of heightened
attention from the public, regulators and the media. Heightened regulatory and public concerns over consumer protection, consumer safety and data privacy
and security issues may subject us to additional legal and social responsibilities and increased scrutiny and negative publicity over these issues, due to the
large number of transactions that take place on our platform and the increasing scope of our overall business operations. We may become the target of
detrimental conduct by third parties, which include complaints, anonymous or otherwise, to regulatory agencies. We may be subject to government or
regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such
third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all.
Moreover, as our business expands and grows, we may be exposed to heightened public scrutiny in jurisdictions where we already operate as well as in new
jurisdictions where we may operate. There is no assurance that we would not become a target for regulatory or public scrutiny in the future or that scrutiny
and public exposure would not severely damage our reputation as well as our business and prospects. Any illegal or immoral conducts by our management
or employees could also result in negative publicity of us and thus harm our public image and reputation.
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In addition, allegations, directly or indirectly against us, may be posted in social media or on blogs or websites by anyone, whether or not
related to us, on an anonymous basis. Consumers value readily available information concerning retailers, manufacturers, and their goods and services and
often act on such information without further investigation or authentication and without regard to its accuracy. The availability of information on social
media platforms and devices is virtually immediate, as is its impact. Social media platforms and devices immediately publish the content their subscribers
and participants post, often without filters or checks on the accuracy of the content posted. Information posted may be inaccurate and adverse to us, and it
may harm our financial performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Our
reputation may be negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about our business, which in
turn may cause us to lose market share, users and revenues and adversely affect the price of our ADSs.
We and certain of our directors and officers have been named as defendants in putative shareholder class action lawsuits, which could have a material
adverse impact on our business, financial condition, results of operation, cash flows and reputation.
We will have to defend against putative shareholder class action lawsuits described in “Item 8. Financial Information—A. Consolidated
Statements and Other Financial Information—Legal Proceedings,” including any appeals of such lawsuits should our initial defenses be unsuccessful. We
are currently unable to estimate the possible outcome or loss or possible range of loss, if any, associated with the resolution of these lawsuits. In the event
that our initial defenses of these lawsuits are unsuccessful, there can be no assurance that we will prevail in any appeal. Any adverse outcome of these cases,
including any plaintiff’s appeal of a judgment in these lawsuits, could have a material adverse effect on our business, financial condition, results of
operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any
liabilities that may arise from these matters. The litigation process may utilize a significant portion of our resources and divert management’s attention from
the day-to-day operations of our company, all of which could harm our business. We also may be subject to claims for indemnification related to these
matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be materially and adversely affected by natural disasters, health epidemics or other public safety concerns affecting the
PRC. Natural disasters may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could
cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to operate our platform and provide
services and solutions. Our business could also be adversely affected if our employees are affected by health epidemics. Our business operations could be
disrupted if any of our employees is suspected of having any transmissible health epidemic, since this may cause our employees to be quarantined and/or
our offices to be temperately shut down. In addition, our results of operations could be adversely affected to the extent that any health epidemic harms the
Chinese economy in general.
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For example, our business and results of operations could be adversely affected by the effects of the recent outbreak of COVID-19 in recent
months. This outbreak of communicable diseases has caused, and may continue to cause us and certain of our business partners, to implement temporary
adjustment of work schemes allowing employees to work from home and adopt remote collaboration. We have taken measures to reduce the impact of the
epidemic outbreak and provide support to our employees, service managers, members and business partners, including, providing advanced online technical
support to enable majority of our employees to work from home efficiently, securing ample supply of disinfectant materials and protective gears for our
employees who were able to return to work, and maintaining a steady supply of daily essential products and epidemic containment materials at stable prices
on our platform as a result of our combination of private labels, joint-venture brands, and product partnerships. However, we might still experience lower
work efficiency and productivity, which may adversely affect our service quality and require us to incur additional costs. Also, in our endeavor to ensure
supply availability, maintain price stability, and prevent price gouging of daily essential items and epidemic containment materials on our platform to
support the well-being of our members and users, we may suffer short-term fluctuations in our results of operations. While the foregoing restrictions and
measures designed to contain the spread of COVID-19 are expected to be temporary, the duration of the disruption and the related economic impact cannot
be reasonably estimated at this time and our results of operations during this period are difficult to predict. Our results of operations may also be adversely
affected to the extent that COVID-19 continues to affect the Chinese economy in general. As a result of the above developments, our results of operations
have been adversely affected in the first quarter of 2020, and our business, financial condition, results of operations and cash flows for the full fiscal year of
2020 may be adversely affected by the COVID-19 outbreak. We currently expect our GMV in the first quarter of 2020 to be RMB7.0 billion, as compared
to RMB6.8 billion in the same period of 2019 and RMB11.0 billion in the fourth quarter of 2019, which is slower growth than we had previously
anticipated. The slower than expected growth in GMV in the first quarter of 2020 was mainly due to the above developments and in particular, the fact that
we, our suppliers, third-party merchants, third-party logistics service providers and other business partners experienced various degrees of temporary
shutdowns and delays in commencement of operations due to COVID-19 in the first quarter of 2020. We will continue to monitor and evaluate the impacts
of COVID-19 to our business, financial condition, results of operations and cash flows for the remainder of fiscal year 2020. Additionally, as COVID-19
continues to evolve into a worldwide health crisis that could adversely affect the economies and financial markets of countries other than China, the extent
to which this outbreak impacts our results of operations will depend on future developments, which are highly uncertain and unpredictable, including new
information which may emerge concerning the severity of this outbreak and future actions we take, if any, to contain this outbreak or treat its impact, among
others.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.
COVID-19 had a severe and negative impact on the Chinese and the global economy in the first quarter of 2020. Whether this will lead to a
prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous
challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of
the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading
economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may
increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the
surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship
between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive
to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in
China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and
financial condition.
The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and,
as such, you are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit report included in our annual report filed with the U.S. Securities and
Exchange Commission, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting
Oversight Board, or the PCAOB, is subject to the laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its
compliance with applicable professional standards. Because our auditors are located in China, a jurisdiction where the PCAOB has been unable to conduct
inspections without the approval of the PRC authorities, our auditors are not currently inspected by the PCAOB. In May 2013, PCAOB announced that it
had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the
PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to
investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in
discussions with CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit
PRC companies that are listed on U.S. securities exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued
challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On
April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging
markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement
again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China, with respect to their audit work of U.S.
reporting companies. The joint statements reflect a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear
what further actions, if any, the SEC and PCAOB will take to address the problem.
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Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and
quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in
China prevents the PCAOB from regularly evaluating our auditors’ audits and its quality control procedures. As a result, investors may be deprived of the
benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’
audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose
confidence in our reported financial information and procedures and the quality of our financial statements.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in
particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the
SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The
proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure
requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three
consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for
affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear if this proposed legislation would be enacted.
Furthermore, there has been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based
companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact
on the stock performance of China-based issuers listed in the United States.
Proceedings instituted by the SEC against PRC affiliates of the “big four” accounting firms, including our independent registered public accounting
firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011, the PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were
affected by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the
PCAOB sought to obtain from the PRC firms access to their audit work papers and related documents. The firms were, however, advised and directed that
under PRC law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in
China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the
Sarbanes-Oxley Act of 2002 against the PRC accounting firms, including our independent registered public accounting firm. A first instance trial of the
proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge
proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect
pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a
settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to
the CSRC. The firms were to receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests,
which in substance require them to facilitate production via the CSRC. If they failed to meet specified criteria, during a period of four years starting from the
settlement date, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Under
the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice four years after
entry of the settlement. The four-year mark occurred on February 6, 2019. It is uncertain whether the SEC will further challenge the four PRC-based
accounting firms’ compliance with U.S. laws in connection with U.S. regulatory requests for audit work papers or if the results of such challenge would
result in the SEC imposing penalties such as suspensions. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting
firms, including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the
requirements of the Exchange Act.
In the event the Chinese affiliates of the “big four” become subject to additional legal challenges by the SEC or PCAOB, depending upon the
final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their
operations in China, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act,
including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty
regarding China-based, U.S.-listed companies and the market price of our common stock may be adversely affected.
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If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable
to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be
determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs
from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs
in the United States.
We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our
costs and the risk of non-compliance.
We are or will be subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange
Commission, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various
regulatory authorities in China and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new
and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over
time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated
by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we
may be subject to penalty and our business may be harmed.
Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC
regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be
subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of certain parts of our businesses, including value-added telecommunications services, is subject to restrictions under
current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added
telecommunication service provider (excluding e-commerce) and any such foreign investor must have experience in providing value-added
telecommunications services overseas and maintain a good track record, and foreign investors are prohibited from engaging in the distribution of audio and
video products in China via the internet in accordance with the Special Administrative Measures for Market Access of Foreign Investment (Negative List)
promulgated in 2019.
We are an exempted Cayman Islands company and our PRC subsidiaries are considered foreign-invested enterprises. Accordingly, none of
these PRC subsidiaries is eligible to provide internet content-related services. As a result, we conduct such business activities through one of our VIEs,
Zhejiang Yunji Preferred E-Commerce Co., Ltd., or Yunji Preferred, whose wholly owned subsidiary holds a VATS License for online data processing and
transaction processing business (operating e-commerce, excluding internet finance and e-hailing services) and internet content-related services (excluding
information search and inquiry services and real-time interactive information services). Yunji Preferred is 99.0099% owned by Mr. Shanglue Xiao, the
chairman of our board of directors and our chief executive officer, and 0.9901% owned by Mr. Huan Hao, a beneficial owner of the shares of our company.
Mr. Shanglue Xiao and Mr. Huan Hao are PRC citizens. Our WFOE has entered into a series of contractual arrangements with our VIEs (including Yunji
Preferred) and their respective shareholders, which enable us to:
•
exercise effective control over our VIEs;
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•
•
receive substantially all of the economic benefits and bear the obligation to absorb substantially all of the losses of our VIEs; and
have an exclusive option to purchase all or part of the equity interests in our VIEs when and to the extent permitted by PRC law.
As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their
financial results and their subsidiaries into our consolidated financial statements under U.S. GAAP. For a detailed discussion of these contractual
arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”
In the opinion of Han Kun Law Offices, our PRC legal counsel, (i) the ownership structures of our WFOE and our VIEs in China are not in
violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our WFOE, our VIEs and their respective
shareholders governed by PRC law are not in violation of PRC laws or regulations currently in effect, and valid and binding upon each party to such
arrangements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect.
However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future
PRC laws, regulations and rules; accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is
uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If
we or our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:
•
•
•
•
revoking the business licenses and/or operating licenses of such entities;
discontinuing or placing restrictions or onerous conditions on our operations;
imposing fines, confiscating the income from our WFOE or our VIEs, or imposing other requirements with which we or our VIEs may
not be able to comply;
requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and
deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or
exert effective control over our VIEs; or
•
restricting or prohibiting our use of the proceeds to finance our business and operations in China.
The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is
unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIEs in our consolidated
financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and
regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIEs or our right to receive
substantially all the economic benefits and residual returns from our VIEs and we are not able to restructure our ownership structure and operations in a
satisfactory manner, we would no longer be able to consolidate the financial results of our VIEs in our consolidated financial statements. Either of these
results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and
results of operations.
Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020, and on
December 26, 2019, the State Council promulgated the Implementation Rules of Foreign Investment Law, which took effect on January 1, 2020. Since it is
relatively new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether
variable interest entities that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately
“controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign
investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future laws,
administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can
be no assurance that our control over our VIEs through contractual arrangements will not be deemed as foreign investment in the future.
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Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing
contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take
timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current
corporate structure and business operations.
We rely on contractual arrangements with our VIEs and their respective shareholders for a large portion of our business operations, which may not be
as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with our VIEs and their respective shareholders to conduct our
business. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” These contractual
arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their respective
shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or
taking other actions that are detrimental to our interests.
If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of
our VIEs, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current
contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their obligations under the contracts to exercise
control over our VIEs. The shareholders of our VIEs may not act in the best interests of our company or may not perform their obligations under these
contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our VIEs. If any
dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and courts
and therefore will be subject to uncertainties in the PRC legal system. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate
Structure—Any failure by our VIEs or their respective shareholders to perform their obligations under our contractual arrangements with them would have a
material and adverse effect on our business.” Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring our control over the
relevant portion of our business operations as direct ownership would be.
Any failure by our VIEs or their respective shareholders to perform their obligations under our contractual arrangements with them would have a
material and adverse effect on our business.
If our VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we may have to
incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including
seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if the shareholders of
our VIEs were to refuse to transfer their equity interest in our VIEs to us or our designee when we exercise the purchase option pursuant to these contractual
arrangements, or if they were otherwise to act in bad faith toward us, we may have to take legal actions to compel them to perform their contractual
obligations.
All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through
arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with
PRC legal procedures. The legal system in China is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could limit our ability to enforce these contractual arrangements. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.”
Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be
interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel would view such contractual arrangements.
Additionally, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out
the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award
recognition proceedings, which would require additional expenses and delay.
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Jishang Preferred, a wholly-owned subsidiary of Yunji Preferred, one of our VIEs, holds our VATS License for online data processing and
transaction processing business (operating e-commerce, excluding internet finance and e-hailing services) and internet content-related services (excluding
information search and inquiry services and real-time interactive information services). In the event we are unable to enforce our contractual arrangements,
we may not be able to exert effective control over Yunji Preferred, and our ability to conduct these businesses may be negatively affected.
The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial
condition.
The shareholders of our VIEs may have potential conflicts of interest with us. For example, Mr. Shanglue Xiao and Mr. Huan Hao are the
shareholders of Yunji Preferred, one of our VIEs. Mr. Shanglue Xiao is the chairman of our board of directors and our chief executive officer and Mr. Huan
Hao is a beneficial owner of shares of our company. The shareholders may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual
arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive
substantially all the economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a
manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure
you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our
favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that
we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests
in the VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC law. For individuals who are also our directors and officers, we
rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to the company that requires them to
act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. The shareholders of our
VIEs have executed shareholders’ voting rights proxy agreement to appoint our WFOE or a person designated by our WFOE to vote on their behalf and
exercise voting rights as shareholders of our VIEs. If we cannot resolve any conflict of interest or dispute between us and the shareholders of our VIEs, we
would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any
such legal proceedings.
The shareholders of our VIEs may be involved in personal disputes with third parties or other incidents that may have an adverse effect on
their respective equity interests in the relevant VIEs and the validity or enforceability of our contractual arrangements with the relevant entity and its
shareholders. For example, in the event that any of the shareholders of our VIEs divorces his or her spouse, the spouse may claim that the equity interest of
the relevant VIE held by such shareholder is part of their community property and should be divided between such shareholder and his or her spouse. If such
claim is supported by the court, the relevant equity interest may be obtained by the shareholder’s spouse or another third party who is not subject to
obligations under our contractual arrangements, which could result in a loss of the effective control over the relevant VIE by us. Similarly, if any of the
equity interests of our VIEs is inherited by a third party with whom the current contractual arrangements are not binding, we could lose our control over the
relevant VIE or have to maintain such control by incurring unpredictable costs, which could cause significant disruption to our business and operations and
harm our financial condition and results of operations.
Although under our current contractual arrangements, (i) each of the spouses of Mr. Shanglue Xiao and Mr. Huan Hao has respectively
executed a spousal consent letter, under which each spouse agrees that she will not raise any claims against the equity interest, and will take every action to
ensure the performance of the contractual arrangements, and (ii) the VIEs and the their shareholders shall not assign any of their respective rights or
obligations to any third party without the prior written consent of our WFOE, we cannot assure you that these undertakings and arrangements will be
complied with or effectively enforced. In the case any of them is breached or becomes unenforceable and leads to legal proceedings, it could disrupt our
business, distract our management’s attention and subject us to substantial uncertainties as to the outcome of any such legal proceedings.
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Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIEs
owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the
PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the variable interest entity contractual
arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws,
rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other
things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase their tax liabilities. In addition,
the PRC tax authorities may impose punitive interest on our VIEs for the adjusted but unpaid taxes at the rate of 5% over the basic RMB lending rate
published by the People’s Bank of China for a period according to the applicable regulations. Our financial position could be materially and adversely
affected if our VIEs’ tax liabilities increase or if they are required to pay punitive interest.
Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and
prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in
China as a whole. The PRC economy differs from the economies of most developed countries in many respects, including the level of government
involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of
improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the
PRC government continues to play a significant role in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and
among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition
and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. The growth rate of the
Chinese economy has gradually slowed since 2010, and the impact of COVID-19 on the Chinese economy in 2020 is likely to be severe. Any prolonged
slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of
operations.
Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.
We conduct our business primarily through our PRC subsidiaries and our VIEs. 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 under the civil law system may be cited for reference but have limited
precedential value. In addition, any new or changes in PRC laws and regulations related to foreign investment in China could affect the business
environment and our ability to operate our business in China.
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From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court
proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate
the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties
may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely
basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the
violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to
continue our operations.
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.
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.
We only have contractual control over our Yunji mobile app. We do not directly own the mobile apps due to the restrictions on foreign
investment in businesses providing internet content-related services. This may significantly disrupt our business, subject us to sanctions, compromise
enforceability of related contractual arrangements, or have other harmful effects on us.
The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May
2011, the State Council announced the establishment of the State Internet Information Office (with the involvement of the State Council Information Office,
MIIT, and the Ministry of Public Security). The primary role of the State Internet Information Office is to facilitate the policy-making and legislative
development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-
ministry regulatory matters in relation to the internet industry.
Our online platform, operated by Jishang Preferred, a wholly-owned subsidiary of Yunji Preferred, may be deemed to be providing
commercial internet content-related services and online data processing and transaction processing services, which would require Jishang Preferred to obtain
an ICP License and an EDI License. Each of ICP License and EDI License is under the category of value-added telecommunications business operating
licenses, or VATS License. The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications
Business, issued by the MIIT in July 2006, prohibits domestic telecommunications service providers from leasing, transferring or selling
telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for
their illegal operation of a telecommunications business in China. The circular also requires each license holder to have the necessary facilities, including
servers, for its approved business operations and to maintain such facilities in the regions covered by its license. According to the recent practice in China, if
any commercial internet content-related service or online data processing and transaction processing service is to be carried out via mobile apps, such
mobile apps are required to be registered on the VATS License of the operator of such mobile apps. Our Yunji mobile app has been registered on the VATS
License held by Jishang Preferred.
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 the legality of existing and future foreign investments in, and the businesses and activities
of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our
business in China or will be able to maintain our existing licenses or obtain new ones.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our
management named in the annual report based on foreign laws.
We are an exempted company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China and
substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and
all of them are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also
be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In
addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or
such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. Due to jurisdictional limitations, matters of
comity and various other factors, the SEC, U.S. Department of Justice and other U.S. authorities may also experience difficulties in bringing and enforcing
actions against us or our directors and officers, including in instances of fraud or other wrongdoing.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and
enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country
where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement
with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures
Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles
of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment
rendered by a court in the United States.
In addition, shareholder claims that are common in the United States, including class action securities law and fraud claims, may be difficult
to pursue as a matter of law or practicality in China. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law
against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural
requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for
the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are
incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or our ordinary shares,
to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The
Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies
is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you
that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC
or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position,
and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive into
Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would
receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent
of our earnings, which in turn could adversely affect the price of our ADSs.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in
the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition,
our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As
a result, fluctuations in exchange rates may have a material adverse effect on your investment.
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Governmental control of currency conversion may limit our ability to utilize our revenues 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 all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily
relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or 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
subsidiary 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 and
VIEs 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 of China, the PRC government may from time to time impose more restrictive foreign exchange
policies and step up scrutiny of major outbound capital movement. More restrictions and substantial vetting process 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.
Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted
by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition
activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the MOFCOM be notified in advance
of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC
operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in
2008 and was amended in 2018, were triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the PRC National People’s
Congress, or NPC, which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover
thresholds must be cleared by the anti-monopoly authority before they can be completed. In addition, PRC national security review rules which became
effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are
crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that
are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-
consuming, and any required approval processes, including obtaining approval or clearance from the anti-monopoly authority, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
MOFCOM approval may be required for our acquisition of certain PRC subsidiaries.
Pursuant to the M&A Rules, if an overseas company established or controlled by PRC companies or individuals, or PRC Citizens, intends to
acquire equity interests or assets of any other PRC domestic company affiliated with the PRC Citizens, such acquisition must be submitted to MOFCOM for
approval. Our WFOE acquired certain PRC subsidiaries that were wholly-owned, directly or indirectly, by Yunji Sharing, in 2018. Such acquisitions may be
subject to MOFCOM approval, but were not submitted to the MOFCOM for approval. There is no definite penalty provided under M&A Rules for failure to
obtain MOFCOM approval in transactions where such approval is required. If it is determined that MOFCOM approvals are required for the acquisitions,
we may be required to revert the transactions. Nevertheless, considering that all the PRC subsidiaries involved in such transactions were wholly-owned,
directly or indirectly, by Yunji Sharing, which is one of our VIEs, before the acquisitions, and the acquisition of the PRC subsidiaries are inter-group
companies transactions, we understand that the failure to obtain the MOFCOM approvals for the acquisitions of the PRC subsidiaries will not have a
material adverse effect on our financial condition and results of operations. We conducted a few other inter-group restructuring transactions in 2019, which
may also be subject to MOFCOM approval, but were not submitted to MOFCOM for approval. For example, our WFOE acquired Shanghai Suye Cosmetics
Co., Ltd, or Shanghai Suye, which was owned by an affiliated entity of Mr. Shanglue Xiao, in January 2019, and Shanghai Suye was then transferred to
Yunji Preferred from our WFOE in February 2019.
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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 laws.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents
(including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration
purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 further
requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such
as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as
increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who are
PRC residents and may be applicable to any offshore acquisitions that we make in the future.
If our shareholders who are PRC residents fail to make the required registration or to update the previously filed registration, our PRC
subsidiaries may be prohibited from distributing their profits or the proceeds from any capital reduction, share transfer or liquidation to us, and we may also
be prohibited from making additional capital contributions into our PRC subsidiaries. In February 2015, SAFE promulgated a Notice on Further Simplifying
and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective June 2015. Under SAFE Notice 13,
applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required
under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept
registrations under the supervision of SAFE.
All of our shareholders who we are aware of being subject to the SAFE regulations have completed the initial registrations with the local
SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be informed of the identities of all the PRC residents holding direct
or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any
applicable registrations or continuously comply with all requirements under SAFE Circular 37 or other related rules. The failure or inability of the relevant
shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, such as restrictions on our
cross-border investment activities, on the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any
reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described
above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability
to distribute profits to you could be materially and adversely affected.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan
participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC
citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an
overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the
PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to
handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and
other employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who have been granted options are
subject to these regulations as our company is an overseas-listed company. Failure to complete SAFE registrations may subject them to fines of up to
RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our
PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to
adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations Relating to Labor Protection in the PRC—Employee Stock Incentive Plan.”
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In addition, the State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted
shares. Under these circulars, our employees working in China 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. See “Item 4.
Information on the Company—B. Business Overview—Regulations—Regulations Relating to Labor Protection in the PRC—Employee Stock Incentive
Plan.”
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our
business.
We are an exempted Cayman Islands holding company and we may rely on dividends and other distributions on equity paid by our PRC
subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and
service any debt we may incur. If any of our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, each of which is a wholly foreign-
owned enterprise, may pay dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards and
regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, if any, to fund a certain
statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise
may allocate a portion of its after-tax profits based on PRC accounting standards to a staff welfare and bonus fund. These reserve fund and staff welfare and
bonus fund cannot be distributed to us as dividends.
Our PRC subsidiaries generate primarily all of their revenue in Renminbi, which is not freely convertible into other currencies. As a result,
any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their Renminbi revenues to pay dividends to us.
The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward
by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries
to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to
dividends payable by PRC companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between
the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may
delay or prevent us from using the proceeds to make loans to our PRC subsidiaries and our VIEs in China, 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 and our VIEs. We may make loans to
our PRC subsidiaries and VIEs subject to the approval from governmental authorities and limitation of amount, or we may make additional capital
contributions to our wholly foreign-owned subsidiaries in China.
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Any loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject to
PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly foreign-owned subsidiaries in China to finance their
activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. In addition, a foreign invested enterprise shall use its
capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the
following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or payment prohibited by relevant laws and
regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided
by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and
(iv) paying the expenses related to the purchase of real estate that is not for self-use (except for foreign-invested real estate enterprises).
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange
Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating
Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the
Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange
Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign
Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital
of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-
enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from
foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the
principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for
purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice.
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement
Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19,
but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to
issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE
Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign
currency we hold, including the net proceeds, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our
business in China.
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 VIEs 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 or VIEs when needed. If
we fail to complete such registrations or obtain such approvals, our ability to use the proceeds 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.
If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us
and our non-PRC shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto
management body” within China is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of
25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management
over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT, issued the Circular of the State Administration of
Taxation on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the De Facto
Standards of Organizational Management, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management
body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled
by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s
general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According
to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by
virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following
conditions are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and
human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books
and records, company seals, and board and shareholder resolutions, are located or maintained in China; and (iv) at least 50% of voting board members or
senior executives habitually reside in China.
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We believe that we are not a PRC resident enterprise for PRC tax purposes. 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 could be subject to PRC tax at a rate of 25% on our
worldwide income, which could materially reduce our net income, and we may be required to withhold a 10% withholding tax from dividends we pay to our
shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS
holders) may be subject to PRC tax 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 China. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including
our ADS holders) and any gain realized on the transfer of ADSs or Class A ordinary shares by such shareholders may be subject to PRC tax at a rate of 10%
in the case of non-PRC enterprises or a rate of 20% in the case of non-PRC individuals unless a reduced rate is available under an applicable tax treaty. It is
unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the
PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or Class A ordinary
shares.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
In February 2015, the SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by
Non-Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also transactions
involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7
provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase
and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other
person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the
taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the
transferee, or the PRC entity which directly owns the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was
established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC
enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a
tax rate of 10%, for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC
tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC
tax would not be applicable to the transfer by any non-resident enterprise of ADSs of the Company acquired and sold on public securities markets.
On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident
Enterprises, or the SAT Public Notice 37, which came into effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident
enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required time limits,
and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax authority. If the non-resident enterprise
voluntarily declares and pays its tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid its tax payable in
time.
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We face uncertainties on the reporting and consequences of future private equity financing transactions, share exchanges or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident
enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a
result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under SAT Public Notice
7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with them or to establish that we and our non-resident enterprises
should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.
Changes in U.S. and international trade policies, particularly with regard to China, may adversely impact our business and operating results.
The U.S. government has made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies
towards China. In January 2020, the “Phase One” agreement was signed between the United States and China on trade matters. However, it remains unclear
what additional actions, if any, will be taken by the U.S. or other governments with respect to international trade agreements, the imposition of tariffs on
goods imported into the U.S., tax policy related to international commerce, or other trade matters. While cross-border business may not be an area of our
focus, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products and services,
impact the competitive position of our products or prevent us from selling products in certain countries. If any new tariffs, legislation and/or regulations are
implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-
China trade tension, such changes could have an adverse effect on our business, financial condition and results of operations.
Risks Related to Our ADSs
The trading price of our ADSs may be volatile, which could result in substantial losses to you.
Since our ADSs became listed on the Nasdaq Global Market on May 3, 2019, the trading price of our ADSs has ranged from US$3.80 to
US$18.20 per ADS in 2019. The trading prices of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may
happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating
financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their
initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other PRC
companies’ securities after their offerings, including internet and e-commerce companies, may affect the attitudes of investors toward PRC companies listed
in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any
negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other PRC
companies may also negatively affect the attitudes of investors towards PRC companies in general, including us, regardless of whether we have conducted
any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to
our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the
second half of 2011, which may have a material and adverse effect on the trading price of our ADSs.
In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the
following:
•
•
regulatory developments affecting us or our industry, users, suppliers or third-party sellers;
announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;
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•
•
•
•
•
•
•
•
•
•
•
•
•
changes in the economic performance or market valuations of other e-commerce companies;
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
conditions in the e-commerce market;
announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures,
capital raisings or capital commitments;
additions to or departures of our senior management;
public perception or negative news about our products or us;
our share repurchase program;
litigation, government investigation or other legal or regulatory proceedings;
fluctuations of exchange rates between the RMB and the U.S. dollar;
release or expiry of lock-up or other transfer restrictions on our issued and outstanding shares or ADSs;
sales or perceived potential sales of additional Class A ordinary shares or ADSs; and
general economic or political conditions in China or elsewhere in the world.
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
We are named as a defendant in putative shareholder class action lawsuits in the United States, and we may be involved in more class action
lawsuits in the future. Such lawsuits 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.
The concentration of our share ownership among executive officers, directors, and principal shareholders and their affiliated entities will likely limit
your ability to influence corporate matters and could discourage others from pursuing any change of control transaction that holders of our ordinary
shares and ADSs may view as beneficial.
As of February 29, 2020, our executive officers, directors, and principal shareholders and their affiliated entities together beneficially own
approximately 87.7% of our total outstanding ordinary shares. As a result of the concentration of ownership, these shareholders will have considerable
influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other
significant corporate actions. Such shareholders may take actions that are not in the best interest of us or our other shareholders. This concentration of
ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the
opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will
limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control
transactions that holders of our ordinary shares and ADSs may view as beneficial.
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We cannot guarantee that any share repurchase program will be fully consummated or that any share repurchase program will enhance long-term
shareholder value, and share repurchases could increase the volatility of the price of our ADSs and could diminish our cash reserves.
On August 28, 2019, our board of directors authorized a share repurchase program to repurchase up to US$20 million of our ADSs over the
following six months through February 28, 2020. The share repurchase program, authorized by our board of directors, does not obligate us to repurchase
any specific dollar amount or to acquire any specific number of ADSs. The share repurchase program could affect the price of our ADSs and increase
volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our ADSs. We accumulatively repurchased
approximately US$20 million of ADSs under the share repurchase program and closed the share repurchase program in January 2020.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, or if they adversely change
their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our
business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our
ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these
analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could
cause the market price or trading volume for our ADSs to decline.
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control
transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.
We have a dual-class ordinary share structure. Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares.
Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share.
Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not
convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity
that is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A
ordinary shares.
As of February 29, 2020, the chairman of our board of directors and our chief executive officer, Mr. Shanglue Xiao, beneficially own an
aggregate of 949,960,000 Class B ordinary shares, which represent 89.0% of our total voting power. Therefore, Mr. Shanglue Xiao have decisive influence
over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company
or our assets. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential
merger, takeover or other change of control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.
The dual-class structure of our ordinary shares may adversely affect the trading market for the ADSs.
S&P Dow Jones and FTSE Russell have previously announced changes to their eligibility criteria for inclusion of shares of public companies
on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more
than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use
of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of the ADSs representing our Class A
ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or
otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for the ADSs
representing our Class A ordinary shares. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital
structure could also adversely affect the value of the ADSs.
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Because 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.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In
addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under
Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a
dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of
directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and
cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual
restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely
upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value 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.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise the same rights as our
shareholders.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to
attend general meetings of our shareholders or to cast any votes at such meetings. As an ADS holder, you will only be able to exercise the voting rights
carried by the underlying Class A ordinary shares indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit
agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the
depositary will try, as far as is practicable, to vote the Class A ordinary shares underlying your ADSs in accordance with your instructions. If we ask for
your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with
these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but
it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you
withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened,
you may not receive sufficient advance notice of the meeting to withdraw the 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 memorandum and 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 ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have
agreed to give the depositary notice of shareholder meetings sufficiently in advance of such meetings. Nevertheless, we cannot assure you that you will
receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs.
In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting
instructions. This means that you may not be able to exercise your right to direct how the 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. In addition, in your capacity as an ADS holder, you will not be able to call a
shareholders’ meeting. Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote the Class A ordinary shares
underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.
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Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote the Class A ordinary
shares underlying your ADSs at shareholders’ meetings unless:
• we have instructed the depositary that we do not wish a discretionary proxy to be given;
• we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
•
•
a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
the voting at the meeting is to be made on a show of hands.
The effect of this discretionary proxy is that you cannot prevent our Class A ordinary shares underlying your ADSs from being voted, except
under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our
Class A ordinary shares are not subject to this discretionary proxy.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption
from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and
the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act.
We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement
to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be
unable to participate in our rights offerings and may experience dilution in your holdings.
You may not receive cash dividends if the depositary decides it is impractical to make them available to you.
The depositary will pay cash dividends on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares or
other deposited securities, and we do not have any present plan to pay any cash dividends on our Class A ordinary shares in the foreseeable future. To the
extent that there is a distribution, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives
on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the
number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a
distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the
mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such
property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to
time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of
reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of
ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. In addition,
the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time
if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of
the deposit agreement, or for any other reason.
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Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our operations in China and substantially all of
our assets are located in China. In addition, our directors and executive officers, and some of the experts named in this annual report, reside within China,
and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to bring an action against us or against
these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment
against our assets or the assets of our directors and officers.
Your investment in our ADSs may be impacted if we are encouraged to issue CDRs in the future.
The PRC central government once proposed rules that would allow PRC technology companies listed outside China to list on the PRC stock
exchanges through the creation of Chinese Depositary Receipts, or CDRs. It is uncertain if and when the CDR mechanism will be finalized and put in place
due to evolving PRC government policies. Once the CDR mechanism is in place, we might consider and be encouraged to issue CDRs and allow investors
to trade our CDRs on PRC stock exchanges. However, there are uncertainties as to whether a pursuit of CDRs in China would bring positive or negative
impact on your investment in our ADSs.
Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.
Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement
or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York, and
you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and
irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding. The depositary may, in its sole discretion, require that
any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under
the terms described in the deposit agreement, which may include claims arising under the federal securities laws, although the arbitration provisions of the
deposit agreement do not preclude you from pursuing claims under the U.S. federal securities laws in federal courts. 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 the U.S.
federal securities laws and the rules and regulations promulgated thereunder. The state and federal courts sitting in New York generally respect the
contractual decision of the parties to submit their disputes to arbitration and such arbitration provisions are generally enforceable under federal law and the
laws of the State of New York, subject to certain exceptions, such as corruption, fraud or undue means. Therefore, we believe that the arbitration provision
in the deposit agreement is enforceable under federal law and the laws of the State of New York.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable
outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require
a claim to be submitted to arbitration, the federal or state courts in the City of New York have 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.
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If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under
the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a
jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is
brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be
conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be
less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the
deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial
owner of ADSs or by us or the depositary of compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are
incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by
our memorandum and articles of association, the Companies Law (2020 Revision) of the Cayman Islands and the common law of the Cayman Islands. The
rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive
authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the
Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and
judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or
to obtain copies of lists of shareholders of these companies. Our directors have discretion under our memorandum and articles of association to determine
whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit
proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by
management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United
States.
Our memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us and adversely
affect the rights of holders of our Class A ordinary shares and the ADSs.
We have conditionally adopted amended and restated memorandum and articles of association. Our new memorandum and articles of
association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These
provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority,
without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A 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 Class A ordinary shares and ADSs may be materially and adversely affected.
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We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable
to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and
regulations in the United States that are applicable to U.S. domestic issuers, including:
•
•
•
•
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered
under the Exchange Act;
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
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish
our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the Nasdaq Stock Market. Press releases relating to
financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the
SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded
the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate
governance matters that differ significantly from Nasdaq’s corporate governance requirements; these practices may afford less protection to
shareholders than they would enjoy if we complied fully with Nasdaq’s corporate governance requirements.
As a Cayman Islands company listed on the Nasdaq Global Market, we are subject to Nasdaq’s corporate governance requirements. However,
Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices
in the Cayman Islands, which is our home country, may differ significantly from Nasdaq’s corporate governance requirements. For example, neither the
Companies Law of the Cayman Islands nor our memorandum and articles of association requires a majority of our directors to be independent and we could
include non-independent directors as members of our compensation committee and nominating committee, and our independent directors would not
necessarily hold regularly scheduled meetings at which only independent directors are present. We intend to rely on home country practice to be exempted
from the corporate governance requirement that we have a majority of independent directors on our board of directors. As a result of this and other home
country practice we may follow in the future, our shareholders may be afforded less protection than they otherwise would under Nasdaq’s corporate
governance requirements applicable to U.S. domestic issuers.
We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, may rely on exemptions from certain corporate
governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Shanglue Xiao, the chairman of our board of
directors and our chief executive officer, will own more than 50% of our total voting power. For so long as we remain a controlled company under that
definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including an exemption from the rule that
a majority of our board of directors must be independent directors or that we have to establish a nominating committee and a compensation committee
composed entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to
these corporate governance requirements.
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There can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any
taxable year, which could subject U.S. investors in our ADSs or Class A ordinary shares to significant adverse U.S. income tax consequences.
We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such
year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market
value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to
treat our VIE (including its subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effective control over the
operation of such entity but also because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results of operations
in our consolidated financial statements. Assuming that we are the owner of our VIE (including its subsidiaries) for U.S. federal income tax purposes, and
based upon our current and expected income and assets, including goodwill, and the value of our ADSs, we do not believe that we were a PFIC for the
taxable year ended December 31, 2019 and we do not expect to be a PFIC for the foreseeable future.
While we do not believe that we were a PFIC for the taxable year ended December 31, 2019 and we do not expect to become a PFIC, because the
value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our
ADSs may cause us to become a PFIC for the current or subsequent taxable years. Recent fluctuations in the market price of our ADSs increased our risk of
becoming a PFIC. Because the market price of our ADSs and ordinary shares may continue to fluctuate considerably, we cannot assure you of our PFIC
status for any taxable year. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and
assets, which may be affected by how, and how quickly, we use our liquid assets. If we determine not to deploy significant amounts of cash for active
purposes or if it were determined that we do not own the stock of our VIE for U.S. federal income tax purposes, our risk of being a PFIC may substantially
increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of
each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If we are a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax
Considerations”) may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of the ADSs or Class A ordinary
shares and on the receipt of distributions on the ADSs or Class A ordinary shares to the extent such gain or distribution is treated as an “excess distribution”
under the U.S. federal income tax rules, and such 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 ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which
such U.S. holder holds our ADSs or Class A ordinary shares. For more information see “Item 10. Additional Information—E. Taxation—U.S. Federal
Income Tax Considerations—Passive Foreign Investment Company Considerations.”
We will incur increased costs and become subject to additional rules and regulations as a result of being a public company.
We are a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The
Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, have detailed requirements concerning corporate
governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect
these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate
activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting
obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we
cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a
public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.
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We are named as a defendant in putative shareholder class action lawsuits in the United States, and we may be involved in more class action
lawsuits in the future. Such lawsuits could divert a significant amount of our management’s attention and other resources from our business and operations,
which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not
successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be
required to pay significant damages, which could have a material and adverse effect on our financial condition and results of operations.
ITEM 4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
We commenced operations through Yunji Sharing Technology Co., Ltd., or Yunji Sharing, and launched our Yunji app in May 2015.
In November 2017, Yunji Inc. was established in the Cayman Islands as our offshore holding company to facilitate financing and offshore
listing. Shortly following its incorporation, Yunji Inc. established a wholly-owned subsidiary in Hong Kong, Yunji Holding Limited.
In February 2018, Yunji Holding Limited established a wholly-owned subsidiary in China, Hangzhou Yunchuang Sharing Network
Technology Co., Ltd., or Yunchuang Sharing. In April 2018, we gained control over Yunji Sharing through Yunchuang Sharing by entering into a series of
contractual arrangements with Yunji Sharing and its shareholders. The contractual arrangements with Yunji Sharing were subsequently amended and
restated in December 2018.
In June 2018, Zhejiang Yunji Preferred E-Commerce Co., Ltd., or Yunji Preferred, was established. In the same month, we gained control
over Yunji Preferred through Yunchuang Sharing by entering into a series of contractual arrangements with Yunji Preferred and its shareholders. The
contractual arrangements with Yunji Preferred were subsequently amended and restated in December 2018. We have migrated all of our business operations
under Yunji Sharing and its subsidiaries to Yunji Preferred and Yunchuang Sharing and their subsidiaries.
On May 3, 2019, our ADSs commenced trading on the Nasdaq Global Market under the symbol “YJ.” We raised approximately
US$109.0 million in net proceeds from the issuance of new shares from the IPO and related over-allotment option arrangement after deducting underwriting
commissions and the offering expenses payable by us.
Our principal executive offices are located at 15/F, South Building, Hipark Phase 2, Xiaoshan District, Hangzhou, People’s Republic of
China. Our telephone number at this address is +86-571-8168-8920. Our registered office in the Cayman Islands is located at the offices of Maples
Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States
is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711. We maintain our web site at www.yunjiglobal.com.
The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC using its EDGAR system.
See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” for a discussion
of our capital expenditures.
B.
Business Overview
We operate a social e-commerce platform in China using a unique, membership-based model that leverages the power of social interaction.
We offer high-quality products at attractive prices and incentivize our members to promote our platform and share our products with their social contacts.
We empower prime emerging brands and manufacturers with deep understanding of market trends and customer behavior to produce high-quality
innovative products to better meet the demands of our members.
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Our platform has attracted a large and growing base of users, including members and non-members. These users are actively purchasing
products on our platform. Buyers on our platform increased from approximately 16.9 million in 2017 to approximately 23.2 million in 2018 and decreased
to approximately 22.5 million in 2019. During the same period, our GMV increased by 134.9% from RMB9.6 billion in 2017 to RMB22.7 billion in 2018
and by 55.7% from RMB22.7 billion in 2018 to RMB35.3 billion in 2019. In 2019, 72.4% of our GMV were from purchases made by our members and the
remaining were from purchases made by non-members.
Members are the key participants on our platform and drivers of our substantial growth. Our members gain access to a dedicated app that
provides access to a curated selection of products, exclusive membership benefits and features, including discounted prices. Previously, a user had to
purchase a membership package in order to become a member and enjoy membership benefits. In order to stimulate our users’ interest in transacting on our
platform and attract more members, in 2019, we provided each non-member user with a free three-month experiential period during which time the user had
access to the full spectrum of membership benefits. After the three-month experiential period, the user could become our member if he or she met a certain
cumulative spending threshold or certain other requirements during the experiential period or if he or she purchased one of our membership packages.
Starting in January 2020, we further refined our membership enrollment system by allowing any user to become a member and enjoy membership benefits
free of charge for one year by simply registering for an account on the Yunji app. If the user meets a certain cumulative spending threshold or certain other
requirements during the initial one-year period, the user may extend his or her membership for an extra year. Our members, typically middle-class
consumers, are highly social and are interested in discussing and sharing their shopping experiences and various products within their social circles.
Members often refer others to become members and are rewarded for doing so. Members can also promote products on various social platforms and are
rewarded if those users purchase our products. We also provide support such as training, technology support and customer services to make the process
easier for them. As of December 31, 2019, we had accumulated 13.8 million members. We had approximately 9.6 million transacting members on our
platform in 2019.
We offer products across a large variety of categories with the aim of catering to the various daily needs of our users and their households. We
also add to our product offerings based on feedback and understanding of our members and users based on various analytics. While we offer products from
mainstream and emerging brands, we also work with manufacturers directly to produce private labels. In particular, we engage in minority-interest equity
investments in high-quality innovative brands and manufacturers, combining their unique manufacturing capabilities and supply channels with our deep
understanding of end customers through our various user analytics to develop innovative products specifically designed to meet the demands of our
members and users. In this way, we empower our manufacturer and brand partners with products improvement advices based on our understanding of
market trends and insights on customer behavior and precise marketing and customer education through our active communities, thereby supporting our
partners to achieve further growth.
To complement our existing merchandise sales business under which we acquire products from suppliers and sell them directly to customers,
we launched our marketplace business in the first quarter of 2019 whereby third-party merchants can sell products on our platform and pay us commissions
on their sales. We attract and select third-party merchants to offer high quality products at attractive prices to our users through our marketplace business
and monitor the third-party merchants’ performance and activities on our platform closely to ensure that they meet our requirements for authentic products
and high-quality logistics and customer service. In each product category in the marketplace model, we will only select a limited number of brands,
fostering a healthy competitive environment where we only select and work with the best third-party merchants to offer our members a broad range of
carefully curated high-quality products. Products offered through our marketplace business are directly sold and fulfilled by third-party merchants. Our
marketplace business allows us to further expand our product offerings, improve the shopping experience on our platform, and attract and retain more
members and users.
We are extremely focused on the quality and pricing of our products under both the merchandise sale business and the marketplace business.
We have been intentionally maintaining a balance between expanding the product category coverage to meet our users’ evolving demand and controlling the
number of SPUs in each category to ensure that we only offer curated products with high value and quality to our users. As a result, we offered an average
of 2,315, 6,613 and 17,660 SPUs on our platform on a daily basis in December 2017, December 2018 and December 2019, respectively.
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We currently generate revenues mainly by selling products directly on our platform to users, including both members and non-members, and
earning commissions on the sales of products by third-party merchants on our platform. Total orders we fulfilled under our merchandise sales business
increased substantially from 75.8 million in 2017 to 153.4 million in 2018 and further increased to 166.6 million in 2019. Total orders fulfilled by third-
party merchants under the marketplace business in 2019 were 34.6 million. Our total revenues were RMB6,444.1 million, RMB13,015.2 million and
RMB11,672.0 million (US$1,676.6 million) in 2017, 2018 and 2019, respectively. We recorded net loss of RMB123.8 million (US$17.8 million),
RMB56.3 million and RMB105.7 million in 2019, 2018 and 2017, respectively.
Our Business Model
We operate a social e-commerce platform in China using a unique, membership-based model that leverages the power of social interaction.
We offer high-quality products at attractive prices and incentivize our members to promote our platform and share our products with their social contacts.
We operate on our platform both our merchandise sales business, under which we acquire products from suppliers and sell them directly to customers, and
our marketplace business that launched in the first quarter of 2019, under which third-party merchants can sell products on our platform and pay us
commissions on their sales.
Under our merchandise sales business, we work with a mix of mainstream brands, emerging brands and private labels to offer products across
a large variety of categories based on feedback and understanding of our members and users based on various analytics. In particular, we empower quality
manufacturers with products improvement advices based on our understanding of market trends and insights on customer behavior and precise marketing
and customer education through our active communities, thereby supporting the further growth of our manufacturing partners.
To complement our existing merchandise sales business, we launched our marketplace business in the first quarter of 2019. We attract and
select third-party merchants to offer high quality products at attractive prices to our users through our marketplace business and monitor the third-party
merchants’ performance and activities on our platform closely to ensure that they meet our requirements for authentic products and high-quality logistics
and customer service. Products offered through our marketplace business are directly sold and fulfilled by third-party merchants. Our marketplace business
allows us to further expand our product offerings, improve the shopping experience on our platform, and attract and retain more members and users.
The decrease in total revenues in 2019 was primarily due to a decrease in revenues from sales of merchandise as we shifted a portion of our
merchandise sales business to our marketplace business that we introduced in the first quarter of 2019 whereby third-party merchants can sell products on
our platform and pay us commissions on their sales. Revenues generated under the marketplace business were recognized on a net basis, while revenues
generated under our merchandise sales business were recognized on a gross basis.
Yunji Platform
We conduct our social e-commerce business primarily through our flagship Yunji app. In addition, we create visually appealing interfaces in
mini programs and HTML-5 webpages available in major social platforms in China, including WeChat, QQ, Weibo, to promote our platform and products.
Through these promotional channels, potential users can learn about our platform and visit our mobile apps.
Our members can easily share the mini programs and links to HTML-based webpages with their family, friends and other social contacts who
may be interested in buying products on our platform. The promotional interfaces visually aid the shopping experience on our platform, and enable viral
dissemination of product information on a large scale at low costs.
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Yunji App
Our flagship Yunji app is used by our members and non-member users to discover, explore and purchase a wide range of high-quality
products at attractive prices and to access other membership features and benefits. We provide services to members and non-member users under the same
app so as to open up our platform and provide better user experience. To date, revenue from product sales to non-member users not resulting from
promotion made by existing members has been immaterial.
• One can become a member of our platform mainly by accepting invitation from existing members in the form of an invitation link or
QR code whereby the invitee can register an account on the Yunji app. Previously, the invitee can then become a member through
purchasing a membership package consisting of a set of selected products or services and access to the Yunji app containing
membership benefits and features. In order to stimulate our users’ interest in transacting on our platform and attract more members, in
2019, we provided each non-member user with a free three-month experiential period during which time the user had access to the full
spectrum of membership benefits. After the three-month experiential period, the user could become our member if he or she met a
certain cumulative spending threshold or certain other requirements during the experiential period or if he or she purchased one of our
membership packages. Starting in January 2020, we further refined our membership enrollment system by allowing any user to become
a member and enjoy membership benefits free of charge for one year by simply registering for an account on the Yunji app. If the user
meets a certain cumulative spending threshold or certain other requirements during the initial one-year period, the user may extend his
or her membership for an extra year.
• The member can choose to view our product offerings on our user-friendly app interface by accessing any of our three sales formats, i.e.
flash sale (特卖), endorsements (代言) and channels (频道). See “Item 4. Information on the Company—B. Business Overview—Our
Product Offerings—Sales Formats.”
• The member can click on the desired product to view detailed product description and consider whether to make the purchase. In
addition to the attractive price, the app also offers features to encourage the member to recommend his/her family, friends or other
social contacts to purchase our products. In the product listings, the member can see the amount of incentives he/she will earn if
someone purchases products via the links he/she shares through his/her social network. Our app provides the member with ready-to-use
promotional materials containing product description and reviews, which can be easily posted on social network platforms such as
WeChat, QQ and Weibo with the seamless integration of our platform with such social network platforms. The member may also create
promotional materials on his/her own and share them with other members.
• The member can access our community feature by clicking on the “Endorsement” (代言) tab at the bottom of the app interface to see
what other members are buying and sharing. Our members write product description and reviews, upload photographs and short video
clips and host live video broadcasts to express their opinions on, share their experience with and recommend to other members a variety
of products. The live video broadcasts, in particular, help our members better understand the various features of products offered on our
platform and aid them in their product selection processes, especially for products for which there are many options available such as
apparel. From time to time, we organize campaigns featuring popular brands and products, in which members can post product reviews
and host live video broadcasts on the Yunji app. These campaigns offer an open forum for members to share their experience with the
relevant products, making it easier for members to find others with similar shopping interest and help each other in picking out the best
fit products.
•
In 2019, we launched the Yunji Endorsement app through which members and users could also access our community features, view
product reviews posted by and live video broadcasts hosted by our members and purchase products offered on our platform.
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Our Member Community
Our member community is driven by social connections. Users access our platform mostly through invitation and recommendation by our
existing members via their social networks both online and offline. As a result, new users come to us with established trust in their own family, friends and
neighbors, as well as shared interests and similar purchasing preferences with our existing members. Therefore, they are more likely to find our platform
credible and refer our platform and products through their social networks to other friends, neighbors and family members. We keep close contacts with our
member community to learn their changing consumption needs and preferences, which serve as crucial references to product curation and procurement for
our supply chain team.
Members
One can become a member of our platform mainly by accepting invitation from existing members in the form of an invitation link or QR code
whereby the invitee can register an account on the Yunji app. Previously, the invitee can then become a member through purchasing a membership package,
which consists of a set of selected products or services and access to the Yunji app containing membership benefits and features. Membership packages are
offered at a fixed price, depending on the different selection of products or services included in the package. In order to stimulate our users’ interest in
transacting on our platform and attract more members, in 2019, we provided each non-member user with a free three-month experiential period during
which time the user had access to the full spectrum of membership benefits. After the three-month experiential period, the user could become our member if
he or she met a certain cumulative spending threshold or certain other requirements during the experiential period or if he or she purchased one of our
membership packages. Starting in January 2020, we further refined our membership enrollment system by allowing any user to become a member and enjoy
membership benefits free of charge for one year by simply registering for an account on the Yunji app. If the user meets a certain cumulative spending
threshold or certain other requirements during the initial one-year period, the user may extend his or her membership for an extra year. We may further
refine and develop our membership enrollment and benefits system to expand our membership base and encourage existing members to extend the length of
their memberships by making purchases on our platform. Our members enjoy more attractive prices than non-member users when purchasing products on
our platform, and receive incentives for promoting and initiating transactions of our products via their social networks and for inviting new members to our
platform. We had a cumulative number of approximately 2.9 million, 7.4 million and 13.8 million members on our platform as of December 31, 2017, 2018
and 2019, respectively.
We provide members with benefits both in the form of Yun-coins and cash incentives. Through these benefits, we attract members to our
platform and encourage and motivate our members to share product reviews and promotional materials of our products via their social networks. Members
receive units of Yun-coin, each equivalent to RMB1.00, when they join as a member, when they successfully refer a new member, and from time to time as
a form of coupon. Additionally, members enjoy exclusive discounts when purchasing products on our platform, and receive referral incentives for products
sold via the links they share through their social networks. For each transaction completed from the promotion by a member, such member earns a certain
percentage of the listed price, with the percentage being determined based on the market price and margin of the product. Additionally, we may provide
extra incentive to a member depending on the number of completed promotions or purchases made as a result of the member’s referral. The referral
incentive is allocated to the member’s account immediately following payment for the transaction, and may be used by the member after seven days
following the receipt of product by the buyer. We also provide members with a variety of tools and support to enable them to promote our products via their
social networks, including ready-to-use product promotional materials, online and offline training to facilitate product sales, and centralized order
fulfillment, product delivery and real-time customer service.
Our members generally come from middle-class households and make purchase decisions for their respective households. The majority of our
members are female. Our members typically spend much time on social networks and take an interest in discussing trends and sharing shopping experience
and product information among their social contacts both online and offline. We offer social experience as an integral part of our member experience. Our
members not only enjoy shopping as supported by membership benefits and features on our platform, but also can become more involved in the promotion
of our products and platform and the building of our member community. Many of our members promote our products via their social networks, and some
of them become influential opinion leaders within their social networks affecting the consumption preferences of many others. Our members also form
groups and engage in interactive activities both online and offline based on their existing social network, geographic locations and interests, which allow
them to obtain relevant product information more easily, establish trust relationships amongst themselves and keep them engaged with our platform. We
facilitate member groups to provide support to members and enable further communication among members. The grouping system helps us enhance
member engagement and promote community value. In particular, we encourage members to form neighborhood-based groups based on geographic
proximity which allows for easier and more frequent organization of offline events to foster social interaction and enhance the trust relationship amongst our
members. The majority of our offline events were not intended to drive product sales or promotions, but instead to provide our members with opportunities
to learn something new, share their experience and better interact with each other. As a result, our offline events have attained positive feedback from our
members and have played a key part in the continual enhancement of member engagement and loyalty on our platform.
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Driven by social interaction, our platform has accumulated a highly active member base. We had approximately 2.3 million, 6.1 million and
9.6 million transacting members on our platform in 2017, 2018 and 2019, respectively. In 2019, 41.9% of transacting members promoted products through
their social networks where such promotion resulted in order placement on our platform. In the same period, 72.4% of our GMV were from purchases that
our members made and we had approximately 87.4% repeat purchase rate from our transacting members.
We outsource some member services to third-party service companies and they hire service managers based on the standards we provide in
our agreements with the third-party service companies. Most of service managers are also our members. Third-party service companies select service
managers based on their capability in facilitating members’ product sales and in training members, and assign them to provide services to a group of
members. The member groups operate both online on social network platforms such as WeChat, QQ and Weibo and offline through trainings and
experience-sharing gatherings hosted by our neighborhood-based groups, generating diversified forms of interactive social experiences as an integral part of
our member benefits.
As of December 31, 2019, our members were served by more than 80,000 service managers. Service managers provide training and support to
our members, including teaching members how to use our apps and platform, responding to questions from members on a daily basis, and organizing both
online and offline training courses to share their sales experience. Service managers also facilitate members’ product sales, including monitoring and
collecting member feedback on a real-time basis, designing and implementing marketing strategies for popular products in the member group, and helping
to address member queries related to our products.
Non-Member Users
Through our members’ word-of-mouth referral via their social networks both online and offline, our platform has garnered trust and attracted
a large and growing base of users. Users actively purchase products on our platform. The number of buyers in 2017, 2018 and 2019 are approximately
16.9 million, 23.2 million and 22.5 million, respectively. Since our platform is recommended by family, friends and neighbors, users may find us more
credible and have more confidence in the quality of products offered on our platform.
Our Product Offerings
We offer broad coverage of product categories from mainstream brands, emerging brands and private labels on our platform under the
combination of our merchandise sales business and our marketplace business with an aim of catering to the various daily needs of our users and their
households, including beauty and personal care, household goods, cloths, food and fresh produce, computer and electronics, apparel, bags and cases, baby
and maternity products and home appliances. Our top product categories that each contributed to more than 10% of our GMV are (i) beauty and personal
care, food and fresh produce, computer and electronics, and household goods in 2017, (ii) beauty and personal care, computer and electronics, food and
fresh produce, and apparel, bags and cases in 2018 and (iii) beauty and personal care, food and fresh produce, household goods, apparel, bags and cases and
online virtual services in 2019, while each of the other product categories contributed less than 10% of our GMV in each of 2017, 2018 and 2019. Within
each product category, we offer carefully curated items meeting the preferences of our users with attractive pricing. In December 2017, December 2018 and
December 2019, we offered an average of 2,315, 6,613 and 17,660 SPUs for sale on our platform on a daily basis, respectively. In December 2019, products
offered under our recently launched marketplace business accounted on average for 82.5% of SPUs for sale on our platform on a daily basis.
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Product and Supplier Selection
For our merchandise sales business, our product procurement team, consisting of 226 employees as of December 31, 2019, possess extensive
knowledge and understanding of existing and potential users’ needs and preferences, and our big data capabilities enable us to better analyze market trends
and understand customer behavior. We reflect such knowledge and understanding in product selection and when working with our suppliers. This
customer-to-manufacturer (C2M) model allows us to source products in response to evolving customer needs and preferences, and enable us to help our
suppliers, especially our manufacturing partners, provide products better designed for end customers and manage regional inventory storage. From time to
time, we are directly involved in the product design process of our manufacturing partners. We review and continually monitor the performance of each
SPU based on a few key dimension, in particular revenue contribution and margin, and suspend and replace SPUs with poor performance each month.
We believe it is crucial for us to carefully select the suppliers with high-quality product offerings, and empower them with our understanding
of market trends and insights on customer behavior to better design products meeting customer preferences. We have adopted a set of selection guidelines
for identifying potential suppliers. Our key supplier selection criteria include manufacturing capability, reputation, sales records among consumers similar to
those in our user community, and product offerings. Once a potential supplier is identified, we conduct due diligence reviews on its qualifications. We
generally choose to work with reputable brand owners with good track records and high-quality product offerings. For manufacturing partners producing
private labels, we conduct on-site visits and examine candidates based on our selection criteria, including the relevant qualifications and governmental
permits. We also conduct detailed factory auditing on the supplier’s manufacturing capability and production process to control product quality.
We follow similar selection guidelines for identifying potential third-party merchants. We conduct careful diligence and select third-party
merchants in our marketplace business in terms of scale, reputation and brand recognition, sales records among consumers similar to those in our user
community, logistics and customer service capabilities, and product offerings to ensure that the merchants are able to offer high quality products at
competitive prices, possess in-depth knowledge of the current trends in their particular product categories and have the operation flexibility and logistics and
customer service efficiency to meet our members’ demands. Furthermore, in each product category in the marketplace model, we will only select a limited
number of brands in each category and we will replace the underperformers on a quarterly basis with newly curated brands in our marketplace model. In this
way, we are committed to selecting and working with only the best third-party merchants, fostering a healthy competitive environment where the merchants
can establish deep collaborations with us in our marketplace business to offer our members a broad range of carefully curated high-quality products at
attractive prices.
Sales Formats
We offer products in three sales formats—flash sale, endorsements and channels—through each of which users could view our product
offerings.
Flash sale (特卖). We organize flash sale events every day to sell a finite quantity of discounted products for a limited period of time
beginning at 9:00 a.m. (Beijing time) each day. To foster user interest, we periodically analyze historical data, seasonality and user feedback to determine
the types of products we should offer for different hours and days. In addition, we carefully adjust our product mix to achieve a balanced and
complementary product offering across different product categories so as to maximize sales.
Endorsements ( 代 言 ). We provide our members with community features to see what other members are buying and sharing, including
product reviews, photos and short videos. In 2019 we introduced the live video broadcast function where members can host live video broadcasts to express
their opinions on, share their experience with and promote to other members products on our platform. During the live video broadcast, as the host member
is sharing his/her experience and interacting with other users viewing the broadcast, direct links to the products being discussed are displayed on the screen
to facilitate convenient purchasing of the products. Similar to product referrals made by members via their social networks, the live broadcast hosts receive
referral incentives for products sold via their live broadcasts.
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Channels (频道). We organize all of our product offerings on our Yunji app based on product characteristics such as category, functionality
and brand into different channels on our Yunji app to facilitate easy browsing by our users. Some of our most popular channels include:
• Must-Buy Goods, which displays products that we most highly recommend based on our understanding of market trends and user
preferences through various user analytics;
•
Seasonal Produce, which offers high-quality fresh seasonal fruits and vegetables that are shipped directly from the places of production;
and
• Apparel Outlet, which is our online fashion apparel store selling a broad range of high-quality and high-value apparel products from a
mix of mainstream brands, emerging brands and private labels meeting the diverse and fast-changing fashion needs of our members.
Pricing
We strive to offer attractive pricing for all the products offered on our platform. We make continual efforts to maintain and improve an
efficient cost structure and create incentives for our suppliers and our third-party merchants to provide us with competitive prices. For the products with
recognized brand names, we set our prices to be competitive with those on other major e-commerce platforms in China. We typically negotiate with our
suppliers and our third-party merchants for discounted prices based on our large sales volume and other value propositions. For the products we offer with
private labels, we set our prices to be not only appealing to the users but also satisfactory to us in terms of margin contribution. For these products, we
typically have more discretion in setting the retail price and more leverage in negotiating with our manufacturing partners.
We also offer a selection of discounted products on special occasions, such as the anniversary of the founding of our company on May 16 and
China’s new online shopping festival on November 11, and on important holidays. We also hold daily promotions through flash sale events for selected
products for a limited period of time. Special promotions attract bargain hunters and give our users an additional incentive to visit our platform regularly.
Quality Control
We have a dedicated team and stringent quality assurance and control procedures to ensure product quality and prevent counterfeit products.
We carefully scrutinize the products before listing them on our platform. We diligently examine the product sourcing channel and qualification of our
suppliers and our third-party merchants, carefully inspect products delivered to the warehouses, and reject or return products that do not meet our quality
standards or the purchase order specifications. We also reject any products with broken or otherwise compromised packaging. In addition, we inspect all
products before shipment to our users and conduct random periodic quality checks on our inventory. For products sold by third-party merchants whose order
fulfillment is handled by the third-party merchants themselves and are not processed by our logistics centers, we carefully scrutinize the product sourcing
channels of the third-party merchants and impose penalties, typically in amounts equal to several times the value of the relevant products, for any quality
non-compliance that we discover through customer feedback.
Our Suppliers and Third-Party Merchants
Seeking to offer a balanced mix of products of mainstream brands, emerging brands and private labels on our platform, we provide values to a
variety of suppliers and third-party merchants. We help owners of mainstream brands expand their business in China or certain specific regions in China
cost effectively. We often cooperate with third-party mainstream brands to help launch and market their new products on our platform, providing feedback
on the new products based on various user analytics and effectively introducing the new products to our members and users through our active social
communities. We also support owners of emerging brands in reaching a wider customer base and gaining better recognition and reputation. In addition, we
engage in minority-interest equity investments in high-quality manufacturers and innovative brands, combining their unique manufacturing capabilities and
supply channels with our deep understanding of end customers through our various user analytics to develop innovative products specifically designed to
meet the demands of our members and users. In this way, we empower our manufacturer and brand partners with products improvement advices based on
our understanding of market trends and insights on customer behavior and precise marketing and customer education through our active communities,
thereby supporting our partners to achieve further growth. Our suppliers and third-party merchants included merchants of mainstream brands and emerging
brands and manufacturing partners we cooperate with. Our private labels include Solo Life ( 素野), Yuan Sheng Huang, Unibeauty and P&S, among others.
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Starting in 2019, we have been particularly focused on developing our crafted sale cooperation with suppliers, in which we collaborate with
leading global manufacturers to incubate products and brands distinguishable with the following characteristics: high quality, attractive design, compelling
value and high throughput. Through the crafted sales cooperation with suppliers, we are able to cultivate brands with individual “super products” capable of
generating millions or even billions of RMB in sales, increase incomes for our service managers, provide more value to our members, and improve the
profitability of our platform. For example, through our crafted sales cooperation with suppliers, we have empowered multiple brands in the fruit category in
2019 to achieve million-dollar sales volume on a per-day and per-SKU basis.
We generally enter into framework supply agreements with suppliers and third-party merchants annually based on our standard form. We
constantly communicate with our suppliers to keep them informed of any changes to the inventory levels of their products in order for them to timely
respond to our sales demands. With the exception of third-party merchants outside of China for whom we handle the logistics and delivery process within
China, substantially all of the third-party merchants under the marketplace business take responsibility for the procurement, storage and management of
their own inventory. Before hosting a major sales event, we provide advance notice to our suppliers and third-party merchants so that they can prepare
ample stock to meet a potential surge in demand and increased purchases. Our standard form agreement requires suppliers and third-party merchants to
represent that their goods are authentic and from lawful sources and do not infringe upon the intellectual property rights or other lawful rights of third
parties and to pay us liquidated damages for any breach.
Fulfillment and Customer Service
We deliver a compelling customer experience by fulfilling orders quickly and accurately. We provide centralized and comprehensive
fulfillment and customer service to users regardless of whether they purchase products on our apps directly or through the introduction of our members. Our
fulfillment infrastructure for the prompt receipt, storage and shipment of products is primarily comprised of a nationwide warehouse and delivery network,
which we operate mainly through collaboration with contracted third-party logistics service providers. We fulfilled approximately 75.8 million,
153.4 million and 166.6 million orders in 2017, 2018 and 2019, respectively, under our merchandise sales business.
Products offered through our marketplace business are directly sold and fulfilled by third-party merchants, who take responsibility for the
entire fulfillment and customer service process. We closely monitor the speed and service quality of the third-party merchants through customer surveys and
feedbacks from our members to ensure member satisfaction.
Fulfillment Process
Our products are strategically stored at warehouses we use and the suppliers’ warehouses. The volume of products to be stored at the
warehouses and the choice of warehouse to be placed are determined based on customer demand. When a user places an order and makes payment, our
warehouse management system automatically processes the order and assigns it to the warehouse or warehouses with the appropriate inventory. The third-
party logistics service provider that we have hired in the region picks up the order at the warehouse to make the delivery. Once the order has shipped, our
warehouse management system automatically updates the inventory level for each product in the order, ensuring that additional inventory will be ordered as
needed. For some of our products that are not stored at the warehouses, such as fresh produce or home appliances, the third-party logistics service providers
will pick up the order from the facilities of the respective suppliers to make the delivery. To further enhance inventory accountability and security, we track
our inventory at all stages of the receiving and order fulfillment process. Our users can track the shipping status of their orders through our platform at each
step of the process.
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Payment
We provide our users with a number of payment options, including credit or debit cards or e-wallets. We cooperate with major third-party
online payment platforms such as Alipay, WeChat Pay, JD Pay and UnionPay to provide these options.
Warehouses
We strategically select the locations for warehouse facilities and choose the type of warehouse facilities at these locations based on the density
of orders we expect to be fulfilled. As of December 31, 2019, warehouse facilities in our fulfillment network included 10 central warehouses, 19 regional
warehouses, and 1 supermarket warehouse, with an aggregate gross floor area of approximately 204,991 square meters in 21 cities. As third-party merchants
under our marketplace business handle the fulfillment logistics for the products sold on our platform themselves, demand for expansion of our fulfillment
infrastructure has assuaged. We have started and will continue integrating and consolidating our warehouse facilities to enhance the efficiency in fulfilling
orders placed from all areas in China under our merchandise sales business.
We operate seven warehouses ourselves, and the other warehouses we use are operated by third-party vendors. We establish our operating
standards under our operating agreements with third-party vendors and typically renew these agreements on an annual basis.
At each warehouse location, inventory is bar-coded and tracked through our warehouse management system, allowing real-time monitoring of
inventory levels across our fulfillment network and item tracking at each warehouse location. We repackage all products to our standardized boxes for
optimized storage at the warehouses. Our warehouse management system is specifically designed to support the frequent curated sales events on our
platform and the large volume of inventory turnover.
Delivery
We deliver products to users across China through collaboration with third-party logistics service providers. The warehouses have a dispatch
system to more effectively manage the pick-up and delivery services by third-party logistics service providers. We closely monitor the speed and service
quality of the third-party logistics service providers through our internal tracking system as well as customer surveys and feedbacks to ensure customer
satisfaction.
To ensure timely delivery of our products, third-party logistics service providers are bound by the terms of cooperation agreements with us to
deliver the products within the stipulated timeframe that we had promised to our users at the time of purchase. We leverage our large-scale operations and
reputation to obtain favorable contractual terms from third-party logistics service providers. To reduce the risk of reliance on any single logistics service
provider and to ensure timely delivery at all times, we maintain close working relationships with several leading third-party logistics service providers in
China and typically contract with two or more local delivery companies in each major city or region. We typically negotiate and enter into agreements on an
annual basis.
Customer Service
Providing superior customer service is our high priority. Our commitment to users is reflected in the high service levels provided by our
customer service staff as well as in our product return policy.
Customer service center. We have a customer service center in Hefei, Anhui to provide real-time assistance to our users. Users can
communicate with online representatives through our mobile apps. We train our customer service representatives to answer user inquiries and proactively
educate potential users about our products and promptly resolve customer complaints. We typically enter into service agreements on an annual basis with
third-party BPO companies to provide customer service. As of December 31, 2019, 48.6% of our customer service representatives were outsourced from
third-party BPO companies and 51.4% were our employees.
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Product returns. We generally allow users to return unused goods within seven days, counting from the date when the user receives the
product. Once a user submits a return application request on our mobile app, our customer service representative will review and process the request or
contact the user through our mobile app or by phone if there are any questions relating to the request. Upon receipt of the returned product, we credit the
user’s payment account with the purchase price. The same policies apply to products sold through our marketplace business. We believe our product return
policy helps build user trust and increase user loyalty.
Technology
Our smooth operation and rapid growth are supported by our technological capabilities. Our technology team, coupled with our proprietary
technology and infrastructure and the large volume of data generated and collected on our platform, have created opportunities for continuous improvements
in our technology capabilities. The key components of our technology include big data analytics and artificial intelligence (AI), which are also the focus of
our research and development efforts.
Big Data and Artificial Intelligence
We are able to obtain feedback timely from users on our platform, and gain access to a large volume of transaction and user behavioral data.
We develop and leverage big data analytics to enhance the accuracy of user behavior predictions and user profiling, optimize targeted marketing and
platform operations, and deliver best-in-class user experience. We utilize AI and machine learning technologies to conduct modeling exercises and data
mining in order to gain actionable and effective insights from the data. For example, we not only look into the basic order information but also user
behavioral data, and then build predictive and statistical models based on the data we have accumulated. Our big data capabilities enable us to better analyze
market trends and understand customer behavior, and we reflect such understanding in SPU selection and when working with our suppliers and third-party
merchants. This customer-to-manufacturer (C2M) model allows us to source products in response to evolving customer needs and preferences, and enable
us to help our suppliers and third-party merchants, especially our manufacturing partners, provide products better designed for end customers and manage
regional inventory storage.
With access to a massive amount of data, we believe we are in a strong position to capitalize on the use of AI and machine learning
technologies in the new e-commerce arena. To date, we have applied various AI and machine learning technologies on our platform in multiple areas, such
as personalization of product recommendation, intelligent inventory management, automated risk assessment, automated fulfillment process, and automated
question answering. We will continue to explore the application of the big data and AI technologies on our platform and use them in more areas such as
intelligent customer services to enhance user experience.
Technology Infrastructure
We build our technology infrastructure to support our business in a cost-effective manner. We have built a reliable and smart network
infrastructure to ensure high availability and a low risk of downtime. We currently utilize third-party clouds in China to host our network infrastructure,
renting public servers and bandwidth.
We focus on maintaining and enhancing the reliability, stability and scalability of our service-oriented technology infrastructure. Our
technology infrastructure enables us to accurately process and fulfill increasingly large numbers of orders at peak periods while maintaining processing
speed and quality consistency, as well as powering full supply chain visibility and control. For example, we have adopted a micro-service architecture that is
built on top of our technology infrastructure to support horizontal scaling at all times. We have also designed a complex transaction processing system and
supply chain management system which can support the continued growth in our business.
Our Technology Team
We invest significant resources in research and development to improve our technology and develop solutions supporting our platform
operations. We incurred RMB58.2 million, RMB143.6 million and RMB315.2 million (US$45.3 million) of technology and content expenses in 2017, 2018
and 2019, respectively.
Our technology team primarily consists of four groups. We have a team of engineers who focus on the development and implementation of
new functions or features of our transaction and supply chain management systems. We have a team of research and development personnel who focus on
technology development and providing user support services. A team of data scientists who leverage big data analytics to support our business decision
making. We also have a team of IT personnel who provide internal system maintenance and system operations and development. As of December 31, 2019,
our technology team had a total of 523 personnel. Data Privacy and Security
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We are committed to protecting our users’ personal information and privacy. We have established and implemented a strict platform-wide
policy on data collection, processing and usage. We collect personal information and other data that is related to the services we provide and use the
collected data for our platform operations, all with users’ consent.
To ensure the confidentiality and integrity of our data, we maintain a comprehensive and rigorous data security program. We anonymize and
encrypt confidential personal information and take other technological measures to ensure the secure processing, transmission and usage of data. We have
also established stringent internal protocols under which we grant classified access to confidential personal data only to limited employees with strictly
defined and layered access authority.
We back-up our user and other forms of data on a daily basis in separate and various secured data back-up systems to minimize the risk of
data loss. We also conduct frequent reviews of our back-up systems to ensure that they function properly and are well maintained. Our back-end security
system is capable of handling malicious attacks each day to safeguard the security of our platform and to protect the privacy of our users.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Our business generates and processes a large
amount of data, and we are required to comply with PRC laws relating to data privacy and security. The improper use or disclosure of data could have a
material and adverse effect on our business and prospects” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—
Failure to protect confidential information of our users and network against security breaches could damage our reputation and brand and substantially harm
our business and results of operations.”
Intellectual Property
We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property as
critical to our success, and we rely on trademark, copyright and patent law and confidentiality, invention assignment and non-compete agreements with our
employees and others to protect our proprietary rights. As of December 31, 2019, we owned 32 computer software copyrights in China relating to various
aspects of our operations and maintained 379 trademark registrations inside China and 23 trademark registrations outside China. As of December 31, 2019,
we had 363 trademark applications inside China and 10 outside China. As of December 31, 2019, we had 3 patent applications pending in China. As of
December 31, 2019, we had registered 20 domain names, including www.yunjiglobal.com, among others.
Marketing
We have been able to build a large base of loyal users through, among other means, word-of-mouth referrals via users’ social networks and
organization of offline interactive events, which we intend to utilize to further grow our user base and increase member stickiness. Our ability to do so
depends on whether we can continue to provide superior user experience and promote and enhance our community value.
To enhance our brand awareness, we also have engaged in offline marketing and brand promotion activities. For example, we host offline
promotion campaigns for the shopping festival on November 11 each year in major cities in China. We maintain official accounts on various social
networking and live streaming platforms in China to continuously engage and communicate with our members and to promote awareness of our brand. We
also engage passionate members to host live video broadcast sessions to promote our products on various social media channels.
Competition
The e-commerce industry in China is intensely competitive. Our competitors include all major e-commerce companies in China, and other
internet companies in China that engage in social e-commerce businesses.
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We anticipate that the e-commerce industry will continually evolve and will continue to experience rapid technological change, evolving
industry standards, shifting customer requirements, and frequent innovation. We must continually innovate to remain competitive.
We compete primarily on the basis of the following factors: (i) our ability to attract and retain a large number of members and other users and
establish strong community bonding and maintain member loyalty through social interaction effectively, (ii) our full-serviced platform that enables users to
buy products easily, (iii) strong fulfillment capabilities, including logistics and online payment, (iv) advanced technology infrastructure, and (v) reliable and
flexible supply chain with customer-to-manufacturer (C2M) capability and strong manufacturing partner network.
We believe that we are well-positioned to effectively compete on the basis of the factors listed above. However, some of our current or future
competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger user base or greater financial, technical or
marketing resources than we do, and they may also adopt membership-based or social network-driven e-commerce models or other similar models on their
platforms.
Seasonality
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retail seasonality
patterns. For example, we generally experience less user traffic and purchase orders during the Chinese New Year holiday season in the first quarter of each
year. Furthermore, sales are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies in
China hold special promotional campaigns on November 11 each year that boost sales in the fourth quarter relative to other quarters, and we hold a special
promotional campaign in the second quarter of each year, on May 16, to celebrate the anniversary of the founding of our platform. All other components of
our operating cost and expenses generally continued to increase as we grew our business and expanded our user base. Overall, the historical seasonality of
our business has been relatively mild due to our rapid growth but may increase further in the future. Due to our limited operating history, the seasonal trends
that we have experienced in the past may not apply to, or be indicative of, our future operating results.
Insurance
We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased food safety insurance for our
products. In addition to providing social security insurance for our employees as required by PRC law, we also provide supplemental commercial medical
insurance, which covers life insurance, for our employees. We do not maintain business interruption insurance, nor do we maintain product liability
insurance or standalone key-man life insurance.
Regulations
This section sets forth a summary of the most significant rules and regulations that affect our business and operations in China.
Regulations Relating to Foreign Investment
Guidance Catalogue of Industries for Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign
Investment, or the Guidance Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce, or MOFCOM, and the
National Development and Reform Commission, or NDRC. The Guidance Catalog lays out the basic framework for foreign investment in China, classifying
businesses into three categories with regard to foreign investment: “encourage,” “restricted” and “prohibited.” Industries not listed in the catalog are
generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. In addition, in June 2018 the MOFCOM and
the NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the 2018 Negative List, which became
effective on July 28, 2018 to amend the Guidance Catalog. In June 2019, the MOFCOM and the NDRC jointly promulgated the Special Management
Measures (Negative List) (2019), or the 2019 Negative List, which became effective and replaced the 2018 Negative List in July 2019. In June 2019,
MOFCOM and the NDRC also jointly promulgated the Encouraged Foreign Investment Industry Catalog (2019), or the 2019 Encouraged List, which
became effective and replaced the “encouraged” category under the Guidance Catalog. Industries that are not listed in either the 2019 Negative List or the
2019 Encourage List are permitted areas for foreign investments, and are generally open to foreign investment unless specifically restricted by other PRC
regulations. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the
majority interests in such joint ventures. In addition, restricted category projects may be subject to higher-level government approvals. Foreign investors are
not allowed to invest in industries in the prohibited category. Foreign investment in value-added telecommunications services (except for e-commerce) falls
within the 2019 Negative List and the percentage of foreign ownership cannot exceed 50%. As a result, foreign investors can only conduct investment
activities through equity or contractual joint ventures with certain shareholding requirements and approvals from competent authorities. PRC partners are
required to hold the majority interests in the joint ventures and the joint ventures are required to obtain approval from MOFCOM and MIIT for their
incorporation and business operations.
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In October 2016, MOFCOM issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-
invested Enterprises, or the FIE Record-filing Interim Measures, most recently amended in July 2017. Pursuant to the FIE Record-filing Interim Measures,
the establishment and change of foreign-invested enterprises are subject to record-filing procedures, instead of prior approval requirements, provided that
such establishment or change does not involve special entry administration measures. If the establishment or change of foreign-invested enterprises matters
involve the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts is still required.
Pursuant to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises promulgated by the State Council in
December 2001 and most recently amended in February 2016, or the FITE Regulations, the ultimate foreign equity ownership in a value-added
telecommunications services provider may not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added
telecommunication business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating
good track records and experience in operating value-added telecommunication business overseas. Foreign investors that meet these requirements must
obtain approvals from the Ministry of Industry and Information Technology, or MIIT, and MOFCOM or their authorized local counterparts, which retain
considerable discretion in granting approvals. MIIT issued the Circular on Strengthening the Administration of Foreign Investment in and Operation of
Value-added Telecommunications Business, or the MIIT Circular, in July 2006. The MIIT Circular reiterated the regulations on foreign investment in
telecommunications businesses, which require foreign investors to set up foreign invested enterprises and obtain telecommunications business operating
licenses to conduct any value-added telecommunications business in China. Under the MIIT Circular, a domestic company that holds an
telecommunications business operating licenses is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from
providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business
illegally in China.
Pursuant to publicly available information, the PRC government has issued telecommunications business operating licenses to only a limited
number of FIEs, most of which are Sino-foreign joint ventures engaging in the value-added telecommunication business. In June 2015, MIIT issued the
Circular on Removing the Restrictions on Equity Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating
E-Commerce) Business to amend the relevant provisions in the FITE Regulations, allowing foreign investors to own more than 50% of equity interest in an
operator that “conducts e-commerce” business. However, other requirements provided by the Foreign Investment Telecommunications Rules (such as the
track record and experience requirement for a major foreign investor) still apply, and foreign investors are still prohibited from holding more than 50% of
equity interest in a provider of other subcategories of value-added telecommunications services.
To comply with PRC laws and regulations, we rely on contractual arrangements with our VIE to operate our e-commerce business in China.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our VIEs and their
respective shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control.”
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Foreign Investment Law
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020 and replaced
three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly
Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. On December 26, 2019, the State Council promulgated
the Implementation Rules of Foreign Investment Law, which took effect on January 1, 2020. The Foreign Investment Law embodies an expected PRC
regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the
corporate legal requirements for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for
the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According to the Foreign Investment Law, “foreign investment” refer to investment activities directly or indirectly conducted by one or more
natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign investor”) within China, and the
investment activities include the following situations: (i) a foreign investor, individually or collectively with other investors, establishes a foreign-invested
enterprise within China; (ii) a foreign investor acquires stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within
China; (iii) a foreign investor, individually or collectively with other investors, invests in a new project within China; and (iv) investments in other means as
provided by laws, administrative regulations, or the State Council.
According to the Foreign Investment Law, the State Council will publish or approve to publish a catalogue for special administrative
measures, or the “negative list.” The Foreign Investment Law grants national treatment to foreign invested entities, except for those foreign invested entities
that operate in industries deemed to be either “restricted” or “prohibited” in the “negative list”. Because the “negative list” has yet to be published, it is
unclear whether it will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign
Investment Law provides that foreign invested entities operating in foreign restricted or prohibited industries will require market entry clearance and other
approvals from relevant PRC governmental authorities.
Furthermore, the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.
In addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments in the
PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to
issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable
compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; mandatory technology
transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of asset disposal, licensing fees of intellectual property rights,
indemnity or compensation legally obtained, or proceeds received upon settlement by foreign investors within China, may be freely remitted inward and
outward in RMB or a foreign currency. Also, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report
investment information in accordance with the requirements.
Licenses, Permits and Filings
The PRC government extensively regulates the telecommunications industry, including the internet sector. The State Council, MIIT,
MOFCOM, SAMR, the former State Administration of Press, Publication, Radio, Film and Television (which has been replaced by the NRTA), and other
relevant government authorities have promulgated an extensive regulatory scheme governing telecommunications, on-line sales and e-commerce. New laws
and regulations may be adopted from time to time that will require us to obtain additional licenses and permits in addition to those that we currently have,
and will require us to address new issues that arise from time to time. In addition, substantial uncertainties exist regarding the interpretation and
implementation of current and any future PRC laws and regulations applicable to the telecommunications, on-line sales and e-commerce.
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We are required to hold certain licenses and permits and to make certain filings with the relevant PRC governmental authorities in connection
with various aspects of our business, including the following:
Value-Added Telecommunication Business Operating Licenses
The PRC Telecommunications Regulations, or the Telecom Regulations, which were issued by the State Council in 2000 and were most
recently amended in February 2016 are the primary governing law on telecommunication services. The Telecom Regulations set out the general framework
for the provision of telecommunication services by PRC entities. Under the Telecom Regulations, telecommunications service providers are required to
procure operating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic telecommunications
services” and “value-added telecommunications services.” A “Catalog of Telecommunications Business” was issued as an attachment to the Telecom
Regulations to categorize telecommunications services as basic or value-added. In December 2015, MIIT released the Catalog of Telecommunication
Business (2015 Revision), or the 2015 Telecom Catalog, implemented in March 2016. Under the 2015 Telecom Catalog, both the online data processing and
transaction processing business (i.e., operating e-commerce business) and information service business, continue to be categorized as value-added
telecommunication services.
In March 2009, MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, or the Telecom Permit
Measures, which was implemented in 2009 and most recently amended in 2017. Pursuant to the Telecom Permit Measures, the operation scope of the value-
added telecommunication business operating license, or VATS license, shall detail the permitted activities of the enterprise to which it is granted. An
approved telecommunication services operator shall conduct its business in accordance with the specifications recorded on its VATS License. The VATS
Licenses can be further categorized based on the specific business operations permitted to be carried out under such licenses, including among others, the
VATS Licenses for internet information services, or the ICP License, and the VATS License for electronic data interchange business, or the EDI License. In
addition, a VATS License holder is required to obtain approval from the original permit-issuing authority prior to any change to its shareholders, business
scope or other information recorded on such license. In February 2015, the State Council has issued the Decisions on Cancelling and Adjusting a Batch of
Administrative Approval Items, which, among others, replaced the pre-registration approval requirement for telecommunications business with post-
registration approval requirement.
In September 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures,
most recently amended in January 2011. Under the Internet Measures, “internet information services” refer to the provision of information through the
internet to online users, and are divided into “commercial internet information services” and “non-commercial internet information services”. Commercial
internet information services operators shall obtain an ICP License, from the relevant government authorities within China.
Each of Jishang Preferred, a wholly-owned subsidiary of Yunji Preferred, one of our VIEs, and Zhejiang Jixiang E-commerce Co., Ltd., or
Zhejiang Jixiang, a wholly-owned subsidiary of Jishang Preferred, holds a VATS License for online data processing and transaction processing business
(operating e-commerce, excluding internet finance and e-hailing services) and internet content-related services (excluding information search and inquiry
services and real-time interactive information services).
Filing by Third-Party Platforms Providers for Publications Online Trading Services and by Sellers of Publications via Online Trading
We are also subject to regulations relating to online trading platform services provided for distribution of publications including books and
audio-video products. According to the Provisions on the Administration of the Publication Market, or the Publication Market Provisions, which were
jointly promulgated by General Administration of Press and Publication and MOFCOM in May 2016 and implemented in June 2016, an online trading
platform that provides services for the distribution of publications shall complete record-filing formalities with the competent publication administrative
authority, and is required to examine the identity of a dealer distributing publications through the platform, verify its business license and Publications
Operation Permit, establish a mechanism to prevent and control the trading risks and take effective measures to rectify illicit actions conducted by the
dealers distributing publications on the platform. If any entity subject to such requirements fails to complete the filing or fails to fulfill the relevant duties of
examination and management in accordance with the Publication Market Provisions, it may be subject to an order to cease illegal acts and a warning by the
competent publication administrative authority, as well as a penalty not exceeding RMB30,000. In practice, such filing has not been open for trading
platform services provided through mobile applications like Yunji app. Jishang Preferred will submit its record-filing application with the competent
authority for providing services for distribution of publications as soon as practical.
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Pursuant to the Publication Market Provisions, an entity engaged in the wholesale or retail of publications shall obtain an operation permit for
publications. If an entity fails to obtain operation permit for publications, it may be subject to an order to cease illegal acts, fines or confiscation of illegal
gains and devices, equipment used for the illegal business operation. In cases where an entity that is engaged in the distribution of publications via the
internet or other information networks within the approved business scope has obtained the operation permit for publications, such entity shall complete its
record-filing formalities with the publication administrative department that has approved its business scope within 15 days after launching its online
distribution business. Zhejiang Jiyuan Network Technology Co., Ltd. holds an operation permit for publications whose scope includes online sales of
publications. Zhejiang Jixiang is in the process of applying for the operation permit for publications.
Filing by Third-Party Platforms Providers for Medical Device Online Trading Services and by Sellers of Medical Devices via Online Trading
Pursuant to the Regulations on the Supervision and Administration of Medical Devices, an enterprise engaging in the operation of medical
devices shall have business premises and storage facilities suitable for the operation scale and scope, and shall have a quality control mechanism or
personnel suitable for the medical devices it operates. An enterprise engaged in the distribution of class two medical devices shall complete record-filing
formalities with the municipal level food and drug administration and provide supporting materials to satisfy the relevant conditions of engaging in the
operation of medical devices, while an enterprise engaged in the distribution of class three medical devices shall apply for an operation permit with the
municipal level food and drug administration and provide supporting materials to satisfy the relevant conditions of engaging in the operation of medical
devices. Zhejiang Jiyuan and Wuhan Yunteng are in the process of completing their respective record-filing for its operation of class two medical devices.
The former China Food and Drug Administration, or the CFDA, which has been merged into SAMR promulgated the Measures for the
Supervision and Administration of Online Sale of Medical Devices, or the Medical Devices Online Sale Measures, in December 2017, which became
effective in March 2018, and the Administrative Measures for Online Drug Information Service, or the Measures for Online Drug Information Service, in
July 2004 and amended in November 2017. Pursuant to the Medical Devices Online Sale Measures and the Measures for Online Drug Information Service,
a provider of a third-party platform for online trading services for medical devices shall complete filing procedures with the competent provincial food and
drug administrative department and obtain an Internet Pharmaceutical Information Services Qualification Certificate. A provider of a third-party platform
for online trading services for medical devices that fails to complete the filing in accordance with the Medical Devices Online Sale Measures may be
ordered by the competent provincial food and drug administrative department to make rectification within a prescribed time limit, and failure to make such
rectification may be subject to public exposure of incompliance and a penalty of not exceeding RMB30,000. In the case of any engagement in the online
drug information service without obtaining a valid Internet Pharmaceutical Information Services Qualification Certificate, the provider of a third-party
platform may be subject to an order to cease illegal acts and a warning by the competent administrative authority. Jishang Preferred obtained the Internet
Pharmaceutical Information Services Qualification Certificate in April 2019 and is in the process of submitting its record-filing application with the
competent authority for its online trading services for medical devices.
Pursuant to the Medical Devices Online Sale Measures and the Measures for Online Drug Information Service, a seller of medical devices via
online transactions shall complete record-filing procedures with the competent food and drug administrative department, or such seller may be ordered to
make rectification within a prescribed time limit, and failure to make such rectification may be subject to public exposure of incompliance and a penalty of
up to RMB10,000. Zhejiang Jiyuan is in the process of submitting its record-filing application with the competent authority for its online sales of medical
devices.
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Food Operation Permit
China has adopted a licensing system for food supply operations under the Food Safety Law and its implementation rules. Entities or
individuals that intend to engage in food production, food distribution or food service businesses must obtain licenses or permits for such businesses.
Pursuant to the Administrative Measures on Food Operation Licensing issued by the CFDA in August 2015 and amended in November 2017, an enterprise
needs to obtain a Food Operation Permit from the local food and drug administration, and the permits already obtained by food business operators prior to
the effective date of these new measures will remain valid for their originally approved validity period. Zhejiang Youji Supply Chain Management Co.,
Ltd., or Youji Supply Chain, a wholly-owned subsidiary of our WFOE, holds the Food Operation Permit.
Filing by Third-Party Platform Providers for Food Online Trading
In July 2016, the CFDA promulgated the Measures for Investigation and Handling of Illegal Acts Involving Online Food Safety, 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. In practice, such filing has not been open for trading platform services provided through mobile applications like Yunji
app. Jishang Preferred will submit its record-filing application as a third-party platform provider for online food trading as soon as practical.
Licenses Relating to Internet Audio-Visual Program Services
The former State Administration of Radio Film and Television, or the SARFT, which is the predecessor of NRTA and the former Ministry of
Information Industry jointly issued the Administrative Regulations on Internet Audio-Visual Program Service, or the Internet Audio-Visual Program
Regulations, in December 2007 which became effective as of January 31, 2008 and was subsequently amended in August 2015. The Internet Audio-Visual
Program Regulations define “internet audio-visual programs services” as the production, edition and integration of audio-video programs, the supply of
audio-video programs to the public via the internet, and providing uploading and audio-video programs transmission services to a third party. Entities
engaging in internet audio-visual programs services must obtain the internet audio-visual program transmission license, or the Audio-Visual License issued
by the NRTA, which is only issued to state-owned or state-controlled entities unless the license applicants have obtained internet audio-visual program
transmission licenses prior to the promulgation of the Audio-visual Program Provisions in accordance with the then-in-effect laws and regulations.
According to the Categories of the Internet Audio-Video Program Services (Trial) promulgated by the SARFT in March 2017, “aggregation of internet
audio-visual programs”, meaning “editing and arranging the internet audio-visual programs on the same website and providing searching and watching
services to public users,” falls into the definition of the aforementioned “internet audio-visual programs services.” As of the date of this annual report, we
have not obtained the Audio-Visual License for our business, and are not qualified to apply for the Audio-Visual License according to currently applicable
law.
According to the Administrative Regulations on Production of Broadcasting and Television Programs, which was promulgated by the SARFT
on July 19, 2004, an entity engaged in producing broadcasting and television programs shall obtain the Production and Operation of Broadcasting and
Television Programs Permit. If an entity engages in producing broadcasting and television programs without such permit, the relevant governmental
authority may order such entity to cease its operations and confiscate its relevant equipment and impose a fine. We provide and display video programs on
our apps, and therefore, are required obtain the Production and Operation of Broadcasting and Television Programs Permit. Jishang Preferred currently
holds the Production and Operation of Broadcasting and Television Programs Permit. Beijing Feiyun Huyu Technology Co., Ltd, or Beijing Feiyun, a
wholly-owned subsidiary of Yunji Preferred, is in the process of applying for the Production and Operation of Broadcasting and Television Programs
Permit.
SARFT issued the Notice on Strengthening the Management of Live Streaming Service for the Network Audio-visual Programs in September
2016, pursuant to which an internet live streaming service provider shall (i) equip personnel to review the content of the live-stream; (ii) establish the
technical methods and work mechanisms in order to emergently replace the unlawful content by using backup program; (iii) record the live streaming
program and keep records for at least 60 days to fulfil the inspections requirements from the competent administrative authorities. The State Internet
Information Office promulgated the Administrative Provisions on Internet Live Streaming Services in November 2016, pursuant to which an internet live
streaming service provider shall (i) establish a live streaming content review platform; (ii) conduct authentication registration of internet live streaming
issuers based on their identity certificates, business licenses and organization code certificates, etc.; and (iii) enter into a service agreement with internet live
streaming services user to specify both parties’ rights and obligations.
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According to the Notice of Filing by Entities Engaged in Live Streaming Services which was issued by Cyberspace Administration on
July 12, 2017, an entity that operates as a transmission platform for live streaming activities shall complete record-filing procedures with local branch of
Cyberspace Administration. Currently, no specific regulation has been promulgated with respect to the consequence of breach of such requirements.
According to the Circular on Tightening the Administration of Online Live Services which was issued jointly by National Working Group of Attacking
Pornography and Illegal Publications, MIIT, Ministry of Public Security, Ministry of Culture and Tourism, SARFT and Cyberspace Administration on
August 1, 2018, online live streaming service providers shall fulfill the website ICP filing formalities with competent authority according to applicable laws,
and shall fulfill the public security filing formalities with the local public security organs within 30 days of their live services being launched. Jishang
Preferred and Beijing Feiyun are in the process of completing their respective record-filing procedures with the competent authorities.
Regulations on Commercial Factoring
The commercial factoring is a relatively new business in China, the MOFCOM issued the circulars to promote commercial factoring in
specific regions. Pursuant to the Circular on the Pilot Work of Commercial Factoring, which was promulgated by the MOFCOM on June 27, 2012, a trial
implementation of commercial factoring pilot work was permitted in Tianjin Binhai New Area and Shanghai Pudong New Area to explore the approaches to
develop the commercial factoring. Certain specific requirements for establishment of commercial factoring companies in Tianjin Binhai New Area and
Shanghai Pudong New Area were provided under the Reply Letter on Pilot Plan of Commercial Factoring issued by the MOFCOM on October 9, 2012. In
December 2012, the said trial implementation of commercial factoring pilot work was extended to Guangzhou and Shenzhen under the Notice on Trial
Establishment of Commercial Factoring Companies in Shenzhen and Guangzhou by Service Providers from Hong Kong and Macau, which allowed
qualified investors from Hong Kong and Macau to establish commercial factoring companies in the said cities. The MOFCOM issued the Notice on
Industrial Administration of Commercial Factoring on August 15, 2013, which imposes reporting requirements on commercial factoring companies
established in the trial zones. Pursuant to the Reply of the Ministry of Commerce on Launching Pilot Commercial Factoring Business in the Chongqing
Liangjiang New Area, the Sunan Modernization Development Demonstration Zone and the Suzhou Industrial Park, released by the MOFCOM on
August 26, 2013, and amended on October 28, 2015, the trial implementation of commercial factoring was extended to Chongqing Liangjiang New Area,
Sunan Modernization Development Demonstration Zone, and the Suzhou Industrial Park.
Regulations Relating to Financing Lease
On September 18, 2013, MOFCOM issued the Administration Measures of Supervision on Financing Lease Enterprises, or the Leasing
Measures, to regulate and administer the business operations of financing lease enterprises. According to the Leasing Measures, financing lease enterprises
are allowed to carry out financing lease business in such forms as direct lease, sublease, sale-and-lease-back, leveraged lease, entrusted lease and joint lease
in accordance with the provisions of relevant laws, regulations and rules. However, the Leasing Measures prohibit financing lease enterprises from engaging
in financial business such as accepting deposits, providing loans or entrusted loans. Without the approval from relevant authorities, financing lease
enterprises shall not engage in inter-bank borrowing and other businesses. In addition, financing lease enterprises are prohibited from carrying out illegal
fund-raising activities in the name of financing lease. The Leasing Measures require financing lease enterprises to establish and improve their financial and
internal risk control systems, and a financing lease enterprise’s risk assets shall not exceed ten times of its total net assets. Risk assets generally refer to the
adjusted total assets of a financing lease enterprise excluding cash, bank deposits, sovereign bonds and entrusted leasing assets.
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Regulations Relating to OEM Production and Labeling of Domestic Cosmetic Products
Pursuant to the Regulations Concerning the Hygiene Supervision over Cosmetics Products, the Hygiene Regulations, which was promulgated
by the former Ministry of Health and became effective in 1990, and its implementation rules, the Implementation of Hygiene Regulations, which was
promulgated by the former Ministry of Health and became effective in 1991 and amended in 2005, cosmetic products are divided into “special purpose
cosmetic products” and “non-special purpose cosmetic products”. “Special purpose cosmetic products” refer to those cosmetics used for hair growth,
hair-dye, hair perm, hair removal, breast massage, deodorant, fading cream and sun protection. Any cosmetic product not covered by such scope is a
non-special purpose cosmetic product.
Pursuant to the Implementation of Hygiene Regulations and other applicable laws, a producer of cosmetic products shall obtain and maintain
the Cosmetic Production Enterprise Hygiene License issued by the local branch of the CFDA. In addition, a producer shall obtain the Special Cosmetics
Approval Certificate issued by the local branch of the CFDA for production of domestic special purpose cosmetics products. In cases where producers
cooperate with OEMs to manufacture such products, the OEM, instead of the producer, shall obtain and maintain the above-mentioned certificates. Pursuant
to the Implementation of Hygiene Regulations and the Measures for the Administration of Record-Filing of Domestic Non-Special Purpose Cosmetic
Products, which was promulgated by the CFDA and become effective in 2011, a producer shall complete the Non-Special Purpose Cosmetics Filing with
the local branch of the CFDA for production of domestic non-special purpose cosmetics products. In cases where producers cooperate with OEMs to
manufacture such products, such producer shall apply for such record-filing with province-level branch of CFDA where such OEM is located. If any
information of such record-filing changes, the producer shall renew the record-filing accordingly.
The Administrative Provisions on the Labeling of Cosmetics, which was promulgated in August 2007 by the General Administration of
Quality Supervision, Inspection and Quarantine and became effective in September 2008, requires labels of cosmetic products to contain information such
as name and address of the producers, date of production, expiry date, batch number, applicable industrial standards, quality inspection certificates, and
production license number. No claim or implication that a cosmetic product has medical or therapeutic effects is permitted to be included in the labels of
such cosmetic product.
Regulations Relating to E-Commerce
In January 2014, the former State of Administration of Industry and Commerce (which has been merged into SAMR) adopted the
Administrative Measures for Online Trading, or the Online Trading Measures, which took effect in March 2014. Under the Online Trading Measures,
e-commerce platform operators are required to examine, register and archive the identity information of the merchants applying for access to their platforms
as sellers, and verify and update such information regularly. The Online Trading Measures also provide that e-commerce platform operators must make
publicly available (i) the link to or the information contained in the business licenses of the merchants, in the case of business entities, or (ii) a label
confirming the verified identity of the merchants, in the case of individuals. A consumer is entitled to return the commodities within seven days after receipt
of the commodities without giving a reason, except for the following commodities: customized commodities, fresh and perishable commodities, audio-
visual products downloaded online or unpackaged by consumers and computer software and other digital commodities, and newspapers and journals that
have been delivered. E-commerce platform operators must, within seven days upon receipt of the returned commodities, provide full refunds to consumers.
In addition, operators are prohibited from setting forth provisions in contracts or other terms that are not fair or reasonable to consumers such as those
excluding or restraining consumers’ rights, relieving or exempting operators’ responsibilities, and increasing the consumers’ responsibilities, or conducting
transactions in a forcible manner taking advantage of contractual terms or technical means.
In March 2016, the State Administration of Taxation, or the SAT, the Ministry of Finance, or the MOF, and the General Administration of
Customs jointly issued the Circular on Tax Policy for Cross-Border E-Commerce Retail Imports, which took effect in April 2016. Pursuant to this circular,
goods imported through the cross-border e-commerce retail are subject to tariff, import value-added tax, and consumption tax based on the types of goods.
Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers, and e-commerce companies, companies operating
e-commerce transaction platforms or logistic companies are required to withhold the taxes.
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On August 31, 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 sets forth a series of requirements on e-commerce platform operators. According to the E-Commerce Law,
e-commerce platform operators shall verify and register platform merchants, and cooperate with the market regulatory administrative department and tax
administrative department to conduct industry and commerce registrations and tax registrations for merchants. The e-commerce platform operators shall
also prepare a contingency plan for cybersecurity events and take technological measures and other measures to prevent online illegal and criminal
activities. The E-Commerce Law also expressly requires platform operators to take necessary actions to ensure fair dealing on their platforms to safeguard
the legitimate rights and interests of consumers, including to prepare platform service agreements and transaction information record-keeping and
transaction rules, to prominently display such documents on the platform’s website, and to keep such information for no less than three years following the
completion of a transaction. To legally handle intellectual property infringement disputes, upon receipt of the notice specifying preliminary evidence for
alleged infringement, the platform operators are required to take necessary measures in a timely manner, such as deleting, blocking and disconnecting the
hyperlinks, terminating transactions and services, and to forward notices to merchants on its platform. If an e-commerce platform operator fails to take
necessary measures when it knows or should have known that a merchant on the platform infringes any third-party intellectual property rights, products or
services provided by a merchant on its platform do not meet the requirements regarding personal or property safety, or any merchant otherwise impairs the
lawful rights and interests of consumers, the e-commerce platform operator will be held jointly liable with the merchants on its platform.
Moreover, the E-Commerce Law imposes a requirement on operators of e-commerce platforms to assist in tax collection with respect to
income generated by sellers from transactions conducted on e-commerce platforms, including among others, submitting to the tax authority information on
the identities of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement may result in
operators of e-commerce platform being subject to fines and, in severe circumstances, suspension of business operations of e-commerce platforms. If the
members on our platform were deemed to be selling our products on consignment basis, the PRC tax authorities may require our members to make tax
registration and request our assistance in these efforts, pursuant to the E-Commerce Law and our members may be subject to more stringent tax compliance
requirements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Failure to comply with the relatively new
E-Commerce Law may have a material adverse impact on our business, financial conditions and results of operations.” According to the EIT Law, the VAT
Law and other applicable regulations, sellers that conduct transactions on e-commerce platforms are generally subject to enterprise income tax at a rate of
25%, and value-added tax at a rate of 13% or 9% for services or products sold on the e-commerce platforms. Certain sellers that are deemed as small
taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%.
Regulations Relating to Pyramid Selling in the PRC
The Regulations on Prohibition of Pyramid Selling, that were promulgated by the State Council in August 2005 and became effective in
November 2005, prohibit pyramid selling activities. According to the Regulations on Prohibition of Pyramid Selling, the following activities taken by
organizers or operators are considered as “pyramid selling”: (i) taking in new members and compensating each member by giving material awards or other
financial benefits, based upon the number of new members directly or indirectly introduced by such member on a rolling basis, so as to gain illegal benefits;
or (ii) requesting a sum of money as entry fee or as a condition to membership for new members, either directly or through purchasing commodities, so as to
gain illegal benefits; or (iii) requesting members to introduce additional members to establish a multi-level relationship and compensating each member
based on the level of sales generated by the additional members introduced by such member, so as to gain illegal benefits. The PRC laws and regulations
have not defined “illegal benefit” and the determination of gaining “illegal benefit” is to a large extent subject to discretionary view of the competent
authorities in the PRC. Any individual or entity engaging in organization of pyramid selling may be subject to confiscation of illegal gains and fines ranging
from RMB0.5 million to RMB2.0 million (US$0.3 million), and even criminal liabilities if a crime is constituted. On March 23, 2016, the former State of
Administration of Industry and Commerce (which has been merged into SAMR) promulgated the Risk Warning for New Types of Pyramid Selling, which
provides that if an activity satisfies the three features stated above at the same time, it will be identified as pyramid selling, regardless of whether any illegal
benefit is obtained.
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In May 2017, we received a formal notice from the local Administration for Market Regulation in Hangzhou, which ruled that our sales and
marketing practice adopted in our early stage of development prior to February 2016 violated the Regulations on the Prohibition of Pyramid Selling and
imposed a penalty of approximately RMB9.6 million (US$1.4 million). We fully paid this fine in June 2017 and have adjusted our business practices since
February 2016 to comply with the Regulations on the Prohibition of Pyramid Selling and other applicable regulations. We have adjusted our practices
specifically as follows: (i) to avoid being deemed as requesting a sum of money as entry fee through purchasing commodities, we have adjusted our
membership package, which individuals are required purchase to become a member of our platform, to include a set of selected products or services and
access to the Yunji app containing membership benefits and features; (ii) to avoid being deemed as giving material awards or other financial benefits to
existing members for new member referrals, we have adjusted the rewards that we grant to our members upon a successful new member referral to
Yun-coins, which are not redeemable for cash and can only be used as coupons for future purchases on our platform; and (iii) to avoid establishing multi-
level relationship of members, we grant members incentives only for products sold directly via the links that such member shares through his/her social
network, and not for products sold via links shared by any other member that was originally invited by such member. In addition, since we have provided
products of value and services to our members as consideration for purchasing our membership package, and the products on our platform are offered at
market prices, we believe our current business practices do not constitute as gaining “illegal benefits.” In December 2018, we and Han Kun Law Offices,
our PRC legal counsel, consulted with the competent government authority in Hangzhou on our current business model and operations, and the district
branch of SAMR having direct jurisdiction over our PRC entities that currently operate our membership-based social e-commerce platform verbally
confirmed that these entities have conducted their business operations lawfully and none of these entities is in violation of the Regulations on the Prohibition
of Pyramid Selling or any other applicable laws. Based on our discussion with the competent government authorities and the advice of Han Kun Law
Offices, we believe that our current business model is not in violation of applicable PRC laws and regulations, including the Regulations on the Prohibition
of Pyramid Selling. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—If our business model were found to be
in violation of applicable laws and regulations, our business financial condition and results of operations would be materially and adversely affected.”
Regulations Relating to Internet Information Security and Privacy Protection
Internet information in China is regulated from a national security standpoint. The National People’s Congress, or the NPC, has enacted the
Decisions on Preserving Internet Security in December 2000 and amended in August 2009, which subject violators to potential criminal punishment in
China for any attempt to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information;
(iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security of the PRC, or
the MPS, has promulgated the Administrative Measures for the Computer Information Network and Internet Security Protection in December 1998 and
amended in January 2011, which prohibits use of the internet in ways which, among other things, result in a leak of state secrets or a spread of socially
destabilizing content. If an internet information service provider violates these measures, the MPS and its local branches may issue warning, confiscate the
illegal gains, impose fines, and, in severe cases, advice competent authority to revoke its operating license or shut down its websites.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in December 2011 and
implemented in March 2012, an internet information service provider may not collect any user personal information or provide any such information to third
parties without the consent of the user. An internet information service provider must expressly inform the users of the method, content and purpose of the
collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An internet
information service provider is also required to properly maintain the user’s personal information, and in case of any leak or likely leak of the user’s
personal information, the internet information service provider must take immediate remedial measures and, in severe circumstances, immediately report to
the telecommunications authority. Moreover, pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC in August 2015 and
implemented in November 2015, any internet service provider that fails to fulfill the obligations related to internet information security administration as
required by applicable laws and refuses to rectify upon orders, shall be subject to criminal penalty for the result of (i) any dissemination of illegal
information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe
situation. Any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or (ii) steals or illegally
obtains any personal information, shall be subject to criminal penalty in severe situation. In addition, the Interpretations of the Supreme People’s Court and
the Supreme People’s Procuratorate of the PRC on Several Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal
Information, issued in May 2017 and implemented in June 2017, clarified certain standards for the conviction and sentencing of the criminals in relation to
personal information infringement.
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In November 2016, the SCNPC, promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on
June 1, 2017. The Cyber Security Law requires that a network operator, which includes, among others, internet information services providers, take
technical measures and other necessary measures in accordance with applicable laws and regulations and the compulsory requirements of the national and
industrial standards to safeguard the safe and stable operation of its networks. We are subject to such requirements as we are operating website and mobile
applications and providing certain internet services mainly through our mobile applications. The Cyber Security Law further requires internet information
service providers to formulate contingency plans for network security incidents, report to the competent departments immediately upon the occurrence of
any incident endangering cyber security and take corresponding remedial measures.
Internet information service providers are also required to maintain the integrity, confidentiality and availability of network data. The Cyber
Security Law reaffirms the basic principles and requirements specified in other existing laws and regulations on personal data protection, such as the
requirements on the collection, use, processing, storage and disclosure of personal data, and internet information service providers being required to take
technical and other necessary measures to ensure the security of the personal information they have collected and prevent the personal information from
being divulged, damaged or lost. Any violation of the Cyber Security Law may subject the internet information service provider to warnings, fines,
confiscation of illegal gains, revocation of licenses, cancellation of filings, shutdown of websites or criminal liabilities.
Furthermore, MIIT’s Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated in July 2013,
effective September 2013, contain detailed requirements on the use and collection of personal information as well as security measures required to be taken
by telecommunications business operators and internet information service providers.
On January 23, 2019, the Office of the Central Cyberspace Affairs Commission and other three authorities jointly issued the Circular on the
Special Campaign of Correcting Unlawful Collection and Usage of Personal Information via Apps. Pursuant to this 2019 circular, (i) app operators are
prohibited from collecting any personal information irrelevant to the services provided by such operator; (ii) information collection and usage policy should
be presented in a simple and clear way, and such policy should be consented by the users voluntarily; (iii) authorization from users should not be obtained
by coercing users with default or bundling clauses or making consent a condition of a service. App operators violating such rules can be ordered by
authorities to correct its incompliance within a given period of time, be reported in public; or even quit its operation or cancel its business license or
operational permits. Furthermore, on November 28, 2019, the SAMR, the Office of the Central Cyberspace Affairs Commission, the MIIT and the Ministry
of Public Security jointly issued the Measures for the Determination of the Collection and Use of Personal Information by Apps in Violation of Laws and
Regulations, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps,
and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. The Provisions on the
Cyber Protection of Children’s Personal Information issued by the Office of the Central Cyberspace Affairs Commission came into effect on October 1,
2019, which requires, among others, that network operators who collect, store, use, transfer and disclose personal information of children under the age of
14 shall establish special rules and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and
clear manner, and shall obtain the consent of the children’s guardians. Furthermore, the authorities issuing the circular has pledged to initiate a campaign to
correct unlawful collection and usage of personal information via apps from January 2019 through December 2019.
Regulations Relating to Product Quality and Consumer Protection
The PRC Product Quality Law, or the Product Quality Law, which was promulgated by the MOFCOM in February 1993 and most recently
amended in December 2018, applies to all production and sale activities in China. Pursuant to the Product Quality Law, products offered for sale must
satisfy the relevant quality and safety standards. Enterprises may not produce or sell counterfeit products in any fashion, including forging brand labels or
giving false information regarding a product’s manufacturer. Violations of state or industrial standards for health and safety and any other related violations
may result in civil liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as
confiscation of products illegally produced and sold and the proceeds from such sales. Severe violations may subject the responsible individual or enterprise
to criminal liabilities. Where a defective product causes physical injury to a person or damage to another person’s property, the victim may claim
compensation from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear the
liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that should bear the
liability, the manufacturer has a right of recourse against the seller.
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The PRC Consumer Rights and Interests Protection Law, or the Consumer Protection Law, as amended in October 2013 and implemented in
March 2014 sets out the obligations of business operators and the rights and interests of the consumers. Pursuant to the Consumer Protection Law, business
operators must guarantee that the sold commodities satisfy the requirements for personal or property safety, provide consumers with authentic information
about the commodities, and guarantee the quality, function, usage and term of validity of the commodities, failure of which may subject business operators
to civil liabilities such as refunding purchase prices, exchange of commodities, repairing, ceasing damages, compensation, and restoring reputation, and
even subject the business operators or the responsible individuals to criminal penalties if business operators commit crimes by infringing the legitimate
rights and interests of consumers. The Consumer Protection Law further strengthens the protection of consumers and imposes more stringent requirements
and obligations on business operators, especially on the business operators through the internet. For example, the consumers are entitled to return the goods
(except for certain specific goods) within seven days upon receipt without any reasons when they purchase the goods from business operators via the
internet. The consumers whose interests are harmed due to their purchase of goods or acceptance of services on online marketplace platforms may claim
damages from the sellers or service providers.
Furthermore, the Consumer Protection Law and the Online Trading Measures, have provided stringent requirements and obligations on
business operators, including internet business operators and platform service providers. For example, consumers are entitled to return goods purchased
online, subject to certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that sellers and service providers comply with
such regulations, the platform operators are required to implement rules governing transactions on the platform, monitor the information posted by sellers
and service providers, and report any violations by such sellers or service providers to the competent authorities. In addition, online platform providers may,
pursuant to the relevant PRC consumer protection laws, be exposed to liabilities if rights and interests of any consumer are infringed upon in connection
with consumers’ purchase of goods or acceptance of services on such online platforms and the online marketplace platform providers fail to provide
consumers with the contact information of the seller or manufacturer. In addition, online marketplace platform providers may be jointly and severally liable
with sellers and manufacturers of relevant goods or services if they are aware or should be aware that such sellers or manufacturers are using the online
platform to infringe the rights and interests of any consumers and fail to take measures necessary to prevent or stop such activities.
The PRC Tort Liability Law, which was enacted by the SCNPC in December 2009 and took effect in July 2010, also provides that if an online
service provider is aware that an online user is committing infringing activities, such as selling counterfeit products, through its internet services and fails to
take necessary measures, it shall be jointly liable with the said online user for such infringement. If the online service provider receives any notice from the
infringed party on any infringing activities, the online service provider shall take necessary measures, including deleting, blocking and unlinking the
infringing content, in a timely manner. Otherwise, it will be held jointly liable with the relevant online user for the extended damages. We are subject to
such requirements and liabilities as we are operating website and mobile applications and providing online platforms to our consumers for consumption and
communications.
Regulations Relating to Payment Services
In June 2010, the PBOC issued the Administrative Measures for the Payment Services of Non-Financial Institutions. Under this rule, a
non-financial institution must obtain a payment business license, or Payment License, to provide payment services and qualifies as a paying institution. With
the Payment License, a non-financial institution may serve as an intermediary between payees and payers and provide some or all of the following services:
online payment, issuance and acceptance of prepaid card, bank card acceptance, and other payment services as specified by the PBOC. Without PBOC’s
approval, no non-financial institution or individual may engage in payment business whether explicitly or in a disguised form.
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In November 2017, the PBOC published a notice, or the PBOC Notice, on the investigation and administration of illegal offering of settlement
services by financial institutions and third-party payment service providers to unlicensed entities. The PBOC Notice intended to prevent unlicensed entities
from using licensed payment service providers as a conduit for conducting the unlicensed payment settlement services, so as to safeguard the fund security
and information security. We believe that our cooperation with third-party online payment service providers is not in violation of the PBOC Notice, because
we sell the products on our platform to users and receive payment from users through the third-party online payment service providers. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business and Industry—We rely on third-party online payment service providers for payment
processing and escrow services on our platform. If these payment services are restricted or curtailed in any way or become unavailable to us or our users for
any reason, our business may be materially and adversely affected.”
Regulations Relating to Intellectual Property in the PRC
Trademark
The PRC Trademark Law and its implementation rules protect registered trademarks. The Trademark Office of National Intellectual Property
Administration under the SAMR is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a
“first-to-file” principle with respect to trademark registration. Registered trademarks are granted a valid term of ten years, which could be renewed each
time for another ten years commencing from the day after the expiry date of the last period of validity if the required renewal formalities have been
completed. Pursuant to the PRC Trademark Law, counterfeit or unauthorized production of the label of another person’s registered trademark, or sale of any
label that is counterfeited or produced without authorization will be deemed as an infringement to the exclusive right to use a registered trademark. The
infringing party will be ordered to stop the infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing
party may also be held liable for the right holder’s damages, which will be equal to the gains obtained by the infringing party or the losses suffered by the
right holder as a result of the infringement, including reasonable expenses incurred by the right holder for stopping the infringement.
Domain Name
The MIIT promulgated the Measures on Administration of Internet Domain Names, or the Domain Name Measures, on August 24, 2017,
which took effect on November 1, 2017. The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names, under
supervision of which the China Internet Network Information Center, or CNNIC, is responsible for the daily administration of “.cn” domain names and
Chinese domain names. CNNIC adopts a “first-to-file” principle with respect to the registration of domain names. Applicants for registration of domain
names must provide the true, accurate and complete information of their identities to domain name registration service institutions. The applicants will
become the holder of such domain names upon the completion of the registration procedure.
Copyright
The PRC Copyright Law, or the Copyright Law, which took effect on June 1, 1991 and was amended in 2001 and in 2010, provides that
Chinese citizens, legal persons, or other organizations shall, whether published or not, own copyright in their copyrightable works, which include, among
others, works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy certain legal rights,
including right of publication, right of authorship and right of reproduction. The Copyright Law extends copyright protection to Internet activities, products
disseminated over the Internet and software products. In addition, the Copyright Law provides for a voluntary registration system administered by the China
Copyright Protection Center, or the CPCC. According to the Copyright Law, an infringer of the copyrights shall be subject to various civil liabilities, which
include ceasing infringement activities, apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also
subject to fines and/or administrative or criminal liabilities in severe situations.
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Pursuant to the Computer Software Copyright Protection Regulations promulgated by the State Council on December 20, 2001 and amended
on January 30, 2013, Chinese citizens, legal persons and other organizations shall enjoy copyright on software they develop, regardless of whether the
software is released publicly. Software copyright commences from the date on which the development of the software is completed. The protection period
for software copyright of a legal person or other organizations shall be 50 years, concluding on December 31 of the 50th year after the software’s initial
release. The software copyright owner may go through the registration formalities with a software registration authority recognized by the State Council’s
copyright administrative department. The software copyright owner may authorize others to exercise that copyright, and is entitled to receive remuneration.
Patent
According to the PRC Patent Law (revised in 2008), the State Intellectual Property Office is responsible for administering patent law in the
PRC. The patent administration departments of provincial, autonomous region or municipal governments are responsible for administering patent law within
their respective jurisdictions. The Chinese patent system adopts a first-to-file principle, which means that when more than one person files different patent
applications for the same invention, only the person who files the application first is entitled to obtain a patent of the invention. Patents in China fall into
three categories: invention, utility model and design. To be patentable, an invention or a utility model must meet three criteria: novelty, inventiveness and
practicability. A patent is valid for twenty years in the case of an invention and ten years in the case of utility models and designs.
Regulations Relating to Labor Protection in the PRC
Labor Contract Law
The PRC Labor Contract Law, or the Labor Contract Law, which became effective on January 1, 2008 and was amended on December 28,
2012, is primarily aimed at regulating rights and obligations of employer and employee relationships, including the establishment, performance and
termination of labor contracts. Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or have been
established between employers and the employees. Employers are prohibited from forcing employees to work above certain time limit and employers shall
pay employees for overtime work in accordance to national regulations. In addition, employee wages shall be no lower than local standards on minimum
wages and must be paid to employees in a timely manner.
Interim Provisions on Labor Dispatch
Pursuant to the Interim Provisions on Labor Dispatch, or the Labor Dispatch Provisions, promulgated by the Ministry of Human Resources
and Social Security on January 24, 2014, which became effective on March 1, 2014, dispatched workers are entitled to equal pay with full-time employees
for equal work. Employers are allowed to use dispatched workers for temporary, auxiliary or substitutive positions, and the number of dispatched workers
may not exceed 10% of the total number of employees.
Social Insurance and Housing Fund
As required under the Regulation of Insurance for Labor Injury implemented on January 1, 2004 and amended in 2010, the Provisional
Measures for Maternity Insurance of Employees of Corporations implemented on January 1, 1995, the Decisions of the State Council on the Establishment
of a Unified Program for Old-Aged Pension Insurance issued on July 16, 1997, the Decisions of the State Council on the Establishment of the Medical
Insurance Program for Urban Workers promulgated on December 14, 1998, the Unemployment Insurance Measures promulgated on January 22, 1999 and
the Social Insurance Law of the PRC implemented on July 1, 2011, employers are required to provide their employees in the PRC with welfare benefits
covering pension insurance, unemployment insurance, maternity insurance, labor injury insurance and medical insurance. These payments are made to local
administrative authorities. Any employer that fails to make social insurance contributions may be order to rectify the non-compliance and pay the required
contributions within a prescribed time limit and be subject to a late fee. If the employer still fails to rectify the failure to make the relevant contributions
within the prescribed time, it may be subject to a fine ranging from one to three times the amount overdue. In accordance with the Regulations on the
Management of Housing Fund which was promulgated by the State Council in 1999 and amended in 2002, employers must register at the designated
administrative centers and open bank accounts for depositing employees’ housing funds. Employer and employee are also required to pay and deposit
housing funds, with an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time.
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Employee Stock Incentive Plan
Pursuant to the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive
Plan of Overseas Listed Company, or Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior
management who participate in any stock incentive plan of an publicly-listed overseas company and who are PRC citizens or non-PRC citizens residing in
China for a continuous period of no less than one year, subject to a few exceptions, are required to register with SAFE through a qualified domestic agent,
which may be a PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, the SAT has issued certain circulars
concerning employee stock options and restricted shares. Under these circulars, employees working in the PRC who exercise stock options or are granted
restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company are required to file documents related to
employee stock options and restricted shares with relevant tax authorities and to withhold individual income taxes of employees who exercise their stock
option or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to withhold income tax in accordance with relevant laws and
regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations Relating to Tax in the PRC
Income Tax
The PRC Enterprise Income Tax Law, or the EIT Law, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises,
including foreign-invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the PRC resident
enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise sets up an organization or establishment
in the PRC, it will be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived
from outside the PRC but with an actual connection with such organization or establishment in the PRC. The EIT Law and its implementation rules permit
certain “high and new technology enterprises strongly supported by the state” that independently own core intellectual property and meet statutory criteria,
to enjoy a reduced 15% enterprise income tax rate. In January 2016, the SAT, the Ministry of Science and Technology and the MOF jointly issued the
Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures for the certification of High and
New Technology Enterprises.
On April 22, 2009, the SAT issued the Circular of the State Administration of Taxation on Issues Relating to Identification of PRC-Controlled
Overseas Registered Enterprises as Resident Enterprises in Accordance With the De Facto Standards of Organizational Management, or the 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” text should be applied in determining the tax resident status of all offshore enterprises. According to the 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 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. Further to SAT Circular 82, on July 27, 2011, the SAT issued the Announcement of the State Administration of Taxation on Printing and
Distributing the Administrative Measures for Income Tax on PRC-controlled Resident Enterprises Incorporated Overseas (Trial Implementation), or the
SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for
procedures and administration details of determination on resident status and administration on post-determination matters.
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Value-added Tax
The Provisional Regulations of the PRC on Value-added Tax, the VAT Regulation, were promulgated by the State Council on December 13,
1993 and came into effect on January 1, 1994 which were subsequently amended from time to time. The Detailed Rules for the Implementation of the
Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) was promulgated by the MOF on December 25, 1993 and subsequently amended
on December 15, 2008 and October 28, 2011, or collectively, the VAT Law. On November 19, 2017, the State Council promulgated the Decisions on
Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the Provisional Regulations of the PRC on Value-added Tax, or the
Order 691. On April 4, 2018, MOF and SAT jointly promulgated the Circular on Adjustment of Value-Added Tax Rates, or Circular 32. On March 31,
2019, the MOF, SAT and General Administration of Customs jointly issued the Announcement on Relevant Polices for Deepening Value-added Tax
Reform, or Announcement No. 39. According to the VAT Law, the Order 691 and the Circular 32, all enterprises and individuals engaged in the sale of
goods, the provision of processing, repair and replacement services, sales of services, intangible assets, real property and the importation of goods within the
territory of the PRC are the taxpayers of VAT. According to Announcement No. 39, the VAT tax rates generally applicable are simplified as 13%, 9%, 6%
and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%.
Dividend Withholding Tax
The EIT Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends derived from sources
within the PRC and declared to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have an
establishment or place of business that is not effectively connected with the relevant income.
Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement, and other applicable PRC
laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under
such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on dividends the Hong Kong resident enterprise receives
from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend
Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their
discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax
authorities may adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in Tax Treaties,
which was issued on February 3, 2018 by the SAT and took effect on April 1, 2018, when determining the applicant’s status as the “beneficial owner”
regarding tax treatments in connection with dividends, interest or royalties in the tax treaties, several factors, including without limitation, whether the
applicant is obligated to pay more than 50% of his or her income over a twelve-month period to residents in a third country or region, whether the business
operated by the applicant constitutes actual business activities, and whether the counterparty country or region to the tax treaty does not levy any tax,
exempts the relevant income from tax, or levies tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual
circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her “beneficial owner” status shall submit the
relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’
Enjoyment of the Treatment under Tax Agreements.
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On February 3, 2015, the SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties
by Non-Tax Resident Enterprises, or the SAT Public Notice 7. The SAT Public Notice 7 extends its tax jurisdiction to cover not only the indirect transfer by
a non-resident enterprise of equity interests in a PRC resident enterprise through disposition of equity interests in an overseas holding company, or an
Indirect Transfer, but also to transactions involving the transfer of other taxable assets through the offshore transfer of a foreign intermediate holding
company. The 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 taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company,
which is an Indirect Transfer, the non-resident enterprise as either transferor or 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.
On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident
Enterprises, or the SAT Public Notice 37, which came into effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident
enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required time limits,
and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax authority. If the non-resident enterprise
voluntarily declares and pays its tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid its tax payable in
time.
Regulations relating to Foreign Exchange
General Administration of Foreign Exchange
Under the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and most recently amended on August 5, 2008 and
various regulations issued by the State Administration of Foreign Exchange of the PRC, or the SAFE and other relevant PRC government authorities,
Renminbi is convertible into other currencies for current account items, such as trade-related receipts and payments and payment of interest and dividends.
The conversion of Renminbi into other currencies and remittance of the converted foreign currency outside the PRC for of capital account items, such as
direct equity investments, loans and repatriation of investment, requires the prior approval from the SAFE or its local office.
Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies may not
repatriate foreign currency payments received from abroad or retain the same abroad. Foreign-invested enterprises may retain foreign exchange in accounts
with designated foreign exchange banks under the current account items subject to a cap set by the SAFE or its local office. Foreign exchange proceeds
under the current accounts may be either retained or sold to a financial institution engaged in settlement and sale of foreign exchange pursuant to relevant
SAFE rules and regulations. For foreign exchange proceeds under the capital accounts, approval from the SAFE is generally required for the retention or
sale of such proceeds to a financial institution engaged in settlement and sale of foreign exchange.
Pursuant to the Circular of the SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, or
the SAFE Circular 59, promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012 and was further amended on May 4,
2015, approval of SAFE is not required for opening a foreign exchange account and depositing foreign exchange into the accounts relating to the direct
investments. The SAFE Circular 59 also simplified foreign exchange-related registration required for the foreign investors to acquire the equity interests of
Chinese companies and further improve the administration on foreign exchange settlement for foreign-invested enterprises.
The Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or the SAFE Circular 13,
effective from June 1, 2015, cancels the administrative approvals of foreign exchange registration of direct domestic investment and direct overseas
investment and simplifies the procedure of foreign exchange-related registration. Pursuant to the SAFE Circular 13, the investors shall register with banks
for direct domestic investment and direct overseas investment.
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The Circular on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or the
SAFE Circular 19, which was promulgated by the SAFE on March 30, 2015 and became effective on June 1, 2015, provides that a foreign-invested
enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the
relevant foreign exchange administration has confirmed monetary capital contribution rights and interests (or for which the bank has registered the injection
of the monetary capital contribution into the account). Pursuant to the SAFE Circular 19, for the time being, foreign-invested enterprises are allowed to
settle 100% of their foreign exchange capital on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own operational
purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign
exchanges settled, the invested enterprise must first go through domestic re-investment registration and open a corresponding account for foreign exchange
settlement pending payment with the foreign exchange administration or the bank at the place where it is registered.
The Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or the SAFE
Circular 16, which was promulgated by the SAFE and became effective on June 9, 2016, provides that enterprises registered in the PRC may also convert
their foreign debts from foreign currency into Renminbi on self-discretionary basis. The SAFE Circular 16 also provides an integrated standard for
conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary
basis, which applies to all enterprises registered in the PRC.
According to the FIE Record-filing Interim Measures, the Administrative Rules on the Company Registration, which was promulgated by the
State Council on June 24, 1994, became effective on July 1, 1994 and latest amended on February 6, 2016, and other laws and regulations governing the
foreign invested enterprises and company registrations, the establishment of a foreign invested enterprise and any capital increase and other major changes
in a foreign invested enterprise shall be registered with the State Administration for Market Regulation, or the SAMR, or its local counterparts, and shall be
filed via the foreign investment comprehensive administrative system, or the FICMIS, if such foreign invested enterprise does not involve special access
administrative measures prescribed by the PRC government.
Pursuant to the SAFE Circular 13 and other laws and regulations relating to foreign exchange, when setting up a new foreign invested
enterprise, the foreign invested enterprise shall register with the bank located at its registered place after obtaining the business license, and if there is any
change in capital or other changes relating to the basic information of the foreign-invested enterprise, including without limitation any increase in its
registered capital or total investment, the foreign invested enterprise must register such changes with the bank located at its registered place after obtaining
approval from or completing the filing with competent authorities. Pursuant to the relevant foreign exchange laws and regulations, the above-mentioned
foreign exchange registration with the banks will typically take less than four weeks upon the acceptance of the registration application.
Based on the forgoing, if we intend to provide funding to our wholly foreign owned subsidiaries through capital injection at or after their
establishment, we must register the establishment of and any follow-on capital increase in our wholly foreign owned subsidiaries with the SAMR or its local
counterparts, file such via the FICMIS and register such with the local banks for the foreign exchange related matters.
Offshore Investment
Under the Circular of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Administration over the
Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or the SAFE Circular 37, issued by the
SAFE and effective on July 4, 2014, PRC residents are required to register with the local SAFE branch prior to contributing assets or equity interests in an
offshore special purpose vehicle, or SPV, which is defined as offshore enterprises directly established or indirectly controlled by PRC residents for
investment and financing purposes, with the enterprise assets or interests they hold in China or overseas. The term “control” means obtain the operation
rights, right to proceeds or decision-making power of a SPV through acquisition, trust, holding shares on behalf of others, voting rights, repurchase,
convertible bonds or other means. An amendment to registration or subsequent filing with the local SAFE branch by such PRC resident is also required if
there is any change in basic information of the offshore company or any material change with respect to the capital of the offshore company. At the same
time, the SAFE has issued the Operation Guidance for the Issues Concerning Foreign Exchange Administration over Round-trip Investment regarding the
procedures for SAFE registration under the SAFE Circular 37, which became effective on July 4, 2014 as an attachment of Circular 37.
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Under the relevant rules, failure to comply with the registration procedures set forth in the SAFE Circular 37 may result in bans on the foreign
exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliates, and may
also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
Regulations on Dividend Distribution
The principal laws and regulations regulating the dividend distribution of dividends by foreign-invested enterprises in the PRC include the
PRC Company Law, as amended in 1999, 2004, 2005, 2013 and 2018, the Wholly Foreign-owned Enterprise Law promulgated in 1986 and amended in
2000 and 2016 and its implementation regulations promulgated in 1990 and subsequently amended in 2001 and 2014, the PRC Equity Joint Venture Law
promulgated in 1979 and subsequently amended in 1990, 2001 and 2016 and its implementation regulations promulgated in 1983 and subsequently
amended in 1986, 1987, 2001, 2011 and 2014, and the PRC Cooperative Joint Venture Law promulgated in 1988 and amended in 2000, 2016 and 2017 and
its implementation regulations promulgated in 1995 and amended in 2014 and 2017. Under the current regulatory regime in the PRC, foreign-invested
enterprises in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting standards and
regulations. A PRC company is required to set aside as statutory reserve funds at least 10% of its after-tax profit, until the cumulative amount of such
reserve funds reaches 50% of its registered capital unless laws regarding foreign investment provide otherwise. A PRC company shall not 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.
C.
Organizational Structure
The chart below summarizes our corporate structure, including our principal subsidiaries, our VIEs and our VIEs’ principal subsidiaries, as of
the date of this annual report:
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Notes:
(1) Daqiao Network Technology (Hangzhou) Co., Ltd., Hangzhou Yuepeng Trading Co., Ltd., and Deqing Jijie Investment Management Partnership
(Limited Partnership) each holds 65.53%, 28.09%, and 6.38% of the equity interests in Yunji Sharing, respectively. All of these entities are
shareholders or affiliates of shareholders of our company. We plan to dissolve this entity in the future as it does not engage in substantial business
activities.
(2) Mr. Shanglue Xiao and Mr. Huan Hao each holds 99.0099% and 0.9901% of the equity interests in Yunji Preferred, respectively. Mr. Shanglue Xiao
and Mr. Huan Hao are both beneficial owners and directors of our company. Mr. Shanglue Xiao also serves as the chairman of our board of directors
and the chief executive officer of our company and Mr. Huan Hao also serves as the chief technology officer of our company.
(3) Hangzhou Yunchuang Sharing Network Technology Co., Ltd. holds 10% of the equity interest in Zhejiang Jiyuan, and Chuangke Information
Technology (Shenzhen) Co., Ltd., a foreign-invested enterprise established by Yunji Holding Limited holds 90% of the equity interest in Zhejiang
Jiyuan.
The following is a summary of the currently effective contractual arrangements relating to Yunji Sharing and Yunji Preferred.
Contractual Arrangements with Our Consolidated Affiliated Entities and Their Respective Shareholders
Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added
telecommunication services and certain other businesses. We are an exempted company incorporated in the Cayman Islands. Yunchuang Sharing is our PRC
subsidiary and a foreign-invested enterprise under PRC laws. To comply with PRC laws and regulations, we conduct certain of our business in China
through Yunji Sharing and Yunji Preferred, our consolidated affiliated entities in the PRC, based on a series of contractual arrangements by and among
Yunchuang Sharing, our VIEs and their shareholders. We refer to Yunchuang Sharing as our WFOE, and Yunji Sharing and Yunji Preferred collectively as
our VIEs in this annual report.
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Our contractual arrangements with our VIEs and their respective shareholders allow us to (i) exercise effective control over our VIEs,
(ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests in our VIEs
when and to the extent permitted by PRC law.
As a result of our direct ownership in our WFOE and the contractual arrangements with our VIEs, we are regarded as the primary beneficiary
of our VIEs, and we treat them and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of
our VIEs and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
Agreements that provide us with effective control over our VIEs
Voting Trust Agreements and Powers of Attorney. Pursuant to the amended and restated voting trust agreement and powers of attorney, dated
December 14, 2018, among our WFOE, Yunji Preferred and the shareholders of Yunji Preferred, each of the shareholders of Yunji Preferred has executed a
power of attorney to irrevocably authorize our WFOE, or any person designated by our WFOE, to act as its attorney-in-fact to exercise all of its rights as a
shareholder of Yunji Preferred, including, but not limited to, the right to (i) convene and attend shareholders’ meetings, (ii) sign and deliver written
resolutions on behalf of such shareholder, (iii) vote on any resolution that requires shareholders to vote, such as the sale, transfer and disposal of all or part
of the assets owned by a shareholder, and (iv) sell, transfer, pledge or dispose all or part of a shareholder’s equity interests in Yunji Preferred. The powers of
attorney will remain effective until such shareholder ceases to be a shareholder of Yunji Preferred or otherwise instructed by our WFOE.
On December 17, 2018, our WFOE, Yunji Sharing and the shareholders of Yunji Sharing entered into an amended and restated voting trust
agreement and powers of attorney, and each of the shareholders of Yunji Sharing executed a power of attorney, which contained terms substantially similar
to the voting trust agreement and powers of attorney by and among our WFOE, Yunji Preferred and the shareholders of Yunji Preferred described above.
Equity Interest Pledge Agreements. Pursuant to the amended and restated equity interest pledge agreement, dated December 14, 2018, among
our WFOE, Yunji Preferred and the shareholders of Yunji Preferred, the shareholders of Yunji Preferred have pledged 100% equity interests in Yunji
Preferred to our WFOE to guarantee performance by the shareholders of their obligations under the exclusive option agreement, the exclusive service
agreement, the voting trust agreement and powers of attorney, as well as the performance by Yunji Preferred of its obligations under the exclusive option
agreement and the exclusive service agreement. In the event of a breach by Yunji Preferred or any of its shareholders of contractual obligations under these
contractual arrangements, our WFOE, as pledgee, will have the right to dispose of the pledged equity interests in Yunji Preferred and will have priority in
receiving the proceeds from such disposal. The shareholders of Yunji Preferred also covenant that, without the prior written consent of our WFOE, they will
not dispose of, create or allow any encumbrance on the pledged equity interests. The equity interest pledge agreement will remain effective until the pledges
are released.
On December 17, 2018, our WFOE, Yunji Sharing and the shareholders of Yunji Sharing entered into an amended and restated equity interest
pledge agreement, which contained terms substantially similar to the equity interest pledge agreement by and among our WFOE, Yunji Preferred and the
shareholders of Yunji Preferred described above.
We have completed the registration of the equity interest pledge under the amended and restated equity interest pledge agreements in relation
to each of Yunji Preferred and Yunji Sharing with the relevant office of the State Administration of Market Regulation in accordance with the PRC Property
Rights Law.
Agreements that allow us to receive economic benefits from our VIEs
Exclusive Service Agreements. Pursuant to the amended and restated exclusive service agreement, dated December 14, 2018, between our
WFOE and Yunji Preferred, our WFOE has the exclusive right to provide Yunji Preferred with operational supports as well as consulting and technical
services required by Yunji Preferred’s business. Without our WFOE’s prior written consent, Yunji Preferred may not accept the same or similar operational
supports as well as consulting and technical services provided by any third party during the term of the agreement. Yunji Preferred agrees to pay our WFOE
service fees at an amount determined by our WFOE in its sole discretion, which should be paid within ten business days upon receipt of invoice from our
WFOE. Our WFOE has the exclusive ownership of all the intellectual property rights created as a result of the performance of the exclusive service
agreement. To guarantee Yunji Preferred’s performance of its obligations thereunder, the shareholders of Yunji Preferred have pledged all of their equity
interests in Yunji Preferred to our WFOE pursuant to the equity interest pledge agreement. The exclusive service agreement has an initial term of ten years
and shall automatically renew at the end of each term for a further term of ten years, unless otherwise terminated by our WFOE in its sole discretion with 30
days’ prior written notice.
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On December 17, 2018, our WFOE and Yunji Sharing entered into an amended and restated exclusive service agreement, which contains
terms substantially similar to the exclusive service agreement between our WFOE and Yunji Preferred described above.
Agreements that provide us with the option to purchase the equity interests in and assets of our VIEs
Exclusive Option Agreements. Pursuant to the amended and restated exclusive option agreement, dated December 14, 2018, among our
WFOE, Yunji Preferred and the shareholders of Yunji Preferred, each of the shareholders has irrevocably granted our WFOE an exclusive option to
purchase all or part of its equity interests in Yunji Preferred, and Yunji Preferred has irrevocably granted our WFOE an exclusive option to purchase all or
part of its assets. Our WFOE may exercise such options at a price equal to the loan provided by our WFOE to the shareholders of Yunji Preferred, which
price may be adjusted based on the proportion of the equity interests or assets to be transferred. Yunji Preferred and the shareholders of Yunji Preferred
covenant that, without our WFOE’s prior written consent, they will not, among other things, (i) create any pledge or encumbrance on their equity interests in
Yunji Preferred, other than those created under the equity interest pledge agreement, (ii) transfer or otherwise dispose of their equity interests in Yunji
Preferred, (iii) change Yunji Preferred’s registered capital, (iv) amend Yunji Preferred’s articles of association, (v) dispose any assets of Yunji Preferred or
enter into any material contract (except in the ordinary course of business), or (vi) merge Yunji Preferred with any other entity. The exclusive option
agreement has an initial term of ten years and shall automatically renew at the end of each term for a further term of ten years, unless otherwise terminated
by our WFOE in its sole discretion with ten days’ prior written notice.
On December 17, 2018, our WFOE, Yunji Sharing and the shareholders of Yunji Sharing entered into an amended and restated exclusive
option agreement, which contained terms substantially similar to the exclusive option agreement by and among our WFOE, Yunji Preferred and the
shareholders of Yunji Preferred described above, except that our WFOE may exercise the options to purchase the equity interests and assets of Yunji
Sharing at the price of RMB1.00 or the lowest price permitted under applicable PRC law.
Loan Agreement. Pursuant to the loan agreement, dated December 14, 2018, between our WFOE and the shareholders of Yunji Preferred, our
WFOE made loans in an aggregate amount of RMB12.12 million to the shareholders of Yunji Preferred for the sole purpose of making capital contribution
to Yunji Preferred. The shareholders of Yunji Preferred can only repay the loans by the sale of all or part of their equity interests in Yunji
Preferred to our WFOE or its designated person pursuant to the amended and restated exclusive option agreement, and, to the extent permitted
under PRC law, pay all of the proceeds from sale of such equity interests to our WFOE. In the event that the shareholders of Yunji Preferred sell their equity
interests in Yunji Preferred to our WFOE or its designated person at a purchase price equal to or less than the principal amount of the loans, the loans will be
interest free and the loans shall be deemed to be duly repaid. If the purchase price is higher than the principal amount of the loans, the excess amount will be
deemed as interest on the loans and shall be paid to our WFOE. The term of the loan agreement is ten years from the date of the loan agreement, which may
be extended upon mutual agreement.
Spousal Consent Letters. The spouses of the shareholders of Yunji Preferred have each signed a spousal consent letter agreeing that the equity
interests in Yunji Preferred held by and registered under the name of the respective shareholders will be disposed pursuant to the contractual agreements
with our WFOE. Each spouse agreed not to assert any rights over the equity interest in Yunji Preferred held by the respective shareholder.
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In the opinion of Han Kun Law Offices, our PRC legal counsel:
•
•
the ownership structures of our VIEs in China and our WFOE are not in violation of applicable PRC laws and regulations currently in
effect; and
the contractual arrangements between our WFOE, our VIEs and their respective shareholders governed by PRC law are valid, binding
and enforceable, and will not result in any violation of applicable PRC laws and regulations currently in effect.
However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of
current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC
legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If we or any of our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of
the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or
failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that
establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these
regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in
those operations.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal
system and changes in laws and regulations in China could adversely affect us.”
D.
Property, Plant and Equipment
We are headquartered in Hangzhou, China and have leased an aggregate of approximately 15,170 square meters of office space in Hangzhou.
As of the date of this annual report, we have also leased an aggregate of approximately 6,941 and 5,446 square meters of office space in Hefei and
Shenzhen, China respectively.
As of December 31, 2019, warehouse facilities in our fulfillment network included 10 central warehouses, 19 regional warehouses, and 1
supermarket warehouses in China. We operate seven of these warehouse facilities and lease properties for such facility with an aggregate floor area of
approximately 53,931 square meters. We engage third-party vendors for the remaining warehouse facilities in 18 cities with an aggregate floor area of
approximately 151,060 square meters, including providing physical space for such facilities and operating the day-to-day activities of such facilities.
We will adjust our fulfillment infrastructure as needed over the next several years to accommodate our future business expansion plans,
further improve logistic efficiency and enhance customer experience.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based
upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report
on Form 20-F.
A.
Operating Results
We operate a social e-commerce platform in China using a unique, membership-based model that leverages the power of social interaction.
We offer high-quality products at attractive prices and incentivize our members to promote our platform and share our products with their social contacts.
We generate our revenues mainly by selling the products on our platform to users, including members and non-member users, and earning commissions on
the sales of products by third-party merchants on our platform under our marketplace business that launched in the first quarter of 2019.
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Our total revenues were RMB6,444.1 million, RMB13,015.2 million and RMB11,672.0 million (US$1,676.6 million) in 2017, 2018 and
2019, respectively. The decrease in total revenues in 2019 was primarily due to a decrease in revenues from sales of merchandise as we shifted a portion of
our merchandise sales business to our marketplace business whereby third-party merchants can sell products on our platform and pay us commissions on
their sales. Revenues generated under the marketplace business were recognized on a net basis, while revenues generated under our merchandise sales
business were recognized on a gross basis. We recorded net loss of RMB123.8 million (US$17.8 million), RMB56.3 million and RMB105.7 million in
2019, 2018 and 2017, respectively.
Key Factors Affecting Our Results of Operations
Our results of operations and financial condition are affected by the general factors affecting China’s retail industry, including, among others,
China’s overall economic growth, the increase in per capita disposable income, the growth in consumer spending and consumption upgrade, and the
competitive environment in China. In addition, they are also affected by factors driving online retail in China, such as the growing number of online
shoppers, the improved logistics infrastructure and the increasing adoption of mobile payments. Unfavorable changes in any of these general factors could
materially and adversely affect our results of operations.
Due to the recent COVID-19 outbreak, our results of operations and financial conditions may be affected in the short-term. For example, there
may be short-term uncertainties surrounding the level of engagement of our members and users due to the COVID-19 outbreak; our ability to fulfill orders
cost-effectively in the short-term may be adversely affected; and we may experience difficulties in maintaining our desired efficient cost structure in the
short-term and creating incentives for our suppliers and third-party merchants to provide us and our members with competitive prices, as we work to ensure
supply availability, maintain price stability, and prevent price gouging of daily essential items and epidemic containment materials on our platform to
support the well-being of our members and users during this period of outbreak. Our results of operations may also be adversely affected to the extent that
COVID-19 continues to affect the Chinese economy in general. As a result of the above factors, our results of operations have been adversely affected in the
first quarter of 2020, and our financial condition, results of operations and cash flows for the full fiscal year of 2020 may be adversely affected by the
COVID-19 outbreak. We currently expect our GMV in the first quarter of 2020 to be RMB7.0 billion, as compared to RMB6.8 billion in the same period of
2019 and RMB11.0 billion in the fourth quarter of 2019, which is slower growth than we had previously anticipated. The slower than expected growth in
GMV in the first quarter of 2020 was mainly due to the impacts of the COVID-19 outbreak and in particular, the fact that we, our suppliers, third-party
merchants, third-party logistics service providers and other business partners experienced various degrees of temporary shutdowns and delays in
commencement of operations due to COVID-19 in the first quarter of 2020. We will continue to monitor and evaluate the impacts of COVID-19 to our
business, financial condition, results of operations and cash flows for the remainder of fiscal year 2020. See “Item 3. Key Information—3.D. Risk Factors—
Failure to successfully manage our fulfillment infrastructure or any interruption in the operation of the warehouse facilities for an extended period may
negatively affect our business, prospects and results of operations” and “Item 3. Key Information—3.D. Risk Factors—We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.”
While our business is influenced by general factors affecting our industry, our results of operations are more directly affected by company
specific factors, including the following major factors:
Our ability to attract members and users and increase their activities
Attracting, engaging and retaining users have been one of our key focuses since our inception. We measure our effectiveness in attracting,
engaging and retaining users through several key performance indicators, including the number of buyers who place orders on our platform, the number of
orders we fulfill and the number of orders fulfilled by the third-party merchants selling products under our marketplace business. Our ability to attract and
retain users and increase user activities depends on our ability to continue to offer carefully curated authentic products at attractive prices, provide superior
shopping and social experience, and promote and enhance community value among members and other users. We have been able to build a large base of
users through, among other means, word-of-mouth referrals via our members’ social networks and both online and offline interactive events. Only when our
members are satisfied with the products and experience on our platform, would they stay active on our platform, and in turn promote our products and
recommend platform to their family, friends and other social contacts. To grow our user base and keep them engaged, we have implemented a distinctive
product offering strategy whereby we offer broad coverage of product categories with an aim of catering to the various daily needs of users and their
households, but carefully select items within each category meeting the preferences of users with attractive pricing, and we design our sales formats to meet
our members’ evolving needs and preferences. We also facilitate communications among members based on geographical location or shared interest.
Furthermore, we provide incentives and organize campaign activities to enhance user activities.
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Our ability to manage product offerings and supply chain
Our results of operations are also affected by whether we can successfully implement our product selection strategy and manage our product
offerings. We offer broad coverage of product categories to cater to the various daily needs of our users and their households, but provide carefully curated
items within each category to meet the preferences of our users. In December 2019, we offered an average of 17,660 SPUs on our platform on a daily basis,
including products of mainstream brands, emerging brands and our own brands. While we will continue to work with reputable brand owners with good
track records, we intend to broaden and deepen our cooperation with high-quality manufacturing partners to increase our offering of private label products.
We review and continually monitor the performance of each SPU, supplier and third-party merchant, and carefully manage the mix of products we offer,
based on a number of metrics such as the preferences of users, revenue contribution and margin.
We make continual efforts to maintain and improve an efficient cost structure and create incentives for our suppliers and third-party merchants
to provide us and our members with competitive prices. As our business further grows in scale, we strive to obtain more favorable terms from suppliers,
including pricing terms and volume-based rebates. In addition, we aim to create value for our suppliers and third-party merchants by providing an effective
channel for selling large volumes of their products online and by offering them comprehensive information on customer preferences and market demand and
ensuring the high quality of fulfillment services. We believe this value proposition also helps us obtain favorable terms from suppliers and third-party
merchants.
Our Ability to Manage Our Mix of Product and Service Offerings
Our results of operations are also affected by the mix of products and services we offer. We commenced our e-commerce business by
primarily selling products directly on our platform to users, including both members and non-members. We launched our marketplace business in the first
quarter of 2019 whereby third-party merchants can sell products on our platform and pay us commissions on their sales. We offer a wide range of products
and services and aim to provide one-stop shopping to maximize our wallet share. Our mix of products and services also affects our gross margin. Revenues
generated under the marketplace business were recognized on a net basis, while revenues generated under our merchandise sales business were recognized
on a gross basis. The split between our merchandise sales business and our marketplace business thus has a major influence on our revenue growth and our
gross margins. We intend to further expand our selection of general merchandise products and attract more quality third-party merchants to our marketplace
business.
Our ability to conduct sales and marketing efficiently
A key advantage of our business model that distinguishes us from many other players in China’s e-commerce industry is our ability to
leverage our members’ social networking activities to conduct sales and marketing efficiently. We provide incentives to members for promoting our
products and inviting new members through their social networks, and the referral incentives are recorded as reduction of our revenues. We outsource some
member services to third-party service companies, which select, hire and train service managers to provide the services. Most of the service managers are
members. We pay member management fees to the third-party service companies for their product sales facilitation services. The member management fees
have accounted for the substantial majority of our sales and marketing expenses.
In addition, we intend to invest more efforts in marketing and brand promotion activities both online and offline. Such initiatives would not
only support an increase in the number and activities of our members, but also allow us to expand our user base to reach a broader range of online
purchasers. We believe an increase in the number of users accessing and making purchases on our platform, whether or not they are members, would result
in significant growth in our revenues and scale.
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Our ability to fulfill orders cost-effectively
Our results of operations depend in part on our ability to fulfill orders quickly and accurately, as it is an important part of a compelling
customer experience. We provide centralized and comprehensive fulfillment and customer service to users primarily through collaboration with contracted
third-party vendors. As of December 31, 2019, warehouse facilities in our fulfillment network included 10 central warehouses, 19 regional warehouses, and
one supermarket warehouse, with an aggregate gross floor area of approximately 204,991 square meters in 21 cities. In the first quarter of 2019, we
launched our marketplace business, allowing third-party merchants to sell their products on our platform and pay commissions on their sales to us. Unlike
our merchandise sales business where we handle the fulfillment process for the products sold, substantially all of the third-party merchants under our
marketplace business handle the fulfillment logistics for their products sold on our platform, thereby lessening the demand for expansion of our fulfillment
infrastructure. We have started and will continue integrating and consolidating our warehouse facilities to improve the efficiency in fulfilling orders placed
from all areas in China under our merchandise sales business and to enhance customer experience. We have primarily relied on third-party logistics service
providers to operate the warehouses and provide last-mile delivery, third-party online payment platforms to provide various payment options, and BPO
arrangements to provide customer services. As our user base grows and business evolves, we may invest more resources in operating fulfillment facilities
and hiring our own personnel to better meet the demands of our anticipated growth, and we must make such investments in a cost-effective manner.
Our ability to effectively invest in technology
We have invested, and will continue to invest, in research and development and technology. As our business grows, and as we continue to
expand and enhance our platform, we will continue to invest in personnel with expertise in big data analytics and AI technologies, and other research and
development personnel. In addition, we have dedicated and will continue to dedicate resources to research and development efforts, focusing on developing
innovative applications and solutions aimed at providing more convenience to users, further enhancing our supply chain management capabilities and
increasing our operational efficiency. Moreover, we will also continue to invest resources in the development of our technology infrastructure to support the
growth of our business.
Key Components of Results of Operations
Revenues
Revenues are comprised of sale of merchandise, net, membership program revenue, marketplace revenue and other revenues. The following
table sets forth the components of our revenues by amounts and percentages of our total revenues for the periods presented:
2017
RMB
%
For the Year Ended December 31,
2018
RMB
%
(in thousands, except for percentages)
RMB
2019
US$
%
Revenues:
Sale of merchandise, net
Membership program revenue
Marketplace revenue
Other revenues
Total
5,912,109
510,818
—
21,144
6,444,071
91.7
8.0
0.0
0.3
100.0
11,388,425
1,552,437
—
74,363
13,015,225
87.5
11.9
0.0
0.6
100.0
10,548,322
776,839
311,914
34,949
11,672,024
1,515,171
111,586
44,804
5,020
1,676,581
90.3%
6.7%
2.7%
0.3%
100.0
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Revenues generated from sales of most products on our platform are recorded as revenues from sale of merchandise, net of discounts,
coupons, referral incentives provided to members, return allowances and VAT. We acquire products from suppliers and sell them to users. We expect
revenues generated from sale of merchandise will continue to account for a majority of our total revenues.
We earn membership fees from our members, who pay a fixed fee in exchange for (1) a package of selected products, (2) the right to receive
member exclusive discounts for products sold on our flagship Yunji app, (3) access rights to our flagship Yunji app and its member-exclusive features,
(4) the right to receive units of Yun-coin upon a successful new member referral, (5) member exclusive training, and (6) certain units of Yun-coin. In order
to stimulate our users’ interest in transacting on our platform and attract more members, in 2019, we provided each non-member user with a free three-
month experiential period during which time the user had access to the full spectrum of membership benefits. After the three-month experiential period, the
user could become our member if he or she met a certain cumulative spending threshold or certain other requirements during the experiential period or if he
or she purchased one of our membership packages. Starting in January 2020, we further refined our membership enrollment system by allowing any user to
become a member and enjoy membership benefits free of charge for one year by simply registering for an account on the Yunji app. If the user meets a
certain cumulative spending threshold or certain other requirements during the initial one-year period, the user may extend his or her membership for an
extra year. Yun-coin can only be used as credits when making purchases on our platform, with one unit of Yun-coin representing RMB1.00. Yun-coins
cannot be redeemed for cash. Members may transfer Yun-coins to others for free.
In the first quarter of 2019, we launched our marketplace business, allowing third-party merchants to sell their products on the platform and
pay commissions on their sales to us. The revenues from the marketplace business is recognized on a net basis.
Other revenues include revenues earned on net basis from sales of certain products on our platform, such as air tickets, tourist attractions
tickets, cruise, group tour, hotel reservation and car insurance policies.
Operating Cost and Expenses
Operating cost and expenses consist primarily of cost of revenues, fulfillment expenses, sales and marketing expenses, research and
development expenses, and general and administrative expenses. The following table sets forth the components of our operating expenses by amounts and
percentages of total revenues for the periods presented:
2017
RMB
%
For the Year Ended December 31,
2018
RMB
%
(in thousands, except for percentages)
RMB
2019
US$
%
Operating Cost and Expenses:
Cost of revenues
Fulfillment
Sales and marketing
Technology and content
General and administrative
Total
5,172,842
569,410
707,735
58,159
50,153
6,558,299
80.3
8.8
11.0
0.9
0.8
101.8
10,706,596
1,162,051
955,128
143,645
147,208
13,114,628
82.3
8.9
7.3
1.1
1.1
100.8
9,249,474
965,883
1,187,462
315,167
277,487
11,995,473
1,328,604
138,741
170,568
45,271
39,859
1,723,043
79.2
8.3
10.2
2.7
2.4
102.8
Cost of revenues. Cost of revenues consists of purchase price of merchandise, inbound shipping charges, write-downs of inventory and
member training costs. Inbound shipping charges to receive merchandise from suppliers are included in the inventories, and recognized as cost of revenues
upon sale of the merchandise to the customers.
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Fulfillment expenses. Fulfillment expenses represent packaging material costs and those costs incurred in outbound shipping, operating and
staffing our fulfillment and customer service facilities, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking,
packaging and preparing customer orders for shipment, processing payment and related transaction costs and responding to inquiries from customers,
depreciation expenses, payroll costs including share-based compensation expenses, and other daily expenses which are related to the purchasing functions.
Fulfillment costs also include third-party payment transaction fees, such as bank card processing and debit card processing fees.
Sales and marketing expenses. Sales and marketing expenses comprise primarily of member management fees, promotion expenses,
marketplace coupons, payroll costs including share-based compensation expenses, depreciation expenses and other daily expenses which are related to the
sales and marketing functions. We engage third-party vendors to provide member management services, which are ultimately performed by service
managers who enter into contracts with the third-party vendors. Certain of our members (customers) have been engaged by third-party vendors to serve as
service managers. We have concluded that the member management services provided by the service managers, including those who are also members, are
for distinct services at fair value, and records the member management fees paid to the third-party vendors as sales and marketing expenses.
Technology and content expenses. Technology and content expenses are expensed as incurred and primarily consist of payroll costs including
share-based compensation expenses, rental expenses, costs associated with the computing, storage and telecommunications infrastructure for internal use
that support our system and the services of our apps and other expenses related to the technology and content functions, which are responsible for
technology research and development and content editing. We account for internal use software development costs in accordance with guidance on
intangible assets and internal use software. This requires capitalization of qualifying costs incurred during the software’s application development stage and
to expense costs as they are incurred during the preliminary project and post implementation/operation stages.
General and administrative expenses. General and administrative expenses consist of payroll costs including share-based compensation
expenses and other expenses which are related to the general corporate functions, including accounting, finance, tax, legal and human relations, costs
associated with use by these functions of facilities and equipment, such as depreciation expenses, rental and other general corporate related expenses.
Taxation
Cayman Islands
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands
except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The
Cayman Islands is not a party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
Hong Kong
Our subsidiary incorporated in Hong Kong, Yunji Hong Kong Limited, is subject to 16.5% Hong Kong profit tax on their taxable income
generated from operations in Hong Kong. Under the Hong Kong tax laws, we are exempted from the Hong Kong income tax on our foreign-derived income.
In addition, payments of dividends from our Hong Kong subsidiary to us are not subject to any Hong Kong withholding tax. No provision for Hong Kong
profits tax was made as we had no estimated assessable profit that was subject to Hong Kong profits tax during 2016 and 2017.
PRC
In accordance with PRC Enterprise Income Tax Law, foreign-invested enterprises and domestic companies are subject to enterprise income
tax on their taxable income at a statutory rate of 25%. In accordance with the implementation rules of PRC Enterprise Income Tax Law, a qualified “High
and New Technology Enterprise” is eligible for a preferential tax rate of 15%. The “High and New Technology Enterprise” certificate is effective for a
period of three years. An entity may re-apply for the “High and New Technology Enterprise” certificate when the prior certificate expires.
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Jishang Preferred obtained its “High and New Technology Enterprise” certificate on November 30, 2018. Therefore, Jishang Preferred is
eligible to enjoy a preferential tax rate of 15% from 2018 to 2020 to the extent it has taxable income under the PRC Enterprise Income Tax Law, as long as
it maintains the “High and New Technology Enterprise” qualification and duly conducts relevant tax filing procedures with the relevant tax authority. From
July 2019, Jishang Preferred started to function as a Procurement company within the Group and is not able to continue its status as an HNTE to enjoy a
preferential tax rate of 15% since 2019.
Our other PRC subsidiaries, VIEs and their subsidiaries are subject to the statutory income tax rate of 25%.
In accordance with the relevant laws and regulations promulgated by the SAT effective from 2008 onwards, enterprises engaging in research
and development activities are entitled to claim 150% of their qualified research and development expenses so incurred as tax deductible expenses when
determining their assessable profits for the year. The additional deduction of 50% of qualified research and development expenses can only be claimed
directly in the annual tax filing and subject to the approval from the relevant tax authorities. Effective from 2018 onwards, enterprises engaging in research
and development activities are entitled to claim 175% of their qualified research and development expenses so incurred as tax deductible expenses. The
additional deduction of 75% of qualified research and development expenses can be directly claimed in the annual tax filing.
We are subject to value-added tax rate of 13% on our sales of products (which was 16% prior to April 1, 2019), and 6% on the services
provided to members (such as technology support, product promotion consulting and support, online training, customer service and order fulfillment), in
each case less any deductible value-added tax we have already paid or borne. While we generate a portion of our revenues by selling products to end users
through member referrals, such referrals are treated as if selling products to members while the members being deemed as selling products to end users on a
consignment basis under PRC tax law. We are also subject to surcharges on value-added tax payments in accordance with the PRC tax law.
Dividends paid by our WFOE to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the
relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and the Hong Kong Special Administrative Region on the
Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax
authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then
the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above
mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file application package with the relevant tax authority, and
settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We may rely on dividends and other distributions on equity paid
by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make
payments to us could have a material and adverse effect on our ability to conduct our business.”
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the
PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such
classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a
percentage of our total revenues for the periods presented. This information should be read together with our consolidated financial statements and related
notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends.
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Consolidated Statements of Operations Data:
Revenues:
Sale of merchandise, net
Membership program revenue
Marketplace revenue
Other revenues
Total revenues
Operating cost and expenses(1):
Cost of revenues
Fulfilment
Sales and marketing
Technology and content
General and administrative
Total operating cost and expenses
Other Operating Income
Loss from operations
Financial income, net
Foreign exchange gain/(loss), net
Change in fair value of warrant liabilities
Other non-operating income, net
Loss before income tax expense, and equity in income of affiliates, net of tax
Income tax benefit/(expense)
Equity in income of affiliates, net of tax
Net loss
Notes:
(1) Share-based compensation expenses were allocated as follows:
Sales and marketing
Technology and content
General and administrative
Fulfillment
Total
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
(in thousands, except for per share data)
5,912,109
510,818
—
21,144
6,444,071
11,388,425
1,552,437
—
74,363
13,015,225
10,548,322
776,839
311,914
34,949
11,672,024
1,515,171
111,586
44,804
5,020
1,676,581
(5,172,842)
(569,410)
(707,735)
(58,159)
(50,153)
(6,558,299)
(10,706,596)
(1,162,051)
(955,128)
(143,645)
(147,208)
(13,114,628)
—
(114,228)
11,564
(7,444)
152
894
(109,062)
3,331
7
(105,724)
—
(99,403)
46,068
(685)
—
7,048
(46,972)
(12,346)
2,992
(56,326)
(9,249,474)
(965,883)
(1,187,462)
(315,167)
(277,487)
(11,995,473)
25,047
(298,402)
121,370
(12,397)
—
52,096
(137,333)
16,720
(3,221)
(123,834)
(1,328,604)
(138,741)
(170,568)
(45,271)
(39,859)
(1,723,043)
3,598
(42,864)
17,434
(1,781)
—
7,483
(19,728)
2,402
(463)
(17,789)
For the Year Ended December 31,
2017
RMB
144
98
1,545
221
2,008
2018
RMB
2019
RMB
US$
(in thousands)
3,192
4,434
41,932
4,742
54,300
29,884
10,562
79,011
8,740
128,197
4,293
1,517
11,349
1,255
18,414
Year ended December 31, 2019 compared to year ended December 31, 2018
Revenues
Our revenues decreased by 10.3% from RMB13,015.2 million in 2018 to RMB11,672.0 million (US$1,676.6 million) in 2019, primarily due
to a decrease in revenues from sales of merchandise as a result of an increase in the proportion of our business contributed from our marketplace business
platform, which was launched in the first quarter of 2019. Marketplace revenue was generated on the marketplace business platform and recognized on a net
basis, while sale of merchandise, net was generated on the merchandise sales platform and recognized on a gross basis. The number of orders fulfilled under
our merchandise sales business grew by 8.5% from 153.4 million in 2018 to 166.6 million in 2019 and the number of orders fulfilled by third-party
merchants under the marketplace business in 2019 was 34.6 million. The significant increase in the total number of orders fulfilled by us and our third-party
merchants in 2019 was primarily due to (i) our ability to continually optimize the mix of our product offerings and carefully curate products of higher
quality at attractive prices to fulfill buyers’ needs, and (ii) our unique membership-based social e-commerce model that led to exponential growth in our
member base, which we have relied upon for promotion of products and new membership referrals, while the number of buyers decreased slightly from
23.2 million in 2018 to 22.5 million in 2019.
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• Revenue from sale of merchandise, net. Our revenue from sale of merchandise, net decreased by 7.4% from RMB11,388.4 million in
2018 to RMB10,548.3 million (US$1,515.2 million) in 2019 due to an increase in the proportion of our business contributed from our
marketplace business platform, which was partially offset by the positive revenue impact from a decrease in estimated refunds payable
to members. The estimation of refund payable to members is based upon the historical data of referral incentives earned by referring
members within their active life cycle. The balance of the payable was RMB396,024 at December 31, 2018, and reflected our strategy
to utilize membership packages and referrals as a principal means of gaining customers. In order to stimulate our users’ interest in
transacting on our platform and attract more members, in 2019, we provided each non-member user with a free three-month experiential
period during which time the user had access to the full spectrum of membership benefits. After the three-month experiential period, the
user could become our member if he or she met a certain cumulative spending threshold or certain other requirements during the
experiential period or if he or she purchased one of our membership packages. The free three-month experiential period enlarged our
member base in 2019 by attracting more non-member users to become members. It further encouraged an increasing percentage of
members to purchase more merchandise to meet the cumulative spending threshold and enjoy the member exclusive discounts under the
membership program. Upon the successful launch of the free three-month experiential period, the amount of revenue earned from
referring members, and the commissions paid to them, decreased since late of the second quarter of 2019. Based on this new pattern of
activity, and the continuing expansion of the free three-month experiential period, we recognized a change in estimate to reduce the
Refund Payable to Members by RMB379,370 during 2019. The adjustment was recorded as an increase in revenue, reflecting the
original establishment of the refund payable as a reduction in revenue (as a form of variable revenue consideration). The balance of the
refund payable as of December 31, 2019 was RMB26,883, and reflected our best estimate of its liability based on historical patterns of
earnings and redemptions, after the introduction of the above mentioned promotion activities.
• Revenue from membership programs. Membership program revenue decreased by 50.0% from RMB1,552.4 million in 2018 to
RMB776.8 million (US$111.6 million) in 2019, primarily due to the refinement of our membership enrollment system to provide users
with alternative paths to achieve membership status in order to facilitate further business expansion. Alternative paths to achieve
membership status include purchasing gift packages or meeting certain other requirements.
• Revenue from marketplace business. Revenue from the marketplace business was RMB311.9 million (US$44.8 million) in 2019
compared with nil in 2018, as we continued to increase our investments in attracting more popular brands and merchants onto our
platform after launching the marketplace business in the first quarter of 2019 and our marketplace business continued to generate higher
commission rates.
• Other revenues. Other revenues decreased by 53.0% from RMB74.4 million in 2018 to RMB34.9 million (US$5.0 million) in 2019.
Operating cost and expenses
Our total operating cost and expenses decreased by 8.5% from RMB13,114.6 million in 2018 to RMB11,995.5 million (US$1,723.0 million)
in 2019. This decrease was due to decreases in cost of revenues and fulfillment expenses, which was partially offset by increases in sales and marketing
expenses, technology and content expenses and general and administrative expenses.
• Cost of revenues. Our cost of revenues decreased by 13.6% from RMB10,706.6 million, representing 82.3% of our total revenues, in
2018 to RMB9,249.5 million (US$1,328.6 million), representing 79.2% of our total revenues, in 2019, which was mainly attributable to
the decline in our sales of merchandise, which recognize revenues on a gross basis.
• Fulfillment expenses. Our fulfillment expenses decreased by 16.9% from RMB1,162.1 million, representing 8.9% of our total revenues,
in 2018 to RMB965.9 million (US$138.7 million), representing 8.3% of our total revenues, in 2019. This decrease was primarily
attributable to a decrease in our warehousing and logistics expenses from RMB866.6 million in 2018 to RMB585.2 million (US$84.1
million) in 2019, resulting from lower merchandise sales and improved logistics efficiency, which was partially offset by an increase in
personnel costs from RMB123.1 million in 2018 to RMB187.4 million (US$26.9 million) in 2019, as the headcount of our fulfillment
personnel increased from 392 as of December 31, 2018 to an average of 456 during the year ended December 31, 2019.
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•
•
Sales and marketing expenses. Our sales and marketing expenses increased by 24.3% from RMB955.1 million, representing 7.3% of our
total revenues, in 2018 to RMB1,187.5 million (US$170.6 million), representing 10.2% of our total revenues, in 2019. The increase in
sales and marketing expenses was primarily attributable to (i) an increase in member management fees from RMB834.6 million in 2018
to RMB876.8 million (US$125.9 million) in 2019 due to an 86.5% increase in the cumulative number of members on our platform from
7.4 million as of December 31, 2018 to 13.8 million as of December 31, 2019, (ii) an increase in personnel costs from RMB34.8 million
in 2018 to RMB51.3 million (US$7.4 million) in 2019, as the headcount of our sales and marketing personnel increased from 105 as of
December 31, 2018 to 205 as of December 31, 2019, and (iii) an increase in business promotion expenses from RMB44.9 million in
2018 to RMB189.8 million (US$27.3 million) in 2019 due to more brand and business promotion activities in 2019, especially
increased business development activities for our marketplace business platform to attract more popular brands and merchants, and
(iv) an increase in share-based compensation expenses from RMB3.2 million in 2018 to RMB29.9 million (US$4.3 million) in 2019 due
to new grant share-based awards.
Technology and content expenses. Our technology and content expenses increased by 119.4% from RMB143.6 million, representing
1.1% of our total revenues, in 2018 to RMB315.2 million (US$45.3 million), representing 2.7% of our total revenues, in 2019, primarily
due to (i) an increase in personnel costs from RMB86.6 million in 2018 to RMB186.9 million (US$26.8 million) in 2019, as the number
of our research and development employees increased from 409 as of December 31, 2018 to 523 as of December 31, 2019, and (ii) an
increase in costs of servers from RMB41.6 million in 2018 to RMB103.3 million (US$14.8 million) in 2019, which was due to the
growth in user traffic.
• General and administrative expenses. Our general and administrative expenses increased by 88.5% from RMB147.2 million,
representing 1.1% of our total revenues, in 2018 to RMB277.5 million (US$39.9 million), representing 2.4% of our total revenues, in
2019. The increase was primarily attributable to (i) an increase in personnel costs from RMB54.9 million in 2018 to RMB127.6 million
(US$18.3 million) in 2019, resulting from an increase in headcount of general and administrative employees from 107 as of
December 31, 2018 to 213 as of December 31, 2019 and an increased amount of bonuses paid, and (ii) an increase in share-based
compensation expenses from RMB41.9 million in 2018 to RMB79.0 million (US$11.3 million) in 2019 due to new grant share-based
awards.
Loss from operations
Our loss from operations was RMB298.4 million (US$42.9 million) in 2019, compared to RMB99.4 million in 2018. The increase in our loss
from operations was primarily due to increases in share-based compensation expenses, personnel costs and market promotion fees.
Financial income, net
Our financial income, net was RMB121.4 million (US$17.4 million) in 2019, compared to RMB46.1 million in 2018. This increase was
primarily due to an increase in the readily determinable fair value of our investment in the equity securities of a Hong Kong listed Company, GXG
(1817.HK).
Foreign exchange gain/(loss), net
We recorded foreign exchange loss, net of RMB12.4 million (US$1.8 million) in 2019, compared to foreign exchange loss, net of
RMB0.7 million in 2018 as a result of the loss for the exchange settlement from the third-party payment settlement platform, which was partially offset by
the appreciation of the U.S. dollar against the Renminbi.
Income tax benefit/(expense)
We recorded income tax benefit of RMB16.7 million (US$2.4 million) in 2019, compared to income tax expense of RMB12.3 million in
2018, primarily because (i) the tax rate of Jishang Preferred changed from 15% in 2018 to 25% in 2019, which resulted in an increase of RMB35.3 million
(US$5.1 million) of deferred tax assets on the revaluation in 2019 and (ii) an increase in deduction for research and development expenses, which was
RMB89.0 million (US$12.8 million) in 2019 compared to RMB77.6 million in 2018, as the number of our research and development employees increased,
partially offset by (i) an increase in our share-based compensation expense from RMB54.3 million in 2018 to RMB128.2 million (US$18.4 million) in 2019
and (ii) an increase in valuation allowance form RMB10.0 million in 2018 to RMB65.2 million (US$9.4 million) in 2019, because we will not be able to
utilize tax loss carry forwards generated by certain unprofitable subsidiaries.
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Net loss
As a result of the foregoing, we recorded net loss of RMB123.8 million (US$17.8 million) in 2019, compared to RMB56.3 million in 2018.
Year ended December 31, 2018 compared to year ended December 31, 2017
Revenues
Our revenues increased by 102.0% from RMB6,444.1 million in 2017 to RMB13,015.2 million (US$1,893.0 million) in 2018, primarily due
to the growth in the number of our buyers from 16.9 million in 2017 to 23.2 million in 2018, and the growth in the number of orders fulfilled from
75.8 million in 2017 to 153.4 million in 2018. The significant increase in the number of buyers and number of orders fulfilled was primarily due to (i) our
ability to continually optimize the mix of our product offerings and carefully curate products of higher quality at attractive prices to fulfill buyers’ needs,
and (ii) our unique membership-based social e-commerce model that led to exponential growth in our member base, which we have relied upon for
promotion of products and new membership referrals. Revenues from sale of merchandise, net increased by 92.6% from RMB5,912.1 million in 2017 to
RMB11,388.4 million (US$1,656.4 million) in 2018 in line with growth in the total revenues. Membership program revenue increased by 203.9% from
RMB510.8 million in 2017 to RMB1,552.4 million (US$225.8 million) in 2018, as our member base grew. Furthermore, as we diversified our product mix
and revenue streams, our other revenues increased by 251.7% from RMB21.1 million in 2017 to RMB74.4 million (US$10.8 million) in 2018.
Operating cost and expenses
Our total operating cost and expenses increased by 100.0% from RMB6,558.3 million in 2017 to RMB13,114.6 million (US$1,907.4 million)
in 2018. This increase was due to increases in all of our operating cost and expenses line items.
• Cost of revenues. Our cost of revenues increased by 107.0% from RMB5,172.8 million, representing 80.3% of our total revenues, in
2017 to RMB10,706.6 million (US$1,557.2 million), representing 82.3% of our total revenues, in 2018, which reflects the increase in
our sales of merchandise.
• Fulfillment expenses. Our fulfillment expenses increased by 104.1% from RMB569.4 million, representing 8.8% of our total revenues,
in 2017 to RMB1,162.1 million (US$169.0 million), representing 8.9% of our total revenues, in 2018. This increase was primarily
attributable to an increase in our warehousing and logistics expenses from RMB446.7 million in 2017 to RMB866.6 million (US$126.0
million) in 2018, which was primarily due to the increase in sales volume. The increase in fulfillment expenses is also attributable to
(i) an increase in third-party payment transaction fees from RMB48.4 million in 2017 to RMB114.7 million (US$16.7 million) in 2018,
which was primarily due to increase in sales volume, and (ii) an increase in personnel costs from RMB62.8 million in 2017 to
RMB123.1 million (US$17.9 million) in 2018, which was due to the increase in the number of our fulfillment employees from 291 as of
December 31, 2017 to 392 as of December 31, 2018.
•
Sales and marketing expenses. Our sales and marketing expenses increased by 34.9% from RMB707.7 million, representing 11.0% of
our total revenues, in 2017 to RMB955.1 million (US$138.9 million), representing 7.3% of our total revenues, in 2018. The increase in
sales and marketing expenses was primarily attributable to (i) an increase in member management fees from RMB631.2 million in 2017
to RMB834.6 million (US$121.4 million) in 2018 due to the substantial increase in the number of our members, (ii) an increase in
personnel costs from RMB25.5 million in 2017 to RMB34.8 million (US$5.1 million) in 2018, as the headcount of our sales and
marketing personnel increased from 94 as of December 31, 2017 to 105 as of December 31, 2018, and (iii) an increase in market
promotion fees from RMB31.0 million in 2017 to RMB44.9 million (US$6.5 million) in 2018 due to more brand and business
promotion activities in 2018.
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•
Technology and content expenses. Our technology and content expenses increased by 147.0% from RMB58.2 million, representing
0.9% of our total revenues, in 2017 to RMB143.6 million (US$20.9 million), representing 1.1% of our total revenues, in 2018, primarily
due to (i) an increase in personnel costs from RMB43.6 million in 2017 to RMB86.6 million (US$12.6 million) in 2018, as the number
of our research and development employees increased from 155 as of December 31, 2017 to 409 as of December 31, 2018, and (ii) an
increase in costs of servers from RMB10.7 million in 2017 to RMB41.6 million (US$6.1 million) in 2018, which was due to the growth
in user traffic.
• General and administrative expenses. Our general and administrative expenses increased by 193.5% from RMB50.2 million,
representing 0.8% of our total revenues, in 2017 to RMB147.2 million (US$21.4 million), representing 1.1% of our total revenues, in
2018. The increase was primarily attributable to (i) an increase in personnel costs from RMB22.2 million in 2017 to RMB54.9 million
(US$8.0 million) in 2018, which was in turn due to an increase in headcount of general and administrative employees from 65 as of
December 31, 2017 to 107 as of December 31, 2018, and (ii) an increase in share-based compensation expenses from RMB1.5 million
in 2017 to RMB41.9 million (US$6.1 million) in 2018, as we started to grant share-based awards in December 2017.
Loss from operations
Our loss from operations was RMB99.4 million (US$14.5 million) in 2018, compared to RMB114.2 million in 2017. Despite the significant
growth in our revenues, our loss from operations did not improve as substantially, primarily due to an increase in share-based compensation expenses and
greater campaign efforts that led to reduced margin.
Financial income, net
Our financial income, net was RMB46.1 million (US$6.7 million) in 2018, compared to RMB11.6 million in 2017. This increase was
primarily due to increased return on investments in wealth management products. For 2017 and 2018, the expected return per annum ranged from 2.2% to
3.9%, and 2.1% to 4.8%, respectively, and the weighted average return of the wealth management products increased from 3.3% in 2017 to 4.1% in 2018.
Furthermore, our cash balance increased in 2018 mainly due to the proceeds from the issuance of preferred shares during the period, which also contributed
to the increase in financial income, net.
Foreign exchange gain/(loss), net
We recorded foreign exchange loss, net of RMB0.7 million (US$0.1 million) in 2018, compared to foreign exchange loss, net of
RMB7.4 million in 2017 as a result of the loss for the exchange settlement of our preferred shareholders’ capital due to our reorganization, which was
partially offset by the appreciation of the U.S. dollar against the Renminbi.
Income tax benefit/(expense)
We recorded income tax expense of RMB12.3 million (US$1.8 million) in 2018, compared to income tax benefit of RMB3.3 million in 2017,
primarily because (i) the tax rate of Jishang Preferred changed from 25% in 2017 to 15% in 2018 because Jishang Preferred obtained a “High and New
Technology Enterprise” certificate in November 2018, which resulted in a reduction of RMB35.7 million (US$5.2 million) of deferred tax assets on the
revaluation in 2018, and (ii) our share-based compensation expense was RMB54.3 million (US$7.9 million) in 2018 compared to RMB2.0 million in 2017,
partially offset by an increase in deduction for research and development expenses, which was RMB77.6 million (US$11.3 million) in 2018 compared to
RMB22.9 million in 2017, as the number of our research and development employees increased.
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Net loss
As a result of the foregoing, we recorded net loss of RMB56.3 million (US$8.2 million) in 2018, compared to RMB105.7 million in 2017.
Critical Accounting Policies
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We
continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other
assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment
than others in their application and require us to make significant accounting estimates.
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated
financial statements and other disclosures included in this annual report. When reviewing our financial statements, you should consider (i) our selection of
critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to
changes in conditions and assumptions.
Revenue recognition
We adopted ASC Topic 606, “Revenue from Contracts with Customers,” for all periods presented. Consistent with the criteria of Topic 606,
we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to
receive in exchange for those goods or services.
To achieve that core principle, we apply the five steps defined under Topic 606: (i) identify the contract(s) with a customer, (ii) identify the
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract,
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We assess its revenue arrangements against specific criteria in order to
determine if it is acting as principal or agent. Revenue arrangements with multiple performance obligations are divided into separate distinct goods or
services. We allocate the transaction price to each performance obligation based on the relative standalone selling price of the goods or services provided.
Revenue is recognized upon the transfer of control of promised goods or services to a customer.
Revenue is recorded net of value-added tax.
Revenue recognition policies for each type of revenue steam are as follows:
Sales of merchandise
We primarily sell merchandise through its Yunji Apps. We present the revenue generated from its sales of merchandise on a gross basis as we
have control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. In making this determination, We also assess
whether it is primarily obligated in these transactions, is subject to inventory risk, has latitude in establishing prices, or has met several but not all of these
indicators. The cash collected from the sales of merchandise is initially recorded in Deferred revenue in the Consolidated Balance Sheets and subsequently
recognized as revenue when the receipt of merchandise is confirmed by the customers, which is the point that the title of the merchandise is transferred to
the customer. The revenue is recorded net of value-added tax, discounts, coupons, incentives and return allowances. Return allowances are estimated based
on historical experiences and updated at the end of each reporting period.
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Membership program
We earn membership fees from our members, who pay a fixed fee in exchange for (1) a merchandise gift package, (2) the right to receive
member exclusive discounts for merchandise sold on the Yunji app, (3) access rights to the member-exclusive features on the Yunji app, (4) the right to
receive units of Yun-coin upon a successful new member referral (“Referral Yun-coins”), (5) member exclusive training, and (6) units of Yun-coins (“New
Member Yun-coins”). Each of these items represents a separate performance obligation. Yun-coin can be used as coupons for the member’s future
purchases on our apps and therefore reflect material rights. In order to promote our membership program, we, at our discretion, allow our users to join the
membership program by purchasing any merchandise of equivalent value of the membership fee through our Yunji app within a defined period as an
alternative way of paying the upfront fixed membership fee, or allow individuals that meet certain requirements to become members without paying
membership fee. When users become members in this manner, they are not entitled to the merchandise gift package and member-exclusive training. We
allocate the transaction price to each performance obligation, after taking into consideration expected refunds payable to members, based on their relative
standalone selling price. When the standalone selling price of a performance obligation is not directly observable, it is estimated by us by using an expected
cost plus a margin approach. For the merchandise gift package, revenue is recognized when the receipt of the gift package is confirmed by the members. For
the right to receive Referral Yun-coins, revenue is recognized when Referral Yun-coin is used and redeemed, or upon expiration if not redeemed. For New
Member Yun-coins, revenue is recognized when the New Member Yun-coin is used and redeemed, or upon expiration if not redeemed. For member
exclusive training, revenue is recognized when the training courses are delivered over the service period by the third party vendors engaged by us. For the
remaining performance obligations, revenue is recognized over the period of the active life cycle of our members on a straight-line basis. The active life
cycle of our members is estimated based on historical behavior of these members, which is approximately one year.
In addition, when members subsequently purchase merchandise, the members initially pay for their purchases at non-member regular prices,
and then are issued refunds equal to the member-exclusive discounts from us as a credit upon the members confirming receipt of the merchandise. We
record such anticipated refunds as a reduction of revenue and as discounts payables to the members.
Marketplace
In 2019, we launched our marketplace business model, under which we operate our e-commerce platform, Yunji app, as a marketplace for
third-party merchants to sell their merchandise to the users of Yunji app. When the transactions are completed on the Yunji app, we charge merchants
commissions at their respective agreed percentage of the amount of merchandise sold by merchants. We act as an agent in these transactions and do not
control the underlying merchandise provided by merchants before they are transferred to users, as we are not responsible for fulfilling the promise to
provide the merchandise to users and have no inventory risk before the merchandise are transferred to the users or after the control is transferred to the
users. In addition, we have no discretion in establishing prices of the merchandise provided by merchants. Revenues are recognized on a net basis to the
extent of the commission we earn at the point of users’ acceptance of merchandise.
Remaining performance obligations
The remaining performance obligations associated with our sale of merchandise represent the cash collected upfront from the customers for
their purchase of merchandise on our apps, but the underlying merchandise has not yet been received by the customers, which is included in the presentation
of deferred revenue.
Revenue allocated to remaining performance obligations of our membership program represents that portion of the overall transaction price
that has been received (or for which we have an unconditional right to payment) allocated to obligations under the membership program that we have not
yet fulfilled, which is included in the presentation of deferred revenue.
The remaining performance obligations associated with our marketplace revenue represents the portion of commission fee included in the
payment collected from the users for their purchase of merchandise on the Yunji app on behalf of the merchants, but the underlying merchandise has not yet
been received by the users, which is included in the presentation of deferred revenue.
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Other goods and services
We offer products such as air tickets, tourist attractions tickets, cruise, group tour, hotel reservation and car insurance through our Yunji app.
We present the revenue generated from such sales on a net basis as we do not have control of the goods or services or have the ability to direct the use of the
goods or services and obtain substantially all of their benefits. Revenue is recognized when we have fulfilled its selling performance obligations on behalf of
the principal in the transaction, which is either when the products are accepted by the customer, or once the order of the products become non-cancellable on
our Yunji app, depending on the terms of the particular agreement.
We also offer loans to the merchants through factoring arrangements. We extend loans to merchants for their expected orders in addition to
the loans to the same merchants who factored their accounts receivables generated from their transactions completed on our Yunji app with recourse and
charges an interest to merchants based on the principal. We record factoring receivables, which is included in accounts receivable, when the cash is
advanced to the merchants. The interests are recognized over the term of loans, normally within three months. When we have legal rights to net settle the
factoring receivables with its payable to merchants from cash flow perspective, we settle the factoring receivables with payables to the same merchants
respectively, provided by the legal rights as per agreement between the two parties.
Refund payable to members
After joining our membership program, members are able to make referrals to other users through their social networks. We provide
incentives to those referring members by paying a cash refund upon a successful merchandise referral.
Since customers are only able to receive referral incentives after they become members by paying the membership fees, the referral incentives
related to merchandise referral are considered payments to customers (and are not payment for a distinct good or service) and accounted for as a refund
payable to members. Such refunds are estimated at the time the membership fee is received and recorded as refund payable to members, and reduce the
transaction price (that we expect to be entitled to keep) for the membership fee revenue recognition calculation described above accordingly. Any amount of
referral incentives expected to be paid in excess of the initial membership fee received is recorded as refund payable to members (and reduces merchandise
revenue subsequently generated from those members) at the time they make subsequent merchandise purchases, up to the amount of the expected future
referral incentives.
The estimation of refunds payable to members is based upon the historical data of referral incentives earned by referring members within their
active life cycle. Once the referral incentives are earned by the referring members, the amounts are transferred to the members’ individual Yunji app
accounts and reclassified from refund payable to members to Incentive payables to members.
Users Incentive Programs
We grant certain units of Yun-coin and other coupons (collectively referred to as coupons), from time to time, to our customers at our
discretion in different situations. Yun-coins are not redeemable for cash and can be used as a coupon for the customer’s future purchase on our Yunji app.
The value of one unit of Yun-coin is equivalent to one RMB. The coupons granted can be categorized into (i) coupons granted concurrent with a revenue
transaction and (ii) coupons granted not concurrent with a revenue transaction. When the coupon is granted concurrent with a revenue transaction, we
determine whether the coupon represents a material right of the current transaction. If the coupon represents a material right, the transaction price is
allocated between merchandise sale and the coupon based on the estimated standalone selling price taking into consideration the coupon’s forfeiture rate. If
the coupon does not represent a material right, it is recognized as a reduction of revenue when they are applied in the future sales. When the coupon is not
granted concurrent with a revenue transaction, we assess whether the coupons were granted in exchange for a distinct service at fair value. When the
coupons are granted in exchange for a distinct service at fair value, they are recorded as expense upon grant. In this case, the person granted coupons in
return for their service activities does not need to be a member. When the coupons are not granted in exchange for a distinct service, they can only be
applied to the future purchase of certain specified merchandise. These coupons are not accounted for when they are granted and are recognized as a
reduction of revenue when they are applied in future sales.
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Starting from 2019, in order to promote our marketplace business, from time to time, we at our own discretion issues coupons in various
forms to users without any concurrent transactions in place or any substantive action needed from the recipient. These coupons can be used in purchase of
goods in a broad range of merchants as an immediate discount of their next purchase, some of which can only be used when the purchase amount exceeds
pre-defined threshold. We settle with the merchants in cash for the coupons used by the users. As the users are required to make purchases of the merchants’
merchandises to redeem the coupons, we recognize the amounts of redeemed coupons as sales and marketing expenses when the purchases are made.
Inventories, net
Inventories, consisting of products available for sale, are stated at the lower of cost and net realizable value. Cost of inventory is determined
using the weighted average cost method. Adjustments are recorded to write down the cost of inventory to the estimated net realizable value due to slow-
moving merchandise and damaged goods, which is dependent upon factors such as historical and forecasted consumer demand, and promotional
environment. Write-downs of RMB7.4 million, RMB2.5 million and RMB3.6 million are recorded in cost of revenues in the consolidated statements of
comprehensive loss for the years ended December 31, 2017, 2018 and 2019, respectively.
Share-based Compensation
On December 19, 2017, we adopted the 2017 Share Incentive Plan, or the 2017 Plan, which allows the compensation committee to grant
options and restricted share units to our directors and employees, and other personnel to acquire our ordinary shares at an exercise price as determined by
the compensation committee at the time of grant. The 2017 Plan was subsequently replaced by the 2019 Plan in March 2019, and is no longer effective. The
awards granted and outstanding under the 2017 Plan survive the termination of the 2017 Plan and remain effective and binding under the 2019 Plan. See
“Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—2019 Share Incentive Plan.” Under the
2019 Plan, 227,401,861 ordinary shares were authorized and reserved for issuance.
Since adoption of the 2017 Plan, which was subsequently replaced by the 2019 Plan in March 2019, we granted options and restricted share
units to our employees. All options and restricted share units granted have a contractual term of six years from the grant date, and the vest over a period of
four years of continuous service, half (1/2) of which vest upon the second anniversary of the stated vesting commencement date and one-fourth (1/4) of the
remaining will vest upon the third and fourth anniversaries of the stated vesting commencement date. Under the 2017 Plan and the 2019 Plan, which
replaced the 2017 plan in its entirety in March 2019, options are exercisable subject to the grantee’s continuous service.
We accounted for the share based compensation costs on a straight-line bases over the requisite service period for the award based on the fair
value on their respectively grant date.
On December 19, 2017, June 30, 2018, November 28, 2018 and January 31, 2019, we granted 73,225,200, 12,021,500, 5,540,000 and
4,968,000 stock options to our directors and employees, respectively. In addition, on December 19, 2017, November 28, 2018 and January 31, 2019, we
granted 5,000,000, 19,800,000 and 14,925,000 restricted share units to our directors and employees, respectively.
On May 3, 2019, we granted 720,000 stock options to certain independent directors. In addition, on May 3, 2019, we were authorized by our
board of directors to grant stock options and RSUs to non-employees under the 2019 Plan, and granted options to purchase an aggregate of 10,409,050
Class A ordinary shares and 3,332,040 RSUs to non-employees by batches during the year ended December 31, 2019.
(a) Options
The following table sets forth the stock options activity for the years ended December 31, 2017, 2018 and 2019:
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Outstanding as of December 31, 2017
Granted
Forfeited
Outstanding as of December 31, 2018
Granted
Forfeited
Exercised
Outstanding as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Exercisable as of December 31, 2019
Number of
shares
73,225,200
17,561,500
(3,674,300)
87,112,400
16,097,050
(7,954,980)
(1,407,920)
93,846,550
93,846,550
32,754,800
Weighted-
average
exercise price
US$
0.09
0.22
0.10
0.12
0.61
0.31
0.09
0.19
—
Weighted
average
remaining
contractual term
5.96
Aggregate
intrinsic
value
000’US$
25,623
5.09
60,399
3.77
—
30,442
—
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of
the underlying stock at each reporting date (December 31, 2018: US$0.81, December 31, 2019: US$ 0.46).
We uses the Binominal option pricing model to estimate the fair value of stock options. The assumptions used to value our options grants
were as follow:
Exercise price (US$)
Exercise multiple
Risk-free interest rate
Expected term (in years)
Expected dividend yield
Expected volatility
Expected forfeiture rate (post-vesting)
Fair value of the underlying shares on the date of options grants (US$)
Fair value of share option (US$)
2018
0.1~0.4
2.2~2.8
2.53%~2.60%
6
—
40.87%~41.81%
5%
0.81
0.40
2019
0.1~0.7
2.2~2.8
1.68%~2.47%
6
—
39.91%~41.29%
0%/5%
0.46~1.42
0.11~1.32
Risk-free interest rate is estimated based on the yield curve of US Sovereign Bond as of the option valuation date. The expected volatility at
the grant date and each option valuation date is estimated based on annualized standard deviation of daily stock price return of comparable companies with a
time horizon close to the expected expiry of the term of the options. We have never declared or paid any cash dividends on its capital stock, and we do not
anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the options.
Share-based compensation expense is recorded on a straight-line basis over the requisite service period, which is generally four years from the
date of grant. We recognized share-based compensation expenses of RMB1.9 million, RMB48.3 million and RMB66.2 million for share options granted
under the 2017 Plan and the 2019 Plan, which replaced the 2017 Plan in its entirety in March 2019, in the consolidated statements of comprehensive loss for
the years ended 2017, 2018 and 2019, respectively.
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As of December 31, 2017, 2018 and 2019, there was RMB174.3 million, RMB181.1 million and RMB137.5 million, respectively, in total
unrecognized compensation expense, related to unvested share options, which is expected to be recognized over a weighted average period of 3.96, 3.07 and
1.97 years, respectively. The unrecognized compensation expense may be adjusted for future changes in actual forfeitures.
(b) Restricted share units
A summary of activities of the service-based restricted share units for the years ended December 31, 2017, 2018 and 2019 is presented below:
Unvested at December 31, 2017
Granted
Unvested at December 31, 2018
Granted
Vested
Forfeited
Unvested at December 31, 2019
Number of
RSUs
5,000,000
19,800,000
24,800,000
18,257,040
(3,036,290)
(3,185,900)
36,834,850
Weighted-Average
Grant-Date Fair Value
US$
0.44
0.81
0.74
0.68
0.76
The fair value of each restricted share units granted with service conditions is estimated based on the fair market value of the underlying our
ordinary shares on the date of grant.
As of December 31, 2017 and 2018, no restricted share units were vested. As of December 31, 2019, 3,036,290 RSUs were vested.
As of December 31, 2017, 2018 and 2019, there was RMB14.3 million, RMB114.7 million and RMB138.4 million in total unrecognized
compensation expense, related to unvested RSUs, which is expected to be recognized over a weighted average period of 3.96, 3.72 and 2.60 years,
respectively.
For the years ended December 31, 2017, 2018 and 2019, our total share-based compensation expenses recognized for the restricted share units
granted were RMB0.2 million, RMB6.0 million and RMB62.0 million, respectively.
Fair Value Measurements
As of December 31, 2018 and 2019, information about inputs into the fair value measurement of our assets and liabilities that are measured or
disclosed at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
Description
Assets:
Short-term investments
Time deposits
Wealth management products
Total assets
Fair value measurement at reporting date using
Fair value
as of
December 31,
2018
RMB
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
RMB
Significant Other
Observable Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
549,056
550,338
1,099,394
104
—
—
—
549,056
550,338
1,099,394
—
—
—
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Description
Assets:
Short-term investments
Time deposits
Wealth management products
Long-term investments
Equity securities with readily
determinable fair value
Total assets
Fair value measurement at reporting date using
Fair value
as of
December 31,
2019
RMB
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
RMB
Significant Other
Observable Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
593,954
180,782
158,072
932,808
—
—
158,072
158,072
593,954
180,782
—
774,736
—
—
—
—
When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we
will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as
interest rates and currency rates. The following is a description of the valuation techniques that we use to measure the fair value of assets that we report in
our consolidated balance sheets at fair value on a recurring basis:
Short-term investments. Short-term investment consists of wealth management products and time deposits, which are valued by us on a
recurring basis. We value our short-term wealth management products investments held in certain banks using model-derived valuations based upon
discounted cash flow, in which significant inputs, mainly including expected return, are observable or can be derived principally from, or corroborated by,
observable market data, and accordingly, we classify the valuation techniques that use these inputs as Level 2. The expected return of the financial products
were determined based on the prevailing interest rates in the market.
Long-term investments. Equity securities with readily determinable fair values are measured and recorded at fair value on a recurring basis
with changes in fair value. We value these equity securities at its quoted prices in stock market, and accordingly we classify the valuation techniques that
use these inputs as Level 1.
Recently Issued Accounting Pronouncements
A list of recently issued accounting pronouncements that are relevant to us is included in note 2 of our consolidated financial statements
included elsewhere in this annual report.
Inflation
To date, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the
year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively.
Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation
in China in the future.
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B.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods presented:
2017
RMB
For the Year Ended December 31,
2019
2018
RMB
RMB
US$
Summary Consolidated Cash Flow Data:
Net cash generated from/(used in) operating activities
Net cash generated from/(used in) investing activities
Net cash generated from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of the year
(in thousands)
699,582
(644,992)
26,255
(10,911)
69,934
287,807
357,741
883,037
(458,047)
747,921
34,594
1,207,505
357,741
1,565,246
(1,116,816)
(115,483)
623,406
11,390
(597,503)
1,565,246
967,743
(160,421)
(16,587)
89,547
1,636
(85,825)
224,833
139,008
To date, our primary sources of liquidity have been issuances of equity securities in our initial public offering and historical private
placements. As of December 31, 2019, our cash, cash equivalents and restricted cash were RMB967.7 million (US$139.0 million). Our cash and cash
equivalents consist of cash at banks. Cash held in accounts with third-party online payment platforms are recorded as other receivables.
Our accounts payable include merchandise purchase payables, warehouse and logistics fees payables and payable to merchants representing
the unpaid balances to the merchants of cash collected by us on behalf of the merchants for products sold on our platform when we are viewed as the agent
in the sales arrangement. As of December 31, 2017, 2018 and 2019, our accounts payable amounted to RMB770.0 million, RMB1,432.3 million and
RMB742.0 million (US$106.6 million), respectively. These changes were primarily contributed by the changes in merchandise purchase payables, which
increased from RMB595.9 million as of December 31, 2017 to RMB1,247.2 million as of December 31, 2018, and decreased to RMB548.4 million
(US$78.8 million) as of December 31, 2019. The changes in merchandise purchase payables reflected a significant growth in our merchandise sales volumes
and scale of our operations from 2017 to 2018 and the shift of a portion of merchandise sales to our recently launched marketplace business platform from
2018 to 2019. Our merchandise purchase payable turnover days were 24.6 days in 2017, 31.0 days in 2018 and 34.9 days in 2019. Merchandise purchase
payable turnover days for a given period equal to average merchandise purchase payable at the beginning and the end of the period divided by cost of
revenues during the period and then multiplied by the number of days during the period.
As of December 31, 2017, 2018 and 2019, our net inventories amounted to RMB332.8 million, RMB675.5 million and RMB428.3 million
(US$61.5 million), respectively. The increase in our net inventories from December 31, 2017 to December 31, 2018 reflected the additional inventory
required to support our substantially expanded sales volumes during the same period, while the decrease in net inventories from December 31, 2018 to
December 31, 2019 was primarily due to a portion of merchandise sales shifting to our recently launched marketplace business platform, under which
substantially all of the third-party merchants handle the procurement, storage and management of their own inventory. Our inventory turnover days were
15.0 days in 2017, 17.0 days in 2018 and 21.5 days in 2019. Inventory turnover days for a given period equal to average inventory balances at the beginning
and the end of the period divided by cost of revenues during the period and then multiplied by the number of days during the period. Our inventory balances
will fluctuate over time due to a number of factors, including changes in our product mix. Our inventory balances typically increase when we prepare for
special promotion events, such as the special promotional campaign on our founding anniversary May 16 and the online shopping festival on November 11.
We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated
working capital requirements and capital expenditures for at least the next 12 months from the date of this annual report. After this report, we may decide to
enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of
additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could
result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to
us, if at all. Although as of December 31, 2019, we did not have any borrowings or long-term debt, given the potential impact of COVID-19 on our
business, financial condition and results of operation in the full fiscal year of 2020 and especially the first quarter of 2020, we will closely monitor our cash
flow and working capital positions for each period.
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As of December 31, 2019, we had RMB967.7 million (US$139.0 million) in cash, cash equivalents and restricted cash, of which
approximately 57.0% were held in Renminbi, 41.9% in U.S. dollars, and the remainder in other currencies. Although we consolidate the results of our VIEs
and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our VIEs
and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Our Consolidated
Affiliated Entities and Their Respective Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate
structure, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”
A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations,
Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service-related
foreign exchange transactions.
We expect that substantially all of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made
in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are
allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval
from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of
China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access
to foreign currencies for current account transactions in the future.
Operating activities
Net cash used in operating activities in 2019 was RMB1,116.8 million (US$160.4 million), as compared to net loss of RMB123.8 million
(US$17.8 million) in the same period. In 2019, the principal items accounting for the difference between our net cash used in operating activities and our net
loss were (i) a decrease in accounts payable of RMB674.4 million (US$96.9 million), (ii) a decrease in deferred revenue of RMB365.1 million (US$52.5
million) and (iii) a non-cash change in the estimate of refund payable to members of RMB379.4 million (US$54.5 million), partially offset by (i) a decrease
in inventories of RMB243.6 million (US$35.0 million) and (ii) an increase in other payable and accrued liabilities of RMB134.0 million (US$19.2 million).
The decreases in accounts payable and inventories were primarily due to a portion of merchandise sales shifting to our recently launched marketplace
business platform under which substantially all of the third-party merchants handle the procurement, storage and management of their own inventory. The
increase in other payable and accrued liabilities was primarily due to increases in merchants deposits in our marketplace business and salaries and welfare
payable. The non-cash change in the estimate of refund payable to members was due to the on-going pattern and changes of the members’ referral behavior
in that an increasing number of non-member users became members in 2019 due to the introduction of the three-month experiential membership period and
that the member can earn referral commission only when the referee is non-member.
Net cash generated from operating activities in 2018 was RMB883.0 million, as compared to net loss of RMB56.3 million in the same period.
In 2018, the principal items accounting for the difference between our net cash generated from operating activities and our net loss were (i) an increase in
accounts payable of RMB662.2 million, (ii) an increase in incentive payables to members of RMB182.1 million, (iii) an increase in refund payable to
members of RMB248.1 million, and (iv) an increase in deferred revenue of RMB223.4 million, partially offset by (i) an increase in inventories of
RMB345.3 million, and (ii) an increase in prepaid expenses and other current assets of RMB184.3 million. The increases in accounts payable, incentive
payables to members and inventories were primarily due to the growth of our business. The increase in refund payable to members was primarily due to an
increase in the number of members referring products and hence becoming eligible to receive refunds. The increase in prepaid expenses and other current
assets was primarily due to an increase in prepaid member training costs.
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Net cash generated from operating activities in 2017 was RMB699.6 million, as compared to net loss of RMB105.7 million in the same
period. In the year ended December 31, 2017, the principal items accounting for the difference between our net cash generated from operating activities and
our net loss were (i) an increase in accounts payable of RMB611.2 million, (ii) an increase in deferred revenue of RMB211.3 million, and (iii) an increase in
member management fees payable of RMB100.0 million, partially offset by (i) an increase in inventories of RMB242.8 million, and (ii) an increase in
prepaid expenses and other current assets of RMB145.4 million. The increase in accounts payable was primarily due to the growth of our business and the
resulting increase in our ability to negotiate more favorable payment terms from suppliers. The increase in advance from customers was primarily due to an
increase in sales volume. The increase in member management fees payable was primarily due to an increase in the number of members. The increase in
inventories was primarily due to the growth of our business. The increase in prepaid expenses and other current assets was primarily due to an increase in
prepaid member training costs. The increase in other receivables was primarily due to an increase in cash held in accounts with third-party payment
settlement platforms.
Investing activities
Net cash used in investing activities in 2019 was RMB115.5 million (US$16.6 million), primarily due to cash paid for short-term investments
of RMB4,793.9 million (US$688.6 million), cash paid for long-term investments of RMB120.9 million (US$17.4 million) and loans provided to third
parties of RMB171.9 million (US$24.7 million), partially offset by cash received from maturity of short-term investments of RMB5,028.8 million
(US$722.3 million).
Net cash used in investing activities in 2018 was RMB458.0 million, primarily due to purchase of short-term investments of
RMB11,539.4 million and purchase of property, equipment and software of RMB28.7 million, partially offset by maturity of short-term investments of
RMB11,124.6 million.
Net cash used in investing activities in 2017 was RMB645.0 million, primarily due to purchase of short-term investments of
RMB2,195.3 million and purchase of property, equipment and software of RMB13.7 million, partially offset by maturity of short-term investments of
RMB1,564.5 million.
Financing activities
Net cash generated from financing activities in 2019 was RMB623.4 million (US$89.5 million), mainly consisting of the proceeds from the
IPO.
shares.
Net cash generated from financing activities in 2018 was RMB747.9 million, mainly consisting of the proceeds from the issuance of preferred
Net cash generated from financing activities in 2017 was RMB26.3 million, consisting of the proceeds from the issuance of preferred shares.
Capital expenditures
Our capital expenditures were RMB13.8 million, RMB28.7 million and RMB28.2 million (US$4.0 million) in 2017, 2018 and 2019,
respectively. We intend to fund our future capital expenditures with our existing cash balance and cash flow from operating activities. We will continue to
make capital expenditures to meet the expected growth of our business.
Holding Company Structure
Yunji Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries,
our VIEs and their subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC
subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay
dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as
determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and our VIEs and their subsidiaries in
China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50%
of their registered capital. In addition, our wholly foreign-owned subsidiaries in China may allocate a portion of their after-tax profits based on PRC
accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion, and our VIEs and their subsidiaries may allocate a
portion of its after-tax profits based on PRC accounting standards to a surplus fund at their discretion. The statutory reserve funds and the discretionary
funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the
banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and
meet the requirements for statutory reserve funds.
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C.
Research and Development, Patents and Licenses, Etc.
See “Item 4. Information On the Company—B. Business Overview—Technology” and “Item 4. Information On the Company—B. Business
Overview—Intellectual Property.”
D.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the
year ended December 31, 2019 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E.
Off-balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition,
we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
F.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2019:
Operating lease
Less than
1 year
Payment Due by Period
3-5
1-3
years
years
(in RMB thousands)
19,254 23,471 5,705
More than
5 years
—
Total
48,430
Our operating lease obligations relate to our leases of offices and warehouses. Other than as shown above, we did not have any significant
capital and other commitments, long-term obligations or guarantees as of December 31, 2019.
G.
Safe Harbor
See “Forward-Looking Statements” on page 3 of this annual report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
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Directors and Executive Officers
Shanglue Xiao
Huan Hao
Qingrong Kong
Yanhua Sun
Wei Ying
Li-Lan Cheng
Gao Wang
Suqin Xi
Jun Zhang
Jianjian Hu
Hui Ma
Chen Chen
Position/Title
Age
41 Chairman of the Board of Directors and Chief Executive Officer
38 Director and Chief Technology Officer
33 Director
42 Director
53 Director
55 Independent Director
55 Independent Director
64 Independent Director
46 Chief Operating Officer
40 Chief Marketing Officer
42 Chief People Officer and Chief Strategy Officer
39 Chief Financial Officer
Mr. Shanglue Xiao is our founder, and has served as the chairman of our board of directors and chief executive officer since our inception.
Mr. Xiao is a serial entrepreneur with more than 15 years of experience in the e-commerce industry. Prior to founding our company, Mr. Xiao founded the
Xiaoye Perfume, an online cosmetics retailer in China, in 2003. Mr. Xiao received his EMBA from China Europe International Business School.
Mr. Huan Hao has served as our director since February 2018 and our chief technology officer since our inception. Mr. Hao has also been in
charge of our member community management since April 2020. Mr. Hao has extensive knowledge of internet companies and the technology industry.
Mr. Hao served as a senior manager in Tencent (700.HK), a provider of comprehensive internet services serving the largest online community in China and
listed on Hong Kong Stock Exchange, from December 2011 to May 2015. Mr. Hao worked as a consultant in Oracle from April 2009 to November 2011.
Mr. Hao received his bachelor’s degree from Nanchang University.
Mr. Qingrong Kong has served as our director since February 2018. Mr. Kong is currently a director in Crescent HydePark Advisors China,
where he focuses on private equity investment in consumer-related industries. From October 2010 to July 2012, Mr. Kong worked as an assistant manager
of transaction service department in PricewaterhouseCoopers. Prior to this, Mr. Kong was a senior consultant in Ernst & Young from July 2007 to
September 2010. Mr. Kong is a Chartered Financial Analyst (CFA) and a member of China Institute of Certified Public Accountants (CICPA). Mr. Kong
received his dual bachelor’s degree in law and accounting from Shanghai Jiaotong University.
Mr. Yanhua Sun has served as our director since February 2018. Mr. Sun has over 13 years of experience in direct investment, strategic
management and marketing management. Mr. Sun is currently the managing director of Eastern Bell Venture Capital. Mr. Sun was as a director of Envision
Capital from September 2011 to December 2013. Prior to joining Envision Capital, Mr. Sun was a vice president at Capital Today. Mr. Sun received his
bachelor’s degree from Zhejiang University and an MBA from Fudan University.
Mr. Wei Ying has served as our director since February 2018. Mr. Ying is currently a managing director of CDH Investments. Prior to joining
CDH Investments, Mr. Ying was a vice president of China Water Affairs Group Limited from February 2007 to March 2009 and president and executive
director of China Plant Development Holdings Limited from July 2008 to July 2009. Prior to this, Mr. Ying served as an executive director of China
Resources Textiles (Holding) Co., Ltd. Mr. Ying currently serves as non-executive director for several Hong Kong listed companies, such as CHTC Fong’s
International Company Limited (0641.HK), New Focus Auto Tech Holdings Ltd (0360.HK), Fountain Set (Holdings) Limited (0420.HK), China Health
Group Limited (0673.HK) and Zhongsheng Group Holdings Limited (0881.HK). Mr. Ying has also served as a director of Giant Interactive Group Inc.
since May 2016. Mr. Ying received his bachelor’s degree in accounting from Zhejiang Gongshang University and an MBA from University of San
Francisco.
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Mr. Li-Lan Cheng has served as our director since May 2019. Mr. Cheng has served as the acting chief financial officer of Leju Holdings
Limited (NYSE: LEJU) since June 2017. Mr. Cheng also served as Leju’s executive director from March 2014 to March 2017. Mr. Cheng has served as the
chief operating officer of E-House (China) Holdings Limited, a real estate services company in China, since April 2012. He was E-House’s chief financial
officer from November 2006 to April 2012. Prior to joining E-House, Mr. Cheng served as the chief financial officer of SouFun Holdings Limited, a real
estate internet company in China, from 2005 to 2006. From 2002 to 2004, Mr. Cheng served as an executive director and the chief financial officer of
SOHO China Limited, a real estate developer in Beijing. Mr. Cheng was an assistant director and the head of the Asian transportation sector investment
banking group of ABN AMRO Asia from 1997 to 2002. Mr. Cheng currently serves as an independent director of 51job, Inc. (NASDAQ: JOBS), a human
resource service provider, an independent director of LAIX Inc. (NYSE: LAIX), an artificial intelligence company for English language training, and an
executive director of E-House (China) Enterprise Holdings Limited (2048.HK), a real estate transaction service provider in China. Mr. Cheng received a
bachelor’s degree in Economics from Swarthmore College and a Ph.D. degree in Economics from the Massachusetts Institute of Technology. Mr. Cheng is
a chartered financial analyst (CFA).
Mr. Gao Wang has served as our director since May 2019. Mr. Wang has been a professor of marketing at China Europe International
Business School (CEIBS) since 2009. Prior to joining CEIBS, Mr. Wang was an associate professor of marketing at the School of Economics and
Management, Tsinghua University from 2002 to 2008. Before joining the faculty of Tsinghua University, he worked as a manager of the Strategic Analytics
Group at the Minute Maid Company, a division of Coca Cola in Houston, for two years with responsibility for sales planning/evaluation and marketing plan.
Prior to that, Mr. Wang was a senior consultant at Information Resources Inc. (IRI) in Chicago from 1998 to 2000 with responsibility for marketing model
development. Mr. Wang currently serves as the supervisor of Beijing Zhuoyuezhiye Consulting Company Limited and as non-executive director of the
following companies: GOME Electrical Appliances Holding Limited, Anhui Gujing Distillery Company Limited, CCDI Group Company Limited, Canature
Environmental Products Co., Ltd and Sineng Electric Company Limited. Mr. Wang received his bachelor’s degree in demography from Renmin University
of China and his master’s and Ph.D. degrees in sociology from Yale University.
Mr. Suqin Xi has served as our director since January 2020. Mr. Xi has been a consultant of Puhua Capital since October 2019. Prior to joining
Puhua Capital, Mr. Xi served as a counsel of Hangzhou Municipal Market Supervision Bureau from 2014 to 2016. From 2009 to 2014, Mr. Xi was the
director of Hangzhou Municipal Financial Services Office, where he was responsible for developing and managing local financial services. Prior to that,
Mr. Xi served as the deputy director of Hangzhou Administration for Industry and Commerce, from 1998 to 2009, where he was in charge of company
registration, trademark advertising supervision, e-government and policy related affairs. Mr. Xi received his bachelor’s degree in history from Hangzhou
University in 1982.
Mr. Jun Zhang has served as our chief operating officer since June 2019. Mr. Zhang has over a decade of experience in retail and e-commerce.
Prior to joining Yunji, he served as a general manager of Alibaba’s Tmall 3C Unit starting in 2007, where he was responsible for multiple segments of
business operations. Mr. Zhang was also one of the founding members of Tmall, where he participated in system construction for commodity category
management and design, platform operations, and marketing. Prior to joining Alibaba, Mr. Zhang served as China Operations Manager of Bertelsmann’s
book business. Mr. Zhang graduated from Hubei Radio and TV University.
Ms. Jianjian Hu has served as our chief marketing officer since June 2019 and, before that, served as our chief operating officer from October
2016 until June 2019. Ms. Hu has over 19 years of extensive experience in fast moving consumer goods and retail industry. Prior to joining our company,
Ms. Hu served as the national procurement director of Yonghui Superstores Co., Ltd (SSE: 601933), a company operating top chain supermarkets in China,
from May 2010 to October 2016. Prior to this, Ms. Hu was the district procurement director of Walmart’s Fujian branch from April 2007 to May 2010.
Ms. Hu also worked in Fujian Trust-Mart Supermarket Chain Co., Ltd. from October 1999 to March 2007, serving as the senior district procurement
manager. Ms. Hu is now pursuing her EMBA in Zhejiang University.
Mr. Hui Ma has served as our chief people officer and chief strategy officer since November 2018. Mr. Ma is an industry veteran and has over
12 years of experience in the e-commerce sector in China. Prior to joining us, Mr. Ma served as the chief operating officer of SKIO Group, an innovated
new energy automobile company in China, from June 2015 to November 2018. Before that, Mr. Ma held various positions at Alibaba (NYSE: BABA),
including serving as general manager of its consumer experience development division from June 2013 to June 2015, as director of its information platform
technology department from September 2011 to June 2013, and as senior manager of its human resources department from November 2009 to September
2011. Mr. Ma received his bachelor’s degree in civil engineering and his Ph.D. in advanced manufacturing engineering and information system from
Zhejiang University.
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Mr. Chen Chen has served as our chief financial officer since May 2018. Mr. Chen has more than 16 years of comprehensive experience in
audit and consulting services. Prior to joining us, Mr. Chen was a partner at Deloitte, and had been working in Deloitte since July 2002. Mr. Chen currently
serves as an independent director and chair of the audit committee of Q&K International Group Limited. Mr. Chen is a member of the Association of
International Certified Professional Accountants (AICPA) and China Institute of Certified Public Accountants (CICPA). Mr. Chen received his bachelor’s
degree from Shanghai Jiaotong University.
B.
Compensation of Directors and Executive Officers
For the fiscal year ended December 31, 2019, we paid an aggregate of RMB13.4 million (US$1.9 million) in cash to our executive officers,
and we did not pay any compensation to our non-executive directors. We have not set aside or accrued any amount to provide pension, retirement or other
similar benefits to our directors and executive officers. Our PRC subsidiaries and our VIEs are required by law to make contributions equal to certain
percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a
housing provident fund.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is
employed for a specified time period. We may terminate employment for cause, at any time, for certain acts of the executive officer, such as continued
failure to satisfactorily perform, willful misconduct or gross negligence in the performance of agreed duties, conviction or entry of a guilty or nolo
contendere plea of any felony or any misdemeanor involving moral turpitude, or dishonest act that results in material to our detriment or material of the
employment agreement. We may also terminate an executive officer’s employment without cause upon 60-day advance written notice. In such case of
termination by us, we will provide severance payments to the executive officer as may be agreed between the executive officer and us. The executive officer
may resign at any time with a 60-day advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict
confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any
of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or
proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose
in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment
with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these
inventions, designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her
employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) solicit from any
customer doing business with us during the effective term of the employment agreement business of the same or of a similar nature to our business;
(ii) solicit from any of our known potential customer business of the same or of a similar nature to that which has been the subject of our known written or
oral bid, offer or proposal, or of substantial preparation with a view to making such a bid, proposal or offer; (iii) solicit the employment or services of, or
hire or engage, any person who is known to be employed or engaged by us; or (iv) otherwise interfere with our business or accounts, including, but not
limited to, with respect to any relationship or agreement between any vendor or supplier and us.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to
indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of
their being a director or officer of our company.
2019 Share Incentive Plan
In December 2017, our shareholders and board of directors approved the 2017 Share Incentive Plan, which we refer to as the 2017 Plan in this
annual report, to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and promote the
success of our business. In March 2019, we adopted a 2019 Share Incentive Plan, or the 2019 Plan, which replaced the 2017 Plan in its entirety, and the
2017 Plan is no longer effective. The awards granted and outstanding under the 2017 Plan survive the termination of the 2017 Plan and remain effective and
binding under the 2019 Plan. The maximum aggregate number of ordinary shares that may be issued under 2019 Plan is initially 227,401,861 ordinary
shares, which shall be increased by a number equal to 1% of the then total issued and outstanding ordinary shares on an as-converted and fully diluted basis,
on each of the first, second, third, fourth and fifth anniversary of the date of effectiveness of the 2019 Plan. As of February 29, 2020, options to purchase a
total of 92,682,510 Class A ordinary shares and 85,897,600 restricted share units were outstanding under the 2019 Plan.
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The following paragraphs summarize the principal terms of the 2019 Plan.
Type of Awards. The 2019 Plan permits the awards of options, restricted share units, restricted shares, share appreciation rights, dividend
equivalents and share payments.
Plan Administration. Our board of directors or a committee appointed by the board of directors will administer the 2019 Plan. The plan
administrator will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and
conditions of each grant.
Award Agreement. Awards granted under the 2019 Plan are evidenced by an award agreement that sets forth the terms, conditions and
limitations for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service
terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to our directors, employees, consultants and members.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the relevant award agreement.
Options that are vested and exercisable will terminate if they are not exercised prior to the time as the plan administrator determines at the time of grant.
However, the maximum exercisable term is ten years from the date of effectiveness of the 2019 Plan.
Transfer Restrictions. Awards may not be transferred in any manner by the participant other than in accordance with the exceptions provided
in the 2019 Plan or the relevant award agreement or otherwise determined by the plan administrator, such as transfers by will or the laws of descent and
distribution.
Termination and Amendment of the 2019 Plan. Unless terminated earlier, the 2019 Plan has a term of ten years from the date of effectiveness
of the 2019 Plan. Our board of directors has the authority to terminate, amend, suspend or modify the 2019 Plan in accordance with our articles of
association. However, without the prior written consent of the participant, no such action may adversely affect in any material way any award previously
granted pursuant to the 2019 Plan.
The following table summarizes, as of February 29, 2020, the number of ordinary shares underlying outstanding options, restricted shares and
other equity awards that we granted to our directors and executive officers.
Name
Shanglue Xiao
Huan Hao
Qingrong Kong
Yanhua Sun
Wei Ying
Li-Lan Cheng
Ordinary Shares
Underlying
Options and
Restricted
Share
Units
20,000,000
15,000,000(1)
*
*(1)
—
—
—
*
Exercise Price
(US$/Share)
0.0925
—
0.0925
—
—
—
—
0.1
113
Date of Grant
December 19, 2017
November 28, 2018
December 19, 2017
November 28, 2018 and
January 1, 2020
Date of Expiration
December 18, 2023
November 27, 2024
December 18, 2023
November 27, 2024 and
December 31, 2025
—
—
—
—
—
—
May 3, 2019
May 2, 2025
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Name
Gao Wang
Suqin Xi
Jun Zhang
Jianjian Hu
Hui Ma
Chen Chen
Ordinary Shares
Underlying
Options and
Restricted
Share
Units
*
*(1)
22,600,000(1)
*
*(1)
*
*(1)
*
*(1)
Exercise Price
(US$/Share)
0.1
—
—
0.0925
—
0.4
—
0.1
—
Date of Grant
Date of Expiration
May 3, 2019
January 1, 2020
January 1, 2020
December 19, 2017
November 28, 2018 and
January 1, 2020
November 28, 2018
January 1, 2020
June 30, 2018
November 28, 2018 and
January 1, 2020
May 2, 2025
December 31, 2025
December 31, 2025
December 18, 2023
November 27, 2024 and
December 31, 2025
November 27, 2024
December 31, 2025
June 29, 2024
November 27, 2024 and
December 31, 2025
All directors and executive officers as
a group
89,550,000
Note:
*
All awards granted to such director or officer were less than 1% of our total ordinary shares on an as-converted basis outstanding as of the date of this
annual report.
(1) Represents restricted share units.
As of February 29, 2020, our employees, other than our directors and executive officers held options to purchase 33,683,920 Class A ordinary
shares, with exercise prices ranging from US$0.0925 per share to US$0.5 per share and 40,864,500 restricted share units.
C.
Board Practices
Our board of directors consists of eight directors. A director is not required to hold any shares in our company by way of qualification. A
director who is in any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or transaction with our company is
required to declare the nature of his interest at a meeting of our directors. Subject to the Nasdaq Stock Market Rules and disqualification by the chairman of
the relevant board meeting, a director may vote in respect of any contract or transaction or proposed contract or transaction notwithstanding that he may be
interested therein, and if he does so his vote shall be counted and he shall be counted in the quorum at any meeting of our directors at which any such
contract or transaction or proposed contract or transaction is considered. Our directors may exercise all the powers of our company to raise or borrow money
and to mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or any part thereof, to issue debentures, debenture
stock, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of our company or of any third party.
Committees of the Board of Directors
We have establish three committees under the board of directors: an audit committee, a compensation committee and a nominating and
corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described
below.
Audit Committee. Our audit committee consists of Mr. Li-Lan Cheng, Mr. Gao Wang and Mr. Suqin Xi. Mr. Li-Lan Cheng is the chairman of
our audit committee. We have determined that Mr. Li-Lan Cheng, Mr. Gao Wang and Mr. Suqin Xi satisfy the “independence” requirements of the Nasdaq
Stock Market Rules and Rule 10A-3 under the Exchange Act. We have determined that Mr. Li-Lan Cheng qualifies as an “audit committee financial
expert.” The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The
audit committee is responsible for, among other things:
•
appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the
independent auditors;
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•
•
•
•
reviewing with the independent auditors any audit problems or difficulties and management’s response;
discussing the annual audited financial statements with management and the independent auditors;
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor
and control major financial risk exposures;
reviewing and approving all proposed related party transactions;
• meeting separately and periodically with management and the independent auditors; and
• monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance.
Compensation Committee. Our compensation committee consists of Mr. Li-Lan Cheng, Mr. Gao Wang and Mr. Suqin Xi. Mr. Li-Lan Cheng
is the chairman of our compensation committee. We have determined that Mr. Li-Lan Cheng, Mr. Gao Wang and Mr. Suqin Xi satisfy the “independence”
requirements of the Nasdaq Stock Market Rules. The compensation committee will assist the board in reviewing and approving the compensation structure,
including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee
meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
•
•
•
•
reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other
executive officers;
reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors;
reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s
independence from management.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Li-Lan Cheng,
Mr. Gao Wang and Mr. Suqin Xi. Mr. Li-Lan Cheng is the chairman of our nominating and corporate governance committee. We have determined that
Mr. Li-Lan Cheng, Mr. Gao Wang and Mr. Suqin Xi satisfy the “independence” requirements of the Nasdaq Stock Market Rules. The nominating and
corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the
composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
•
•
selecting and recommending to the board nominees for election by the shareholders or appointment by the board;
reviewing annually with the board the current composition of the board with regards to characteristics such as independence,
knowledge, skills, experience and diversity;
• making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the
board; and
•
advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our
compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and
on any remedial action to be taken.
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Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to
act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also
owe to our company a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth Courts have moved toward an objective
standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us,
our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights
vested thereunder in the holders of the shares. In certain limited exceptional circumstances, a shareholder may have the right to seek damages in our name if
a duty owed by our directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and
powers of our board of directors include, among others:
•
•
•
•
•
convening shareholders’ annual and extraordinary general meetings and reporting its work to shareholders at such meetings;
declaring dividends and distributions;
appointing officers and determining the term of office of the officers;
exercising the borrowing powers of our company and mortgaging the property of our company; and
approving the transfer of shares in our company, including the registration of such shares in our share register.
Terms of Directors and Officers
Our directors may be elected by an ordinary resolution of our shareholders. Alternatively, our board of directors may, by the affirmative vote
of a simple majority of the directors present and voting at a board meeting appoint any person as a director to fill a casual vacancy on our board or as an
addition to the existing board. Our directors are not automatically subject to a term of office and hold office until such time as they are removed from office
by an ordinary resolution of our shareholders. In addition, a director will cease to be a director if he (i) becomes bankrupt or makes any arrangement or
composition with his creditors; (ii) dies or is found to be or becomes of unsound mind; (iii) resigns his office by notice in writing; (iv) without special leave
of absence from our board, is absent from meetings of our board for three consecutive meetings and our board resolves that his office be vacated; or (v) is
removed from office pursuant to any other provision of our articles of association.
Our officers are appointed by and serve at the discretion of the board of directors, and may be removed by our board of directors.
D.
Employees
As of December 31, 2019, we had a total of 1,334 employees. We had a total of 605 and 1,013 employees as of December 31, 2017 and 2018,
respectively. The following table gives breakdowns of our employees as of December 31, 2019 by function:
Function
Procurement
Operations, including customer service and logistics
Technology
Sales and Marketing
General and Administrative
Total
116
As of December 31, 2019
226
167
523
205
213
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To focus corporate resources on the more crucial parts of our business model and for better operating efficiency, we enter into arrangements
with third-party BPO companies to provide certain ancillary services available on our platform, such as real-time customer service. As of December 31,
2019, 557 of our customer service personnel were outsourced from third-party BPO companies, representing 48.6% of the total customer service personnel.
We outsource provision of member services to third-party service companies and they select, hire, train and compensate service managers at
our request. Most of the service managers are our members. Service managers enter into contracts with third-party service companies and are not our
employees. As of December 31, 2019, our members were served by more than 80,000 service managers. We currently work with seven third-party service
companies and enter into agreements with them on an annual basis or for a longer term. These third-party service companies select service managers based
on the standards we provide in our agreements. We have the right to supervise the performance of the service managers and may request third-party service
companies to replace service managers who do not meet our standards. We pay training fees to third-party service companies based on the number of
members managed by these service companies through service managers that provide training and support to our members. We pay member management
fees to third-party service companies for their product sales facilitation services. The service companies compensate the service managers based on the
length of work hours and other performance criteria.
As required by regulations in China, we participate in various government statutory employee benefit plans, including social insurance funds,
namely, medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits, as well as a housing provident
fund. We are required under PRC law to contribute 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.
We enter into standard labor contracts with our employees. We also enter into standard confidentiality and non-compete agreements with all
of our employees. The non-compete restricted period typically expires two years after the termination of employment, and we agree to compensate the
employee with a certain percentage of his/her pre-departure salary during the restricted period.
Our success depends on our ability to attract, retain and motivate qualified employees that share our values. We place great emphasis on our
corporate culture to ensure that we maintain consistently high standards everywhere we operate. We believe that we maintain a good working relationship
with our employees, and we have not experienced any labor disputes. None of our employees are represented by labor unions.
E.
Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of
February 29, 2020 by:
•
•
each of our directors and executive officers; and
each person known to us to own beneficially more than 5% of our total outstanding shares.
The calculations in the table below are based on 2,123,164,162 ordinary shares as of February 29, 2020, including (i) 1,173,204,162 Class A
ordinary shares (excluding the company’s repurchase of 35,627,060 Class A ordinary shares in the form of ADSs held as treasury shares and reserved for
future issuance upon the exercising or vesting of awards granted under our share incentive plans); and (ii) 949,960,000 Class B ordinary shares.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including
through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation
of the percentage ownership of any other person.
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Directors and Executive Officers**:
Shanglue Xiao(1)
Huan Hao(2)
Qingrong Kong(3)
Yanhua Sun(4)
Wei Ying(5)
Li-Lan Cheng(6)
Gao Wang(7)
Jun Zhang
Suqin Xi(8)
Jianjian Hu
Hui Ma
Chen Chen
All Directors and Executive Officers as a Group
Principal Shareholders:
Lanlan Ltd.(9)
Entities affiliated with Eastern Bell Venture Capital(10)
CPYD Singapore Pte. Ltd.(11)
Fasturn Overseas Limited(12)
Trustbridge Partners IV, LP(13)
Acceleration S Limited(14)
Ordinary Shares Beneficially Owned
Class A
Ordinary
Shares
Class B
Ordinary
Shares
Total Ordinary
Shares
% of
Total
Ordinary
Shares
% of
Aggregate
Voting
Power***
10,000,000
51,540,000
—
—
—
—
—
—
—
*
—
—
68,040,000
949,960,000
—
—
—
—
—
—
—
—
—
—
—
949,960,000
—
949,960,000
271,832,540
215,800,000
149,200,000
111,000,000
110,803,324
—
—
—
—
—
959,960,000
51,540,000
—
—
—
—
—
—
—
*
—
—
1,018,000,000
949,960,000
271,832,540
215,800,000
149,200,000
111,000,000
110,803,324
45.0
2.4
—
—
—
—
—
—
—
*
—
—
47.6
44.7
12.8
10.2
7.0
5.2
5.2
89.0
0.5
—
—
—
—
—
—
—
*
—
—
89.5
89.0
2.5
2.0
1.4
1.0
1.0
*
**
***
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Less than 1% of our total outstanding shares.
Except as indicated otherwise below, the business address of our directors and executive officers is 15/F, South Building, Hipark Phase 2, Xiaoshan
District, Hangzhou 310000, Zhejiang Province, People’s Republic of China.
For each person or group included in this column, percentage of total voting power represents voting power based on both Class A and Class B
ordinary shares held by such person or group with respect to all outstanding shares of our Class A and Class B ordinary shares as a single class. Each
holder of our Class A ordinary shares is entitled to one vote per share. Each holder of our Class B ordinary shares is entitled to ten votes per share.
Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a one-for-one basis, while Class A ordinary
shares are not convertible into Class B ordinary shares under any circumstances.
Represents (i) 949,960,000 Class B ordinary shares held by Lanlan Ltd., a BVI business company, and (ii) 10,000,000 Class A ordinary shares
issuable to Mr. Shanglue Xiao upon exercise of options within 60 days after February 29, 2020. Lanlan Ltd. is wholly owned by Mr. Shanglue Xiao.
The registered address of Lanlan Ltd. is Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British
Virgin Islands.
Represents (i) 50,720,000 Class A ordinary shares held by Qiuqiu Inc., a BVI business company, and (ii) 820,000 Class A ordinary shares issuable
to Mr. Huan Hao upon exercise of options within 60 days after February 29, 2020. Qiuqiu Inc. is wholly owned by Mr. Huan Hao. The registered
address of Qiuqiu Inc. is Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin
Islands.
The business address of Mr. Qingrong Kong is 378 Wukang Road, 6/F, Shanghai, People’s Republic of China.
The business address of Mr. Yanhua Sun is Unit C, 7th Floor, East Hope Plaza, 1777 Century Avenue, Shanghai, People’s Republic of China.
The business address of Mr. Wei Ying is 3/F, K.stone Building, No. 1 East Yan’an Road, Huangpu District, Shanghai, People’s Republic of China.
The business address of Mr. Li-Lan Cheng is 11/F Floor, Yinlin Building, No. 788 Guangzhong Road, Shanghai, China.
The business address of Mr. Gao Wang is 699 Hongfeng Road, Pudong New District, Shanghai 201206, China.
The business address of Mr. Suqin Xi is Jingyi Villa, No. 5 Geling Road, Beishan Street, Xihu District, Hangzhou, China.
Based on a Schedule 13G filed by the relevant reporting persons on February 7, 2020. Represents 949,960,000 Class B ordinary shares held by
Lanlan Ltd., a BVI business company. Lanlan Ltd. is wholly owned by Mr. Shanglue Xiao. The registered address of Lanlan Ltd. is Maples
Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands.
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(10) Represents (i) 211,711,690 Class A ordinary shares and (ii) 332,085 ADSs, representing 3,320,850 Class A ordinary shares, held by Eastern Bell
XIX Investment Limited, a BVI business company, and (iii) 56,800,000 Class A ordinary shares held by Eastern Bell XII Investment Limited, a
British Virgin Islands company. The registered address of each of Eastern Bell XIX Investment Limited and Eastern Bell XII Investment Limited is
Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands. Eastern Bell XIX Investment Limited is wholly-owned by Suzhou
Zhongding No. 3 Venture Capital Center (Limited Partnership) (苏州钟鼎三号创业投资中心（有限合伙）) , whose general partners are Shanghai
Dingying Investment Management Center (Limited Partnership) (上海鼎迎投资管理中心（有限合伙）) and Suzhou Zhongding Hengtang Equity
Investment Management Center (Limited Partnership) ( 苏州钟鼎恒棠股权投资管理中心（有限合伙）), each of which is ultimately controlled
by Mr. Li Yan. Eastern Bell XII Investment Limited is wholly-owned by Suzhou Zhongding No. 4 Venture Capital Center (Limited Partnership) (苏
州钟鼎四号创业投资中心（有限合伙）), whose general partners are Shanghai Dingying Investment Management Center (Limited Partnership)
(上海鼎迎投资管理中心（有限合伙）) and Shanghai Zhongding Investment Center (Limited Partnership) (上海种鼎创业投资中心（有限合
伙）), each of which is ultimately controlled by Mr. Li Yan.
(11) Represents 215,800,000 Class A ordinary shares held by CPYD Singapore Pte. Ltd., a Singapore exempted private company limited by share. The
registered address of CPYD Singapore Pte. Ltd. is Marker Icon, 1 Temasek Avenue, #20-01 Millennia Tower, Singapore 039192. CPYD Singapore
Pte. Ltd. is beneficially owned and controlled by Mr. David Hand. CPYD Singapore Pte. Ltd. is a fund managed by Crescent Point.
(12) Represents (i) 126,820,000 Class A ordinary shares and (ii) 2,238,000 ADSs, representing 22,380,000 Class A ordinary shares, held by Fasturn
Overseas Limited, a BVI business company. Fasturn Overseas Limited is wholly owned by Mr. Yuan Chen. The registered address of Fasturn
Overseas Limited is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands.
(13) Based on a Schedule 13G filed by the relevant reporting persons on February 14, 2020. Represents (i) 94,350,000 Class A ordinary shares and (ii)
1,665,000 ADSs, representing 16,650,000 Class A ordinary shares, held by Trustbridge Partners IV, LP a Cayman Islands limited partnership.
Trustbridge Partners IV, LP is controlled by TB Alternative Assets Ltd, an investment adviser organized under the Cayman Islands and registered
under Section 203 of the Investment Advisors Act of 1940. TB Alternative Assets Ltd acts as the investment adviser of Trustbridge Partners IV LP.
The registered address of Trustbridge Partners IV, LP is c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town,
Grand Cayman KY1-9005, Cayman Islands. The business address of TB Alternative Assets Ltd is c/o Maples Corporate Services Limited, Ugland
House, Grand Cayman, Cayman Islands, KY1-1104.
(14) Represents 110,803,324 Class A ordinary shares held by Acceleration S Limited, a BVI business company. Acceleration S Limited is ultimately
controlled by Mr. Shangzhi Wu. The registered address of Acceleration S Limited is Maples Corporate Services (BVI) Limited, Kingston Chambers,
PO Box 173, Road Town, Tortola, British Virgin Islands.
To our knowledge, as of February 29, 2020, 231,410,730 of our ordinary shares were held by one record holder in the United States, which
was Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is
likely to be much larger than the number of record holders of our ordinary shares in the United States.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to
one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B.
Related Party Transactions
Contractual Arrangements with our Variable Interest Entity and its Shareholders
See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated
Entities and Their Respective Shareholders.”
Shareholders Agreement
We entered into our amended and restated shareholders agreement on June 4, 2018 with our shareholders, which consist of holders of ordinary
shares and preferred shares. The shareholders agreement provides for certain shareholders’ rights, including information and inspection rights, right of
participation, right of first refusal and co-sale rights, and contains provisions governing our board of directors and other corporate governance matters.
Registration Rights Granted to Shareholders
We have granted certain registration rights to our shareholders. Set forth below is a description of the registration rights granted under the
shareholders agreement.
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Demand Registration Rights. At any time after the earlier of (i) June 4, 2021 or (ii) six months after the completion of our initial public
offering, holders of at least twenty percent (20%) of the registrable securities (including preferred shares and ordinary shares issued upon conversion of
preferred shares) then issued and outstanding have the right to demand that we file a registration statement of all registrable securities that the holders
request to be registered and included in such registration by written notice. Other than required by the underwriter(s) in connection with our initial public
offering, at least twenty-five percent (25%) of the registrable securities requested by the holders to be included in the underwriting and registration shall be
so included. We have the right to defer filing of a registration statement for a period of not more than 90 days after the receipt of the request of the initiating
holders if we furnish to the holders requesting registration a certificate signed by our president or chief executive officer stating that in the good faith
judgment of our board of directors, it would be materially detrimental to us and our shareholders for such registration statement to be filed at such time.
However, we cannot exercise the deferral right more than once in any twelve-month period. We are obligated to effect no more than three demand
registrations, other than demand registration to be effected pursuant to registration statement on Form F-3, for which an unlimited number of demand
registrations shall be permitted.
Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our securities, we must offer shareholders
an opportunity to include in the registration all or any part of the registrable securities held by such holders. If the managing underwriters of any
underwritten offering determine in good faith that marketing factors require a limitation of the number of shares to be underwritten, and the number of
shares that may be included in the registration and the underwriting shall be allocated (i) first, to us, (ii) second, to each holder requesting inclusion of its
registrable securities in such registration statement on a pro rata basis based on the total number of registrable securities then held by each such holder;
provided that at least twenty-five percent (25%) of the registrable securities requested by the holders to be included in the underwriting and registration shall
be so included and all shares that are not registrable securities shall first be excluded from such registration and underwriting before any registrable
securities are so excluded.
Form F-3 Registration Rights. Our shareholders may request us in writing to file an unlimited number of registration statements on Form F-3.
We shall effect the registration of the securities on Form F-3 as soon as practicable, except in certain circumstances.
Expenses of Registration. We will bear all registration expenses, other than underwriting discounts and commissions.
Termination of Registration Rights. Our shareholders’ registration rights will terminate (i) after two years of the initial public offering, or
(ii) all such registrable securities proposed to be sold by a shareholder may then be sold under Rule 144 promulgated under the Securities Act.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Employment
Agreements and Indemnification Agreements.”
Share Incentive Plan
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers— “2019 Stock Incentive
Plan.”
Transactions with Our Founder and Related Entities
Transactions with Hangzhou Yuepeng Trading Co., Ltd., or Hangzhou Yuepeng. Hangzhou Yuepeng is under control of Mr. Shanglue Xiao,
our chairman and chief executive officer. In 2017, 2018 and 2019, we made payments on behalf of Hangzhou Yuepeng in the amount of RMB0.1 million,
nil and nil, respectively. As of December 31, 2017, 2018 and 2019, we had RMB0.9 million, nil and nil, respectively, due from Hangzhou Yuepeng,
representing the payment made on behalf of Hangzhou Yuepeng. The outstanding balances have been fully repaid and there is no amount due from the
related party as of the date of this annual report.
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Transactions with Hongkong Smallye International Investment Limited, or Hongkong Smallye. Hongkong Smallye is under control of
Mr. Shanglue Xiao, our chairman and chief executive officer. As of December 31, 2017, 2018 and 2019, we had RMB0.2 million, nil and nil, respectively,
due from Hongkong Smallye and RMB1.4 million, nil and nil, respectively, due to Hongkong Smallye, representing ordinary course trade receivables
generated from our business operations. The outstanding balances have been fully repaid and there is no amount due from or to the related party as of the
date of this annual report.
Transactions with Small Ye Group, or Small Ye. Small Ye is under control of Mr. Shanglue Xiao, our chairman and chief executive officer. As
of December 31, 2017, 2018 and 2019, we had RMB40 thousand, nil and nil, respectively, due from Small Ye, representing the payment made on behalf of
Small Ye. The outstanding balances have been fully repaid and there is no amount due from the related party as of the date of this annual report. In 2017,
2018 and 2019, we purchased products from Small Ye in the amount of nil, nil and RMB3.1 million (US$0.4 million), respectively. As of December 31,
2017, 2018 and 2019, we had nil, nil and RMB0.7 million (US$95.2 thousand), respectively, due to Small Ye, representing the payments due to Small Ye
for products purchased from Small Ye.
Transactions with Mr. Shanglue Xiao. In 2017, 2018 and 2019, we made reimbursement to Mr. Shanglue Xiao, our chairman and chief
executive officer, for the expenses he incurred in connection with his business activities for our company in the amount of RMB2.5 million, nil and nil,
respectively. As of December 31, 2017, 2018 and 2019, we had RMB1.8 million, nil and nil, respectively, due to Mr. Shanglue Xiao, our chairman and
chief executive officer, representing the expenses he incurred in connection with his business activities for our company that have not been reimbursed by
us. The outstanding balances have been fully repaid and there is no amount due to Mr. Shanglue Xiao as of the date of this annual report. In 2017, 2018 and
2019, we made payments on behalf of Mr. Shanglue Xiao, our chairman and chief executive officer, for his personal education purposes in the amount of
nil, RMB0.6 million and nil, respectively. As of December 31, 2017, 2018 and 2019, we had nil, RMB0.4 million and nil, respectively, due from
Mr. Shanglue Xiao, our chairman and chief executive officer, representing payment on behalf of Mr. Shanglue Xiao for his personal education purposes.
The outstanding balances have been fully repaid and there is no amount due from Mr. Shanglue Xiao as of the date of this annual report.
Transaction with Wuhan Dahong Enterprise Management Partnership (LP), or Wuhan Dahong. Wuhan Dahong holds non-controlling equity
interest in Wuhan Yunteng, one of our principal subsidiaries. As of December 31, 2017, 2018 and 2019, we had nil, RMB14 thousand and RMB20 thousand
(US$2.9 thousand) , respectively, due from Wuhan Dahong, representing the payment made on behalf of Wuhan Dahong for its incorporation fees. The
outstanding balance has been fully repaid and there is no amount due from the related party as of the date of this annual report.
Transaction with Lanlan Ltd. Lanlan Ltd. is one of our principal shareholders and wholly-owned by Mr. Shanglue Xiao, our chairman and
chief executive officer. As of December 31, 2017, 2018 and 2019, we had nil, RMB8 thousand and nil, respectively, due from Lanlan, representing the
payment made on behalf of Lanlan for its incorporation fees. The outstanding balance has been fully repaid and there is no amount due from the related
party as of the date of this annual report.
Transactions with Our Equity Investees
Transaction with Hangzhou Tianshi Technology Co. Ltd., or Tianshi. Tianshi is our equity investee and our supplier. In 2017, 2018 and 2019,
we purchased products from Tianshi in the amount of nil, RMB39.8 million and RMB25.3 million (US$3.6 million), respectively. As of December 31,
2017, 2018 and 2019, we had nil, RMB5.6 million and RMB0.2 million (US$25.7 thousand), respectively, due to Tianshi, representing the payments due to
Tianshi for products purchased from Tianshi.
Transaction with Hangzhou Zhangtaihe Health Technology Co., Ltd, or Zhangtaihe. Zhangtaihe is our equity investee and our supplier. In
2017, 2018 and 2019, we purchased products from Zhangtaihe in the amount of nil, RMB32.1 million and RMB16.4 million (US$2.4 million), respectively.
As of December 31, 2017, 2018 and 2019, we had nil, RMB5.0 million and RMB0.4 million (US$51.6 thousand), respectively, due to Zhangtaihe,
representing the payments due to Zhangtaihe for products purchased from Zhangtaihe.
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Transaction with Guangdong Weixin Technology Co Ltd., or Guangdong Weixin. Guangdong Weixin is our equity investee and our supplier.
In 2017, 2018 and 2019, we purchased products from Guangdong Weixin in the amount of nil, RMB37.0 million and RMB79.3 million (US$11.4 million),
respectively. As of December 31, 2017, 2018 and 2019, we had nil, RMB70 thousand and RMB0.1 million (US$14.4 thousand), respectively, due to
Guangdong Weixin, representing the payments in year 2018 and deposits in year 2019 due to Guangdong Weixin for products purchased from Guangdong
Weixin. As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB5.8 million (US$0.8 million), respectively, advance to Guangdong Weixin,
representing the advance payment for products purchased from Guangdong Weixin.
Transaction with Beijing Siwei Technology and Culture Co., Ltd., or Beijing Siwei. Beijing Siwei is our equity investee and our supplier. In
2017, 2018 and 2019, we purchased products from Beijing Siwei in the amount of nil, RMB0.3 million and RMB5.6 million (US$0.8 million), respectively.
As of December 31, 2017, 2018 and 2019, we had nil, RMB0.2 million and RMB0.1 million (US$15.8 thousand), respectively, due to Beijing Siwei,
representing the payments due to Beijing Siwei for products purchased from Beijing Siwei. In 2017, 2018 and 2019, we provided marketplace service to
Beijing Siwei in the amount of nil, nil and RMB91 thousand (US$13.1 thousand), respectively.
Transaction with Hangzhou Adopt A Cow Biological Technology Co., Ltd., or Hangzhou Biological Technology. Hangzhou Biological
Technology is our equity investee and our supplier. In 2017, 2018 and 2019, we purchased products from Hangzhou Biological Technology in the amount
of nil, RMB0.5 million and RMB103.3 million (US$14.8 million), respectively. As of December 31, 2017, 2018 and 2019, we had nil, RMB0.6 million and
RMB4.9 million (US$0.7 million), respectively, due to Hangzhou Biological Technology, representing the payments due to Hangzhou Biological
Technology for products purchased from Hangzhou Biological Technology.
Transaction with Hangzhou Jixi Internet Technology Co., Ltd., or Hangzhou Jixi. Hangzhou Jixi is our equity investee and our supplier. As of
December 31, 2017, 2018 and 2019, we had nil, nil and RMB1.0 million (US$0.1 million), respectively, due from Hangzhou Jixi representing an one-year
interest free loan.
Transaction with Hangzhou Bixin Biology Technology Co., Ltd., or Hangzhou Bixin. Hangzhou Bixin is our equity investee and our supplier.
In 2017, 2018 and 2019, we purchased products from Hangzhou Bixin in the amount of nil, nil and RMB69.3 million (US$10.0 million), respectively. As of
December 31, 2017, 2018 and 2019, we had nil, nil and RMB0.3 million (US$43.5 thousand), respectively, due to Hangzhou Bixin, representing the
payments due to Hangzhou Bixin for products purchased from Hangzhou Bixin. In 2017, 2018 and 2019, we provided marketplace service to Hangzhou
Bixin in the amount of nil, nil and RMB0.4 million (US$53.6 thousand), respectively.
Transaction with Hangzhou Dianhua Technology Co., Ltd., or Hangzhou Dianhua. Hangzhou Dianhua is our equity investee and our supplier.
In 2017, 2018 and 2019, we purchased products from Hangzhou Dianhua in the amount of nil, nil and RMB0.4 million (US$60.3 thousand), respectively.
As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB0.1 million (US$14.4 thousand), respectively, due to Hangzhou Dianhua, representing
the payments due to Hangzhou Dianhua for products purchased from Hangzhou Dianhua.
Transaction with Hunan Haomeihaomei Cosmetics Co., Ltd., or Hunan Haomeihaomei. Hunan Haomeihaomei is our equity investee and our
supplier. In 2017, 2018 and 2019, we purchased products from Hunan Haomeihaomei in the amount of nil, nil and RMB13.4 million (US$1.9 million),
respectively. As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB0.5 million (US$65.4 thousand), respectively, due to Hunan
Haomeihaomei, representing the payments due to Hunan Haomeihaomei for products purchased from Hunan Haomeihaomei.
Transaction with Ningbo Langfei Household Appliance Co., Ltd., or Ningbo Langfei. Ningbo Langfei is our equity investee and our supplier.
In 2017, 2018 and 2019, we purchased products from Ningbo Langfei in the amount of nil, nil and RMB3.5 million (US$0.5 million), respectively. As of
December 31, 2017, 2018 and 2019, we had nil, nil and RMB0.1 million (US$17.0 thousand), respectively, due to Ningbo Langfei, representing the
payments due to Ningbo Langfei for products purchased from Ningbo Langfei.
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Transaction with Shenzhen Liumangyike Food and Beverage Management Co., Ltd., or Shenzhen Liumangyike. Shenzhen Liumangyike is our
equity investee and our supplier. In 2017, 2018 and 2019, we purchased products from Shenzhen Liumangyike in the amount of nil, nil and
RMB11 thousand (US$1.6 thousand), respectively. As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB66 thousand (US$9.5 thousand),
respectively, due to Shenzhen Liumangyike, representing the payments due to Shenzhen Liumangyike for products purchased from Shenzhen Liumangyike.
In 2017, 2018 and 2019, we provided marketplace service to Shenzhen Liumangyike in the amount of nil, nil and RMB0.3 million (US$43.2 thousand),
respectively.
Transaction with Guangzhou Misili Personal care Co., Ltd., or Guangzhou Misili. Guangzhou Misili is our equity investee and our supplier.
In 2017, 2018 and 2019, we purchased products from Guangzhou Misili in the amount of nil, nil and RMB8.2 million (US$1.2 million), respectively. As of
December 31, 2017, 2018 and 2019, we had nil, nil and RMB0.3 million (US$39.8 thousand), respectively, due to Guangzhou Misili, representing the
payments due to Guangzhou Misili for products purchased from Guangzhou Misili.
Transaction with Shanxi Yunnong Supply Chain Management Co., Ltd., or Shanxi Yunnong. Shanxi Yunnong is our equity investee and our
supplier. In 2017, 2018 and 2019, we purchased products from Shanxi Yunnong in the amount of nil, nil and RMB8.0 million (US$1.1 million),
respectively. As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB4.7 million (US$0.7 million), respectively, due to Shanxi Yunnong,
representing the payments due to Shanxi Yunnong for products purchased from Shanxi Yunnong.
Transaction with Zhejiang Zhengdao Fengju Supply Chain Management Co., Ltd., or Zhejiang Zhengdao Fengju. Zhejiang Zhengdao Fengju
is our equity investee and our supplier. In 2017, 2018 and 2019, we purchased products from Zhejiang Zhengdao Fengju in the amount of nil, nil and
RMB31.4 million (US$4.5 million), respectively. As of December 31, 2017, 2018 and 2019, we had nil, nil and RMB6.0 million (US$0.9 million),
respectively, due to Zhejiang Zhengdao Fengju, representing the payments due to Zhejiang Zhengdao Fengju for products purchased from Zhejiang
Zhengdao Fengju.
We believe the terms of the transactions with Small Ye, Tianshi, Zhangtaihe, Guangdong Weixin, Beijing Siwei, Hangzhou Biological
Technology, Hangzhou Jixi, Hangzhou Bixin, Hangzhou Dianhua, Hunan Haomeihaomei, Ningbo Langfei, Shenzhen Liumangyike, Guangzhou Misili,
Shanxi Yunnong and Zhejiang Zhengdao Fengju are comparable to those with third-party suppliers.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
From time to time, we may be involved in disputes and legal or administrative proceedings in the ordinary course of our business. In May
2017, we received a notice from the local Administration for Market Regulation in Hangzhou, which ruled that our sales and marketing practice adopted in
our early stage of development prior to February 2016 violated the Regulations on the Prohibition of Pyramid Selling and imposed a penalty of
approximately RMB9.6 million (US$1.4 million). We paid this fine in June 2017 and have adjusted our business practices since February 2016 to comply
with the Regulations on the Prohibition of Pyramid Selling and other applicable regulations. See “Item 4. Information on the Company—B. Business
Overview—Regulations—Regulations Relating to Pyramid Selling in the PRC” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Business and Industry—Any lack of requisite approvals, licenses or permits applicable to our business or failure to comply with any requirements of PRC
laws, regulations and policies may have a material and adverse impact on our business, financial condition and results of operations.”
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Starting in November 2019, we and certain of our officers and directors and others have been named as defendants in putative securities class
actions captioned Chen v. Yunji Inc. et al., Case No. 1:19-cv-06403 (U.S. District Court for the Eastern District of New York, filed on November 12, 2019)
(the “Chen Case”); Van Hoomissen v. Yunji Inc. et al., Case No. 1:19-cv-06479 (U.S. District Court for the Eastern District of New York, filed on
November 15, 2019) (the “Hoomissen Case”); Axel Lindholm v. Yunji Inc. et al., Case No. 21635/2020E (Bronx County Supreme Court of the State of New
York, filed on January 31, 2020) (the “Lindholm Case”), and Christopher Guilford v. Yunji, et al., Case No. 23095/2020E (Bronx County Supreme Court of
the State of New York, filed on March 3, 2020) (the “Guilford Case”). The actions allege that defendants made misstatements and omissions in connection
with our initial public offering in May 2019 in violation of the Securities Act of 1933. On February 3, 2020, the U.S. District Court for the Eastern District
of New York consolidated the two federal court lawsuits (the Chen Case and the Hoomissen Case) under the caption In Re Yunji Inc., Securities Litigation,
No. 1:19-cv-06403-LDH (the “Federal Court Action”), and appointed lead plaintiff and lead counsel of the Federal Court Action. On March 19, 2020, an
amended complaint was filed in the Federal Court Action. The Lindholm Case, the Guilford Case and the Federal Court Action otherwise remain in their
preliminary stages.
Dividend Policy
Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition,
our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either
case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share
premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall
due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem
relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain
most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash
requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to
us. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Dividend Distribution.”
If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares
underlying the ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS
holders in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B.
Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING
A.
Offering and Listing Details
See “C. Markets” for our host market and trading symbol. We have a dual-class structure in which Class B ordinary shares have different
voting rights from Class A ordinary shares. Class B ordinary shares are each entitled to ten votes, whereas Class A ordinary shares are each entitled to one
vote. See “ Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—Our dual-class voting structure will limit your ability to influence
corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and the ADSs
may view as beneficial.”
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B.
Plan of Distribution
Not applicable.
C.
Markets
The ADSs, each represents ten of our Class A ordinary shares, have been listed on Nasdaq since May 3, 2019. The ADSs trade under the
symbol “YJ.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
The following are summaries of material provisions of our current amended and restated memorandum and articles of association and of the
Companies Law, insofar as they relate to the material terms of our ordinary shares.
Objects of Our Company. Under our amended and restated memorandum and articles of association, the objects of our company are
unrestricted and we have the full power and authority to carry out any object not prohibited by the laws of the Cayman Islands.
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. We may not issue shares to bearer. Our shareholders who are nonresidents of the Cayman Islands
may freely hold and vote their shares.
Each Class B ordinary share is convertible into an equal number of Class A ordinary shares upon the occurrence of certain matters as set forth
in our memorandum and articles of association, including upon any direct or indirect 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. Class A ordinary shares are not convertible into Class B
ordinary shares under any circumstances.
Dividends. Our directors may from time to time declare dividends (including interim dividends) and other distributions on our shares in issue
and authorize payment of the same out of the funds of our company lawfully available therefor. In addition, our shareholders may declare dividends by
ordinary resolution, but no dividend shall exceed the amount recommended by our directors. Our memorandum and articles of association provide that
dividends may be declared and paid out of the funds of our Company lawfully available therefor. Under the laws of the Cayman Islands, our company may
pay a dividend out of either profit or share premium account; provided that in no circumstances may a dividend be paid if this would result in our company
being unable to pay its debts as they fall due in the ordinary course of business.
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Voting Rights. In respect of all matters subject to a shareholders’ vote, each holder of Class A ordinary shares is entitled to one vote per share
and each holder of Class B ordinary shares is entitled to ten votes per share. Our Class A ordinary shares and Class B ordinary shares votes 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 meeting of shareholders is by
show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder holding not less than 10% of the
votes attaching to the shares present in person or by proxy.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching
to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the
issued and outstanding ordinary shares at a meeting. A special resolution will be required for important matters such as a change of name or making changes
to our memorandum and articles of association. Our shareholders may, among other things, divide or combine their shares by ordinary resolution.
General Meetings of Shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’
annual general meetings. Our memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as
our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such
time and place as may be determined by our directors.
Shareholders’ general meetings may be convened by the chairman of our board of directors or by our directors (acting by a resolution of our
board). Advance notice of at least seven days is required for the convening of our annual general shareholders’ meeting (if any) and any other general
meeting of our shareholders. A quorum required for any general meeting of shareholders consists of, at the time when the meeting proceeds to business, one
or more of our shareholders holding shares which carry in aggregate (or representing by proxy) not less than one-third of all votes attaching to all of our
shares in issue and entitled to vote at such general meeting.
The Companies Law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with
any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our memorandum and
articles of association provide that upon the requisition of any one or more of our shareholders holding shares which carry in aggregate not less than
one-third of all votes attaching to all issued and outstanding shares of our company entitled to vote at general meetings, our board will convene an
extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our memorandum and articles of association do
not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such
shareholders.
Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary
shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale of Class B ordinary shares by a holder thereof to any person
or entity, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A ordinary shares.
Transfer of Ordinary Shares. Subject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary
shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on
which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
•
•
•
the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other
evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
the instrument of transfer is in respect of only one class of ordinary shares;
the instrument of transfer is properly stamped, if required;
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•
•
in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed
four; and
a fee of such maximum sum as the Nasdaq Stock Market may determine to be payable or such lesser sum as our directors may from
time to time require is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send
to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, on ten calendar days’ notice being given by advertisement in such one or more newspapers, by electronic
means or by any other means in accordance with the rules of the Nasdaq Stock Market be suspended and the register closed at such times and for such
periods as our board of directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the
register closed for more than 30 days in any year as our board may determine.
Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient
to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to
the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are
monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the
paid-up capital, such the assets will be distributed so that, as nearly as may be, the losses are borne by our shareholders in proportion to the par value of the
shares held by them.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid
on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called
upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares. We may issue shares on terms that such shares are subject to redemption, at our option or
at the option of the holders of these shares, on such terms and in such manner as may be determined, before the issue of such shares, by our board of
directors or by our shareholders by special resolution. Our company may also repurchase any of our shares on such terms and in such manner as have been
approved by our board of directors or by an ordinary resolution of our shareholders. Under the Companies Law, the redemption or repurchase of any share
may be paid out of our Company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of
capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they
fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid
up, (b) if such redemption or repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our
company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares. Whenever the capital of our company is divided into different classes the rights attached to any such class may,
subject to any rights or restrictions for the time being attached to any class, only be materially adversely varied with the consent in writing of the holders of
all of the issued shares of that class or with the sanction of an ordinary resolution passed at a separate meeting of the holders of the 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 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 our 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.
Issuance of Additional Shares. Our memorandum and articles of association authorizes our board of directors to issue additional ordinary
shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
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Our memorandum and articles of association also authorizes our board of directors to establish from time to time one or more series of
preference shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
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•
•
the designation of the series;
the number of shares of the series;
the dividend rights, dividend rates, conversion rights, voting rights; and
the rights and terms of redemption and liquidation preferences.
Our board of directors may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance of these
shares may dilute the voting power of holders of ordinary shares.
Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain
copies of our list of shareholders or our corporate records. However, we intend to provide our shareholders with annual audited financial statements.
Anti-Takeover Provisions. Some provisions of our memorandum and articles of association may discourage, delay or prevent a change of
control of our company or management that shareholders may consider favorable, including provisions that:
•
•
authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges
and restrictions of such preference shares without any further vote or action by our shareholders; and
limit the ability of shareholders to requisition and convene general meetings of shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and
articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Exempted Company. We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes
between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside
of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an
ordinary company except that an exempted company:
•
•
•
does not have to file an annual return of its shareholders with the Registrar of Companies;
is not required to open its register of members for inspection;
does not have to hold an annual general meeting;
• may issue negotiable or bearer shares or shares with no par value;
• may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first
instance);
• may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
• may register as a limited duration company; and
• may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the
company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or
other circumstances in which a court may be prepared to pierce or lift the corporate veil).
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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”, “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual
report on Form 20-F.
D.
Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Relating to Foreign Exchange.”
E.
Taxation
The following summary of certain Cayman Islands, PRC and U.S. federal income tax considerations of an investment in our ADSs or Class A
ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This
summary does not deal with all possible tax considerations relating to an investment in our ADSs or Class A ordinary shares, such as tax considerations
under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United
States.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands
except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. The
Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ordinary shares will not be subject to taxation in the Cayman Islands and no withholding
will be required on the payment of a dividend or capital to any holder of our ordinary shares or the ADSs, nor will gains derived from the disposal of our
ordinary shares or the ADSs be subject to Cayman Islands income or corporation tax.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto
management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax 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 State Administration of Taxation issued a
circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled
enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC
enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax
resident by virtue of having its “de facto management body” in China 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.
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We believe that Yunji Inc. is not a PRC resident enterprise for PRC tax purposes. Yunji Inc. is not controlled by a PRC enterprise or PRC
enterprise group and we do not believe that Yunji Inc. meets all of the conditions above. Yunji Inc. 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
China 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 us.
If the PRC tax authorities determine that Yunji Inc. 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 the ADSs. In addition,
non-resident enterprise shareholders (including the ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of
ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including
the 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. It is also unclear whether non-PRC shareholders of Yunji Inc. would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that Yunji Inc. is treated as a PRC resident enterprise.
Provided that our Cayman Islands holding company, Yunji Inc., is not deemed to be a PRC resident enterprise, holders of the ADSs and
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 owns 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 Related 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 discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of the
ADSs or ordinary shares by a U.S. Holder (as defined below) that acquires the ADSs and holds the ADSs or ordinary shares as “capital assets”(generally,
property held for investment) under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal
tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue
Service, or the IRS, with respect to any U.S. federal income tax considerations described below, and there can be no assurance that the IRS or a court will
not take a contrary position. This discussion, moreover, does not address the U.S. federal estate, gift, and alternative minimum tax considerations, the
Medicare tax on certain net investment income or any state, local and non-U.S. tax considerations relating to the ownership or disposition of the ADSs or
ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular investors in light of
their individual circumstances or to persons in special tax situations such as:
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•
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•
•
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•
•
•
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banks and other financial institutions;
insurance companies;
pension plans;
cooperatives;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
certain former U.S. citizens or long-term residents;
tax-exempt entities (including private foundations);
holders who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation;
investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated
transaction for U.S. federal income tax purposes;
investors that have a functional currency other than the U.S. dollar;
persons that actually or constructively own 10% or more of our stock (by vote or value); or
partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding the ADSs or ordinary
shares through such entities.
all of whom may be subject to tax rules that differ significantly from those discussed below.
Each U.S. Holder is urged to consult its tax advisor regarding the application of U.S. federal taxation to its particular circumstances, and the
state, local, non-U.S. and other tax considerations of the ownership and disposition of the ADSs or ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of the ADSs or ordinary shares that is, for U.S. federal income tax
purposes:
•
•
•
•
an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in or organized under the law of the
United States or any state thereof or the District of Columbia;
an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who
have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person
under the Code.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of the ADSs or ordinary
shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships
holding the ADSs or ordinary shares and their partners are urged to consult their tax advisors regarding an investment in the ADSs or ordinary shares.
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The discussion below assumes that the representations contained in the deposit agreement are and will continue to be true, and that the
obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. For U.S. federal income
tax purposes, a U.S. Holder of ADSs will generally be treated as the beneficial owner of the underlying shares represented by the ADSs. Accordingly,
deposits or withdrawals of ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either
(i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on
the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. For this purpose,
cash and assets readily convertible into cash are categorized as passive assets and the company’s goodwill and other unbooked intangibles are taken into
account. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We
will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25% (by value) of the stock.
Although the law in this regard is not entirely clear, we treat our VIEs and their subsidiaries as being owned by us for U.S. federal income tax
purposes because we control their management decisions and are entitled to substantially all of the economic benefits associated with them. As a result, we
consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of our
VIEs for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.
Assuming that we are the owner of our VIEs and their subsidiaries for U.S. federal income tax purposes, and based upon our current and
projected income and assets, and projections as to the market price of the ADSs, we do not believe we were a PFIC for the 2019 taxable year and do not
expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because the determination of
whether we are or will become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets.
Fluctuations in the market price of the ADSs may cause us to be or become a PFIC for the current or future taxable years because the value of our assets for
purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of the ADSs
from time to time (which may be volatile). In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our
anticipated market capitalization. Among other matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become a
PFIC for the current or future taxable years. Recent fluctuations in the market price of our ADSs increased our risk of becoming a PFIC. Because the market
price of our ADSs and ordinary shares may continue to fluctuate considerably, we cannot assure you of our PFIC status for any taxable year. The
composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised. Under circumstances
where our revenue from activities that produce passive income significantly increases relative to our revenue from activities that produce non-passive
income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially
increase.
If we are a PFIC for any year during which a U.S. Holder holds the ADSs or ordinary shares, we generally will continue to be treated as a
PFIC for all succeeding years during which such U.S. Holder holds the ADSs or ordinary shares.
The discussion below under “—Dividends” and “—Sale or Other Disposition” is written on the basis that we will not be or become classified
as a PFIC for U.S. federal income tax purposes. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes
on gain recognized with respect to the ADSs and common shares and on certain distributions, plus an interest charge on certain taxes treated as having been
deferred under the PFIC rules. The U.S. federal income tax rules that apply generally if we are treated as a PFIC are discussed below under “—Passive
Foreign Investment Company Rules.”
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Dividends
Any cash distributions paid on the ADSs or ordinary shares (including the amount of any PRC tax withheld) out of our current or accumulated
earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend
income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in the case of ADSs. Because
we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, you should expect to treat the full amount of any
distribution as a “dividend” for U.S. federal income tax purposes. Dividends received on the ADSs or ordinary shares will not be eligible for the dividends-
received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Individuals and other non-corporate U.S. Holders will be subject to tax at the lower capital gain tax rate applicable to “qualified dividend
income”; provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares on which the dividends are paid are readily tradable
on an established securities market in the United States, or, in the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we are
eligible for the benefit of the United States-PRC income tax treaty (the “Treaty”), (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder
(as discussed below) for the taxable year in which the dividend is paid and the preceding taxable year, and (3) certain holding period requirements are met.
The ADSs have been approved for listing on the Nasdaq Global Market. Provided that this listing is approved, we believe that the ADSs
should generally be considered to be readily tradable on an established securities market in the United States. There can be no assurance that the ADSs will
continue to be considered readily tradable on an established securities market in later years. Because the ordinary shares will not be listed on a U.S.
exchange, we do not believe that dividends received with respect to ordinary shares that are not represented by ADSs will be treated as qualified dividends
unless we meet certain residence and Treaty eligibility requirements described below.
In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law (see “Item 10. Additional
Information—E. Taxation—People’s Republic of China Taxation”), we may be eligible for the benefits of the Treaty. If we are eligible for such benefits,
dividends we pay on our ordinary shares, regardless of whether such shares are represented by the ADSs, and regardless of whether the ADSs are readily
tradable on an established securities market in the United States, should be eligible for the reduced rates of taxation described in the preceding paragraph.
U.S. Holders are urged to consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to the ADSs or ordinary
shares.
For U.S. foreign tax credit purposes, dividends paid on the ADSs or ordinary shares will generally be treated as income from foreign sources
and will generally constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income
Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid on the ADSs or ordinary shares (see “Item 10. Additional Information
—E. Taxation—People’s Republic of China Taxation”). Depending on the U.S. Holder’s particular facts and circumstances and subject to a number of
complex conditions and limitations, PRC withholding taxes on dividends that are non-refundable under the Treaty may be treated as foreign taxes eligible
for credit against a U.S. Holder’s U.S. federal income tax liability. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld
may instead claim a deduction for U.S. federal income tax purposes in respect of such withholding, but only for a year in which such holder elects to do so
for all creditable foreign income taxes. The rules governing the foreign tax credit are complex and U.S. Holders are urged to consult their tax advisors
regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition
A U.S. Holder will generally recognize gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the
difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary shares. The gain or loss will
generally be capital gain or loss and will be long term if the ADSs or ordinary shares have been held for more than one year. The deductibility of a capital
loss may be subject to limitations. Any such gain or loss that the U.S. Holder recognizes will generally be treated as U.S. source income or loss for foreign
tax credit limitation purposes, which could limit the availability of foreign tax credits. Nevertheless, in the event we are deemed to be a PRC resident
enterprise under the PRC Enterprise Income Tax Law, we may be eligible for the benefits of the Treaty. In such event, if PRC tax were to be imposed on
any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the Treaty may elect to treat such gain as PRC
source income. If a U.S. Holder is not eligible for the benefits of the Treaty or fails to make the election to treat any gain as foreign source, then such U.S.
Holder may not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of the ADSs or ordinary shares unless such credit
can be applied (subject to applicable limitations) against United States federal income tax due on other income derived from foreign sources in the same
income category (generally, the passive category). Each U.S. Holder is advised to consult its tax advisor regarding the tax consequences if a foreign tax is
imposed on a disposition of the ADSs or ordinary shares, including the availability of the foreign tax credit under its particular circumstances.
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Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds the ADSs or ordinary shares, and unless the U.S. Holder
makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules on (i) any excess distribution that we
make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average
annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any
gain realized on the sale or other disposition including, under certain circumstances, a pledge, of ADSs or ordinary shares. Under the PFIC rules:
•
•
•
the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;
the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year
in which we are classified as a PFIC (each, a “pre-PFIC year”) will be taxable as ordinary income; and
the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for
individuals or corporations, as appropriate, for that year, increased by an additional tax equal to the interest on the resulting tax deemed
deferred with respect to each such taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder holds the ADSs or ordinary shares, and any of our subsidiaries, our VIEs or
any of their subsidiaries is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC
for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our
subsidiaries, our VIEs or their subsidiaries.
As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market
election with respect to such stock. If a U.S. Holder makes this election with respect to the ADSs, the holder will generally (i) include as ordinary income
for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of
such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the
end of the taxable year, but such deduction will only be allowed to the extent of the amount previously included in income as a result of the mark-to-market
election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a
U.S. Holder makes a mark-to-market election in respect of the ADSs and we cease to be classified as a PFIC, the holder will not be required to take into
account the gain or loss described above during any period that we are not classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain
such U.S. Holder recognizes upon the sale or other disposition of the ADSs in a year when we are a PFIC will be treated as ordinary income and any loss
will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of
the mark-to-market election.
The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at
least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable United States Treasury
regulations. The ADSs, but not our ordinary shares, will be treated as marketable stock upon their listing on the Nasdaq Global Market. We anticipate that
the ADSs should qualify as being regularly traded, but no assurances may be given in this regard.
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Because a mark-to-market election cannot technically be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be
subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for
U.S. federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result
in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns the ADSs or ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS
Form 8621. You should consult your tax advisor regarding the U.S. federal income tax consequences of owning and disposing of the ADSs or ordinary
shares if we are or become a PFIC.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required
to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of
each fiscal year. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange
Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish Deutsche Bank Trust Company Americas, the depositary of the ADSs, with our annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and
other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our 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.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at www.yunjiglobal.com.
In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I.
Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation
To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the
year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively.
Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation
in China in the future.
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Market Risks
Foreign Exchange Risk
Substantially all of our revenues and expenses are denominated in RMB. We do not believe that we currently have any significant direct
foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange
risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi
because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The
Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amounts available to us.
As of December 31, 2019, we had Renminbi-denominated cash, cash equivalents and restricted cash of RMB405.4 million, U.S. dollar-
denominated cash, cash equivalents and restricted cash of US$79.0 million. Assuming we had converted RMB405.4 million into U.S. dollars at the
exchange rate of RMB6.9618 for US$1.00 as of December 31, 2019, our U.S. dollar-denominated cash, cash equivalents and restricted cash would have
been US$137.3 million. If the RMB had depreciated by 10% against the U.S. dollar, our U.S. dollar cash, cash equivalents and restricted cash would have
been US$132.0 million instead. Assuming we had converted US$79.0 million into RMB at the exchange rate of RMB6.9618 for US$1.00 as of
December 31, 2019, our Renminbi-denominated cash, cash equivalents and restricted cash would have been RMB955.6 million. If the RMB had depreciated
by 10% against the U.S. dollar, our Renminbi-denominated cash, cash equivalents and restricted cash would have been RMB1,010.6 million instead.
Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing
bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates,
and we have not used any derivative financial instruments to manage our interest risk exposure.
We may invest the net proceeds in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not applicable.
B.
Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
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D.
American Depositary Shares
Fees and Charges the ADS Holders May Have to Pay
As an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges
(in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
Service
•
To any person to which ADSs are issued or to any person to which a
distribution is made in respect of ADS distributions pursuant to stock
dividends or other free distributions of stock, bonus distributions, stock
splits or other distributions (except where converted to cash)
Up to US$0.05 per ADS issued
Fees
•
Cancellation of ADSs, including the case of termination of the deposit
Up to US$0.05 per ADS cancelled
agreement
•
•
•
•
Distribution of cash dividends
Up to US$0.05 per ADS held
Distribution of cash entitlements (other than cash dividends) and/or cash
Up to US$0.05 per ADS held
proceeds from the sale of rights, securities and other entitlements
Distribution of ADSs pursuant to exercise of rights.
Up to US$0.05 per ADS held
Distribution of securities other than ADSs or rights to purchase additional
Up to US$0.05 per ADS held
ADSs
•
Depositary services
Up to US$0.05 per ADS held on the applicable record date(s) established
by the depositary bank
As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and
governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by
any of your ADSs) such as:
•
Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman
Islands (i.e., upon deposit and withdrawal of ordinary shares).
• Expenses incurred for converting foreign currency into U.S. dollars.
• Expenses for cable, telex and fax transmissions and for delivery of securities.
• Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes
(i.e., when ordinary shares are deposited or withdrawn from deposit).
•
•
Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements
applicable to ordinary shares, deposited securities, ADSs and ADRs.
• Any applicable fees and penalties thereon.
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of
their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary
bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to
ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
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The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of
distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee
to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or
uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage
and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered
holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’
ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested
service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Fees and Other Payments Made by the Depositary to Us
The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees
collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. For the year
ended December 31, 2019, we received reimbursement in the amount of approximately RMB8.5 million (US$1.2 million) from the depositary.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of
securities holders, which remain unchanged.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-230424) in
relation to our initial public offering, which was declared effective by the SEC on May 2, 2019. Our initial public offering closed in May 2019. Morgan
Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and China International Capital Corporation Hong Kong Securities
Limited were the representatives of the underwriters for our initial public offering. Counting in the ADSs sold upon the exercise of the over-allotment option
by the underwriters, we offered and sold an aggregate of 110,000,000 ADSs representing 1,100,000,000 Class A ordinary shares, at an initial public offering
price of US$11.00 per ADS, and received approximately US$109.0 million of proceeds after deducting underwriting discounts commissions and other
offering expenses payable by us.
For the period from May 2, 2019, the date that the F-1 Registration Statement was declared effective by the SEC, to December 31, 2019, the
total expenses incurred for our company’s account in connection with our initial public offering was approximately US$14.4 million, which included
US$9.0 million in underwriting discounts and commissions for the initial public offering and approximately US$5.5 million in other costs and expenses for
our initial public offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning
more than 10% or more of our equity securities or our affiliates. None of the net proceeds from the initial public offering were paid, directly or indirectly, to
any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
For the period from May 2, 2019, the date that the F-1 Registration Statement was declared effective by the SEC, to December 31, 2019,
US$52.9 million of the net proceeds received from our initial public offering were used for investment in business operations, research and development,
and for general corporate purpose. There is no material change in the use of proceeds as described in the F-1 Registration statement. We still intend to use
the remainder of the proceeds from our initial public offering, as disclosed in our registration statements on Form F-1.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation
of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of the end of the period covered
by this annual report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management, with the participation of our chief executive officer and chief financial officer, has concluded that we
did not maintain effective disclosure controls and procedures as of December 31, 2019, because of the material weaknesses in our internal control over
financial reporting described below.
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Management’s Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation
report by our independent registered public accounting firm due to a transition period established by rules of the SEC for newly listed public companies.
Internal Control over Financial Reporting
In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2017, 2018 and 2019, we
and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the
standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements
will not be prevented or detected on a timely basis.
The material weaknesses that have been identified relate to (i) our lack of sufficient financial accounting staff and management with
appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial
statements and related disclosures under U.S. GAAP and SEC reporting and compliance requirements and (ii) our lack of sufficient documented financial
closing policies and procedures, especially those related to period end expenses cut-off and accruals. The material weaknesses, if not timely remediated,
may lead to significant misstatements in our consolidated financial statements in the future.
We have implemented and plan to implement a number of measures to address the material weaknesses that have been identified in
connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2017, 2018 and 2019. We have hired
additional qualified financial and accounting staff with working experience of U.S. GAAP and SEC reporting requirements and plan to continue such hiring
efforts. We intend to conduct regular and continuous U.S. GAAP accounting and financial reporting training programs for our financial reporting and
accounting personnel. We are in the process of enhancing our internal audit function and engaging an external consulting firm to assist us to assess
Sarbanes-Oxley Act compliance requirements and improve our overall internal controls. Furthermore, we are also in the process of preparing
comprehensive accounting policies, manuals and closing procedures to improve the quality and accuracy of our period end financial closing process.
However, we cannot assure you that all of these measures will be sufficient to remediate our material weaknesses in a timely manner.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered
by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
ITEM 16B. CODE OF ETHICS
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees in March 2019. We
have posted a copy of our code of business conduct and ethics on our website at www..yunjiglobal.com.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers Zhong Tian LLP and its affiliates, our principal external auditors, for the periods indicated. We did not pay any other fees to our
principal auditor during the periods indicated below.
Audit fees(1)
Tax fees(2)
All other fees
Notes:
For the Year Ended December 31,
2018
2019
(in thousands of RMB)
8,500
1,177
—
6,000
1,223
—
(1)
(2)
“Audit fees” means the aggregate fees billed for professional services rendered by our principal auditors for the audit of our annual financial
statements and the review of our comparative interim financial statements, including audit fees relating to our initial public offering in 2019.
“Tax fee” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax
compliance, tax advice, and tax planning.
The policy of our audit committee is to pre-approve all audit and other service provided by PricewaterhouseCoopers Zhong Tian LLP and its
affiliates as described above, other than those for de minimis services which are approved by the audit committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On August 28, 2019, our board of directors authorized a share repurchase program, under which we may repurchase up to US$20 million of
our ADSs over the following six months through February 28, 2020. The share repurchase program was publicly announced on August 28, 2019.
As of December 31, 2019, we had repurchased 3,382,986 ADSs under this share repurchase program. The table below is a summary of the
shares repurchased by us in 2019. All shares were repurchased in the open market pursuant to the share repurchase program announced on August 28, 2019.
Period
August 29—31, 2019
September 2019
October 2019
November 2019
December 2019
Total Number of
ADSs Purchased
—
42,507
610,317
1,693,662
1,036,500
Average Price
Paid per ADSs
(US$)
—
6.99
6.04
4.45
5.00
Total Number of
ADSs Purchased
as Part of Share
Repurchase
Program
—
42,507
610,317
1,693,662
1,036,500
Approximate Dollar
Value of ADSs that
May Yet Be Purchased
Under Share
Repurchase Program
(US$, in millions)
20.0
19.7
16.0
8.5
3.3
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the Nasdaq Global Market, we are subject to Nasdaq’s corporate governance requirements. However,
Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices
in the Cayman Islands, which is our home country, may differ significantly from Nasdaq’s corporate governance requirements. Maples and Calder (Hong
Kong) LLP, our Cayman Islands counsel, has provided a letter to the Nasdaq Global Market certifying that neither the Companies Law of the Cayman
Islands nor our memorandum and articles of association requires a majority of our directors to be independent. We rely on home country practice to be
exempted from the corporate governance requirement that we have a majority of independent directors on our board of directors. As a result of this and
other home country practice we may follow in the future, our shareholders may be afforded less protection than they otherwise would under Nasdaq’s
corporate governance requirements applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—As
an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance
matters that differ significantly from Nasdaq’s corporate governance requirements; these practices may afford less protection to shareholders than they
would enjoy if we complied fully with Nasdaq’s corporate governance requirements.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
PART III.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Yunji Inc. are included at the end of this annual report.
ITEM 19. EXHIBITS
Exhibit
Number
Description of Document
1.1
2.1
2.2
2.3
2.4
Third Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 3.2 to
the Form F-1 filed on March 21, 2019 (File No. 333-230424))
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3) (incorporated herein by reference to Exhibit 4.3 to the Form S-8
filed on August 30, 2019 (File No. 333-233539))
Registrant’s Specimen Certificate for Class A Common Shares (incorporated herein by reference to Exhibit 4.2 to the Form F-1 filed on
March 21, 2019 (File No. 333-230424))
Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated herein by reference to
Exhibit 4.3 to the Form S-8 filed on August 30, 2019 (File No. 333-233539))
Amended and Restated Shareholders Agreement between the Registrant and other parties thereto dated June 4, 2018 (incorporated herein by
reference to Exhibit 4.4 to the Form F-1 filed on March 21, 2019 (File No. 333-230424))
2.5 *
Description of Securities
4.1
4.2
4.3
4.4
4.5
2019 Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Form F-1 filed on March 21, 2019 (File No. 333-230424))
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to
Exhibit 10.2 to the Form F-1 filed on March 21, 2019 (File No. 333-230424))
Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.3 to the F-1
filed on March 21, 2019 (File No. 333-230424))
English translation of the amended and restated Proxy Agreement and Power of Attorney among the WFOE of the Registrant, Yunji Preferred
and the shareholders of Yunji Preferred dated December 14, 2018 (incorporated herein by reference to Exhibit 10.4 to the F-1 filed on
March 21, 2019 (File No. 333-230424))
English translation of the amended and restated Proxy Agreement and Power of Attorney among the WFOE of the Registrant, Yunji Sharing
and the shareholders of Yunji Sharing dated December 17, 2018 (incorporated herein by reference to Exhibit 10.5 to the F-1 filed on
March 21, 2019 (File No. 333-230424))
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Exhibit
Number
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Description of Document
English translation of the amended and restated Equity Pledge Agreement among the WFOE of the Registrant, Yunji Preferred and the
shareholders of Yunji Preferred dated December 14, 2018 (incorporated herein by reference to Exhibit 10.6 to the F-1 filed on March 21, 2019
(File No. 333-230424))
English translation of the amended and restated Equity Pledge Agreement among the WFOE of the Registrant, Yunji Sharing and the
shareholders of Yunji Sharing dated December 17, 2018 (incorporated herein by reference to Exhibit 10.7 to the F-1 filed on March 21, 2019
(File No. 333-230424))
English translation of the amended and restated Exclusive Service Agreement between the WFOE of the Registrant and Yunji Preferred dated
December 14, 2018 (incorporated herein by reference to Exhibit 10.8 to the F-1 filed on March 21, 2019 (File No. 333-230424))
English translation of the amended and restated Exclusive Service Agreement between the WFOE of the Registrant and Yunji Sharing dated
December 17, 2018 (incorporated herein by reference to Exhibit 10.9 to the F-1 filed on March 21, 2019 (File No. 333-230424))
English translation of the amended and restated Exclusive Option Agreement among the WFOE of the Registrant, Yunji Preferred and the
shareholders of Yunji Preferred dated December 14, 2018 (incorporated herein by reference to Exhibit 10.10 to the F-1 filed on March 21,
2019 (File No. 333-230424))
English translation of the amended and restated Exclusive Option Agreement among the WFOE of the Registrant, Yunji Sharing and the
shareholders of Yunji Sharing dated December 17, 2018 (incorporated herein by reference to Exhibit 10.11 to the F-1 filed on March 21, 2019
(File No. 333-230424))
English translation of Loan Agreement among Mr. Shanglue Xiao, Mr. Huan Hao and the WFOE of the Registrant, dated December 14, 2018
(incorporated herein by reference to Exhibit 10.12 to the F-1 filed on March 21, 2019 (File No. 333-230424))
Preferred Share Purchase Agreement among the Registrant, Yunji Sharing and certain other parties thereto dated February 12, 2018
(incorporated herein by reference to Exhibit 10.13 to the F-1 filed on March 21, 2019 (File No. 333-230424))
Preferred Share Purchase Agreement among the Registrant, the WFOE of the Registrant, Yunji Sharing and certain other parties thereto dated
June 4, 2018 (incorporated herein by reference to Exhibit 10.14 to the F-1 filed on March 21, 2019 (File No. 333-230424))
8.1*
Principal Subsidiaries of the Registrant
11.1
12.1*
12.2*
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the F-1 filed on March 21, 2019
(File No. 333-230424))
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1** CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2** CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1 *
Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm
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Exhibit
Number
Description of Document
15.2 *
Consent of Han Kun Law Offices
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Scheme Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
Filed with this Annual Report on Form 20-F.
Furnished with this Annual Report on Form 20-F.
145
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Form 20-F
Table of Contents
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Yunji Inc.
By: /s/ Shanglue Xiao
Name: Shanglue Xiao
Title: Founder, Chairman, and Chief Executive Officer
Date: April 24, 2020
146
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Form 20-F
Table of Contents
YUNJI INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2019
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Changes in Shareholders’ Deficit for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2018 and 2019
Notes to the Consolidated Financial Statements
F-2
F-3
F-7
F-9
F-12
F-15
F-1
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Form 20-F
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Yunji Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Yunji Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and
the related consolidated statements of comprehensive loss, of changes in shareholders’ deficit and of cash flows for each of the three years in the period
ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers Zhong Tian LLP
PricewaterhouseCoopers Zhong Tian LLP
Shanghai, the People’s Republic of China
April 24, 2020
We have served as the Company’s auditor since 2018.
F-2
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable, net
Advance to suppliers
Inventories, net
Amounts due from related parties
Prepaid expenses and other current assets
Total current assets
Non-current assets:
Property, equipment and software, net
Long-term investments
Deferred tax assets
Operating lease right of use assets, net
Other non-current assets
Total non-current assets
Total assets
As of December 31,
2019
RMB
US$
2018
RMB
1,519,146
46,100
1,099,394
7,436
48,516
675,543
377
410,439
3,806,951
36,954
16,999
56,640
—
1,255
111,848
3,918,799
883,369
84,374
774,736
28,527
87,289
428,322
6,830
567,432
2,860,879
45,344
198,860
97,792
43,043
56,281
441,320
3,302,199
126,888
12,120
111,284
4,098
12,538
61,524
981
81,507
410,940
6,513
28,565
14,047
6,183
8,084
63,392
474,332
The accompanying notes are an integral part of these consolidated financial statements.
F-3
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY/(DEFICIT)
Current liabilities (including amounts of the consolidated VIEs and VIEs’ subsidiaries without recourse to
the primary beneficiary of RMB 2,892,823 and RMB 3,665,225 as of December 31, 2018 and 2019,
respectively)
Accounts payable
Deferred revenue
Incentive payables to members
Refund payable to members
Member management fees payable
Other payable and accrued liabilities
Amounts due to related parties
Operating lease liabilities, current
Total current liabilities
Non-current liabilities
Operating lease liabilities, non-current
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
As of December 31,
2019
RMB
US$
2018
RMB
1,432,274
546,975
421,945
396,024
108,384
197,962
11,445
—
3,115,009
741,959
181,828
384,486
26,883
78,355
349,111
18,296
17,559
1,798,477
106,576
26,118
55,228
3,862
11,255
50,147
2,628
2,522
258,336
—
197
197
3,115,206
27,734
11,329
39,063
1,837,540
3,984
1,627
5,611
263,947
Note 27
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Mezzanine equity
Series Seed convertible redeemable preferred shares (US$0.000005 par value, 373,000,000 shares authorized, issued and
outstanding as of December 31, 2018)
Series A convertible redeemable preferred shares (US$0.000005 par value, 389,200,000 shares authorized, issued and
outstanding as of December 31, 2018)
Series B convertible redeemable preferred shares (US$0.000005 par value, 111,911,357 shares authorized, issued and
outstanding as of December 31, 2018)
Series B+ convertible redeemable preferred shares (US$0.000005 par value, 21,105,395 shares authorized, issued and
outstanding as of December 31, 2018)
Total mezzanine equity
The accompanying notes are an integral part of these consolidated financial statements.
F-5
As of December 31,
2019
2018
RMB US$
RMB
1,977,336 — —
2,090,722 — —
708,609 — —
137,381 — —
4,914,048 — —
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Shareholders’ (deficit)/equity
Ordinary shares (US$0.000005 par value 9,104,783,248 and 20,000,000,000 shares authorized as of
December 31, 2018 and 2019, respectively; 1,151,400,000 shares issued and outstanding as of
December 31, 2018; 1,208,831,222 Class A ordinary shares and 949,960,000 Class B ordinary shares
issued as of December 31, 2019; 1,179,445,572 Class A ordinary shares and 949,960,000 Class B
ordinary shares outstanding as of December 31, 2019)
Additional paid-in capital
Statutory reserve
Accumulated other comprehensive income
Less: Treasury stock (nil and 29,385,650 shares as of December 31, 2018 and 2019, respectively)
Accumulated deficit
Total Yunji Inc. shareholders’ (deficit)/equity
Non-controlling interests
Total shareholders’ (deficit)/equity
Total liabilities, mezzanine equity and shareholders’ (deficit)/equity
As of December 31,
2019
RMB
US$
2018
RMB
36
—
8,504
55,565
—
(4,180,922)
(4,116,817)
6,362
(4,110,455)
3,918,799
70
7,255,404
11,633
88,863
(96,669)
(5,805,332)
1,453,969
10,690
1,464,659
3,302,199
10
1,042,174
1,671
12,764
(13,886)
(833,884)
208,849
1,536
210,385
474,332
The accompanying notes are an integral part of these consolidated financial statements.
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Revenues:
Sales of merchandise, net
Membership program revenue
Marketplace revenue
Other revenues
Total revenues
Operating cost and expenses:
Cost of revenues
Fulfilment
Sales and marketing
Technology and content
General and administrative
Total operating cost and expenses
Other operating income
Loss from operations
Financial income, net
Foreign exchange loss, net
Change in fair value of warrant liabilities
Other non-operating income, net
Loss before income tax expense, and equity in income of affiliates, net of tax
Income tax benefit/(expense)
Equity in income/(loss) of affiliates, net of tax
Net loss
Less: net income attributable to non-controlling interests shareholders
Net loss attributable to YUNJI INC.
2017
RMB
5,912,109
510,818
—
21,144
6,444,071
(5,172,842)
(569,410)
(707,735)
(58,159)
(50,153)
(6,558,299)
—
(114,228)
11,564
(7,444)
152
894
(109,062)
3,331
7
(105,724)
—
(105,724)
2018
RMB
2019
RMB
US$
11,388,425
1,552,437
—
74,363
13,015,225
(10,706,596)
(1,162,051)
(955,128)
(143,645)
(147,208)
(13,114,628)
—
(99,403)
46,068
(685)
—
7,048
(46,972)
(12,346)
2,992
(56,326)
3,362
(59,688)
10,548,322
776,839
311,914
34,949
11,672,024
(9,249,474 )
(965,883 )
(1,187,462 )
(315,167 )
(277,487 )
(11,995,473 )
25,047
(298,402 )
121,370
(12,397 )
—
52,096
(137,333 )
16,720
(3,221 )
(123,834 )
1,928
(125,762 )
1,515,171
111,586
44,804
5,020
1,676,581
(1,328,604)
(138,741)
(170,568)
(45,271)
(39,859)
(1,723,043)
3,598
(42,864)
17,434
(1,781)
—
7,483
(19,728)
2,402
(463)
(17,789)
277
(18,066)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Accretion on convertible redeemable preferred shares to redemption value
Re-designation to Series A convertible redeemable preferred shares from Initial
Ordinary Shareholders’ contribution, including beneficial conversion feature
Deemed dividend from preferred shareholders
Net loss attributable to ordinary shareholders
Net loss
Other comprehensive income
Foreign currency translation adjustment
Total comprehensive loss
Less: total comprehensive income attributable to non-controlling interests
shareholders
Total comprehensive loss attributable to YUNJI INC.
Net loss attributable to ordinary shareholders
Weighted average number of ordinary shares used in computing net loss per
2017
RMB
(1,628,656)
—
—
(1,734,380)
(105,724)
—
(105,724)
—
(105,724)
2018
RMB
(2,187,633)
(60,796)
107
(2,308,010)
(56,326)
55,565
(761)
3,362
(4,123)
2019
RMB
(1,532,013)
US$
(220,060)
—
—
(1,657,775)
(123,834)
33,298
(90,536)
1,928
(92,464)
—
—
(238,126)
(17,789)
4,783
(13,006)
277
(13,283)
(238,126)
(1,734,380)
(2,308,010)
(1,657,775)
share, basic and diluted
1,268,000,000
1,165,136,438
1,818,487,917
1,818,487,917
Net loss per share attributable to ordinary shareholders
- Basic
- Diluted
(1.37)
(1.37)
(1.98)
(1.98)
(0.91)
(0.91)
(0.13)
(0.13)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Ordinary share
(US$0.000005 par value)
Number of
Shares issued
Amount
RMB
Paid in
Capital of
Yunji
Sharing
Technology
Co., Ltd.
RMB
Additional
paid-in
capital
RMB
Statutory
reserve
RMB
Accumulated
other
comprehensive
income
RMB
Accumulated
deficit
RMB
Total Yunji
Inc.
shareholders’
deficit
RMB
Non-
controlling
interest
RMB
Total
shareholders’
deficit
RMB
Balance as of
January 1, 2017
1,268,000,000 —
1,000
—
—
—
(187,229)
(186,229)
—
(186,229)
Transfer of paid
in capital of
Yunji Sharing
to Yunji Inc.
when Yunji
Inc. was
incorporated
Net loss
Appropriation
to statutory
reserves
Accretion on
convertible
redeemable
preferred
shares to
redemption
value
Share based
compensation
Balance as of
December 31,
2017
—
—
—
—
(1,000)
—
1,000
—
—
—
—
—
—
—
(105,724)
(105,724)
—
—
—
(105,724)
—
—
—
—
4,227
—
(4,227)
—
—
—
—
—
—
—
—
—
(3,008)
2,008
—
—
—
(1,625,648)
(1,628,656)
—
(1,628,656)
—
—
2,008
—
2,008
1,268,000,000
—
—
—
4,227
—
(1,922,828)
(1,918,601)
—
(1,918,601)
F-9
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Accumulated
Additional
paid-in
capital
Statutory
reserve
other
comprehensive
income
Accumulated
deficit
Total Yunji
Inc.
shareholders’
deficit
Non-
controlling
interest
Total
shareholders’
deficit
share
par value)
Ordinary
(US$0.000005
Number of
Shares issued
Amount
RMB
—
—
Balance as of January 1, 2018
Net loss
Foreign currency translation
1,268,000,000
—
—
—
—
RMB
RMB
RMB
4,227
—
—
—
RMB
(1,922,828)
(59,688)
RMB
(1,918,601)
(59,688)
RMB
RMB
—
3,362
(1,918,601)
(56,326)
—
—
—
55,565
—
55,565
—
55,565
adjustments
Accretion on convertible
redeemable preferred
shares to redemption
value
Appropriation to statutory
reserves
Issuance of ordinary shares
at par value
Deemed dividend from
Preferred Shareholders
(Note 22)
Capital injection from
non-controlling interests
Re-designation to Series A
convertible redeemable
preferred shares from
Initial Ordinary
Shareholders’
contribution, including
beneficial conversion
feature(Note 22)
Share based compensation
Balance as of December 31,
—
—
—
—
—
—
—
36
—
—
(54,193)
—
—
—
(107)
—
4,277
—
—
—
—
—
—
—
—
(2,133,440)
(2,187,633)
(4,277)
—
107
—
—
36
—
—
—
—
—
—
(2,187,633)
—
36
—
3,000
3,000
(116,600,000)
—
—
—
—
54,300
—
—
—
—
(60,796)
—
(60,796)
54,300
—
—
(60,796)
54,300
2018
1,151,400,000
36
—
8,504
55,565
(4,180,922)
(4,116,817)
6,362
(4,110,455)
The accompanying notes are an integral part of these consolidated financial statements.
F-10
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Ordinary share
(US$0.000005 par value)
Number of
Shares issued Amount
RMB
36
—
—
Balance as of
January 1, 2019
1,151,400,000
Treasury stock
Number of
Shares
Amount
RMB
Additional
paid-in
capital
RMB
Accumulated
other
Total Yunji
Inc.
Non-
Total
Statutory comprehensive Accumulated shareholders’ controlling shareholders’
reserve
RMB
interest
RMB
income
RMB
deficit
RMB
deficit
RMB
deficit
RMB
—
—
—
—
—
—
—
8,504
—
55,565
—
(4,180,922)
(125,762)
(4,116,817)
(125,762)
6,362
1,928
(4,110,455)
(123,834)
—
33,298
—
33,298
—
33,298
—
—
—
—
Net loss
Foreign currency
translation
adjustments
Accretion on
convertible
redeemable
preferred shares
to redemption
value
Appropriation to
statutory reserves
Issuance of ordinary
shares upon
Initial Public
Offering(Note 21)
Conversion of
redeemable
preferred
shares(Note 21)
Repurchasing
common
stock(Note 21)
Issuance of ordinary
shares due to the
exercise of share
option(Note 23)
Issuance of
restricted
shares(Note 23)
Capital injection
from
non-controlling
interests
Share based
compensation
—
—
—
—
—
—
—
—
(36,494)
—
—
3,129
—
—
(1,495,519)
(1,532,013)
(3,129)
—
—
—
(1,532,013)
—
112,174,470
4
—
—
737,293
—
—
—
737,297
—
737,297
895,216,752
30
—
— 6,446,030
—
—
—
(33,829,860) (117,371)
—
—
—
—
1,407,920
5,769
(4,689)
—
—
—
3,036,290
14,933
(14,933)
—
—
—
—
—
—
—
—
—
—
128,197
—
—
—
—
—
—
—
—
—
6,446,060
—
6,446,060
—
(117,371)
—
(117,371)
—
—
—
—
1,080
—
—
—
1,080
—
—
2,400
2,400
128,197
—
128,197
Balance as of
December 31, 2019
2,158,791,222
70 (29,385,650)
(96,669) 7,255,404
11,633
88,863
(5,805,332)
1,453,969
10,690
1,464,659
The accompanying notes are an integral part of these consolidated financial statements.
F-11
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(All amounts in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash generated from/(used in) operating activities:
Depreciation and amortization
Shared-based compensation
Loss/(gain) from disposal of property, equipment and software
Equity in (income)/loss of affiliates
Changes in fair value for equity securities with readily determinable fair value
Inventory write-downs
Foreign exchange loss
Change in fair value of warrant liabilities
Amortization of right of use assets
Change in estimate of refund payable to members
Cash dividend received
Deferred income tax
Changes in operating assets and liabilities:
Increase in accounts receivable
(Increase)/decrease in inventories
Increase in advance to suppliers
(Increase)/decrease in prepaid expenses and other current assets
Increase in other non-current assets
(Increase)/decrease in amounts due from related parties
Increase/(decrease) in accounts payable
Increase in refund payable to members
Increase/(decrease) in incentive payables to members
Increase/(decrease) in member management fees payable
Increase/(decrease) in deferred revenue
Increase in amount due to related parties
Increase in other payable and accrued liabilities
Net cash generated from/(used in) operating activities
2017
RMB
2018
RMB
2019
RMB
US$
(105,724)
(56,326)
(123,834)
(17,789)
3,808
2,008
2
(7)
—
7,445
10,911
(152)
—
—
—
(22,735)
9,306
54,300
871
(2,992)
—
2,540
190
—
—
—
—
(13,067)
19,888
128,197
(1,518)
3,221
(68,555)
3,608
13,706
—
19,430
(379,370)
190
(30,020)
(778)
(242,780)
(11,891)
(145,374)
(6,658)
(345,305)
(25,285)
(184,341)
—
(140)
611,235
70,291
158,570
99,967
211,256
192
53,478
699,582
—
773
662,249
248,081
182,105
8,417
223,424
8,248
116,507
883,037
(4,525)
243,613
(38,773)
60,654
(278)
(6,453)
(674,414)
10,229
(37,459)
(30,029)
(365,147)
6,851
133,972
(1,116,816)
2,857
18,414
(218)
463
(9,847)
518
1,969
—
2,791
(54,493)
27
(4,312)
(649)
34,993
(5,569)
8,713
(40)
(927)
(96,874)
1,469
(5,381)
(4,313)
(52,450)
984
19,243
(160,421)
The accompanying notes are an integral part of these consolidated financial statements.
F-12
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 and 2019
(All amounts in thousands)
Cash flows from investing activities:
Purchase of property, equipment and software
Proceeds from disposal of property, equipment and software
Cash paid for short term investments
Cash received from maturity of short term investments
Cash received from merchants for factoring services
Cash provided to merchants for factoring services
Loans provided to third parties
Cash paid for long-term investments
Net cash used in investing activities
2017
RMB
2018
RMB
2019
RMB
US$
(13,720)
8
(2,195,322)
1,564,542
(28,731)
17
(11,539,398)
11,124,565
—
—
—
(500)
(644,992)
—
—
—
(14,500)
(458,047)
(28,184)
3,041
(4,793,867)
5,028,793
10,000
(42,467)
(171,855)
(120,944)
(115,483)
(4,048)
437
(688,596)
722,341
1,436
(6,100)
(24,685)
(17,372)
(16,587)
The accompanying notes are an integral part of these consolidated financial statements.
F-13
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Form 20-F
Table of Contents
YUNJI INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 and 2019
(All amounts in thousands)
Cash flows from financing activities:
Proceeds from issuance of convertible redeemable preferred shares, net of issuance
costs
Proceeds from issuance of ordinary shares upon Initial Public Offering, net of issuance
costs
Net proceeds from exercise of share options
Cash paid for repurchase of common stocks
Capital injection from non-controlling shareholders
Net cash generated from financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Supplemental disclosure of cash flow information
Cash paid for income tax
Supplemental schedule of non-cash investing and financing activities
Accretion on convertible redeemable preferred shares to redemption value
Re-designation to Series A convertible redeemable preferred shares from Initial
Ordinary Shareholders’ contribution, including beneficial conversion feature
Deemed dividend from convertible redeemable preferred shareholders
Issuance of Series B convertible redeemable preferred shares to the funder with no
consideration
Payable for capital expenditure
Net settlement between factoring receivables and payables
2017
RMB
2018
RMB
2019
RMB
US$
26,255
744,921
—
—
—
—
—
—
26,255
(10,911)
69,934
287,807
357,741
—
—
—
3,000
747,921
34,594
1,207,505
357,741
1,565,246
737,297
1,080
(117,371)
2,400
623,406
11,390
(597,503)
1,565,246
967,743
105,906
155
(16,859)
345
89,547
1,636
(85,825)
224,833
139,008
10,161
18,978
13,413
1,927
1,628,656
2,187,633
1,532,013
220,060
Note 21
—
—
—
95
—
60,796
(107)
6,421
209
—
—
—
—
—
—
—
94
15,901
14
2,284
2019
As of December 31,
2018
RMB
1,519,146
46,100
1,565,246
RMB
883,369
84,374
967,743
US$
126,888
12,120
139,008
Cash and cash equivalents
Restricted cash(Note 2.9)
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
2017
RMB
328,741
29,000
357,741
The accompanying notes are an integral part of these consolidated financial statements.
F-14
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION
(a) Principal activities
Yunji Inc. (“Yunji”, or “the Company”) was incorporated under the laws of the Cayman Islands in November 2017, as an exempted company with limited
liability.
The Company, through its subsidiaries, consolidated variable interest entities (“VIEs”) and VIE’s subsidiaries (collectively, the “Group”), offers a selection
of high-quality products covering a broad range of categories at attractive prices through its e-commerce platform, Yunji App. In 2019, the Company
integrated its original two e-commerce platforms, Yunji VIP App and Yunji Flagship App into one platform, Yunji App, with both basic features for all its
users and exclusive features for the members of the Group’s membership program. Starting from first quarter of 2019, the Group also started to operate
Yunji App as a marketplace platform for third party merchants to sell their merchandise to Yunji App users. The Group’s principal operation and geographic
market is in the People’s Republic of China (“PRC”).
On May 3, 2019, the Company completed its initial public offering (IPO) of 11,000,000 American Depositary Shares (“ADSs”), each representing ten
Class A ordinary shares of the Company, at the price of US$11.00 per ADS. On June 4, 2019, the Company’s underwriters exercised their over-allotment
option to purchase an additional 217,447 ADSs. The Company received US$109 million (equivalent to RMB 737 million) of proceeds after deducting
underwriting discounts commissions and other offering expense from its IPO and related over-allotment option arrangement. Immediately prior to the
completion of the IPO, all classes of preferred shares of the Company, which were originally classified as Mezzanine Equity, were converted and
re-designated as 895,216,752 Class A ordinary shares on a one-for-one basis.
(b) History of the Group and Basis of Presentation for the Reorganization
Prior to the incorporation of the Company and starting in May 2015, the Group’s business was carried out under subsidiaries (“Operating Entities”) of Yunji
Sharing Technology Co., Ltd. (“Yunji Sharing”), previously known as Hangzhou Bolue Biology Technology Co., Ltd. (“Bolue”). Mr. Xiao Shanglue is the
co-founder of Bolue (the “Co-Founder”). The Co-Founder, Mr. Wang Peng, and the other two institutional investors were initial ordinary shareholders of
Yunji Sharing (the four parties were collectively named as the “Initial Ordinary Shareholders”). In July 2015 and in November 2016, Yunji Sharing
attracted new investors through series seed round financing (“Former Series Seed Capital Contribution”) and series A round of financing (“Former Series A
Capital Contribution”), respectively (Note 22). The investors of the Former Series Seed and Series A Capital Contribution are namely as “Former Series
Seed Beneficiary Owners” and “Former Series A Beneficiary Owners”, respectively. Given the fact Yunji Sharing was incorporated as a limited corporation
in China with no shares issued, the paid in capital contributed by the Initial Ordinary Shareholders, the Former Series Seed Beneficiary Owners and the
Former Series A Beneficiary Owners determined their equity interests percentage at Yunji Sharing level. In addition, the capital contributions from the
Initial Ordinary Shareholders were recorded in the “Paid in capital of Yunji Sharing Technology Co., Ltd.” at the respective periods. Also, the capital
contributions with preference and redemption rights from the Former Series Seed Beneficiary Owners and the Former Series A Beneficiary Owners were
recorded in the “Mezzanine equity” at the respective periods (Note 22). After Yunji Inc. was established in Cayman Island in November 2017, Yunji
Holdings Limited (“Yunji Holding”) was incorporated in Hong Kong as a wholly owned subsidiary of the Company, and Hangzhou Yunchuang Sharing
Network Technology Co., Ltd. (“Yunchuang Sharing” or “WFOE”) was established as a wholly owned subsidiary of Yunji Holding in the PRC. Thereafter,
the new PRC subsidiaries and Zhejiang Yunji Preferred E-commerce Co., Ltd.,(“Yunji Preferred”), which is a VIE to hold Internet Content Provider
(“ICP”) license, were established. Consequently, a series of contractual agreements were entered into among Yunchuang Sharing, Yunji Sharing, Yunji
Preferred and its existing shareholders, including loan agreement, exclusive service agreement, equity interest pledge agreement, exclusive option
agreement, proxy agreement and power of attorney, spousal consent letters that irrevocably authorized the existing shareholders designated by Yunchuang
to exercise the equity owner’s rights over Yunji Sharing and Yunji Preferred.
F-15
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(b) History of the Group and Basis of Presentation for the Reorganization (continued)
In preparation of its initial public offering, the Group underwent a reorganization (the “Reorganization”) starting from December 2017. Under the
Reorganization, the aforementioned Initial Ordinary Shareholders, the Former Series Seed Beneficiary Owners and the Former Series A Beneficiary Owners
of Yunji Sharing, effectively swapped Yunji Sharing’s equity with Yunji Inc.’s shares. In doing so, Yunji Sharing returned the initial capital back to both of
the Former Series Seed Beneficiary Owners and the Former Series A Beneficiary Owners to repurchase their equity interests of Yunji Sharing. These
shareholders contributed the full amount of the returned capital into Yunji Inc. to complete the Reorganization. After the Reorganization, the prior
shareholding interests at Yunji Sharing were mirrored to the shareholding interests of the Group.
As the shareholdings in the Company and Yunji Sharing were with a high degree of common ownership immediately before and after the Reorganization,
even though no single investor controlled Yunji Sharing or Yunji Inc., the transaction of the Reorganization was determined as recapitalization with lack of
economic substance, and was accounted for in a manner similar to a common control transaction. Consequently, the financial information of the Group is
presented on a carryover basis for all periods presented. The number of outstanding shares in the consolidated balance sheets, the consolidated statements of
changes in shareholders’ deficit, and per share information including the net loss per share have been presented retrospectively as of the beginning of the
earliest period presented on the consolidated financial statements to reflect the final shares issued in the Reorganization.
F-16
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(b) History of the Group and Basis of Presentation for the Reorganization (continued)
The Group’s consolidated financial statements include the financial statements of the Company, its subsidiaries, consolidated VIEs and VIE’s subsidiaries.
As of December 31, 2019, the Company’s principal subsidiaries are as follows:
Subsidiaries
Yunji Holding Limited
Chuangke Information Technology (Shenzhen)
Place of
incorporation
Hong Kong
Date of
incorporation or
acquisition
December 20, 2017
Percentage
of direct or
indirect
Principal activities
100%
Investment holding
Co., Ltd.
Shenzhen
August 28, 2018
100% Technology development
Zhejiang Youji Supply Chain Management Co.,
Ltd.
Anhui Delue Network Technology Co., Ltd.
Anhui Yunhe Network Technology Co., Ltd.
Zhejiang Jiyuan Network Technology Co., Ltd.
Zhejiang Zhelue Network Technology Co., Ltd.
Hangzhou Jichuang Network Technology Co.,
Ltd.
Wuhan Yunteng Logistics Co., Ltd.
Yunji Hongkong Limited
Ningbo Yunchu Trading Co., Ltd.
Hangzhou Yunchuang Sharing Network
Technology Co., Ltd.
Ningbo Meishan Bonded Port Area Jichuang
Taihong Venture Capital Partnership(LP)
Desking technology(HK) Co., Limited
Huzhou
Hefei
Hefei
Hangzhou
Hangzhou
November 30, 2016
January 15, 2017
March 28, 2019
August 14, 2018
May 23, 2016
Hangzhou
May 23, 2016
Wuhan
Hong Kong
Ningbo
May 22, 2016
August 25, 2015
May 10, 2018
Hangzhou
June 13, 2018
Ningbo
January 15, 2019
Hong Kong
July 26, 2016
Jironghuishang Commercial Factoring (Tianjin)
Co., Ltd
Tianjin
October 16, 2018
F-17
100%
100%
100%
100%
100%
100%
90%
100%
100%
100%
100%
100%
100%
Procurement
Customer service
Customer service
Procurement
Sales of merchandise
Investment holding
Procurement and
logistics
Procurement
Custom clearance
Investment holding
Investment holding
Investment holding and
Financing solution
Financing solution
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(b) History of the Group and Basis of Presentation for the Reorganization (continued)
As of December 31, 2019, the Company’s principal consolidated VIEs are as follows:
VIEs and VIE subsidiaries
Yunji Sharing Technology Co., Ltd
Zhejiang Jishang Network Technology Co., Ltd.
(closed in August 2019)
Zhejiang Yunji Preferred E-Commerce Co., Ltd.
Zhejiang Jishang Preferred E-Commerce Co.,
Ltd.
Zhejiang Jixiang E-commerce Co., Ltd
Place of
incorporation
Date of
incorporation or
acquisition
Percentage
of direct or
indirect
Hangzhou
March 5,2018
Hangzhou
Hangzhou
Hangzhou
Hangzhou
April 29, 2015
June 13, 2018
April 22, 2016
August 14, 2018
F-18
100%
100%
100%
100%
100%
Principal activities
Investment holding
E-Commerce and
procurement
Investment holding
E-Commerce and
procurement
E-Commerce
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(c) Consolidated variable interest entities
In order to comply with the PRC laws and regulations which prohibit or restrict foreign investments into companies involved in restricted businesses, the
Group operates its Apps and other restricted businesses in the PRC through certain PRC domestic companies, whose equity interests are held by certain
management members of the Company or onshore nominees of certain investors of the Company (“Nominee Shareholders”). The Company obtained
control over these PRC domestic companies by entering into a series of Contractual Arrangements with these PRC domestic companies and their respective
Nominee Shareholders. These contractual agreements cannot be unilaterally terminated by the Nominee Shareholders or the PRC domestic companies. As a
result, the Company maintains the ability to control these PRC domestic companies and is entitled to substantially all of the economic benefits from these
PRC domestic companies. Management concluded that these PRC domestic companies are VIEs of the Company, of which the Company is the ultimate
primary beneficiary. As such, the Group consolidated financial results of these PRC domestic companies and their subsidiaries in the Group’s consolidated
financial statements. The principal terms of the agreements entered into amongst the VIEs, their respective shareholders and the WFOE are further
described below.
Loan Agreements
Pursuant to the relevant loan agreements, the WFOE has granted interest-free loans to the relevant Nominee Shareholders of the relevant VIEs with the sole
purpose of providing funds necessary for the capital injection to the relevant VIEs. Only the WFOE can require the Nominee Shareholders to settle the loan
amount with the equity interests of relevant VIEs, subject to any applicable PRC laws, rules and regulations. The relevant Nominee Shareholder has agreed
that any proceeds from sale of the Nominee Shareholder’s equity interest in the relevant VIE should be used to repay the loan amount to the WFOE. The
term of the loan agreements is ten years and can be extended with the written consent of both parties before expiration.
Exclusive Option Agreements
Pursuant to the exclusive option agreement, the Nominee Shareholders of the VIEs have granted the WFOE the exclusive and irrevocable right to purchase
or to designate one or more person(s) at its discretion to purchase part or all of the equity interests in the VIEs (the “Target Equity”) from the Nominee
Shareholders at any time, and the VIEs have granted the WFOE the exclusive and irrevocable right to purchase or to designate one or more person(s) at its
discretion to purchase part or all of the assets of the VIEs (the “Target Assets”) at any time. The total transfer price for the Target Equity and/or the Target
Assets shall be equal to the loan provided by the WFOE to the Nominee Shareholders under the Loan Agreements. The VIEs and their Nominee
Shareholders have agreed that without prior written consent of the WFOE, the Nominee Shareholders shall not sell, transfer, pledge or dispose of their
equity interests, and the VIEs shall not sell, transfer, pledge or dispose of their assets, including but not limit to significant assets, significant revenue and
significant business. In addition, the VIEs covenant that they shall not declare any dividend or change capitalization structure of the VIEs or enter into any
loan or investment agreements.
Proxy Agreement and Power of Attorney
Pursuant to the Proxy Agreement and Power of Attorney, each of the Nominee Shareholders appointed the WFOE as their attorney-in-fact to exercise all
shareholder rights under PRC law and the relevant articles of association, including but not limited to, calling and attending shareholders meetings, voting
on their behalf on all matters requiring shareholder approval, including but not limited to the appointment and removal of directors, as well as the sale,
transfer and disposal of all or part of the equity interests owned by such shareholders. The powers of attorney will remain effective for a given Nominee
Shareholders until such shareholder ceases to be a shareholder of the relevant VIE or otherwise instructed by the WFOE.
F-19
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(c) Consolidated variable interest entities (continued)
Exclusive Service Agreement
Pursuant to the exclusive service agreement, the WFOE has agreed to provide to the VIEs services, including, but not limited to, development, maintenance
and update of technology, design, installation, daily management, maintenance and updating of the network system, hardware design, and marketing. The
VIEs shall pay to the WFOE service fees determined by the WFOE in its sole discretion. The agreement has a term of 10 years and shall automatically
renew at the end of each term for a further term of ten years, unless otherwise terminated by the WFOE in its sole discretion with 30 days’ prior written
notice.
Equity Interest Pledge Agreements
Pursuant to the relevant equity interest pledge agreements, the Nominee Shareholders of the VIEs have pledged 100% equity interests in relevant VIEs to
the WFOE to guarantee performance by the Nominee Shareholders of their obligations under the exclusive option agreements, the proxy agreement and
power of attorney and the loan agreements, as well as the performance by the VIEs of their obligations under the exclusive option agreements and the
exclusive service agreements. All of the equity interest pledge agreements shall remain valid until the pledges are released. In the event of a breach by the
VIEs or any of their Nominee Shareholders of contractual obligations under the exclusive option agreements, the proxy agreement and power of attorney,
the exclusive service agreements, the loan agreements and the equity interest pledge agreements, as the case may be, the WFOE, as pledgee, will have the
right to dispose of the pledged equity interests in the relevant VIE and will have priority in receiving the proceeds from such disposal. The Nominee
Shareholders of the VIEs also covenant that, without the prior written consent of the WFOE, they will not dispose of, create or allow any encumbrance on
the pledged equity interests. In October and December 2018, the Group registered the equity pledge with the relevant office of the Administration for
Industry, respectively.
Spousal Consent Letters
Pursuant to the Spousal Consent Letters, each Nominee Shareholder, who is a natural person, and his or her spouse unconditionally and irrevocably agreed
that the equity interests in the VIEs held by such Nominee Shareholder will be disposed of pursuant to the equity interest pledge agreements, the exclusive
option agreements, the loan agreement and the proxy agreement and power of attorney. Each of their spouses agreed not to assert any rights over the equity
interests in the VIEs held by their respective spouses. In addition, in the event that any spouse obtains any equity interests in any VIE held by his or her
spouse for any reason, he or she agreed to be bound by the contractual arrangements.
(d) Risks in relations to the VIE structure
The following table set forth the assets, liabilities, results of operations and changes in cash, cash equivalents and restricted cash of the consolidated VIEs
and their subsidiaries taken as a whole, which were included in the Group’s consolidated financial statements with intercompany transactions eliminated(It
should be noted that the VIEs were not established until 2018 as the Reorganization occurred. The following disclosures present the operations and financial
positions of the businesses that currently constitute the VIE entities as of and for the respective periods.):
F-20
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(d) Risks in relations to the VIE structure (continued)
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable, net
Advance to suppliers
Inventories, net
Amounts due from the Group companies(2)
Amounts due from related parties(1)
Prepaid expense and other current assets
Property, equipment and software, net
Operating lease right-of-use assets
Deferred tax assets
Other non-current assets
Total assets
Accounts payable
Deferred revenue
Incentive payables to members
Refund payable to members
Members management fee payable
Other payable and accrued liabilities
Amounts due to the Group companies(3)
Amounts due to related parties(1)
Operating lease liabilities, current
Operating lease liabilities, non-current
Deferred Tax Liability
Total liabilities
As of December 31,
2019
2018
RMB
RMB
772,466
139,323
26,000
80,289
463,191
—
—
5,271
13,823
21,393
—
19,403
888,991
2,872,259
355
5,809
371,661
171,498
35,306
30,057
—
8,774
53,494
58,613
—
4,804
2,625,287
3,417,493
93,864
326,014
541,677
158,942
421,945
396,024
108,384
137,490
1,193,439
—
—
—
26,883
13,805
282,189
2,846,591
6,039
4,762
3,735
1
3,668,961
—
2,892,823
Information related to VIEs’ transactions with related parties is included in Note 26.
(1)
(2) Amounts due from the Group companies consisted of inter-company receivables for the rendering of services made by the VIEs and their subsidiaries
on behalf of other Group companies.
(3) Amounts due to the Group companies consisted of inter-company payables for the purchase of goods made by other Group companies on behalf of
the VIEs and their subsidiaries.
F-21
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(d) Risks in relations to the VIE structure (continued)
Total revenues
Cost of revenues
Net (loss)/income
Net cash generated by/(used in) operating activities
Net cash generated by/(used in) investing activities
Net cash generated by/(used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
F-22
Year Ended December 31,
2018
RMB
2,551,221
(593,605)
(364)
778,728
(25,014)
(208,982)
(2,302)
542,430
256,036
798,466
2017
RMB
1,639,501
(429,376)
(138,510)
425,422
(445,710)
26,255
7,160
13,127
242,909
256,036
2019
RMB
4,570,774
(2,550,386)
16,071
(1,019,175)
440,033
—
288
(578,854)
798,466
219,612
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. PRINCIPAL ACTIVITIES AND ORGANIZATION (CONTINUED)
(d) Risks in relations to the VIE structure (continued)
Under the Contractual Arrangements with the consolidated VIEs, the Company has the power to direct activities of the consolidated VIEs and VIEs’
subsidiaries through the Group’s relevant PRC subsidiaries, and can have assets transferred freely out of the consolidated VIEs and VIEs’ subsidiaries
without restrictions. Therefore, the Company considers that there is no asset of the consolidated VIEs and VIEs’ subsidiaries that can only be used to settle
obligations of the respective VIEs and VIEs’ subsidiaries except for registered capital of VIEs and VIEs’ subsidiaries amounting to RMB 33,797 and RMB
33,797 as of December 31, 2018 and 2019, respectively. Since the consolidated VIEs and VIEs’ subsidiaries are incorporated as limited liability companies
under the PRC Law, the creditors of the consolidated VIEs and VIEs’ subsidiaries do not have recourse to the general credit of the Company.
The Group believes that the Group’s relevant PRC subsidiaries’ Contractual Arrangements with the consolidated WFOEs, VIEs and VIEs’ subsidiaries and
the Nominee Shareholders are in compliance with PRC laws and regulations, as applicable, and are legally enforceable. However, uncertainties in the PRC
legal system could limit the Company’s ability to enforce these Contractual Arrangements.
In addition, if the current structure of any of the Contractual Arrangements were found to be in violation of any existing PRC laws, the Company may be
subject to penalties, which may include but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being
required to restructure the Company’s operations or terminate the Company’s operating activities. The imposition of any of these or other penalties may
result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control
the VIEs and VIEs’ subsidiaries, which may result in deconsolidation of the VIEs and VIEs’ subsidiaries.
There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the
Company cannot be assured that the PRC government authorities will not ultimately take a view that is contrary to the Company’s belief and the opinion of
its PRC legal counsel. In March 2019, the draft Foreign Investment Law was submitted to the National People’s Congress for review and was approved on
March 15, 2019, which came into effect from January 1, 2020. The approved Foreign Investment Law does not touch upon the relevant concepts and
regulatory regimes that were historically suggested for the regulation of VIE structures, and thus this regulatory topic remain unclear under the Foreign
Investment Law. Since the Foreign Investment Law is new, there are substantial uncertainties exist with respect to its implementation and interpretation and
the possibility that such entities will be deemed as foreign-invested enterprise and subject to relevant restrictions in the future shall not be excluded. If the
contractual arrangements establishing the Company’s VIE structure are found to be in violation of any existing law and regulations or future PRC laws and
regulations, the relevant PRC government authorities will have broad discretion in dealing with such violation, including, without limitation, levying fines,
confiscating our income or the income of our affiliated Chinese entities, revoking our business licenses or the business licenses of our affiliated Chinese
entities, requiring us and our affiliated Chinese entities to restructure our ownership structure or operations and requiring us or our affiliated Chinese entities
to discontinue any portion or all of our value-added businesses. Any of these actions could cause significant disruption to the Company’s business
operations, and have a severe adverse impact on the Company’s cash flows, financial position and operating performance. If the imposing of these penalties
cause the Company to lose its rights to direct the activities of and receive economic benefits from the VIEs, which in turn may restrict the Company’s ability
to consolidate and reflect in its financial statements the financial position and results of operations of its VIEs.
F-23
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES
2.1 Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“US GAAP”).
Significant accounting policies followed by the Group in the preparation of its accompanying consolidated financial statements are summarized below.
2.2 Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, the consolidated VIEs and VIEs’ subsidiaries for
which the Company is the ultimate primary beneficiary.
A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power, has the power to appoint or remove
the majority of the members of the board of directors, to cast a majority of votes at the meeting of the board of directors or to govern the financial and
operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards
normally associated with, ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All transactions and balances between the Company, its subsidiaries, VIEs and VIEs’ subsidiaries have been eliminated upon consolidation.
2.3 Non-controlling interests
For the Company’s consolidated subsidiaries, VIEs and VIEs’ subsidiaries, non-controlling interests are recognized to reflect the portion of their equity that
is not attributable, directly or indirectly, to the Company as the controlling shareholder. Non-controlling interests are classified as a separate line item in the
equity section of the Group’s Consolidated Balance Sheets and have been separately disclosed in the Group’s Consolidated Statements of Comprehensive
Loss to distinguish the interests from that of the Company.
2.4 Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the balance sheet date, and the reported revenues and expenses during the
reporting periods in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated
financial statements include, but are not limited to sales returns, the valuation and recognition of share-based compensation arrangements, inventory reserve
for excess and obsolete inventories, depreciable lives of property, equipment and software, and refund payable to members. Actual results could differ from
those estimates.
The estimation of refunds payable to members is based upon the historical data of referral incentives earned by referring members within their estimated
active life cycle. On a quarterly basis, the Company revisits the estimation with a consistently applied approach and the most up-to-date data, and any
change in accounting estimate will be reflected in relevant revenue streams in current period (Note 13).
F-24
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.5 Foreign currencies
The Group’s reporting currency is Renminbi (“RMB”). The functional currency of the Group’s holding entities incorporated in Cayman Islands and Hong
Kong, China (“HK”) is the United States dollars (“US$”). The Group’s PRC subsidiaries, consolidated VIEs and VIEs’ subsidiaries and the other HK
subsidiary determined their functional currency to be RMB. The determination of the respective functional currency is based on the criteria of ASC 830,
Foreign Currency Matters and is based primarily on the currency the entity conducts its business in.
Transactions denominated in other than the functional currencies are translated into the functional currency of the entity at the exchange rates quoted by
authoritative banks prevailing on the transaction dates. Exchange gains and losses resulting from those foreign currency transactions denominated in a
currency other than the functional currency are recorded in the Consolidated Statements of Comprehensive Loss. Total exchange loss were RMB 7,444,
RMB 685 and RMB 12,397 for the years ended December 31, 2017, 2018 and 2019, respectively.
The financial statements of the Group are translated from the functional currency into RMB. Assets and liabilities denominated in foreign currencies are
translated into RMB using the applicable exchange rates at the balance sheet date. Equity accounts other than earnings generated in current period are
translated into RMB at the appropriate historical rates. Revenues, expenses, gain and loss are translated into RMB using the periodic average exchange
rates. The resulting foreign currency translation adjustments are recorded in other comprehensive income as a component of shareholders’ equity. Total
foreign currency translation adjustments to the Group’s other comprehensive income were a gain of RMB 55,565 and RMB 33,298, for the years ended
December 31, 2018 and 2019, respectively. There were no foreign currency translation adjustments to the Group’s other comprehensive income for the year
ended December 31, 2017.
2.6 Convenience translation
Translations of the Consolidated Balance Sheets, the Consolidated Statements of Comprehensive Loss and the Consolidated Statements of Cash Flows from
RMB into US$ as of and for the year ended December 31, 2019 are solely for the convenience of the readers and were calculated at the rate of
US$1.00=RMB 6.9618, representing the index rates stipulated by the federal reserve board. No representation is made that the RMB amounts could have
been, or could be, converted, realized or settled into US$ at that rate on December 31, 2019, or at any other rate.
2.7 Fair value measurements
Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurement for assets and liabilities required or permitted to be
recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
F-25
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.7 Fair value measurements (continued)
Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach, (2) income approach
and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or
comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The
measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that
would currently be required to replace an asset.
Financial assets and liabilities of the Group mainly consist of cash and cash equivalents, restricted cash, short-term investments, trade receivables, amounts
due from related parties, prepayments and other current assets, equity securities with readily determinable fair values included in long-term investments,
trade payables, amounts due to related parties, accruals and other liabilities. As of December 31, 2018 and 2019, except for short-term investments and
equity securities with readily determinable fair values included in long-term investments, the carrying values of cash and cash equivalents, restricted cash,
trade receivables, amounts due from related parties, prepayments and other current assets, trade payables, amounts due to related parties, accruals and other
liabilities are approximated to their fair values due to the short-term maturity of these instruments. The Group reports short-term investments at fair value
and discloses the fair value of these investments based on level 2 measurement and reports equity securities with readily determinable fair values included in
long-term investments at fair value based on level 1 measurement (Note 8).
2.8 Cash and cash equivalents
Cash includes currency on hand and deposits held by financial institutions that can be added to or withdrawn without limitation. Cash equivalents represent
short-term, highly liquid investments that are readily convertible to known amounts of cash and with original maturities from the date of purchase of three
months or less.
2.9 Restricted cash
Cash that is restricted as to withdrawal or for use or pledged as security is reported separately on the face of the Consolidated Balance Sheets. The Group’s
restricted cash mainly represents i) security deposits held in designated bank accounts for issuance of bank acceptance and letter of guarantee, ii) deposits
held in the Group’s own bank accounts designated by the customs authorities that the Group makes for cross-border comprehensive tax for imported
merchandise, iii) cash held in the Group’s own bank accounts, the use of which is restricted to collecting cash on behalf of the merchants for products sold
on Yunji App and transferring these cash receipts to the merchants under the bank’s custody. Restricted cash with the restriction period lapsing within one
year are classified as current assets in the Consolidated Balance Sheets.
2.10 Short-term investment
Short-term investments are comprised of i) time deposits placed with banks with original maturities longer than three months but less than one year, ii)
wealth management products issued by PRC banks or other financial institutions, which contains fixed or variable interest with original maturities within
one year. Such investment are generally not permitted to be redeemed early or are subject to penalties for redemption prior to maturities. These investments
are stated at fair value. Changes in the fair value are reflected in Financial income in the Consolidation Statements of Comprehensive Loss.
F-26
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.11 Accounts receivable, net
Accounts receivables, net mainly represent amounts due from customers, including the funds extended by the Group to qualified merchants through its
factoring arrangements (the “factoring receivables”), and are recorded net of allowance for doubtful accounts. As of December 31, 2018 and 2019, the
balance of the factoring receivables was nil and RMB 17,041, respectively.
The Group considers many factors in assessing the collectability of its accounts receivable including the factoring receivables, such as the age of the
amounts due, the payment history, creditworthiness and financial conditions of the customers and industry trend, to determine the allowance percentage for
the overdue balances by age. The Group adjusts the allowance percentage periodically when there are significant differences between estimated bad debts
and actual bad debts. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. The Group also makes
specific allowance if there is strong evidence indicating that the accounts receivable are likely to be unrecoverable. Accounts receivable balances are written
off after all collection efforts have been exhausted. The allowance for doubtful accounts receivable, including the factoring receivables was nil at
December 31, 2018 and 2019, respectively.
2.12 Inventories, net
Inventories, consisting of products available for sale, are stated at the lower of cost and net realizable value. Cost of inventory is determined using the
weighted average cost method. Adjustments are recorded to write down the cost of inventory to the estimated net realizable value due to slow-moving
merchandise and damaged goods, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment. Write
downs of RMB 7,445, RMB 2,540 and RMB 3,608 are recorded in Cost of revenues in the Consolidated Statements of Comprehensive Loss for the years
ended December 31, 2017, 2018 and 2019, respectively.
2.13 Property, equipment and software, net
Property, equipment and software are stated at cost less accumulated depreciation. Property, equipment and software are depreciated at rates sufficient to
write off their costs less impairment and residual value, if any, over the estimated useful lives on a straight-line basis. The estimated useful lives are as
follow:
Category
Leasehold improvement
Electronic equipment
Furniture
Software
Vehicles
Estimated useful lives
Shorter of the term of the lease or the estimated useful lives of the assets
3 years
3 years
3 years
3 years
Repairs and maintenance costs are charged to expenses as incurred, whereas the costs of renewals and betterment that extend the useful lives of property,
equipment and software are capitalized as additions to the related assets. The Group recognized the gain or loss on the disposal of property, equipment and
software in the Consolidated Statements of Comprehensive Loss.
Construction in progress represents direct costs that are related to the construction of property, equipment and software and incurred in connection with
bringing the assets to their intended use. Construction in progress is transferred to specific property, equipment and software items and the depreciation of
these assets commences when the assets are ready for their intended use.
F-27
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.14 Long-term investments
The Group’s investments include equity method investments, equity securities with readily determinable fair values and equity securities without readily
determinable fair values.
The Group has investments in privately held companies. The Group applies the equity method of accounting to account for an equity investment, in
common stock or in-substance common stock, according to ASC 323 “Investment—Equity Method and Joint Ventures”, over which it has significant
influence but does not own a majority equity interest or otherwise control.
An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that
entity’s common stock. The Group considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether an
investment in an entity is substantially similar to an investment in that entity’s common stock.
Under the equity method, the Group’s share of the post-acquisition profits or losses of the equity investees are recorded in Equity in income of affiliates, net
of tax in the Consolidated Statements of Comprehensive Loss. The excess of the carrying amount of the investment over the underlying equity in net assets
of the equity investee, if any, represents goodwill and intangible assets acquired. When the Group’s share of losses in the equity investee equals or exceeds
its interest in the equity investee, the Group does not recognize further losses, unless the Group has incurred obligations or made payments or guarantees on
behalf of the equity investee.
Equity securities with readily determinable fair values are measured and recorded at fair value on a recurring basis with changes in fair value, whether
realized or unrealized, recorded through the Consolidated Statements of Comprehensive Loss.
For other equity investments that are not considered as debt securities or equity securities that have readily determinable fair values and over which the
Group has neither significant influence nor control through investments in common stock or in-substance common stock, the Group makes the election for
these investments whereby investment is carried at cost and adjusted in subsequent periods for any impairment or changes in observable prices of identical
or similar investments.
F-28
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.15 Impairment of long-lived assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that
will impact the future use of the assets) indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the
Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of
the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of
the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the
carrying value of the assets over the fair value of the assets.
2.16 Revenue recognition
The Group adopted ASC Topic 606, “Revenue from Contracts with Customers,” for all periods presented. Consistent with the criteria of Topic 606, the
Group recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Group
expects to receive in exchange for those goods or services.
To achieve that core principle, the Group applies the five steps defined under Topic 606: (i) identify the contract(s) with a customer, (ii) identify the
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract,
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Group assesses its revenue arrangements against specific criteria in
order to determine if it is acting as principal or agent. Revenue arrangements with multiple performance obligations are divided into separate distinct goods
or services. The Group allocates the transaction price to each performance obligation based on the relative standalone selling price of the goods or services
provided. Revenue is recognized upon the transfer of control of promised goods or services to a customer.
Revenue is recorded net of value-added tax.
Revenue recognition policies for each type of revenue steam are as follows:
Sales of merchandise
The Group primarily sells merchandise through its Yunji App. The Group presents the revenue generated from its sales of merchandise on a gross basis as
the Group has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. In making this determination, the
Group also assesses whether it is primarily obligated in these transactions, is subject to inventory risk, has latitude in establishing prices, or has met several
but not all of these indicators. The cash collected from the sales of merchandise is initially recorded in Deferred revenue in the Consolidated Balance Sheets
and subsequently recognized as revenue when the receipt of merchandise is confirmed by the customers, which is the point that the title of the merchandise
is transferred to the customer. The revenue is recorded net of value-added tax, discounts, coupons, incentives and return allowances. Return allowances are
estimated based on historical experiences and updated at the end of each reporting period.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.16 Revenue recognition (continued)
Membership program
The Group earns membership fees from its members, who pay a fixed fee in exchange for (1) a merchandise gift package, (2) the right to receive member
exclusive discounts for merchandise sold on the Yunji App, (3) access rights to the member-exclusive features on Yunji App, (4) the right to receive units of
Yunbi (meaning Yun coin) upon a successful new member referral (“Referral Yunbi”), (5) member exclusive training, and (6) units of Yunbi (“New
member Yunbi”). Each of these items represents a separate performance obligation. Yunbi can be used as coupons for the member’s future purchases on
Yunji App and therefore reflect material rights. In order to promote its membership program, the Group, at its discretion, allows its users to join the
membership program by purchasing any merchandise of equivalent value of the membership fee via Yunji App within a defined period as an alternative
way of paying the upfront fixed membership fee, or allows individuals that meet certain requirements to become members without paying membership fee.
When users become members in this manner, they are not entitled to the merchandise gift package and member exclusive training. The Group allocates the
transaction price to each performance obligation, after taking into consideration expected refunds payable to members (Note 2.17), based on their relative
standalone selling price. When the standalone selling price of a performance obligation is not directly observable, it is estimated by the Group by using an
expected cost plus a margin approach. For the merchandise gift package, revenue is recognized when the receipt of the gift package is confirmed by the
members, which were RMB 334,595, RMB 1,197,890 and RMB 557,936 for the years ended December 31, 2017, 2018 and 2019, respectively. For the right
to receive Referral Yunbi, revenue is recognized when Referral Yunbi is used and redeemed, or upon expiration if not redeemed. For New member Yunbi,
revenue is recognized when the New member Yunbi is used and redeemed, or upon expiration if not redeemed. For member exclusive training, revenue is
recognized when the training courses are delivered over the service period by the third party vendors engaged by the Group. For the remaining performance
obligations, revenue is recognized over the period of the active life cycle of the Group’s members on a straight-line basis. The active life cycle of the
Group’s members is estimated based on historical behavior of these members, which is approximately one year.
In addition, when members subsequently purchase merchandise, the members initially pay for their purchases at non-member regular prices, and then are
issued refunds equal to the member-exclusive discounts from the Group as a credit upon the members confirming receipt of the merchandise. The Group
records such anticipated refunds as a reduction of revenue and discounts payables to the members.
F-30
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.16 Revenue recognition (continued)
Marketplace
In 2019, the Group launched its marketplace business model, under which the Group operates its e-commerce platform, Yunji App, as a marketplace for
third party merchants to sell their merchandise to the Yunji App users. When the transactions are completed on Yunji App, the Group charges merchants
commissions at their respective agreed percentage of the amount of merchandise sold by merchants. The Group acts as an agent in these transactions and
does not control the underlying merchandise provided by merchants before they are transferred to users, as the Group is not responsible for fulfilling the
promise to provide the merchandise to users and has no inventory risk before the merchandise are transferred to the users or after the control is transferred to
the users. In addition, the Group has no discretion in establishing prices of the merchandise provided by merchants. Revenues are recognized on a net basis
to the extent of the commission the Group earns at the point of users’ acceptance of merchandise.
Remaining performance obligations
The remaining performance obligations associated with the Group’s sale of merchandise represents the cash collected upfront from the customers for their
purchase of merchandise on Yunji App, but the underlying merchandise has not yet been received by the customers, which is included in the presentation of
Deferred revenue (Note 11). As of December 31, 2018 and 2019, the remaining performance obligation for sales of merchandise were RMB 337,166 and
RMB 129,224, respectively, which are expected to be recognized as revenue when the receipt of merchandise is confirmed by the customers.
Revenue allocated to remaining performance obligations of the Group’s membership program represents that portion of the overall transaction price that has
been received (or for which the Group has an unconditional right to payment) allocated to obligations under the membership program that the Group has not
yet fulfilled, which is included in the presentation of Deferred revenue (Note 11). As of December 31, 2018 and 2019, the aggregate amount of the
transaction price allocated to remaining performance obligations were RMB 209,809 and RMB 42,438, respectively, which are expected to be recognized as
revenue within 12 months.
The remaining performance obligations associated with the Group’s marketplace revenue represents the portion of commission fee included in the payment
collected from the users for their purchase of merchandise on Yunji App on behalf of the merchants, but the underlying merchandise has not yet been
received by the users, which is included in the presentation of Deferred revenue (Note 11). As of December 31, 2019, the remaining performance obligation
for marketplace revenue was RMB 9,800, which are expected to be recognized as revenue when the transactions are completed.
F-31
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.16 Revenue recognition (continued)
Other goods and services
The Group offers products such as air tickets, tourist attractions tickets, cruise, group tour, hotel reservation and car insurance through Yunji App. The
Group presents the revenue generated from such sales on a net basis as the Group does not have control of the goods or services or have the ability to direct
the use of the goods or services and obtain substantially all of their benefits. Revenue is recognized when the Group has fulfilled its selling performance
obligations on behalf of the principal in the transaction, which is either when the products are accepted by the customer, or once the order of the products
become non-cancellable on Yunji App, depending on the terms of the particular agreement.
The Group also offers loans to the merchants through factoring arrangements. The Group extends loans to merchants for their expected orders in addition to
the loans to the same merchants who factored their accounts receivables generated from their transactions completed on Yunji App with recourse and
charges an interest to merchants based on the principal. The Group records factoring receivables, which is included in accounts receivable, when the cash is
advanced to the merchants (Note 2.11). The interests are recognized over the term of loans, normally within three months. When the Group has legal rights
to net settle the factoring receivables with its payable to merchants from cash flow perspective, the Group settles the factoring receivables with payables to
the same merchants respectively, provided by the legal rights as per agreement between the two parties.
2.17 Refund payable to members
After joining the Group’s membership program, members are able to make referrals to other users through their social networks. The Group provides
incentives to those referring members by paying a cash refund upon a successful merchandise referral.
Since customers are only able to receive referral incentives after they become members by paying the membership fees, the referral incentives related to
merchandise referral are considered payments to customers (and are not payment for a distinct good or service) and accounted for as a refund payable to
members. Such refunds are estimated at the time the membership fee is received and recorded as Refund payable to members, and reduce the transaction
price (that the Group expects to be entitled to keep) for the membership fee revenue recognition calculation described above accordingly. Any amount of
referral incentives expected to be paid in excess of the initial membership fee received is recorded as Refund payable to members (and reduces merchandise
revenue subsequently generated from those members) at the time they make subsequent merchandise purchases, up to the amount of the expected future
referral incentives.
The estimation of refunds payable to members is based upon the historical data of referral incentives earned by referring members within their active life
cycle (Note 2.4). Once the referral incentives are earned by the referring members, the amounts are transferred to the members’ individual Yunji App
accounts and reclassified from Refund payable to members to Incentive payables to members.
F-32
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.18 Users incentive programs
The Group grants certain units of Yunbi (meaning ‘Yun-coin’) and other coupons (collectively referred to as coupons), from time to time, to its customers at
its discretion in different situations. Yunbi are not redeemable for cash and can be used as a coupon for the customer’s future purchase on the Yunji App.
The value of one unit of Yunbi is equivalent to one RMB yuan. The coupons granted can be categorized into 1) coupons granted concurrent with a revenue
transaction and 2) coupons granted not concurrent with a revenue transaction. When the coupon is granted concurrent with a revenue transaction, the Group
determine whether the coupon represents a material right of the current transaction. If the coupon represents a material right, the transaction price is
allocated between merchandise sale and the coupon based on the estimated standalone selling price taking into consideration the coupon’s forfeiture rate. If
the coupon does not represent a material right, it is recognized as a reduction of revenue when they are applied in the future sales. When the coupon is not
granted concurrent with a revenue transaction, the Company assesses whether the coupons were granted in exchange for a distinct service at fair value.
When the coupons are granted in exchange for a distinct service at fair value, they are recorded as expense upon grant. In this case, the person granted
coupons in return for their service activities does not need to be a member. When the coupons are not granted in exchange for a distinct service, they can
only be applied to the future purchase of certain specified merchandise. These coupons are not accounted for when they are granted and are recognized as a
reduction of revenue when they are applied in future sales.
Starting from 2019, in order to promote its marketplace business, from time to time, the Group at its own discretion issues coupons in various forms to users
without any concurrent transactions in place or any substantive action needed from the recipient. These coupons can be used in purchase of goods in a broad
range of merchants as an immediate discount of their next purchase, some of which can only be used when the purchase amount exceeds pre-defined
threshold. The Group settles with the merchants in cash for the coupons used by the users. As the users are required to make purchases of the merchants’
merchandises to redeem the coupons, the Group recognizes the amounts of redeemed coupons as Sales and marketing expenses when the purchases are
made.
F-33
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.19 Cost of revenues
Cost of revenues consists of purchase price of merchandise, inbound shipping charges, write-downs of inventory and member training costs. Inbound
shipping charges to receive merchandise from suppliers are included in the inventories, and recognized as cost of revenues upon sale of the merchandise to
the customers.
2.20 Fulfilment
Fulfilment expenses represent packaging material costs and those costs incurred in outbound shipping, operating and staffing the Group’s fulfilment and
customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing
customer orders for shipment, processing payment and related transaction costs and responding to inquiries from customers, depreciation expenses, payroll
costs including share-based compensation expenses, and other daily expenses which are related to the purchasing functions. Fulfilment costs also contain
third party payment transaction fees, such as bank card processing and debit card processing fees.
2.21 Sales and marketing
Sales and marketing expenses comprise primarily of member management fees, promotion expenses, marketplace coupons, payroll costs including share-
based compensation expenses, depreciation expenses and other daily expenses which are related to the sales and marketing functions.
The Group engages third party vendors to provide member management services, which are ultimately performed by service managers who enter into
employment contract with the third party vendors. Certain of the Group’s members (customers) have been engaged by third party vendors to serve as service
managers. The Group has concluded that the member management services provided by the service managers, including those who are also members, are
for distinct services at fair value, and records the member management fees paid to the third party vendors as Sales and marketing expenses.
2.22 Technology and content
Technology and content expenses are expensed as incurred and primarily consist of payroll costs including share-based compensation expenses, rental
expenses, costs associated with the computing, storage and telecommunications infrastructure for internal use that support the Group’s system and Yunji
App services and other expenses which are related to the technology and content functions, which are responsible for technology research and development
and content editing in the Group. The Group accounts for internal use software development costs in accordance with guidance on intangible assets and
internal use software. This requires capitalization of qualifying costs incurred during the software’s application development stage and to expense costs as
they are incurred during the preliminary project and post implementation/operation stages. Costs capitalized for developing such software application were
not material for the periods presented.
2.23 General and administrative
General and administrative expenses consist of payroll costs including share-based compensation expenses and other expenses which are related to the
general corporate functions, including accounting, finance, tax, legal and human relations, costs associated with use by these functions of facilities and
equipment, such as depreciation expenses, rental and other general corporate related expenses.
F-34
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.24 Share-based compensation
The Company grants restricted share units (“RSUs”) and share options of the Company to eligible employees and accounts for these share-based awards in
accordance with ASC 718 Compensation — Stock Compensation.
Employees’ share-based awards are measured at the grant date fair value of the awards and recognized as expenses a) immediately at grant date if no vesting
conditions are required, or b) using a straight-line method over the requisite service period, which is the vesting period.
For nonemployees’ share-based awards, the Group adopted ASU 2018-07 in 2019, according to ASU 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, it clarifies that equity-classified nonemployee share-based payment awards are measured at the grant date. The definition of the term
grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-
based payment award. Nonemployees’ are measured at the grant date fair value of the awards and recognized as expenses using a straight-line method over
the requisite service period, which is the vesting period.
All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Before the Group’s initial public offering, the fair value of RSUs were assessed using the income approach/discounted cash flow method, with a discount
for lack of marketability given that the shares underlying the awards were not publicly traded at the time of grant. This assessment required complex and
subjective judgments regarding the Company’s projected financial and operating results, its unique business risks, the liquidity of its ordinary shares and its
operating history and prospects at the time the grants were made. After the Group’s initial public offering, the fair value of the RSUs is determined based on
the quoted market price of Yunji’s ordinary shares on the grant date.
In addition, the binomial option-pricing model is used to measure the value of share options. The determination of the fair value is affected by the fair value
of the ordinary shares as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility, actual
and projected employee and nonemployee share option exercise behavior, risk-free interest rates and expected dividend yield. Binomial option-pricing
model incorporates the assumptions about grantees’ future exercise patterns. The fair value of these awards was determined by management with the
assistance from an independent valuation firm using management’s estimates and assumptions.
The assumptions used in share-based compensation expense recognition represent management’s best estimates, but these estimates involve inherent
uncertainties and application of management judgment. If factors change or different assumptions are used, the share-based compensation expenses could be
materially different for any period. Moreover, the estimates of fair value of the awards are not intended to predict actual future events or the value that
ultimately will be realized by grantees who receive share-based awards, and subsequent events are not indicative of the reasonableness of the original
estimates of fair value made by the Company for accounting purposes.
In accordance with ASU 2016-09, the Group made an entity-wide accounting policy election to account for forfeitures when they occur.
F-35
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.25 Employee benefits
Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits,
medical care, employee housing fund and other welfare benefits are provided to the employees. Chinese labor regulations require that the PRC subsidiaries
and VIE of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries, up to a maximum
amount specified by the local government. The Group has no legal obligation for the benefits beyond the contributions made. Total amounts of such
employee benefit expenses, which were expensed as incurred, were RMB 154,221, RMB 299,341, RMB 553,175 for the years ended December 31, 2017,
2018 and 2019, respectively.
2.26 Operating leases
The Company applied ASC 842, Leases, on January 1, 2019 on modified retrospective basis and has elected not to recast comparative periods. The
Company determines if an arrangement is a lease at inception. Operating leases are primarily for office and warehouse and are included in Operating lease
right of use assets, net, Operating lease liabilities, current and Operating lease liabilities, non-current on its Consolidated Balance Sheet. Operating lease
right of use assets represent the Group’s right to use an underlying asset for the lease term and Operating lease liabilities represent obligation to make lease
payment arising from the lease. The operating lease right of use assets and liabilities are recognized at lease commencement date based on the present value
of lease payment over the lease term. As most of the Group’s leases do not provide an implicit rate, the Group uses its incremental borrowing rate based on
the information available at lease commencement date in determining the present value of lease payments. The Operating lease right of use assets also
includes any lease payments made and excludes lease incentives. The Group’s lease term may include options to extend or terminate the lease. Renewal
options are considered within the Operating lease right of use assets and liabilities when it is reasonably certain that the Group will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For operating lease with a term of one year or less, the Group has elected to not recognize a lease liability or lease right of use asset on its Consolidated
Balance Sheet. Instead, it recognizes the lease payment as expense on a straight-line basis over the lease term. Short-term lease costs are immaterial to its
Consolidated Statements of Comprehensive Loss. The Group has operating lease agreements with insignificant non-lease components and have elected the
practical expedient to combine and account for lease and non-lease components as single lease component.
Upon the adoption of the new lease standard, on January 1, 2019, the Group recognized operating lease assets of RMB 27,653 and total operating lease
liabilities of RMB 28,261 (including current liabilities of RMB 11,876) on the Consolidated Balance Sheet. There was no impact to Accumulated deficit at
adoption.
2.27 Government grant
Government grants are recognized as Other income, net or as a reduction of specific costs and expenses for which the grants are intended to compensate.
Such amounts are recognized in the Consolidated Statements of Comprehensive Loss upon receipts and all conditions attached to the grants are fulfilled.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.28 Income tax
Current income taxes are recorded in accordance with the regulations of the relevant tax jurisdiction. The Group accounts for income taxes under the asset
and liability method in accordance with ASC 740, Income Tax. Under this method, deferred tax assets and liabilities are recognized for the tax
consequences attributable to differences between carrying amounts of existing assets and liabilities in the financial statements and their respective tax basis,
and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the
Consolidated Statements of Comprehensive Loss in the period of change. Valuation allowances are established when necessary to reduce the amount of
deferred tax assets if it is considered more likely than not that amount of the deferred tax assets will not be realized.
The Group recognizes in its consolidated financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the
facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax
benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Group estimates its liability for unrecognized tax benefits
which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with
respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty
prior to the conclusion of a tax audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Group’s
estimates. As each audit is concluded, adjustments, if any, are recorded in the Group’s consolidated financial statements in the period in which the audit is
concluded. Additionally, in future periods, changes in facts, circumstances and new information may require the Group to adjust the recognition and
measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the
changes occur. As of December 31, 2018 and 2019, the Group did not have any significant unrecognized uncertain tax positions.
F-37
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.29 Treasury stocks
The Company accounts for treasury stocks using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury
stocks account on the Consolidated Balance Sheets.
2.30 Statutory reserves
The Company’s subsidiaries, consolidated VIEs and VIEs’ subsidiaries established in the PRC are required to make appropriations to certain
non-distributable reserve funds.
In accordance with the laws applicable to the Foreign Investment Enterprises established in the PRC, the Group’s subsidiaries registered as wholly-owned
foreign enterprise have to make appropriations from their after-tax profits (as determined under generally accepted accounting principles in the PRC (“PRC
GAAP”)) to reserve funds including general reserve fund, enterprise expansion fund and staff bonus and welfare fund. The appropriation to the general
reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the general reserve fund
has reached 50% of the registered capital of the company. Appropriations to the enterprise expansion fund and staff bonus and welfare fund are made at the
respective company’s discretion.
In addition, in accordance with the PRC Company Laws, the Group’s consolidated VIEs and VIEs’ subsidiaries, registered as Chinese domestic companies,
must make appropriations from their after-tax profits as determined under the PRC GAAP to non-distributable reserve funds including statutory surplus
fund and discretionary surplus fund on an annual basis. The appropriation to the statutory surplus fund must be 10% of the after-tax profits as determined
under PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of the company. Appropriation to the
discretionary surplus fund is made at the discretion of the respective company.
The use of the statutory surplus fund and discretionary surplus fund are restricted to the offsetting of losses or increasing of the registered capital of the
respective company. The staff bonus and welfare fund is a liability in nature and is restricted to fund payments of special bonus to employees and for the
collective welfare of employees. None of these reserves are allowed to be transferred to the company in terms of cash dividends, loans or advances, nor can
they be distributed except under liquidation.
For the years ended December 31, 2017, 2018 and 2019, profit appropriation to statutory surplus fund for the Group’s entities incorporated in the PRC was
approximately RMB 4,227, RMB 4,277 and RMB 3,129 respectively.
F-38
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.31 Comprehensive loss
Comprehensive loss is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding
transactions resulting from investments from shareholders and distributions to shareholders. Comprehensive loss for the periods presented includes net loss
and foreign currency translation adjustments.
2.32 Net loss per share
Basic net loss per share is computed by dividing net loss attributable to holders of ordinary shares, considering the accretions to redemption value of the
preferred shares, deemed dividend from/to preferred shareholders, including beneficial conversion feature, by the weighted average number of ordinary
shares outstanding during the period, if applicable.
Diluted net loss per share is calculated by dividing net loss attributable to ordinary shareholders, as adjusted for the accretion and deemed dividend and
allocation of net income related to the preferred shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the period. Ordinary equivalent shares consist of shares issuable upon the conversion of the preferred shares using the if-converted
method, restricted share units and ordinary shares issuable upon the exercise of outstanding share options using the treasury stock method. Ordinary
equivalent shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive.
2.33 Segment reporting
ASC 280, Segment Reporting, establishes standards for companies to report in their financial statements information about operating segments, products,
services, geographic areas, and major customers.
Based on the criteria established by ASC 280, the Group’s chief operating decision maker (“CODM”) has been identified as the Chief Executive Officer,
who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. As a whole and hence, the
Group has only one reportable segment. The Group does not distinguish between markets or segments for the purpose of internal reporting. As the Group’s
long-lived assets are substantially located in the PRC and substantially all the Group’s revenue are derived from within the PRC, no geographical segments
are presented.
F-39
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.34 Recent accounting pronouncements
In June 2016, the FASB amended guidance related to the impairment of financial instruments as part of ASU 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. For public business entities that are U.S. SEC filers, the amendments in this
Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business
entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the
amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after
December 15, 2021. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company will adopt this new guidance for the year ended December 31, 2019 and interim periods in the year
ended December 31, 2019. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which the Group is
required to recognize an allowance based on its estimate of expected credit loss. The Group has determined that the impact of this new guidance on its
consolidated financial statements is not expected to be material.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements
for Fair Value Measurement,” which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s
disclosure framework project. The new guidance is effective for the fiscal years and interim reporting periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted for the adoption of either the entire ASU or only the provisions that eliminate or modify the requirements.
The Company is evaluating the effects, if any, of the adoption of this guidance on the fair value disclosure in the consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments.” Apart from the amendments to ASU 2016-13 mentioned above, the ASU also included subsequent
amendments to ASU 2016-01, which the Company adopted in January 2018 (Note 2). For entities that have not yet adopted ASU 2017-12, the effective date
is the same as ASU 2017-12. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
For entities that have adopted ASU 2017-12, the effective date is as of the beginning of the first annual reporting period beginning after issuance of this
Update The Company is evaluating the effects, if any, of the adoption of these guidance on the Company’s financial position, results of operations and cash
flows.
In December 2019, the FASB issued ASU 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU provides an
exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for
any incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up in the tax basis of goodwill should be
considered part of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a
separate transaction, and (3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in
the interim period that includes the enactment date. The standard is effective for the Company for fiscal years beginning after December 15, 2020, with
early adoption permitted. The Company is currently evaluating the impact.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
3. CONCENTRATION AND RISKS
3.1 Concentration of credit risk
Financial instruments that potentially subject the Group to the concentration of credit risks consist of cash and cash equivalents, restricted cash, and short-
term investments. The maximum exposures of such assets to credit risk is their carrying amounts as of the balance sheet dates. The Group deposits its cash
and cash equivalents, restricted cash and short-term investments with financial institutions located in jurisdictions where the subsidiaries are located. The
Company believes that no significant credit risk exists as these financial institutions have high credit quality.
3.2 Concentration of customers and suppliers
Substantially all revenue was derived from customers located in China. There are no customers or suppliers from whom revenues or purchases individually
represent greater than 10% of the total revenues or the total purchases of the Group in any of the periods presented.
3.3 Foreign currency exchange rate risk
In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the US$, and the RMB appreciated more than 20%
against the US$ over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the
US$ remained within a narrow band. Since June 2010, the RMB has fluctuated against the US$, at times significantly and unpredictably. The appreciation
of the RMB against the US$ was approximately 5.8% in 2017. The depreciation of the RMB against the US$ was approximately 5.0% in 2018. The
appreciation of the RMB against the US$ was approximately 1.6% in 2019. It is difficult to predict how market forces or PRC or U.S. government policy
may impact the exchange rate between the RMB and the US$ in the future.
4. SHORT TERM INVESTMENT
Time deposits
Wealth management products
As of December 31,
2019
2018
RMB
RMB
549,056
593,954
550,338
180,782
1,099,394
774,736
As of December 31, 2018 and 2019, the Group’s wealth management products mainly consisted of financial products issued by commercial banks in China
with a variable interest rate indexed to the performance of underlying assets and a maturity date within one year when purchased or revolving terms. For the
years ended December 31, 2017, 2018 and 2019, the weighted average return of the wealth management products were 3.3%, 4.1% and 3.4%, respectively.
F-41
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
Prepaid expenses and other current assets consist of the following:
Prepaid member training costs (1)
Receivables from third-party payment settlement platform (2)
Deposits (3)
Prepaid rental expenses
Prepaid advertising expenses
Short-term loan receivables (4)
Share transfer consideration receivable (5)
VAT-input deductible
Staff advance
Others
As of December 31,
2019
2018
RMB
RMB
172,869
36,669
92,639
71,202
63,943
86,796
3,839
617
—
4,085
—
121,949
—
97,667
68,917
115,252
808
640
7,424
32,555
410,439
567,432
(1) The Group engages third party vendors to provide sales and marketing related training to its members, including on-line training courses to facilitate
product sales, updated features on Yunji App, etc. According to the member’s agreement, all members of the Group, except for those joined the
Group’s membership program without paying upfront membership fee, are eligible to attend the training courses provided by these third party
vendors. In case when the Group should make prepayments for the training costs to these third party vendors, the prepaid amounts are amortized over
relevant period of the training courses provided by the third party vendors. For the years ended December 31, 2017, 2018 and 2019, member training
costs were RMB 230,168, RMB 423,586 and RMB 356,283, presented in Cost of revenues in the Consolidation Statements of Comprehensive Loss.
(2) Receivables from third-party payment settlement platform represent cash due from the third party on-line payment service providers in relation to
their processing of payments to the Group. No allowance for doubtful accounts was provided for these receivables.
(3) Deposits mainly represent the customs deposits held in customs bank accounts, which were RMB 58,000 and RMB 65,000 as of December 31, 2018
and 2019, respectively.
(4) Short-term loan receivables represent the principal and interest to be collected on two loans provided by the Group to a customer. The loans include
one principal amount of US$ 10.3 million (equivalent to RMB 71,202) and the other with principal amount of RMB 50,000. Both loans are of one-
year term and with fixed annual interest at approximately 4% within the market rate range, and mature in November 2020 and June 2020,
respectively. The loans are pledged by gold bullion with value no less than the loan principal provided to this customer, and the loan arrangements
were entered into separately from regular sales business with this customer.
(5) Share transfer consideration receivable represents the consideration to be collected for transferring of a third party company’s ADSs. In November
2019, the Group subscribed 820,000 ADSs of a third party company with a total consideration of US$ 13.94 million upon its initial public offering in
NASDAQ. According to a shares transfer agreement that the Group entered into, the Group sold and transferred all these ADSs to another third party
with a fixed consideration of US$ 13.99 million (equivalent to RMB 97.67 million) in December 2019 and the gain of US$50 was recorded in
Financial income, net. The Group received the consideration in January 2020.
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Form 20-F
Table of Contents
6. INVENTORIES, NET
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
Merchandise and packing materials
Less: inventory write-downs
Inventories, net
7. PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net, consist of the following:
Leasehold improvement
Electronic equipment
Furniture
Software
Vehicles
Construction in progress
Subtotal
Less: accumulated depreciation
Property, equipment and software, net
As of December 31,
2019
2018
RMB
RMB
428,763
678,083
(2,540)
(441)
428,322
675,543
As of December 31,
2019
2018
RMB
RMB
29,421
22,758
25,990
18,994
10,117
5,751
2,441
1,808
1,101
1,101
—
3,144
72,214
50,412
(13,458)
36,954
(26,870)
45,344
Depreciation expenses were RMB 3,808, RMB 9,306 and RMB 18,021 for the years ended December 31, 2017, 2018 and 2019, respectively. No
impairment charges were recorded for the years ended December 31, 2017, 2018 and 2019.
As of December 31, 2019 the balances of construction in progress were RMB 3,144 which were primarily relating to the leasehold improvements of office
buildings. There was no construction in progress balances as of December 31, 2018.
F-43
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
8. LONG-TERM INVESTMENTS
The Group’s long-term investments consist of the following:
Equity method investments
Guangdong Weixin Technology Co., Ltd (“Weixin”)
Beijing Siwei Technology and Culture Co., Ltd(“Siwei”)
Hangzhou Zhangtaihe Health Technology Co., Ltd(“Zhangtaihe”)
Ningbo Hongshi Investment Management Partnership Fund (“Hongshi Fund”)
Hangzhou Adopt A Cow Biological Technology Co., Ltd (“Zhaomu”)
Hangzhou Bixin Biotechnology Co., Ltd.(“Bixin”)
Hunan Haomei Haomei Cosmetics Co., Ltd.(“Haomei”)
Shenzhen Liumang Yike Food & Beverage Management Co., Ltd. (“Liumang Yike”)
Zhejiang Zhengdao Fengju Supply Chain Management Co., Ltd.(“Zhengdao”)
Other investments accounted for under equity methods
Equity securities accounted for under alternative measurement
Qinghu Live (Hangzhou) Network Technology Co., Ltd. (“Qinghu”)
Other investments accounted for at cost method under alternative measurement
Equity securities with readily determinable fair values
GXG stock investment
Total long-term investments
F-44
As of December 31,
2018
RMB
2019
RMB
5,017
3,182
2,960
2,000
3,277
—
—
—
—
363
16,799
—
200
200
5,244
3,202
1,772
1,994
3,336
4,113
2,258
3,138
7,188
4,343
36,588
3,000
1,200
4,200
—
16,999
158,072
198,860
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
8. LONG-TERM INVESTMENTS (CONTINUED)
Major investments made by the Company during the years ended December 31, 2017, 2018 and 2019 are summarized as follows:
Investments accounted for using equity method
Investment in Weixin
In January 2018, the Group acquired 30% shareholding of Weixin with a cash consideration of RMB 3,000. As the Group is able to exercise significant
influence in the form of ordinary shares of the investee, the Group therefore started to account for this investment under equity methods from January 2018
and share the results of Weixin accordingly.
Investment in Siwei
In August 2018, the Group acquired 20% ordinary equity interest of Siwei with a cash consideration of RMB 3,000. As the Group is able to exercise
significant influence in the form of ordinary shares of the investee, the Group therefore started to account for this investment under equity methods from
August 2018 and share the results of Siwei accordingly.
Investment in Zhangtaihe
In January 2018, the Group acquired 20% ordinary equity interest of Zhangtaihe with cash consideration of RMB 2,000. As the Group is able to exercise
significant influence in the form of ordinary shares of the investee, the Group therefore started to account for this investment under equity methods from
January 2018 and share the results of Zhangtaihe accordingly.
Investment in Hongshi Fund
Hongshi Fund is a third party investment fund. In September 2018, the Group became a limited partner of Hongshi Fund with cash investment contribution
of RMB 2,000, which consists of over 3% of all investors’ interest in Hongshi Fund. As the Group is able to exercise significant influence in the form of
investing interests of the investee, the Group therefore started to account for this investment under equity methods from September 2018 and share the
results of Hongshi Fund accordingly.
Investment in Zhaomu
In December 2018, the Group acquired 10% ordinary equity interest of Zhaomu with cash consideration of RMB 3,500. By virtue of the Group’s one seat
out of five on the Board of the investee, the Group is able to exercise significant influence over the investee company. The Group’s investment is in the
form of ordinary shares of the investee and the Group accounts for this investment under the equity methods from December 2018.
Investment in Bixin
In January 2019, the Group acquired 30% ordinary equity interest of Bixin with cash consideration of RMB 4,950. As the Group is able to exercise
significant influence in the form of ordinary shares of the investee, the Group therefore started to account for this investment under equity methods from
January 2019 and share the results of Bixin accordingly.
F-45
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
8. LONG-TERM INVESTMENTS (CONTINUED)
Investments accounted for using equity method (Continued)
Investment in Haomei
In April 2019, the Group acquired 30% ordinary equity interest of Haomei with a cash consideration of RMB 3,000. The Group’s investment is in the form
of ordinary shares of the Investee. The Group has one seat out of three on the Board of the Investee. As the Group is able to exercise significant influence in
the form of ordinary shares of the investee, the Group therefore accounts for this investment using equity methods since April 2019 and shares the results of
Haomei accordingly.
Investment in Liumang Yike
In April 2019, the Group acquired 10% ordinary equity interest of Liumang Yike with cash consideration of RMB 3,000. The Group’s investment is in the
form of ordinary shares of the Investee. By virtue of the Group’s one seat out of five on the Board of the investee, the Group is able to exercise significant
influence over the investee, and the Group therefore accounts for this investment using equity methods since April 2019.
Investment in Zhengdao
In April 2019, the Group acquired 40% ordinary equity interest of Zhengdao with a cash consideration of RMB 8,000. The Group has two seat out of five on
the Board of the Investee. As the Group is able to exercise significant influence in the form of ordinary shares of the Investee, the Group therefore started to
account for this investment using equity methods since April 2019 and shares the results of Zhengdao accordingly.
F-46
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
8. LONG-TERM INVESTMENTS (CONTINUED)
The remaining investments accounted for under equity methods are individually immaterial for the periods presented.
The carry amount and unrealized securities holding gain/ (loss) for the investments under equity method as of December 31, 2019 was as follows,
Total value booked under equity method as of December 31,
2017
Addition
Share of cumulative gain for the year ended December 31, 2018
Total value booked under equity method as of December 31,
2018
Addition
Dividends received
Share of cumulative loss for the year ended December 31, 2019
Total value booked under equity method as of December 31,
2019
Equity method investments
307
13,500
2,992
16,799
23,200
(190)
(3,221)
36,588
The Company’s equity investments individually or collectively did not meet the significance in accordance with Rule 4-08 of Regulation S-X (RMB in
millions).
Equity securities accounted for under alternative measurement
Investment in Qinghu
In December 2019, the Group acquired 10% ordinary share interests of Qinghu with cash consideration of RMB 3,000. As the Group does not have
significant influence over Qinghu through its equity investment, which does not have readily determinable market value, therefore, the Group accounts for
the investment of Qinghu at cost minus impairments and plus or minus observable changes in prices.
The remaining equity investments accounted for under alternative measurement are individually immaterial for the periods presented.
Equity securities with readily determinable fair values
Investment in GXG
In May 2019, the Group purchased 22,740,000 ordinary shares of a Hong Kong listed Company - GXG (1817. HK) - with a total consideration of US$
13 million, and recorded its investment in GXG with initial cost of US$ 13 million (equivalent to approximately RMB 89,517). As of December 31, 2019,
based on the market price, the Group re-measured the investment at a fair value of RMB 158, 072, and recorded the unrealized changes in fair value of
RMB 68,555 in Financial income, net in the Consolidation Statements of Comprehensive Loss. This investment is classified as equity securities with readily
determinable fair values.
F-47
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
9. OTHER NON-CURRENT ASSESTS
Other non-current assets consist of the following:
Long-term loan receivable (1)
Others
As of December 31,
2018
RMB
—
1,255
1,255
2019
RMB
50,278
6,003
56,281
(1) Long-term loan receivable represents the principal and interest to be collected of a loan provided by the Group to a third party. The loan was of
principal amount of RMB 50,000, three-year term starting from December 2019, and with a lump sum interest rate of 20% at maturity. The Group
intends to purchase a property from this third party and will re-locate its customer service center in the future.
10. ACCOUNTS PAYABLE
Merchandise purchase payables
Warehouse and logistic fees payables
Payable to merchants (1)
As of December 31,
2019
2018
RMB
RMB
1,247,181
548,427
70,968
48,327
114,125
145,205
1,432,274
741,959
(1) Payable to merchants represents the unpaid balances to the merchants of cash collected by the Group on behalf of the merchants for products sold on
Yunji App when the Group is viewed as the agent in the sales arrangement.
11. DEFERRED REVENUE
Deferred merchandise revenue
Deferred membership program revenue
Deferred marketplace revenue
Deferred other revenue
F-48
As of December 31,
2019
2018
RMB
RMB
337,166
129,224
209,809
42,438
—
9,800
—
366
546,975
181,828
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
11. DEFERRED REVENUE (CONTINUED)
The revenue recognized in the years ended December 31, 2017, 2018 and 2019 that was included in deferred revenue as of the beginning of each respective
period were RMB 112,295, RMB 323,551 and RMB 546,975, respectively.
12. INCENTIVE PAYABLES TO MEMBERS
Accruals of Yunbi granted under member incentive program(1)
Discounts and referral incentive payable(2)
Total incentive payables to members
As of December 31,
2019
2018
RMB
RMB
9,030
412,915
421,945
251
384,235
384,486
(1) Accruals of Yunbi granted under member incentive program represents the value of unredeemed units of Yunbi granted to the members under the
Group’s member incentive program as of December 31, 2018 and 2019. Forfeiture rate is considered to determine their value when granted, which is
estimated based on historical data.
(2) Discounts and referral incentive payable represents unpaid balances of discounts granted to members for their self-purchase and referral incentives
earned by the members for their referral efforts and is transferred to the members’ individual Yunji App accounts. These unpaid balances are
maintained collectively in the members’ Yunji App accounts and can be withdraw as cash upon the members’ requests.
F-49
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
13. REFUND PAYABLE TO MEMBERS
Refund payable to members
As of December 31,
2019
RMB
26,883
2018
RMB
396,024
Refund payable to members represents the estimated referral incentives expected to be refunded to referring members from the upfront membership fees
paid and the merchandise purchases for their own accounts (Note 2.17). The movement of refund payable to members during the periods presented are as
follows:
Balance as of December 31, 2016
Estimated referral incentives to be refunded
Referral incentives earned (1)
Balance as of December 31, 2017
Balance as of December 31, 2017
Estimated referral incentives to be refunded
Referral incentives earned (1)
Balance as of December 31, 2018
Balance as of December 31, 2018
Estimated referral incentives to be refunded
Referral incentives earned (1)
Change in estimate (2)
Balance as of December 31, 2019
Refund payable to members
77,652
430,918
(360,627)
147,943
147,943
626,853
(378,772)
396,024
396,024
132,989
(122,760)
(379,370)
26,883
(1) Once the referral incentives are earned by the referring members, the amounts are transferred to the members’ individual Yunji App accounts and
recorded as Incentive payables to members (Note 12).
(2) The estimation of refund payable to members is based upon the historical data of referral incentives earned by referring members within their active
life cycle. The balance of the payable was RMB396,024 at December 31, 2018, and reflected the Company’s strategy to utilize membership packages
and referrals as a principal means of gaining customers. In June 2019, the Company, at its discretion, launched a series of promotion activities which
allowed non-member users to join the Group’s membership program without having to purchase membership packages. The non-paid membership is
available to new members as long as they meet a certain cumulative spending threshold, or certain other requirements, within a given period of time.
These promotion activities enlarged the Group’s member base in 2019 by attracting more non-member users to become members. It further
encouraged an increasing percentage of members to purchase more merchandise to meet the cumulative spending threshold and enjoy the member
exclusive discounts under the membership program. Upon the successful launch of these promotion activities, the amount of revenue earned from
referring members, and the commissions paid to them, decreased since late of the second quarter of 2019. Based on this new pattern of activity, and
the continuing expansion of the promotion activities, the Company recognized a change in estimate to reduce the Refund Payable to Members by
RMB379,370 during 2019. The adjustment was recorded as an increase in revenue, reflecting the original establishment of the refund payable as a
reduction in revenue (as a form of variable revenue consideration). The balance of the refund payable as of December 31, 2019 was RMB26,883, and
reflected the Company’s best estimate of its liability based on historical patterns of earnings and redemptions, after the introduction of the above
mentioned promotion activities.
F-50
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
14. MEMBER MANAGEMENT FEES PAYABLE
Member management fees payable
As of December 31,
2019
RMB
78,355
2018
RMB
108,384
The Group engages third party vendors to provide management service in the member’s community, including organizing product launch events, collecting
members or Yunji App users’ feedbacks, etc. Member management fees payable represents the Group’s unpaid balance of such service fees to the third
party vendors. For the years ended December 31, 2017, 2018 and 2019, member management fees were RMB 631,151, RMB 834,576 and RMB 876,769,
presented in Sales and marketing expenses in the Consolidation Statements of Comprehensive Loss.
15. OPERATING LEASE
The Company has operating leases primarily for office and operation space. The Company’s operating lease arrangements have remaining terms of one year
to five years with no variable lease costs.
Operating lease costs were RMB 19,135 for the year ended December 31, 2019.
Supplemental cash flow information related to leases were as follows:
Cash paid for amounts included in the measurement of lease liabilities
Right-of-use assets obtained in exchange for operating lease liabilities
Supplemental consolidated balance sheet information related to leases were as follows:
Right-of-use assets
Operating lease liabilities - current
Operating lease liabilities – non-current
Total lease liabilities
Weighted average remaining lease term
Weighted average discount rate
F-51
Year Ended
December 31, 2019
RMB
17,528
46,551
As of December 31, 2019
RMB
43,043
17,559
27,734
45,293
3
4.75%
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
15. OPERATING LEASE (CONTINUED)
Maturities of lease liabilities are as follows:
2020
2021
2022
2023
2024
Total operating lease payments
Less: imputed interest
Total
As of December 31, 2019
RMB
19,254
14,536
8,935
5,644
61
48,430
(3,137)
45,293
At December 31, 2018, minimum lease payments for operating leases under the previous lease standard (“ASC 840”) were as follows:
2019
2020
2021
2022
2023
Total operating lease payments
As of December 31, 2018
RMB
13,126
10,382
5,946
3,597
1,679
34,730
For the years ended December 31, 2017 and 2018, the Company recognized lease expense of RMB 9,133 and RMB 17,522 respectively, under ASC 840.
F-52
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
16. OTHER PAYABLE AND ACCRUED LIABILITIES
Supplier deposits (1)
Merchants deposits (2)
Rental fee payables
IT related service fees
Accrued professional fees
Salaries and welfare payable
Taxes payable
Others
As of December 31,
2019
2018
RMB
RMB
63,826
86,132
—
80,643
5,383
438
—
22,937
8,229
8,179
35,363
94,973
74,807
40,498
10,354
15,311
197,962
349,111
(1) The deposit obtained from the suppliers is to ensure inventory level ready for the Group to purchase and good product quality under the Group’s sales
of merchandise business model.
(2) The deposit obtained from the merchants is to ensure implementation of Yunji App’s platform policy and good product quality to be sold by the
merchants on Yunji App under the Group’s marketplace business model. The deposit can be withdrawn immediately after the merchants terminate its
online shop on Yunji App.
17. OTHER OPERATING INCOME
VAT-in super deduction
Year Ended
December 31,
2017
RMB
—
Year Ended
December 31,
2018
RMB
—
Year Ended
December 31,
2019
RMB
25,047
From 2019, in accordance with “the Announcement on Relevant Policies for Deepening the Value-added Tax Reform” and relevant government policies
announced by the Ministry of Finance, the State Taxation Administration and the General Administration of Customs of China, one China VIE of the
Company, as a consumer service company, is allowed to enjoy additional 10% VAT-in deduction for any services or products it purchased (“VAT-in super
deduction”) from April 1, 2019 to December 31, 2021. The VAT-in super deduction obtained is considered as operating given that all VAT-in were derived
from the purchases for that VIE’s daily operations in nature, and therefore is presented in Other operating income in the Consolidation Statements of
Comprehensive Loss.
F-53
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
18. OTHER NON-OPERATING INCOME, NET
Government grants (1)
Others
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
894
—
894
7,048
—
7,048
Year Ended
December 31,
2019
RMB
43,599
8,497
52,096
(1) Government grants mainly represent cash subsidies received from PRC local governments for companies operating a business in their jurisdictions
and compliance with specific policies promoted by the local governments. These cash subsidies were not subject to meeting any specific future
conditions.
19. FINANCIAL INCOME, NET
Interest income
Gains from fair value change of equity securities with readily
determinable fair value (1)
Bank charges
Others
Year Ended
December 31,
2017
RMB
11,802
Year Ended
December 31,
2018
RMB
46,919
Year Ended
December 31,
2019
RMB
52,889
—
(238)
—
11,564
—
(851)
—
46,068
68,555
(444)
370
121,370
(1) Gain from fair value change of equity securities with readily determinable fair value represents the unrealized changes of fair value of investment in
GXG (Note 8).
F-54
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION
(a) Value added tax (“VAT”) and surcharges
The Group is subject to statutory VAT rate of 13% prior to July 1, 2017, 11% between July 1, 2017 and May 1, 2018 and 10% since May 1, 2018 for
revenues from sales of agricultural products, and 17% prior to May 1, 2018 and 16% since May 1, 2018 for sales of other products, respectively, in the PRC.
The Group is exempted from VAT for revenues from sales of vegetables and contraceptives.
The Group is subject to VAT at the rate of 11% prior to May 1, 2018 and 10% since May 1, 2018 for the logistics services.
(b) Income tax
Cayman Islands
Under the current laws of the Cayman Islands, the Company and its subsidiaries incorporated in the Cayman Islands are not subject to tax on income or
capital gain. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance, the Group’s subsidiaries in Hong Kong are subject to 16.5% Hong Kong profit tax on its taxable
income generated from operations in Hong Kong. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Company are
not subject to any Hong Kong withholding tax.
F-55
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION (CONTINUED)
China
On March 16, 2007, the National People’s Congress of PRC enacted a new Enterprise Income Tax Law (“new EIT law”), under which Foreign Investment
Enterprises (“FIEs”) and domestic companies would be subject to enterprise income tax at a uniform rate of 25%. The new EIT law became effective on
January 1, 2008. In accordance with the implementation rules of EIT Law, a qualified “High and New Technology Enterprise” (“HNTE”) is eligible for a
preferential tax rate of 15%. The HNTE certificate is effective for a period of three years. An entity could re-apply for the HNTE certificate when the prior
certificate expires.
Zhejiang Jishang Preferred E-Commerce Co., Ltd. (“Jishang Preferred”) obtained its HNTE certificate on November 30, 2018 and was eligible to enjoy a
preferential tax rate of 15% from 2018 to 2020 to the extent it has taxable income under the EIT Law, as long as it maintains the HNTE qualification and
duly conducts relevant EIT filing procedures with the relevant tax authority. From July 2019, Jishang Preferred started to function as a Procurement
company within the Group and is not able to continue its status as an HNTE to enjoy a preferential tax rate of 15% since 2019.
The Group’s other PRC subsidiaries, VIEs and VIEs’ subsidiaries are subject to the statutory income tax rate of 25%.
According to relevant laws and regulations promulgated by the State Administration of Tax of the PRC effective from 2008 onwards, enterprises engaging
in research and development activities are entitled to claim 150% of their qualified research and development expenses so incurred as tax deductible
expenses when determining their assessable profits for the year (‘Super Deduction’). The additional deduction of 50% of qualified research and
development expenses can only be claimed directly in the annual EIT filing and subject to the approval from the relevant tax authorities. Effective from
2018 onwards, enterprises engaging in research and development activities are entitled to claim 175% of their qualified research and development expenses
so incurred as tax deductible expenses. The additional deduction of 75% of qualified research and development expenses can be directly claimed in the
annual EIT filing.
Withholding tax on undistributed dividends
The new EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “actual management body” is located
in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global
income. The Implementing Rules of the EIT Law merely define the location of the “actual management body” as “the place where the exercising, in
substance, of the overall management and control of the production and business operation, personnel, accounting, property, etc., of a non-PRC company is
located.” Based on a review of surrounding facts and circumstances, the Group does not believe that it is likely that its operations outside of the PRC should
be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, there is uncertainty
as to the application of the EIT Law. Should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC
income tax on worldwide income at a uniform tax rate of 25%.
F-56
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION (CONTINUED)
Withholding tax on undistributed dividends (continued)
The new EIT law also imposes a withholding income tax of 10% on dividends distributed by an FIE to its immediate holding company outside of China, if
such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends
have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the arrangement between
Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006,
dividends paid by an FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% if the
foreign investor owns directly at least 25% of the shares of the FIE and if Hong Kong company is a beneficial owner of the dividend. The State Taxation
Administration (“SAT”) further promulgated SAT Public Notice [2018] No.9 regarding the assessment criteria on beneficial owner status.
As of December 31, 2018 and 2019, the Group does not have any plan to require its PRC subsidiaries to distribute their retained earnings and intends to
retain them to operate and expand its business in the PRC. Accordingly, no deferred income tax liabilities on withholding tax were provided as of
December 31, 2018 and 2019.
Composition of income tax
The components of loss before tax are as follow:
Loss before tax
Loss from PRC entities
Income from overseas entities
Total loss before tax
Current income tax expense
Deferred income tax benefit
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
(112,583)
3,521
(109,062)
(61,767)
14,795
(46,972)
(204,937)
67,604
(137,333)
Year Ended
December 31,
2017
RMB
19,404
(22,735)
(3,331)
Year Ended
December 31,
2018
RMB
25,413
(13,067)
12,346
Year Ended
December 31,
2019
RMB
13,300
(30,020)
(16,720)
F-57
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION (CONTINUED)
Reconciliation of the differences between statutory tax rate and the effective tax rate
Reconciliation of the differences between the statutory EIT rate applicable to losses of the consolidated entities and the income tax expenses of the Group:
PRC Statutory income tax rate
Effect on tax rates in different tax jurisdiction
The effect of change in the tax rate of Jishang Preferred
Difference in EIT rates of PRC entities
Non-deductible expenses(1)
Additional deduction for research and development
expenditures
Share-based compensation
Non-taxable income
Permanent book-tax differences
Change in valuation allowance
Effective tax rates
Year Ended
December 31,
2017
Year Ended
December 31,
2018
Year Ended
December 31,
2019
25%
0%
0%
0%
-24%
5%
0%
0%
0%
-3%
3%
25%
3%
-76%
9%
-4%
25%
-17%
7%
0%
2%
-26%
25%
8%
26%
0%
-2%
16%
-23%
0%
2%
-40%
12%
(1) During the year ended December 31, 2017, the Group incurred sales and marking expenses without VAT invoices in the amount of RMB 92,603,
which was not deductible from taxable income.
(c) Deferred tax assets and deferred tax liabilities
The following table sets forth the significant components of the deferred tax assets:
Deferred tax assets
Net accumulated losses-carry forward
Deferred membership program revenue
Refund payable to members
Inventory write-downs
Others
Less: valuation allowance
Total deferred tax assets
F-58
As of December 31,
2019
2018
RMB
RMB
8,810
31,471
59,404
635
6,548
(10,004)
96,864
150,990
10,610
6,721
110
6,961
(65,225)
110,167
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION (CONTINUED)
(c) Deferred tax assets and deferred tax liabilities (continued)
Deferred tax liabilities
Prepaid member training costs
Gain or loss from changes in fair values
Others
Total deferred tax liabilities
Movement of valuation allowance
As of December 31,
2018
RMB
2019
RMB
34,514
—
5,907
40,421
9,288
11,312
3,104
23,704
Balance at beginning of the year
Changes of valuation allowance(1)
Balance at end of the year
Year Ended
December 31,
2017
RMB
(8,357)
(2,796)
(11,153)
Year Ended
December 31,
2018
RMB
(11,153)
1,149
(10,004)
Year Ended
December 31,
2019
RMB
(10,004)
(55,221)
(65,225)
(1) Valuation allowances have been provided against deferred tax assets when the Group determines that it is more likely than not that the deferred tax
assets will not be utilized in the future. In making such determination, the Group evaluates a variety of factors including the Group’s entities’
operating history, accumulated deficit, existence of taxable temporary differences and reversal periods. As of December 31, 2018 and 2019, valuation
allowances on a large part of deferred tax assets were provided because it was more likely than not that the Group will not be able to utilize tax loss
carry forwards generated by certain unprofitable subsidiaries. As of December 31, 2018, as some of the unprofitable subsidiaries made one time
profit, valuation allowances of RMB 1,149 were released. As of December 31, 2019, valuation allowances of RMB 55,221 were provided against
deferred tax assets because it was more likely than not that such portion of deferred tax will not be realized based on the Company’s estimate of future
taxable incomes of all its subsidiaries.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
20. TAXATION (CONTINUED)
(c) Deferred tax assets and deferred tax liabilities (continued)
As of December 31, 2019, net operating loss carry forwards from PRC entities will expire as follows:
At December 31,
2020
2021
2022
2023
2024
RMB
—
204
12,671
2,005
591,611
606,491
As of December 31, 2019, the Group had tax losses carry forwards of approximately RMB 606,491 which mainly arose from its subsidiaries, consolidated
VIEs and VIEs’ subsidiaries established in the PRC. The tax losses carry forwards from PRC entities will expire during the period from 2021 to 2024.
21. ORDINARY SHARES
In November 2017, the Company was incorporated as limited liability company with authorized share capital of US$50 divided into 500,000,000 shares
with par value US$0.0001 each. As of December 31, 2017, 1 ordinary share was issued and outstanding.
In January 2018, the shares were subdivided into 10,000,000,000 shares with par value US$0.000005 each. 1 ordinary share was subdivided into 20 ordinary
shares (the “Share Split”) and was therefore after issued and outstanding.
As of December 31, 2018 and 2019, 9,104,783,248 and 20,000,000,000 ordinary shares had been authorized respectively. A total of 2,129,405,572 ordinary
shares, consists of 1,179,445,572 Class A ordinary shares and 949,960,000 Class B ordinary shares, had been issued and outstanding as of December 31,
2019. 1,151,400,000 shares issued and outstanding as of December 31, 2018. 949,960,000 ordinary shares were re-designated to Class B ordinary shares
with super voting power (one share with ten votes) granted to Mr. Xiao Shanglue, Founder and CEO of the Group, upon the completion of the IPO.
Immediately prior to the completion of the IPO, all classes of preferred shares of the Company were converted and re-designated as 895,216,752 Class A
ordinary shares on a one-for-one basis. 201,440,000 ordinary shares of the Company were re-designated as Class A ordinary share and 949,960,000 ordinary
shares were re-designated as Class B ordinary share. Mr. Xiao Shanglue, founder, chairman and chief executive officer of the Company, will be deemed to
beneficially own all of our issued Class B ordinary shares.
On May 3, 2019, the Company completed its IPO on NASDAQ Global Select Market. The Company offered 110,000,000 Class A ordinary shares which
represented 11,000,000 ADSs.
Subsequently on June 4, 2019, over-allotment option were electedly exercised and the Company issued additional 2,174,470 shares of Class A Ordinary
Shares issued at a price of US$1.10 per share.
On August 28, 2019, the Company was authorized by the Board of Directors to, from time to time, acquire up to an aggregate of US$20 million of its shares
in the form of ADSs and/or the ordinary shares of the Company over the next six months in the open market and through privately negotiated transactions,
in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations. As
of December 31, 2019, the Company cumulatively repurchased 33,829,860 Class A ordinary shares at price of US$ 0.40 to 0.70.
F-60
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES
Before the Reorganization, given the fact Yunji Sharing was incorporated as a limited corporation in China with no shares issued, the paid in capital
contributed by the Initial Ordinary Shareholders, the Former Series Seed Beneficiary Owners and the Former Series A Beneficiary Owners determined their
equity interests percentage. The capital contributions with preference and redemption rights from the Former Series Seed Beneficiary Owners and the
Former Series A Beneficiary Owners were recorded in the “Mezzanine equity” at the respective periods.
In July 2015, pursuant to an investment agreement, the Former Series Seed Beneficiary Owners injected to Yunji Sharing with total cash of RMB50,000
(namely, the Former Series Seed Capital Contribution), and incurred issuance cost of RMB1,000. Consequently, beneficial interest of Yunji Sharing was
then 77.27% held by the Initial Ordinary Shareholders and 22.73% held by the Former Series Seed Beneficiary Owners. In connection with issuance of the
Former Series Seed Capital Contribution, Yunji Sharing granted a warrant option to one of the Former Series Seed Beneficiary Owners, the warrant offered
a 5% discount of purchase price in next round financing (the “Series Seed Warrant”). The warrant was determined to be a freestanding financial instrument
and recorded at fair value of RMB382 upon initial recognition after being bifurcated from the Former Series Seed Capital Contribution host, and was
marked to the market value in the applicable subsequent reporting period.
In November 2016, pursuant to an investment agreement, the Former Series A Beneficiary Owners injected to Yunji Sharing with total consideration of
RMB 33,160 and US$15,000(RMB 104,182 equivalent) as well as the full exercise of the Series Seed Warrant at fair value of RMB644. Consequently,
beneficial interest of Yunji Sharing was then 69.59% held by the Initial Ordinary Shareholders, 19.17% held by the Former Series Seed Beneficiary Owners
and 11.24% held by the Former Series A Beneficiary Owners. In addition, Yunji Sharing also issued a warrant option to one of the Former Series A
Beneficiary Owners who has the right to choose to increase the capital injection to Yunji Sharing no more than US$5,000 with the same preference and
redemption rights as the existing the Former Series A Beneficiary Owners (the “Series A Warrant”). The warrant is a determined to be a freestanding
financial instrument and was recorded at fair value of RMB2,182 upon initial recognition after being bifurcated from the Former Series A Capital
Contribution host, and was marked to the market value in the applicable subsequent reporting period. In January 2017, upon the exercise in full of the Series
A Warrant, the Former Series A Beneficiary Owners further injected to Yunji Sharing with total consideration of US$5,000(RMB 34,350 equivalent) as
well as the full exercise of Series A Warrant at fair value of RMB1,754 (collectively, namely, the “Former Series A Capital Contribution”). Total issuance
cost in the amount of RMB 8,095 was incurred for the Former Series A Capital Contribution, including a finder’s commission of RMB 6,509.
Consequently, beneficial interest of Yunji Sharing was then 67.72% held by the Initial Ordinary Shareholders, 18.65% held by the Former Series Seed
Beneficiary Owners and 13.64% held by the Former Series A Beneficiary Owners.
During the Reorganization, in February 2018, the Company issued 373,000,000 Series Seed convertible redeemable preferred shares (“Series Seed Preferred
Shares”) for US$0.022 per share, 56,800,000 Series A convertible redeemable preferred shares (“Series A Preferred Shares”) for US$0.088 per
share(considering the exercise of the aforementioned Series Seed Warrant option), and 215,800,000 Series A Preferred Shares for US$0.093 per share to the
same group of the Former Series Seed Beneficiary Owners and the Former Series A Beneficiary Owners of Yunji Sharing, in exchange for their equity
beneficial ownerships in Yunji Sharing as abovementioned. Thereafter, the Former Series Seed Capital Contribution and the Former Series A Capital
Contribution were legally converted into Series Seed Preferred Shares and Series A Preferred Shares. The share price stated above was defined as original
issuance price of relating preferred shares to be used in Liquidation Preference and Redemption Rights. Likewise, the Former Series Seed Beneficiary
Owners and the Former Series A Beneficiary Owners became the Series Seed Preferred Shareholders and Series A Preferred Shareholders.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
Furthermore, the Company issued 116,600,000 Series A Preferred Shares with the subscription price at US$0.000005 per share to two of the institutional
investors of the Initial Ordinary Shareholders, which was accounted for as a modification/extinguishment to Series A Preferred Shares from the Initial
Ordinary Shareholders’ contributions (discussed in the last paragraph of the Note 19).
In February 2018, pursuant to a share purchase agreement, the Company issued 110,803,324 shares of Series B Preferred Shares for US$0.902 per share for
cash of US$100,000(RMB 630,010 equivalent). Total issuance cost in the amount of RMB 14,062 was incurred for the Series B Preferred Shares, including
a finder’s commission of US$2,000(RMB 12,600 equivalent). The Company paid 50% of the commission in cash amounted US$1,000 and the remaining
50% by issuance of 1,108,033 shares of Series B Preferred Shares for no consideration to the finder, a financial advisor in June 2018. The total of the
finder’s commission was also recorded as an issuance cost as a deduction of the preferred shares.
In June 2018, pursuant to a share purchase agreement, the Company authorized 21,105,395 shares of Series B+ Preferred Shares at US$0.948 per share for
cash of US$20,000(RMB 128,416 equivalent) and 5,276,349 shares of Series B+ Preferred Shares were issued, with issuance cost in the amount of RMB
5,867 was incurred for the Series B+ Preferred shares, including a finder’s commission of RMB 5,867. As one of the investors still being in the process of
completing its administrative procedures for remitting the capital overseas with the local government in order to inject the capital into Yunji Inc., the
investor became subject to the shareholders’ rights and obligations of the Series B+ Preferred Shares in such agreements on the same date, due to the Series
B+ Preferred Shareholder injected the investment of RMB 96,312 into Yunji Sharing. In November 2018, Yunji Sharing returned RMB 96,312 to the Series
B+ Preferred Shareholder and Yunji Inc. received capital injection of US$15,000 (RMB 96,312 equivalent) from Series B+ Preferred Shareholder. When
the administrative procedures was completed, 15,829,046 shares of Series B+ Preferred Shares were issued.
The Series Seed, Series A, Series B and Series B+ Preferred Shares are collectively referred to as the “Preferred Shares”. All series of Preferred Shares have
the same par value of US0.000005 per share.
All of Preferred Shares were converted into Class A ordinary shares immediately upon the completion of the Company’s initial public offerings on May 3,
2019(Note 21). Prior to their conversion, Preferred Shares were entitled to certain preference with respect to conversion, redemption, dividends and
liquidation.
F-62
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
The Group’s Preferred Shares activities for the years ended December 31, 2017, 2018 and 2019 are summarized as below:
Series Seed Shares
Number of
shares
Amount
(RMB)
Series A Shares
Series B Shares
Series B+ Shares
Total
Number of
shares
Amount
(RMB)
Number of
shares
Amount
(RMB)
Number of
shares
Amount
(RMB)
Number of
shares
Amount
(RMB)
Balance as of
December 31, 2016
373,000,000
118,202
218,650,000
137,736
—
—
—
—
591,650,000
255,938
Former Series A Capital
Contribution with
exercise of Series A
Warrant
Accretion on convertible
redeemable preferred
shares to redemption
value
Balance as of
December 31, 2017
Re-designation to Series A
Preferred Shares from
Initial Ordinary
Shareholders’
contribution, including
beneficial conversion
feature
Issuance of Series B
Preferred Shares, net of
issuance cost
Issuance of Series B+
Preferred Shares, net of
issuance cost
Accretion on convertible
redeemable preferred
shares to redemption
value
Balance as of
—
—
53,950,000
36,104
—
—
—
—
53,950,000
36,104
—
970,718
—
657,938
373,000,000
1,088,920
272,600,000
831,778
—
—
—
—
—
—
—
—
—
—
—
1,628,656
645,600,000
1,920,698
—
116,600,000
60,799
—
111,911,357
622,369
—
116,600,000
60,799
—
—
—
111,911,357
622,369
—
—
—
—
—
—
—
—
—
—
21,105,395
122,549
21,105,395
122,549
—
888,416
—
1,198,145
—
86,240
—
14,832
—
2,187,633
December 31, 2018
373,000,000
1,977,336
389,200,000
2,090,722
111,911,357
708,609
21,105,395
137,381
895,216,752
4,914,048
Accretion on convertible
redeemable preferred
shares to redemption
value
Convert to ordinary shares
upon initial public
offering
Balance as of
December 31, 2019
—
717,062
—
725,654
—
76,190
—
13,106
—
1,532,012
(373,000,000) (2,694,398) (389,200,000)
(2,816,376)
(111,911,357)
(784,799)
(21,105,395)
(150,487)
(895,216,752)
(6,446,060)
—
—
—
—
—
—
—
—
—
—
F-63
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
The major rights, preferences and privileges of the Preferred Shares are as follows:
Conversion rights
Each Preferred Share shall be convertible, at the option of the holder, into one ordinary share of the Company. Such conversion ratio is subject to certain
anti-dilutive adjustments in case of share splits, share dividends, combinations, recapitalization and similar events, or issuance of ordinary shares (excluding
certain events such as issuance of ordinary shares pursuant to a public offering) at a price per share less than the conversion price in effect on the date of or
immediately prior to such issuance. In addition, each series of Preferred Shares would automatically be converted into ordinary shares of the Company upon
the closing of a Qualified Initial Public Offering (“Qualified IPO”) as defined in the Memorandum and Articles of Association.
Upon the Former Series Seed Capital Contribution, Qualified IPO means a public offering of ordinary shares of the Company registered on a reputable stock
exchange before December 31, 2020.
Upon the Former Series A Capital Contribution, Qualified IPO was modified to a public offering of ordinary shares of the Company registered under the
PRC and overseas stock exchange with an implied pre-money valuation of US$500,000 (or equivalent RMB) or more before November 4, 2020, and is
approved by the Former Series A Beneficiary Owners.
Upon the issuance of Series B Preferred Shares, Qualified IPO was modified to a public offering of ordinary shares of the Company registered under the
Securities Act or on an internationally recognized securities exchange or inter-dealer quotation system, including the Stock Exchange of Hong Kong
Limited, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, with an implied pre-money valuation of US$4,000,000(or equivalent RMB) or
more before February 12, 2021, and is approved by the majority of the preferred shareholders.
Dividend rights
The holder of each Preferred Share shall have the right to receive non-cumulative dividends, pari passu with the ordinary shares, on an as-converted basis,
when, as and if declared by the Board.
Voting rights
Each Preferred Share shall carry a number of votes equal to the number he would be entitled on an as-converted basis.
F-64
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
Liquidation preference
In the event of any liquidation, dissolution or winding up or deemed liquidation of the Company, whether voluntary or involuntary, all assets and funds of
the Company legally available for distribution to the shareholders shall be distributed to the shareholders according to the following sequence:
(1) Each holder of Series B Preferred Shares and/or Series B+ Preferred Shares shall be entitled to receive, on parity with each other, an amount equal to
one hundred percent (100%) of the original issue price of Series B and Series B+ Preferred Shares, plus all dividends declared and unpaid (the “Series
B Preferred Shares Liquidation Preference”).
(2) After distribution or payment in full of the Series B Preferred Shares Liquidation Preference, each holder of Series A Preferred Shares shall be entitled
to receive, on parity with each other, an amount equal to one hundred percent (100%) of the original issue price of Series A Preferred Shares, plus all
dividends declared and unpaid (the “Series A Preferred Shares Liquidation Preference”).
(3) After distribution or payment in full of the Series B Preferred Shares Liquidation Preference and the Series A Preferred Shares Liquidation
Preference, each holder of Series Seed Preferred Shares shall be entitled to receive, on parity with each other, an amount equal to one hundred percent
(100%) of the original issue price of Series Seed Preferred Shares, plus all dividends declared and unpaid (the “Series Seed Preferred Shares
Liquidation Preference”).
(4) After distribution or payment in full of the amount distributable or payable on the Preferred Shares pursuant to the above sequence, the remaining
assets of the Company available for distribution to Members shall be distributed ratably among the holders of outstanding Ordinary Shares and the
holders of outstanding Preferred Shares in proportion to the number of outstanding Ordinary Shares held by them (with outstanding Preferred Shares
treated on an as-converted basis).
The deemed liquidation events include (i) any consolidation, amalgamation or merger of the Company and/or any subsidiaries with or into any other third
party, in which the Members of the Company or shareholders of such subsidiaries immediately prior to such consolidation, amalgamation, merger or
reorganization, own less than fifty percent (50%) of the voting power of Company or any other subsidiaries immediately after such consolidation, merger,
amalgamation or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent
(50%) of the Company’s or any other subsidiaries’ voting power is transferred, but excluding any transaction effected solely for tax purposes or to change
the Company’s domicile or any other subsidiaries’ domicile (ii) the sale, exchange, transfer or other disposition, in one or a series of related transactions, of
a majority of the outstanding share capital of any subsidiaries of Group to third party acting in concert, under circumstances in which the holders of a
majority in voting power of the outstanding share capital of any subsidiaries immediately prior to such transaction beneficially own less than a majority in
voting power of the outstanding share capital of the surviving entity or the acquiring third party immediately following such transaction (iii) a sale, lease,
transfer or other disposition, in a single transaction or series of related transactions, by any subsidiaries of all or substantially all of the assets of any
subsidiaries, (iv) the exclusive licensing of all or substantially all of the subsidiaries intellectual property to a third party.
The liquidation amounts of Series Seed Preferred Shares, Series A Preferred Shares, Series B Preferred Shares and Series B+ Preferred Shares on
December 31, 2018 were RMB50,000, RMB220,910, RMB636,431 and RMB128,416, respectively.
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
Redemption right
Prior to the Former Series A Capital Contribution, the Former Series Seed Capital Contribution were redeemable if Yunji Sharing fails to consummate a
Qualified IPO as at December 31, 2020. The redemption price shall be one hundred percent (100%) of the original Former Series Seed Capital Contribution
amount and plus a ten percent (10%) annual simple interest. (the “Series Seed Preference Amount”).
Upon the Former Series A Capital Contribution, the Former Series A Capital Contribution were to be redeemable and the Former Series Seed Capital
Contribution were modified to be redeemable, at the holder’s discretion, at any time (i) after the forty-eight (48) months following the Former Series A
Capital Contribution were issued, (ii) there is a material breach by any group company or any founding shareholder, and (iii) the Group Companies cannot
carry out the ordinary business operation for twelve (12) consecutive months or more due to penalty from Governmental Authorities (including frozen of
funds). The redemption price of the Former Series A Capital Contribution would be the higher of (i) the original investment amount of the Former Series A
Capital Contribution, plus a ten percent (10%) annual simple interest and all accrued or declared but unpaid dividends, and (ii) the fair market value of the
Former Series A Capital Contribution to be redeemed determined by a third party independent valuer. The redemption price of Former Series Seed Capital
Contribution was modified to be the higher of (i) the original investment amount of the Former Series Seed Capital Contribution, plus a ten percent (10%)
annual simple interest and all accrued or declared but unpaid dividends, and (ii) the fair market value of the Former Series Seed Capital Contribution to be
redeemed determined by a third party independent valuer.
Upon the issuance of Series B Preferred Shares, Series B Preferred Shares were to be redeemable, Series A Preferred Shares and Series Seed Preferred
Shares were modified to be redeemable, at the holder’s discretion, at any time (i) after the thirty-six (36) months following Series B Preferred Shares were
issued, (ii) there is a material breach by any group company or any Founding Shareholder, and (iii) the Group Companies cannot carry out the ordinary
business operation for twelve (12) consecutive months or more due to penalty from Governmental Authorities (including frozen of funds).
The redemption price of Series B Preferred Shares would be the higher of (i) the original issue price of Series B Preferred Shares, plus a ten percent (10%)
annual compound interest and all accrued or declared but unpaid dividends, and (ii) the fair market value of the Series B Preferred Shares to be redeemed
determined by a third party independent valuer.
The redemption price of Series A Preferred Shares was modified to be the higher of (i) the original issue price of Series A Preferred Shares, plus a ten
percent (10%) annual compound interest and all accrued or declared but unpaid dividends, and (ii) the fair market value of the Series Seed Preferred Shares
to be redeemed determined by a third party independent valuer.
The redemption price of Series Seed Preferred Shares was modified to be the higher of (i) the original issue price of Series Seed Preferred Shares, plus a ten
percent (10%) annual compound interest and all accrued or declared but unpaid dividends, and (ii) the fair market value of the Series Seed Preferred Shares
to be redeemed determined by a third party independent valuer.
Upon the issuance of Series B+ Preferred Shares, there was no change to the redemption condition or redemption price.
In case of insufficient funds and distribution of redemption payments
If the Company’s assets or funds which are legally available on the date of redemption payment are insufficient, the holders of Preferred Shares in the
following sequence: (i) first, pay the Series B and Series B+ redemption price to the holders of Series B Preferred Shares and Series B+ Preferred Shares,
pari passu as amongst themselves, (ii) second, after the full payment of the Series B and Series B+ redemption price, pay the Series A redemption price to
the holders of Series A Preferred Shares, pari passu as amongst themselves, and (iii) third, after the full payment of the Series B and B+ redemption price
and the Series A redemption price, pay the Series Seed redemption price to the holders of Series Seed Prefer Shares, pari passu as amongst themselves.
F-66
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
Accounting for Preferred Shares
The Company has classified the Preferred Shares in the mezzanine equity of the Consolidated Balance Sheets as they are redeemable at the holders’ option
any time after a certain date and were contingently redeemable upon the occurrence of deemed liquidation events outside of the Company’s control. In
addition, the Company records accretions on the Preferred Shares to the redemption value from the issuance dates to the earliest redemption dates. The
accretions are recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in capital. Once additional
paid-in capital has been exhausted, additional charges are recorded by increasing the accumulated deficit. Each issuance of the Preferred Shares was
recognized at the respective issue price at the date of issuance net of issuance costs. The issuance costs for Series Seed, Series A, Series B and Series B+
Preferred Shares were RMB1, 000, RMB8, 095, RMB14, 062 and RMB 5,867, respectively.
The Company determined that there were no embedded derivatives requiring bifurcation as the economic characteristics and risks of the embedded
conversion and redemption features are clearly and closely related to that of the equity host of the Preferred Shares. The Preferred Shares are not readily
convertible into cash as there is not a market mechanism in place for trading of the Company’s shares.
The Company has determined that there was no beneficial conversion feature attributable to any of the Preferred Shares except for the modification to the
Series A Preferred Shares (discussed in the last paragraph of the Note 19) because the initial effective conversion price of these preferred shares were higher
than the fair value of the Company’s ordinary shares determined by the Company with the assistance from an independent valuation firm.
Modification or extinguishment of Preferred Shares
The Company assesses whether an amendment to the terms of its Preferred Shares is an extinguishment or a modification using the fair value model. When
Preferred Shares are extinguished, the difference between the fair value of the consideration transferred to the convertible preferred shareholders and the
carrying amount of the convertible preferred shares (net of issuance costs) is treated as deemed dividends to preferred shareholders. The Company considers
that a significant change in fair value after the change of the terms to be substantive and thus triggers extinguishment. A change in fair value, which is not
significant immediately after the change of the terms is considered non-substantive and thus is subject to modification accounting. When the Preferred
Shares are modified, the Company evaluates whether there is a transfer of value between ordinary shareholders and preferred shareholders as a result of the
modification and therefore, should record a reduction of, or increase to, accumulated deficit as a deemed dividend. When the value is transferred from
preferred shareholders to ordinary shareholders, the value was recorded as an increase to accumulated deficit while charges against additional paid-in
capital. In the absence of additional paid-in capital for the year ended December 31, 2016, the deemed dividend of RMB 132 was recorded as an increase to
accumulated deficit while such amount charges against the accumulated deficit, which resulted in a net RMB 0 impact to accumulated deficit.
In connection with the Former Series A Capital Contribution in 2016, the optional redemption date of the Former Series Seed Capital Contribution was
changed from December 31, 2020 to November 4, 2020, to be in line with the optional redemption date of the Former Series A Preferred Shares.
Meanwhile, the redemption price was changed to the Former Series Seed Beneficiary Owners in connection with the issuance of Former Series A Capital
Contribution.
In addition, in connection with the issuance of the Series B Preferred Shares in 2018, the optional redemption date the Series Seed Preferred Shares and
Series A Preferred Shares was extended from November 4, 2020 to February 8, 2021, to be in line with the optional redemption date of Series B Preferred
Shares. Meanwhile, the redemption price was changed to Series A Preferred Shareholders and Series Seed Preferred Shareholders in connection with the
issuance of the Series B Preferred Shares.
F-67
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
22. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
From both quantitative and qualitative perspectives, the Company assessed the impact of the above modifications and concluded that these amendments
represent modifications rather than extinguishment of the Preferred Shares. The Company evaluated and concluded the impact of above modifications as
immaterial and recorded a reduction of, or increase to, accumulated deficit as a deemed dividend, representing value transferred from the Preferred
Shareholders to the Ordinary Shareholder for the years ended December 31, 2016 and 2018, respectively.
For the modification that the Series A Preferred Shares that were issued to the two institutional investors of the Initial Ordinary Shareholders to replace the
beneficial interest in Yunji Sharing during the Reorganization, the Company determined that the modification should be treated as extinguishment given its
qualitative significance which provided these two investors with the Series A Preferred Shares’ rights, preferences and privileges, and resulted in its
reclassification from the permanent equity to the Mezzanine equity. Upon the reclassification, the shares to these two investors were recorded at the new
cost, which was the fair value of the Series A Preferred Shares of RMB 406,791 on the issuance date of the Series A Preferred Shares. Meanwhile, given
that the issuance date fair value of the common shares was higher than the effective conversion price of re-designated Series A Preferred Shares, the Group
recognized the beneficial conversion feature of RMB 345,992 as an adjustment to the carrying value of the re-designated Series A Preferred Shares,
calculated as the excess of the fair value of its common shares of US$0.54 over the effective conversion price of US$0.067, multiplied by the number of
common shares into which re-designated Series A Preferred Shares converts. The beneficial conversion feature is to be amortized using the effective interest
method through the redemption date of February 12, 2021. The difference of the par value of Series A Preferred Shares and the fair value of the Series A
Preferred Shares with the aforementioned adjustment of beneficial conversion feature of RMB60,796, is accounted for as deemed dividend and allocated to
accumulated deficit.
23. SHARE-BASED COMPENSATION
On December 19, 2017, the Company adopted the 2017 Share Incentive Plan (“the 2017 Plan”), which allows the compensation committee to grant options
and restricted share units (“RSU”) of the Company to its directors, employees, and etc. (collectively, the “Grantees”) to acquire ordinary shares of the
Company at an exercise price as determined by the Compensation Committee at the time of grant. The 2017 Plan was amended and restated in its entirety in
March 2019 and referred to as the 2019 Plan. The awards granted and outstanding under the 2017 Plan survive the termination of the 2017 Plan and remain
effective and binding under the 2019 Plan. According to the 2019 Plan, 227,401,861 ordinary shares were authorized and reserved for the issuance.
Since adoption of the 2017 Plan, the Company granted options and RSUs to employees. All options and RSUs granted have a contractual term of six years
from the grant date, and the vest over a period of four years of continuous service, half (1/2) of which vest upon the second anniversary of the stated vesting
commencement date and one-fourth (1/4) of the remaining will vest upon the third and fourth anniversaries of the stated vesting commencement date. Under
the option plan, options are exercisable subject to the grantee’s continuous service.
The Company accounted for the share based compensation costs on a straight-line bases over the requisite service period for the award based on the fair
value on their respectively grant date.
On December 19, 2017, June 30, 2018, November 28, 2018, and January 31, 2019 the Company granted 73,225,200, 12,021,500, 5,540,000 and 4,968,000
stock options to its directors and employees, respectively. In addition, on December 19, 2017, November 28, 2018 and January 31, 2019, the Company
granted 5,000,000, 19,800,000 and 14,925,000 RSUs to its directors and employees, respectively.
On May 3, 2019, the Company granted 720,000 stock options to its two independent directors. In addition, on May 3, 2019, the Company was authorized by
its Board of Directors to grant stock options and RSUs to non-employees under the 2019 Plan, and granted total 10,409,050 stock options and 3,332,040
RSUs to non-employees by batches during the year ended December 31, 2019.
F-68
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
23. SHARE-BASED COMPENSATION (CONTINUED)
(a) Options
The following table sets forth the stock options activity for the years ended December 31, 2017, 2018 and 2019:
Outstanding as of December 31, 2017
Granted
Forfeited
Outstanding as of December 31, 2018
Granted
Forfeited
Exercised
Outstanding as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Exercisable as of December 31, 2019
Number of
shares
73,225,200
17,561,500
(3,674,300)
87,112,400
16,097,050
(7,954,980)
(1,407,920)
93,846,550
93,846,550
32,754,800
Weighted-
average
exercise price
US$
0.09
0.22
0.10
0.12
0.61
0.31
0.09
0.19
—
Weighted
average
remaining
contractual term
5.96
Aggregate
intrinsic
value
000’US$
25,623
5.09
60,399
3.77
—
30,442
—
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the
underlying stock at each reporting date (December 31, 2018: US$0.81, December 31, 2019: US$ 0.46).
The Group uses the Binominal option pricing model to estimate the fair value of stock options. The assumptions used to value the Company’s options grants
were as follow:
Exercise price (US$)
Exercise multiple
Risk-free interest rate
Expected term (in years)
Expected dividend yield
Expected volatility
Expected forfeiture rate (post-vesting)
2018
0.1~0.4
2.2~2.8
2.53%~2.60%
6
—
2019
0.1~0.7
2.2~2.8
1.68%~2.47%
6
—
40.87%~41.81%
5%
39.91%~41.29%
0%/5%
Fair value of the underlying shares on the date of options grants (US$)
Fair value of share option (US$)
0.81
0.40
0.46~1.42
0.11~1.32
F-69
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
23. SHARE-BASED COMPENSATION (CONTINUED)
Risk-free interest rate is estimated based on the yield curve of US Sovereign Bond as of the option valuation date. The expected volatility at the grant date
and each option valuation date is estimated based on annualized standard deviation of daily stock price return of comparable companies with a time horizon
close to the expected expiry of the term of the options. The Company has never declared or paid any cash dividends on its capital stock, and the Group does
not anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the options.
Share-based compensation expense is recorded on a straight-line basis over the requisite service period, which is generally four years from the date of grant.
The Company recognized share-based compensation expenses of RMB1, 856, RMB 48,298 and RMB 66, 190 for share options granted under the 2017 Plan
and the 2019 Plan in the Consolidated Statements of Comprehensive Loss for the years ended 2017, 2018 and 2019, respectively.
As of December 31, 2018 and 2019, there was RMB 181,059 and RMB 137,487, respectively, in total unrecognized compensation expense, related to
unvested share options, which is expected to be recognized over a weighted average period of 3.07 and 1.97 years, respectively. The unrecognized
compensation expense may be adjusted for future changes in actual forfeitures.
(b) Restricted share units
A summary of activities of the service-based RSUs for the years ended December 31, 2017, 2018 and 2019 is presented below:
Unvested at December 31, 2017
Granted
Unvested at December 31, 2018
Granted
Vested
Forfeited
Unvested at December 31, 2019
Number of
RSUs
5,000,000
19,800,000
24,800,000
18,257,040
(3,036,290)
(3,185,900)
36,834,850
Weighted-Average
Grant-Date Fair Value
US$
0.44
0.81
0.74
0.68
0.76
The fair value of each restricted share units granted with service conditions is estimated based on the fair market value of the underlying ordinary shares of
the Company on the date of grant.
As of December 31, 2018, no RSUs were vested. As of December 31, 2019, 3,036,290 RSUs were vested.
For the years ended December 31, 2017, 2018 and 2019, total share-based compensation expenses recognized by the Group for the RSUs granted were
RMB 152, RMB 6,002 and RMB 62,007, respectively.
As of December 31, 2018 and 2019, there was RMB 114,686 and RMB 138,441 in total unrecognized compensation expense, related to unvested RSUs,
which is expected to be recognized over a weighted average period of 3.72 and 2.60 years, respectively.
F-70
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
24. FAIR VALUE MEASUREMENTS
As of December 31, 2018 and 2019, information about inputs into the fair value measurement of the Group’s assets and liabilities that are measured or
disclosed at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
Description
Assets:
Short-term investments
Time deposits
Wealth management products
Total assets
Description
Assets:
Short-term investments
Time deposits
Wealth management products
Long-term investments
Equity securities with readily
determinable fair value
Total assets
Fair value measurement at reporting date using
Fair value
as of
December 31,
2018
RMB
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
RMB
Significant Other
Observable Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
549,056
550,338
1,099,394
—
—
—
549,056
550,338
1,099,394
—
—
—
Fair value measurement at reporting date using
Fair value
as of
December 31,
2019
RMB
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
RMB
Significant Other
Observable Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
593,954
180,782
158,072
932,808
—
—
158,072
158,072
593,954
180,782
—
774,736
—
—
—
—
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group
will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as
interest rates and currency rates. Following is a description of the valuation techniques that the Group uses to measure the fair value of assets that the Group
reports in its Consolidated Balance Sheets at fair value on a recurring basis.
Short-term investments
Short-term investment consists of wealth management products and time deposits, which are valued by the Group on a recurring basis. The Group values its
short-term wealth management products investments held in certain banks using model-derived valuations based upon discounted cash flow, in which
significant inputs, mainly including expected return, are observable or can be derived principally from, or corroborated by, observable market data, and
accordingly, the Group classifies the valuation techniques that use these inputs as Level 2. The expected return of the financial products were determined
based on the prevailing interest rates in the market.
Long-term investments
Equity securities with readily determinable fair values are measured and recorded at fair value on a recurring basis with changes in fair value. The Group
values these equity securities at its quoted prices in stock market, and accordingly the Group classifies the valuation techniques that use these inputs as
Level 1.
F-71
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
25. NET LOSS PER SHARE
Basic and diluted net loss per share for each of the years/periods presented are calculated as follows:
Numerator:
Net loss attributable to YUNJI INC.
Accretion on convertible redeemable Preferred Shares to redemption value
Re-designation to Series A Preferred Shares from Initial Ordinary Shareholders’
contribution, including beneficial conversion feature
Deemed dividend from convertible redeemable preferred shares holders
Net loss attributable to ordinary shareholders
Denominator:
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
(105,724)
(1,628,656)
(59,688)
(2,187,633)
(125,762)
(1,532,013)
—
—
(1,734,380)
(60,796)
107
(2,308,010)
—
—
(1,657,775)
Weighted average number of ordinary shares used in computing net loss per
share, basic and diluted
1,268,000,000
1,165,136,438
1,818,487,917
Net loss per share attributable to ordinary shareholders:
- Basic
- Diluted
(1.37)
(1.37)
(1.98)
(1.98)
(0.91)
(0.91)
Basic net loss per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of ordinary shares and dilutive potential ordinary shares outstanding during the period.
For the years ended December 31, 2017, 2018 and 2019, assumed conversion of the Preferred Shares have not been reflected in the dilutive calculations
pursuant to ASC 260, “Earnings Per Share,” due to the anti-dilutive effect. The effects of all outstanding share options and RSUs have also been excluded
from the computation of diluted loss per share for the years ended December 31, 2017, 2018 and 2019 as their effects would be anti-dilutive. For the years
ended December 31, 2017, 2018 and 2019, the Company had potential ordinary shares, including non-vested restricted shares, option granted and Preferred
Shares respectively. As the Group incurred losses for the years ended December 31, 2017, 2018 and 2019, these potential ordinary shares were anti-dilutive
and excluded from the calculation of diluted net loss per share of the Company. The weighted-average numbers of non-vested restricted shares, options
granted and Preferred Shares excluded from the calculation of diluted net loss per share of the Company were 4,837,329, 55,838,128 and 644,269,726 as of
December 31, 2017, 20,003,824, 31,314,375 and 859,677,553 as of December 31, 2018, 2,777,428, 27,628,529 and 299,223,134 as of December 31, 2019.
F-72
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
26. RELATED PARTY BALANCES AND TRANSACTIONS
The table below sets forth the major related parties and their relationships with the Group as of December 31, 2019:
Name of related parties
Xiao Shanglue
Hangzhou Yuepeng Trading Co., Ltd.
Lanlan Ltd
Small Ye Group
Wuhan Dahong enterprise management partnership(LP)
Hangzhou Jixi Internet Technology Co., Ltd. (“Jixi”)
Hangzhou Tianshi Technology Co., Ltd (“Tianshi”)
Zhangtaihe
Weixin
Siwei
Zhaomu
Bixin
Hangzhou Dianhua Technology Co., Ltd. (“Dianhua”)
Haomei
Ningbo Langfei Life Electric Co., Ltd. (“Langfei”)
Liumang Yike
Guangzhou Misili Personal Care Products Co., Ltd. (“Misili”)
Shanxi Yunnong Logistic Management Co., Ltd. (“Yunnong”)
Zhengdao
Relationship with the Group
Founder and CEO of the Group
Ordinary shareholder of the Company, controlled by Mr. Xiao Shanglue,
Founder and CEO of the Group
Ordinary shareholder of the Company, controlled by Mr. Xiao Shanglue,
Founder and CEO of the Group
Controlled by Mr. Xiao Shanglue, Founder and CEO of the Group
Non-controlling interest
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
An associate of the Group
Details of related party balances and transactions as of December 31, 2017, 2018 and 2019 are as follows:
Advance to related parties and amounts due from related parties
Advance to related parties
Weixin
Amounts due from related parties
Wuhan Dahong enterprise management partnership(LP)
Xiao Shanglue
Jixi
Lanlan Ltd
Total
F-73
As of December 31,
2018
RMB
2019
RMB
5,799
20
—
1,011
—
1,031
6,830
14
355
—
8
377
377
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
26. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
Amounts due to related parties
As of
December 31,
2019
RMB
2018
RMB
5,557
5,034
70
187
597
—
—
—
—
—
—
—
—
—
11,445
179
359
100
110
4,888
303
100
455
118
66
277
4,681
5,997
663
18,296
Tianshi
Zhangtaihe
Weixin
Siwei
Zhaomu
Bixin
Dianhua
Haomei
Langfei
Liumang Yike
Misili
Yunnong
Zhengdao
Small Ye Group
F-74
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
26. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
The Group believes that the terms of the agreements with the related parties are comparable to the terms in arm’s-length transactions with third-party
customers and vendors.
Transactions with related parties
Payment on behalf of the related parties
Hangzhou Yuepeng Trading Co., Ltd.
Xiao Shanglue
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
100
—
100
—
588
588
—
—
—
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
Reimbursement for employee’s business related expenses
Xiao Shanglue
2,478
—
—
Purchase of merchandise
Tianshi
Zhangtaihe
Weixin
Siwei
Zhaomu
Bixin
Zhengdao
Haomei
Misili
Yunnong
Langfei
Small Ye Group
Dianhua
Liumang Yike
Marketplace service provided to related parties
Bixin
Liumang Yike
Siwei
F-75
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
39,776
32,110
36,958
307
469
—
—
—
—
—
—
—
—
—
109,620
25,295
16,400
79,309
5,626
103,269
69,311
31,418
13,443
8,230
8,006
3,507
3,097
420
11
367,342
Year Ended
December 31,
2017
RMB
Year Ended
December 31,
2018
RMB
Year Ended
December 31,
2019
RMB
—
—
—
—
—
—
—
—
373
301
91
765
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Form 20-F
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
27. COMMITMENTS AND CONTINGENCIES
(a) Capital and other commitments
The Group’s capital commitments primarily relate to commitments on purchase of equipment. Total capital commitments contracted but not yet reflected in
the consolidated financial statements amounted to RMB 1,864 as of December 31, 2019. All of these capital commitments will be fulfilled in the following
year.
(b) Contingencies
In the ordinary course of business, the Group is from time to time involved in legal proceedings and litigations. Starting in November 2019, we and certain
of our officers and directors and others have been named as defendants in putative securities class actions. The actions allege that defendants made
misstatements and omissions in connection with our initial public offering in May 2019 in violation of the Securities Act of 1933. The cases are still at the
preliminary stage, therefore the Group is unable to predict the outcome of these cases, or reasonably estimate a range of possible loss, if any, given the
current status of the litigation. No accrual has been recorded by the Group as of December 31, 2019 in respect of these cases.
28. SUBSEQUENT EVENTS
In December 2019, COVID-19 was reported to have surfaced, and subsequently spread through China and worldwide. The Group’s results of operations
have been adversely affected in the first quarter of 2020 with potentially continuing impacts on subsequent periods. Our suppliers, third-party merchants,
third-party logistics service providers and other business partners experienced various degrees of temporary shutdowns and delays in commencement of
operations due to COVID-19 in the first quarter of 2020. As a result, total revenues of the Group in the first quarter of 2020 has decreased year over year.
Because of the significant uncertainties surrounding the COVID-19 which is still evolving, the extent of the business disruption, including the duration and
the related financial impact on subsequent periods cannot be reasonably estimated at this time.
F-76
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Form 20-F
Table of Contents
YUNJI INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
29. STATUTORY RESERVES AND RESTRICTED NET ASSETS
Pursuant to laws applicable to entities incorporated in the PRC, the Group’s subsidiaries in the PRC must make appropriations from after-tax profit
to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and
(iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires an annual appropriation of 10% of after tax profit
(as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches
50% of a company’s registered capital, the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for specific
purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends. During the years ended December 31, 2017, 2018
and 2019, appropriations to the statutory reserve have been made by the Group, which was RMB 4,227, RMB 4,277 and RMB 3,129, respectively.
In addition, due to restrictions on the distribution of share capital from the Group’s PRC subsidiaries and also as a result of these entities’ unreserved
accumulated losses, total restrictions placed on the distribution of the Group’s PRC subsidiaries’ net assets was RMB 253,310, or 17% of the Group’s total
consolidated net assets as of December 31, 2019.
The Company performed a test on the restricted net assets of consolidated subsidiaries in accordance with Securities and Exchange Commission Regulation
S-X Rule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that it was not applicable for the Company to disclose the financial
statements for the parent company.
F-77
https://www.sec.gov/Archives/edgar/data/1759614/000119312520118175/d799763d20f.htm[4/27/2020 11:16:39 PM]