Stocks
ETFs
Options
Commodities
Crypto
Currency
Pro Newsletters
Research Tools
Daily Feeds
Calendars
Economic Indicators
Class Actions
Calculators
Education
About Us
Working with TipRanks
Follow Us
Global Cord Blood (CORBF)
OTHER OTC:CORBF
Risk Overview Q1, 2022
Risk Distribution
36% Finance & Corporate
30% Legal & Regulatory
16% Ability to Sell
7% Production
7% Macro & Political
4% Tech & Innovation
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
Global Cord Blood Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q1, 2022
Main Risk Category
Finance & Corporate
With 20 Risks
Finance & Corporate
With 20 Risks
Number of Disclosed Risks
56
+3
From last reportS&P 500 Average: 31
56
+3
From last reportS&P 500 Average: 31
Recent Changes
6Risks added
3Risks removed
11Risks changed
Since Mar 2022
6Risks added
3Risks removed
11Risks changed
Since Mar 2022
Number of Risk Changed
11
+9
From last reportS&P 500 Average: 1
11
+9
From last reportS&P 500 Average: 1
See the risk highlights of Global Cord Blood in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 56
Finance & Corporate
Total Risks: 20/56 (36%)Above Sector Average
Share Price & Shareholder Rights12 | 21.4%
Share Price & Shareholder Rights - Risk 1
If the PCAOB is unable to inspect our auditors as required under the HFCA Act, the SEC will prohibit the trading of our ordinary shares. A trading prohibition for our ordinary shares, or the threat of a trading prohibition, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections of our auditors deprives our investors of the benefits of such inspections.Added
Share Price & Shareholder Rights - Risk 2
Our largest shareholder filed a winding up petition with the Grand Court of the Cayman Islands, which, among other things, seeks to prevent our acquisition of Cellenkos, remove our current Board of Directors and effect related governance changes, a Writ of Summons which, among other things, seeks to unwind the Cellenkos Acquisition, and a claim against GM Stem Cells in the British Virgin Islands (the "BVI Claim") which, among other things, seeks a declaration that a share charge over its shares in the Company is invalid.Added
On May 6, 2022, the Company received a winding up petition (the "Petition") filed by Blue Ocean in the Grand Court of the Cayman Islands (the "Cayman Court"). Among other things, the Petition seeks orders that: (i) the Company refrain from proceeding with a proposed transaction by which the Company would acquire Cellenkos, as described in a Form 6-K filed by the Company on April 29, 2022 (the "Cellenkos Acquisition"); (ii) the Company amend and restate its Memorandum and Articles of Association; and (iii) the Company convene an extraordinary general meeting to propose the removal of its current Board of Directors and the appointment of alternative directors proposed by Blue Ocean. In the alternative, the Petition seeks an order for, among other things, the winding up of the Company. On May 16, 2022, a litigation steering committee (the "Litigation Steering Committee"), consisting of Ms. Ting Zheng (Ms. Ting Zheng is the chairman of the Litigation Steering Committee), Mr. Albert Chen, Mr. Mark Chen, Dr. Ken Lu, Ms. Jennifer Wang, Mr. Jack Chow and Mr. Jacky Cheng, was formed to oppose the Petition and to bring such other actions to satisfactorily resolve the matter.
The Cayman Court made various orders in relation to various interlocutory applications filed in the Petition. Among other things:
On May 12, 2022, upon Blue Ocean's application, the Cayman Court issued an ex parte order preventing the completion of the Cellenkos Acquisition (the "12 May Injunction").
On June 15, 2022, upon the Company's application, the Cayman Court ordered, among other things, that, until further order of the Court, any resolution or resolutions (the "Resolutions") that might be passed or purported to be passed at any extraordinary general meeting of the Company to be held or purporting to be held on June 16, 2022 ("the Purported EGM") or other meeting held or purporting to be held pursuant to a Notice of Extraordinary General Meeting dated June 3, 2022 (on June 16, 2022 or any other date) shall not take effect and shall not be implemented, and Blue Ocean must not rely or purport to rely upon any such Resolutions and/or seek to convene or convene any extraordinary general meeting of the Company or other meeting (the "EGM Injunction").
Following a hearing of various interlocutory applications on July 13 and 14, 2022, the Cayman Court subsequently issued a judgment (the "Judgment"). Among other things:
(i)the Cayman Court observed that Blue Ocean's shareholding in and standing as a member of the Company was subject to challenge in proceedings it had commenced by way of the BVI Claim (Claim No. BVIHCV (COM) 2022/0101);(ii)the Cayman Court determined that the 12 May Injunction is to be discharged (for the avoidance of doubt, this aspect of the Judgment, amongst others, will not come into effect until the various consequential matters are heard, a date for which has not yet been set, and the final Order of Court is perfected/ sealed. Therefore, as of the date of this report, the 12 May Injunction remains in place);(iii)the Cayman Court ordered that the EGM Injunction continue until further Order;(iv)the Cayman Court adjourned the Company's application for, among other things, a declaration that the Purported EGM has been invalidly convened and, further or alternatively, a declaration that all proceedings at the Purported EGM are invalid and any resolutions purported to be passed at the Purported EGM are of no effect, with liberty to apply; and (v)the Cayman Court dismissed the Company's application for, among other things, a declaration that Section 99 of the Cayman Islands Companies Act (2022 Revision) does not apply to any disposition of the Company's property and any transfer of shares made prior to the commencement of the Petition, and an order that the Company be permitted to effect the transactions contemplated in the Cellenkos Acquisition.
The Company cautions its shareholders and others that the Judgment, despite having been delivered, will not legally take effect until the various consequential matters, including applications for leave to appeal and/or a stay of execution pending appeal, are heard and the final Order of Court is perfected/ sealed. The Judgment provides that the final Order of Court "should, if necessary, take effect from the date it is perfected so as to preserve any appeal rights which might otherwise be affected".
As of the date of this report, a date for any further hearing(s) has not been fixed and the final Order of Court has not been perfected. This means, among other things, that both the 12 May Injunction and the EGM Injunction still apply. There is also a possibility that the Judgment could still be revised until the final Order of Court is sealed.
Separately, on June 8, 2022, Blue Ocean issued a Writ of Summons (the "Writ") in the Cayman Court against the Company, our current directors, and other parties in relation to the Cellenkos Acquisition. Among other things, Blue Ocean seeks: (i) a declaration that the Cellenkos Acquisition is void; (ii) equitable compensation against various defendants; (iii) rectification of the Company's register of members; and (iv) declarations that certain defendants hold shares/ funds received as trustee of the Company on constructive trust.
Therefore, the Cellenkos Acquisition remains the subject of legal proceedings against, among others, the Company and the current Board of Directors. The ultimate resolution of these proceedings may have a material adverse impact on our business, financial condition, results of operations or cash flows. Failure to settle these proceedings or other unfavorable outcomes in these proceedings – including but not limited to the winding up of the Company, the appointment of joint official liquidators, or the appointment of joint provisional liquidators - could result in significant damages, additional penalties or other remedies imposed against the Company, our current or former directors or officers.
Litigation of this kind could result in substantial costs and a diversion of our management's attention and resources. It could also result in our reputation being harmed and our stock price could decline as a result of allegations made in the course of the proceedings, regardless of the truthfulness of the allegations.
On May 20, 2022, Blue Ocean and Blue Ocean Creation Investment Hong Kong Limited filed the BVI Claim against GM Stem Cells in the High Court of Justice of the Virgin Islands (the "BVI Court"). Among other things, the BVI Claim concerns a "purported share charge allegedly executed by Blue Ocean in favour of GM Stem Cells over the shares in the Company" and seeks a declaration that "the purported Charge dated March 30, 2018 between Blue Ocean and GM Stem Cells in respect of the shares in the Company is invalid and of no legal effect". The outcome of the BVI Claim may result in a change of control of the Company.
Share Price & Shareholder Rights - Risk 3
As a result of the Proposed Transaction or the Redomestication and the Share Exchange, we could be treated as a U.S. corporation for U.S. federal income tax purposes or subject to adverse U.S. federal income tax rules.Added
Under current U.S. federal income tax law, a corporation organized under the laws of the Cayman Islands is generally not treated as a U.S. corporation and, therefore, is treated as a non-U.S. corporation. Section 7874 of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury regulations promulgated thereunder, however, contain rules that may cause a non-U.S. corporation that acquires the stock of a U.S. corporation to be treated as a U.S. corporation for U.S. federal income tax purposes under certain circumstances. If, as a result of the Proposed Transaction or the Redomestication and the Share Exchange (as defined below under "Item 4. Information on the Company-A. History and Development of the Company"), we are treated as a U.S. corporation for U.S. federal income tax purposes, among other consequences, we would generally be subject to U.S. federal income tax on our worldwide income, and our dividends would be treated as dividends from a U.S. corporation and subject to U.S. withholding taxes on payments to non-U.S. Holders ("U.S. Holder" defined below in "Item 10. Additional Information-E. Taxation-United States Federal Income Taxation"). Even if we are not treated as a U.S. corporation for U.S. federal income tax purposes, we and our shareholders may become subject to other adverse tax consequences pursuant to the "60% Inversion Rules" (as described under "Item 10. Additional Information-E. Taxation-United States Federal Income Taxation-Tax Residence of GCBC after the Proposed Transaction and the Redomestication and the Share Exchange").
We do not believe that we are treated as a U.S. corporation for U.S. federal income tax purposes or subject to the 60% Inversion Rules, and we intend to take this position on our tax returns. We have not sought and will not seek any rulings from the IRS as to such tax treatment. There can be no assurance that a tax advisor, the IRS, or a court will agree with the position that we are not treated as a U.S. corporation for U.S. federal income tax purposes or subject to the 60% Inversion Rules. We are not representing to you that we will not be treated as a U.S. corporation for U.S. federal income tax purposes or subject to the 60% Inversion Rules. The rules for determining whether a non-U.S. corporation is treated as a U.S. corporation for U.S. federal income tax purposes or subject to the 60% Inversion Rules are complex, unclear, and the subject of ongoing regulatory change. Our intended position is not free from doubt. For more information about the application of Section 7874 of the Code to us, see "Item 10. Additional Information-E. Taxation-United States Federal Income Taxation- Tax Residence of GCBC after the Proposed Transaction and the Redomestication and the Share Exchange."
Share Price & Shareholder Rights - Risk 4
There is a significant risk that we may be classified as a PFIC, which could result in adverse consequences to investors.Changed
In general, we will be classified as a PFIC in a particular taxable year if either (i) 75 percent or more of our gross income for the taxable year is passive income or (ii) the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50 percent. For this purpose, passive income generally includes dividends, interest, gains from certain commodities transactions, rents, royalties and the excess of gains over losses from the disposition of assets that produce passive income. Goodwill is treated as an active asset under the PFIC rules to the extent attributable to activities that produce active income. Cash generally is a passive asset for these purposes.
Based on the composition of our income and assets and the trading price of our shares, we believe there is a significant risk that we were a PFIC for U.S. federal income tax purposes for our 2022 fiscal year. Additionally, there is a significant risk that we will be a PFIC in our 2023 fiscal year and in the reasonably foreseeable future. The determination of whether we are a PFIC must be made annually based on the facts and circumstances at that time, some of which may be beyond our control, such as the trading price of our shares and the valuation of our assets, including goodwill and other intangible assets, at the time. If it is determined we are a PFIC for any of our taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this report captioned "Item 10. Additional Information-E. Taxation-United States Federal Income Taxation") of our ordinary shares, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of our ordinary shares or the receipt of certain excess distributions from us and may be subject to additional reporting requirements.
U.S. Holders of our ordinary shares are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion in the section entitled "Item 10. Additional Information-E. Taxation-United States Federal Income Taxation-Passive Foreign Investment Company Status."
Share Price & Shareholder Rights - Risk 5
We may have anti-takeover provisions in our organizational documents that discourage a change of control.Certain provisions of our amended and restated memorandum and articles of association may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders.
Certain of these provisions include:
- having a classified Board of Directors with staggered three-year terms;- requiring a special resolution, namely the affirmative vote of not less than two-thirds (66 and 2/3%) of the votes cast by the shareholders in the meeting convened to approve the removal of a director;- providing for filling vacancies on the board only by the vote of the remaining directors or by a special resolution, namely the affirmative vote of not less than two-thirds (66 and 2/3%) of the votes cast by the shareholders in the meeting convened to approve such appointment; and - establishing the requirements and procedures for calling special meetings of shareholders, including a provision that provides that a special meeting of shareholders may only be called by a majority of directors, our chairman, or members together holding not less than seventy-five percent (75%) of the issued shares.
In addition, we entered into service contracts with senior executive officers on June 30, 2009, namely Ms. Ting Zheng, Mr. Albert Chen, Ms. Rui Arashiyama and Ms. Xin Xu. Each contract is automatically renewed every three years until the death or incapacitation of the senior executive officer unless terminated by either party with notice. If a service contract is terminated by the relevant executive within 30 days following a change of control of our company, the executive will be entitled to (i) all the salary and guaranteed bonuses that have actually accrued and are payable to him/her as the case may be; (ii) immediate vesting of all of his/her unvested options; and (iii) a severance payment in the amount of US$5 million. GCBC may terminate a service contract without cause with at least 30 days' written notice, in which case the executive will be entitled to (i) all the salary and guaranteed bonuses that have actually accrued and are payable to him/her as the case may be; (ii) the immediate vesting of all of his or her unvested options; and (iii) if the termination is made within two years of a change of control of our company, a severance payment in the amount of US$5 million. The aggregate cost of the severance payments that would become payable at the option of the senior executive officers upon a change of control could discourage acquisition bids for GCBC. These anti-takeover provisions could make it more difficult for a third party to acquire GCBC, even if the third party's offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
As of March 31, 2022, Nanjing Ying Peng, via its wholly-owned subsidiary Blue Ocean Structure Investment Company Ltd ("Blue Ocean"), beneficially owned approximately 65% equity interest of GCBC. GCBC's Board of Directors is divided into three classes, each of which will generally serve a term of three years with only one class of directors being elected in each year. At each of our annual meetings, as a consequence of GCBC's "staggered" Board of Directors, only a minority of the Board of Directors will be considered for reelection and Nanjing Ying Peng, because of its ownership position, has considerable influence regarding the outcome.
Share Price & Shareholder Rights - Risk 6
Our shareholders may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.We are an exempted company incorporated under the laws of the Cayman Islands, while we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, most of our senior executive officers reside within China for a time and most of our senior executive officers are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.
Share Price & Shareholder Rights - Risk 7
The market price for our ordinary shares may be volatile.The market price for our ordinary shares is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
- actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;- changes in financial estimates or recommendation by securities research analysts;- restatements conforming to the applicable accounting standards;- conditions in the markets for cord blood banking service;- changes in the economic performance or market valuations of companies specializing in cord blood banking services;- announcements by us and our affiliates or our competitors of new products or services, acquisitions, strategic relationships, joint ventures or capital commitments;- changes in key supplier(s) or the shareholding of our key supplier(s);- addition or departure of our shareholders, senior management and key research and development personnel;- fluctuations of exchange rates between the Renminbi and the U.S. dollar;- material litigation or investigation of any kind;- changes in market or investors perception toward U.S.-listed Chinese companies;- change in controlling shareholder;- material adverse event in relation to controlling shareholder;- unfounded accusations by investors or non-investors about us or other U.S.-listed Chinese companies;- release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares;- merger, privatization or acquisition activity;- change in business strategy;- political tension or international policies between China and U.S. or any other countries;- regulations or policies against U.S.-listed Chinese companies;- sales or perceived potential sales of our ordinary shares or instruments convertible into ordinary shares;- the proposed transaction on entry into cell therapy market by acquiring Cellenkos and its products rights; and - proceedings and/or the notice of Petition filed by our largest shareholder concerning Cellenkos Acquisition and the proposed changes involved.
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ordinary shares.
Share Price & Shareholder Rights - Risk 8
Cayman Islands law may be less protective of shareholder rights than the laws of the U.S. or other jurisdictions.We are registered by way of continuation under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands (the "Companies Act") and the common law of the Cayman Islands. The rights of shareholders to take action against our directors and us, the rights of minority shareholders to institute actions, and the fiduciary responsibilities of our directors to us 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 English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. Any shareholder of a company may petition the court which may make a winding up order if the court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company's affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorizing civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company's capital accordingly. The rights of our shareholders and the fiduciary responsibilities 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.
As a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by management, our directors or principal shareholders than they would as a shareholder of a U.S. company.
Share Price & Shareholder Rights - Risk 9
Your ability to bring an action against us or against our directors and executive officers, or to enforce a judgment against us or them, will be limited.We are not incorporated in the United States. We conduct our business outside the United States, and substantially all of our assets are located outside the United States. Most of our directors and executive officers are non-U.S. citizens/residents, and substantially all of the assets of those persons are located, outside the United States. 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 U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands or the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would (i) recognize or enforce judgments of U.S. courts against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or (ii) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Share Price & Shareholder Rights - Risk 10
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
- the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;- 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 are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange. 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 than 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.
Share Price & Shareholder Rights - Risk 11
The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.Sales of substantial amounts of our ordinary shares (or derivative instruments convertible into our ordinary shares) in the public market, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares and could materially impair our future ability to raise capital through offerings of our ordinary shares.
Share Price & Shareholder Rights - Risk 12
Volatility in the price of our ordinary shares may result in shareholder litigation that could in turn result in substantial costs and a diversion of our management's attention and resources.The financial markets in the United States and other countries have experienced significant price and volume fluctuations, and market prices of healthcare companies have been and continue to be extremely volatile. Volatility in the price of our ordinary shares may be caused by factors outside our control and may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the market price of a public company's securities, shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our management's attention and resources.
Accounting & Financial Operations2 | 3.6%
Accounting & Financial Operations - Risk 1
If we fail to maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ordinary shares may be adversely affected.Accounting & Financial Operations - Risk 2
We may not be able to pay any dividends on our ordinary shares.Under Cayman Islands law, we may only pay dividends out of our profits or our share premium account subject to our ability to service our debts as they become due in the ordinary course of business. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. Although our Board of Directors declared a dividend with respect to the fiscal year ended March 31, 2018, future dividends, if any, will be at the discretion of our Board of Directors, subject to obtaining all relevant approvals, and will depend upon our results of operations, our cash flows, our financial condition, the payment of cash dividends from our subsidiaries to us, our capital needs, expansion and acquisition opportunities available, regulatory environment, future prospects and other factors that our directors may deem appropriate. You should refer to "Item 4. Information on the Company-B. Business Overview-Regulation-Dividend Distributions" in this report for additional information regarding our current dividend policy for additional legal restrictions on the ability of our PRC subsidiaries to pay dividends to us.
In addition, due to the failure of the Measures for Administration of Blood Stations to define or interpret the terms "non-profit", "for-profit" or "for the purpose of making a profit" as they relate to our business, we cannot assure you that the PRC government authorities will not request our subsidiaries to use their after-tax profits for their own development and restrict our subsidiaries' ability to distribute their after-tax profits to us as dividends.
Debt & Financing2 | 3.6%
Debt & Financing - Risk 1
Our investments in equity securities may adversely affect our financial performance.Debt & Financing - Risk 2
Our revenues are denominated in Renminbi, which is not freely convertible for capital account transactions.Changed
We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our revenues are primarily denominated in Renminbi, which is currently not freely exchangeable. The PRC government imposes control over the convertibility between Renminbi and foreign currencies. Under the PRC foreign exchange regulations, payments for "current account" transactions, including remittance of foreign currencies for payment of dividends, profit distributions, interest and operation-related expenditures, may be made without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to "capital account" transactions, such as direct foreign investment and foreign currency loans. These capital account transactions must be approved by or registered with the PRC State Administration of Foreign Exchange, or "SAFE" or its authorized local branches. We cannot assure you that we are able to meet all of our foreign currency obligations to remit profits out of China or to fund operations in China.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or "Circular 142". On March 30, 2015, SAFE issued the Circular of the State Administration of Foreign Exchange Concerning Reform of the Administrative Approaches to Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or "Circular 19", which became effective on June 1, 2015 and replaced the Circular 142, to regulate the conversion by foreign invested enterprises, or FIEs, of foreign currency into Renminbi by restricting how the converted Renminbi may be used. On June 9, 2016, SAFE issued the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or "Circular 16", which became effective on the date of promulgation and prevails in the event of any discrepancy between Circular 19 and Circular 16. Circular 19 and Circular 16 require that Renminbi converted from the foreign exchange earnings under capital account which the voluntary settlement has been applied by relevant policies (including the foreign currency-dominated capital of an FIE, foreign debts, and funds repatriated from overseas listing) shall be managed under the accounts for foreign exchange settlement and pending payment. The expenditure scope of such account includes: expenditure within the business scope, payment of funds for domestic equity investment and Renminbi deposits and so forth. An FIE shall truthfully use its capital by itself within the business scope and shall not, directly or indirectly, use its capital or Renminbi converted from the foreign exchange earnings under capital account for (i) expenditure beyond its business scope or expenditure prohibited by laws or regulations, (ii) investing in securities or financial schemes other than bank guaranteed products unless otherwise provided by relevant laws and regulations, (iii) disbursing loans to unrelated parties unless explicitly permitted under its business scope, and (iv) the construction or purchase of real estate that is not for self-use (except for the real estate enterprises). Where an FIE, other than a foreign-invested investment company, foreign-invested venture capital enterprise or foreign-invested equity investment enterprise, makes domestic equity investment by transferring its capital in the original currency, it shall obey the current provisions on domestic re-investment. Where such an FIE makes domestic equity investment by its Renminbi conversion, the invested enterprise shall first go through domestic re-investment registration and open a corresponding account for foreign exchange settlement and pending payment, and the FIE shall thereafter transfer the conversion to the aforesaid account according to the actual amount of investment.
On October 23, 2019, SAFE released the Circular on Further Promoting Cross-border Trade and Investment Facilitation, or "Circular 28", according to which non-investment foreign-invested enterprises are permitted to make domestic equity investments with their capital funds provided that such investments do not violate the Negative List. On April 10, 2020, SAFE promulgated the Circular on Optimizing Administration of Foreign Exchange to Support the Development of Foreign-related Business, or "Circular 8", eligible enterprises are allowed to make domestic payments by using their capital funds, foreign loans and the income under capital accounts of overseas listing, without providing the evidentiary materials concerning authenticity of each expenditure, provided that their capital use shall be authentic and in line with provisions, and conform to the prevailing administrative regulations on the use of income under capital accounts. On December 31, 2020, the People's Bank of China, the NDRC, the MOC, the State-owned Assets Supervision and Administration Commission of the State Council, the China Banking and Insurance Regulatory Commission, and the SAFE jointly promulgated the Circular on Further Optimizing the Cross-border Renminbi Policy to Support the Stabilization of Foreign Trade and Foreign Investment, or "Circular 330",which became effective on February 4, 2021, and further lifts the restriction on the use of RMB income from capital accounts. RMB income from capital accounts of domestic institutions (including foreign direct investment capital, cross-border financing and repatriation of funds raised from overseas listings) shall be operated within the business scope approved by relevant state departments and shall be in line with specified circumstances: (i) shall not be directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by national laws and regulations; (ii) shall not be used for granting loans to non-connected enterprises unless otherwise expressly permitted by its business scope; and (iii) shall not be used for the construction or purchase of real estate that is not for self-use (except for the real estate enterprises). Considering that Circular 28, Circular 8 and Circular 330 are often principle-oriented and subject to the detailed interpretations by the enforcement bodies to further apply and enforce such laws and regulations in practice, it is unclear how they will be implemented, and there exist high uncertainties with respect to its interpretation and implementation by government authorities and banks.
In the future, we may grow our business in part by acquiring additional cord blood banks in China. Any non-compliance with the relevant foreign exchange requirements may delay or inhibit our ability to complete such transactions, which could affect our ability to expand business.
Corporate Activity and Growth4 | 7.1%
Corporate Activity and Growth - Risk 1
Our strategic partnership with Cordlife Singapore may not be successful.Corporate Activity and Growth - Risk 2
If we fail to expand through strategic acquisitions of cord blood banks in other regions, we may not be able to expand our scope of operations or increase our revenues.According to the Notice on Extension of Time Limit on Planning and Establishment of the Cord Blood Bank published by the NHFPC in December 2015, the NHFPC extended the planning and establishment timetable for cord blood banking and will not grant any new licenses before 2020 in addition to the seven existing cord blood banking licenses. On November 29, 2019, the NHC announced the New Policy. Under the New Policy, the LHCs are allowed to approve cord blood banking licenses in 18 pilot FTZs in China. The New Policy does not specify the implementation details, such as qualifications for applicants, license approval procedures or licensed region coverage, but it implies that the regulatory bodies could expand the current seven licensed regions for cord blood banking to up to 19 regions, including Beijing. Detailed rules on the implementation of the New Policy are yet to be provided by relevant government agencies. As of September 24, 2020, the FTZs in China had been increased from 18 FTZs to 21 FTZs, with three new FTZs including Beijing, Hunan and Anhui. Thus, the New Policy implies that the regulatory bodies could expand the current seven licensed regions for cord blood banking to up to 21 regions. On December 30, 2020, the NHC announced a Notice Regarding the Matters Related to Issuance of Cord Blood Banking License, which specified that no cord blood banking license applications shall be accepted in 2021.
On July 2, 2021, the NHC announced the 2021 Policy to specify the nationwide "Separating Permits from Business Licenses" reform measures in the medical field, including allowing online application for cord blood bank establishment and practice approval, and shortening the approval time limit. Meanwhile, the 2021 policy provides that the application procedure shall still be implemented in accordance with the Measures for Administration of Blood Stations; that is, the NHC was responsible for the approval of the establishment of cord blood banks and the LHCs were responsible for the practice approval. However, as of the date of this report, the NHC has not issued any notice on whether to accept the cord blood banking license applications nationwide. We believe we would have to rely on strategic acquisitions of cord blood banks in other regions to expand our operations. Expansion through strategic acquisitions is subject to a number of risks:
- We may fail to locate suitable acquisition candidates with business operations that are consistent with our growth strategy and at prices and on terms that are satisfactory. Alternatively, we may have to compete with other companies or other Chinese cord blood banking operators in bidding to acquire cord blood banks in regions where we do not already operate. Some of these competitors may have greater capital resources than us.
- To finance part or all of our acquisition costs, we may need to issue ordinary shares, incur debt and assume contingent liabilities. Such acquisitions may also create additional amortization expenses related to acquired intangible assets. Any of these factors might harm our financial results and lead to volatility in the price of our shares. Further, any financing we might need for future acquisitions may be available only on terms that restrict our business or impose costs that decrease our profits.
- Even if we make a successful bid, we may be unable to obtain government approvals necessary to consummate any given proposed acquisition. Among others, if the contemplated business concentration has the effect of precluding or impeding competition, the antitrust authorities may prohibit consummation of the contemplated business concentration or impose conditions that would lessen the impact of such concentration poses on competition. Further, we may encounter protective measures in local markets that may preclude or impede our ability to expand into such regions through strategic acquisitions.
- Any integration of new businesses may produce unforeseen risks, operating difficulties and expenditures and may require significant management attention that would otherwise be available for the ongoing development of our business. Among others, we may be unable to discover during due diligence all contingent liabilities and adverse issues, giving rise to unexpected delays or difficulties during integration.
- While all cord blood banks must meet the relevant standards set by the NHC, some cord blood banks, due to their limited operating history, may possess different technological standards and operational models than ours. We may need to devote significant time and resources upon completion of the acquisition to amend and transform the acquired target. We may, prior to the implementation of an acquisition, fail to predict the appropriate amount of time and resources required to complete such transformation. It is even possible that we may not be able to rectify the situation at all. Due to the foregoing uncertainties, we may be subject to substantial costs and unexpected delays arising out of an acquisition.
Our future success depends on our ability to increase our target subscription base by expanding our geographical coverage to other regions. If we are unable to grow our operations through strategic acquisitions, our business, results of operations and financial condition could be materially and adversely affected.
Corporate Activity and Growth - Risk 3
We may not be able to expand our service portfolio by bringing in additional healthcare and therapeutic related services or, if such expansion plans are implemented, we may not realize the anticipated benefits and they could disrupt our business, decrease our profitability, result in dilution to our stockholders or cause us to incur significant additional debt or expense.As part of our business strategy to expand our service portfolio, we are seeking to acquire additional businesses which would enable us to offer additional healthcare and therapeutic related services to our cord blood banking subscribers that in turn diversify our revenue stream, leverage our corporate infrastructure and commercial expertise. There are limited opportunities available that align with our business strategy and there can be no assurance that we will be able to identify or complete any suitable acquisition in a timely manner, on a cost-effective basis, or at all, or that such transactions will be successfully integrated into our business. For example, we have entered into agreements to acquire an approximately 95% equity interest of Cellenkos and the rights to develop and commercialize all of its existing and future products worldwide except those related to Cellenkos' existing collaboration with Incyte Corporation (Nasdaq: INCY). However, we cannot assure you that we can complete this transaction or realize any anticipated benefits from this transaction, if completed. See "-Risks to Our Shareholders- Our largest shareholder filed a winding up petition with the Grand Court of the Cayman Islands, which, among other things, seeks to prevent our acquisition of Cellenkos, remove our current Board of Directors and effect related governance changes, a Writ of Summons which, among other things, seeks to unwind the Cellenkos Acquisition, and a claim against GM Stem Cells in the British Virgin Islands which, among other things, seeks a declaration that a share charge over its shares in the Company is invalid" for more information.
Further, the valuation methods that we use for any acquired business require significant judgments and assumptions. There is no guarantee that we can successfully commercialize such additional healthcare services or such additional healthcare services will be well received by our existing and future subscribers. Actual results and performance of the products or businesses that we may acquire, including anticipated synergies, regulatory outcomes, economies of scale and other financial benefits, could differ significantly from our original assumptions. In addition, acquisitions may cause significant changes to our current business and operations, may subject us to more rigid or constraining regulations or government oversight and may have negative tax and accounting consequences. These results could have a negative impact on our financial position or results of operations and result in significant charges in future periods.
Even if we do acquire suitable businesses, the management of integration of an acquired business or company may disrupt our ongoing business and require management resources that otherwise would be available for ongoing efforts and development of our existing business. The integration of the operations of such acquired businesses requires significant efforts, including the coordination of information technologies, sales and marketing, operations, finance and business systems and processes. These efforts result in additional expenses and involve significant amounts of management's time. Further, due to our limited experience in operating non-cord blood banking business, there may be unanticipated or unforeseeable event which can materially and adversely affected our operation and financial condition. If we cannot successfully integrate additional healthcare and therapeutic related services for the benefits of our cord blood banking subscribers, we may experience material negative consequences to our business, financial condition or results of operations.
Corporate Activity and Growth - Risk 4
We may not be able to manage our expected growth and enlarged business.We anticipate that further expansion will be required in order for us to capitalize on the opportunities available in the cord blood banking industry. Our growth strategy may not be successful for the following reasons:
- Our ability to obtain additional capital for growth is subject to a variety of uncertainties, including our operating results, our financial condition, capital market perception, general market conditions for capital raising activities by healthcare companies, and economic conditions in China.
- Our profitability will be adversely affected by the additional costs and expenses associated with the operation of new facilities, increased marketing and sales support activities, experimenting on electronic and mobile platform to accommodate new consumer behavior, technological improvement projects, the recruitment of new employees, the upgrading of our managerial, operational and financial systems, procedures and controls, and the training and management of our growing employee base.
- The increased scale of operation will present our management with challenges associated with operating an enlarged business, including dedication of substantially more time and resources in operating and managing cord blood banks located in more than one geographic location in China, in ensuring regulatory compliance and in continuing to manage and grow the business.
We do not know whether our revenues will grow at all or grow rapidly enough to absorb the capital and expenses necessary for its growth. It is difficult to assess the extent of capital and expenses necessary for our growth and their impact on our operating results. Failure to manage our growth and enlarged business effectively could have a material adverse effect on our business, financial condition and results of operations.
Legal & Regulatory
Total Risks: 17/56 (30%)Above Sector Average
Regulation11 | 19.6%
Regulation - Risk 1
Our business and financial results may be materially and adversely affected as a result of regulatory changes in the cord blood banking industry in China.Changed
Regulation - Risk 2
We may incur significant initial investments to apply for cord blood banking licenses in other regions, and if we are unsuccessful, our operating results could be materially and adversely affected.Changed
On November 29, 2019, the NHC announced a New Policy. Under the New Policy, the LHCs are allowed to approve cord blood banking licenses in 18 pilot FTZs in China. The New Policy does not specify the implementation details, such as qualifications for applicants, license approval procedures or licensed region coverage, but it implies that the regulatory bodies could expand the current seven licensed regions for cord blood banking to up to 19 regions, including Beijing. Detailed rules on the implementation of the New Policy are yet to be provided by relevant government agencies. As of September 24, 2020, the FTZs in China had been increased from 18 FTZs to 21 FTZs, with three new FTZs including Beijing, Hunan and Anhui. Thus, the New Policy implies that the regulatory bodies could expand the current seven licensed regions for cord blood banking to up to 21 regions. On December 30, 2020, the NHC announced a Notice Regarding the Matters Related to Issuance of Cord Blood Banking License, which specified that no cord blood banking license applications shall be accepted in 2021.
On July 2, 2021, the NHC announced the 2021 Policy to specify the nationwide "Separating Permits from Business Licenses" reform measures in the medical field, including allowing online application for cord blood bank establishment and practice approval, and shortening the approval time limit. Meanwhile, the 2021 policy provides that the application procedure shall still be implemented in accordance with the Measures for Administration of Blood Stations; that is, the NHC was responsible for the approval of the establishment of cord blood banks and the LHCs were responsible for the practice approval. However, as of the date of this report, the NHC has not issued any notice on whether to accept the cord blood banking license applications nationwide. If the NHC or the relevant LHCs decide to grant new cord blood banking licenses in the future in other regions, we may attempt to apply for licenses in such regions. Applying for licenses involves a variety of risks:
- Based on the time needed for the granting of the seven existing cord blood banking licenses, we believe that the application process for a cord blood banking license in China generally takes several years. We may incur substantial costs during the application process in the construction of cord blood banks with no certainty of success.
- At any time during the application process, the NHC or the relevant LHCs may decide not to grant a cord blood banking license in the region. Further, our likelihood of success may not be assessed easily, for the reason of neither the NHC nor the relevant LHCs currently announces the status of those applications including the number of prospective applicants.
- The potential award of new licenses may attract new entrants to the industry. Some of these entrants may consist of internationally based specialists with more extensive technical capabilities and stronger brand recognition and China-based healthcare conglomerates with significantly more resources than us.
We compete with other market players for substantially the same licenses. Increased competition may result in an increase in the average cost per license. There is no assurance that we will be able to obtain new licenses through the application process. If we are unable to successfully obtain the new licenses to be awarded, we may not be able to maintain our market position within the China cord blood banking industry. Currently, we have neither identified any specific locations nor expressed any written interest in constructing a cord blood bank.
Regulation - Risk 3
Changes in U.S. and China relations and related regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our ordinary shares.Added
Political tensions between the U.S. and China have escalated. The U.S. government has taken a range of actions relating to U.S-China relations, including imposing several rounds of tariffs affecting certain products manufactured in China, imposing sanctions, export controls and investment restrictions against Chinese companies, imposing sanctions on certain officials of the PRC and Hong Kong governments, enacting legislation such as the HFCA Act, and implementing enhanced reviews of companies with significant China-based operations. Partially in response to these actions, the PRC government has also taken a number of steps affecting U.S.-China relations, including the issuance of the Unreliable Entity List in 2019 and the enactment of the Anti-Foreign Sanctions Law in 2021. Economic conditions in China are sensitive to global economic conditions. Rising political tensions between China and the U.S. could reduce levels of trade, investment, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. The measures taken by the U.S. and Chinese governments may also restrict our ability to do business with entities both within and outside of China and may cause investors to lose confidence in Chinese companies and counterparties, including us. In addition, new legislation, executive orders, tariffs, laws or regulations may be adopted that negatively affect companies with significant connections to the U.S. or to China, our industry or on us. Any unfavorable government policies on cross-border relations or international trade, including increased scrutiny on companies with significant China-based operations may affect the competitive position of our products, the hiring of research and development personnel, our ability to raise capital, and the market price of our ordinary shares.
The SEC has issued statements focused on companies with significant China-based operations, such as us. For example, on July 30, 2021, SEC Chairman Gary Gensler, issued a Statement on Investor Protection Related to Recent Developments in China, in which he reported that he has directed the SEC staff to engage in targeted additional reviews of filings for companies with significant China-based operations. Consistent with that directive, on December 20, 2021, the SEC posted an illustrative letter containing sample comments to companies with the majority of their operations in the PRC or Hong Kong. The statement and sample comment letter also addressed risks inherent in companies with a variable interest entity, or a VIE, structure, which are used by some companies in China that operate in sectors that are subject to foreign ownership limitations. We do not have a VIE structure and are not in an industry that is subject to foreign ownership limitations. Further, we believe that we have full and complete disclosures relating to our operations in China, including applicable risks. However, our periodic reports and other filings with the SEC may be subject to enhanced review by the SEC, and this additional scrutiny could affect our ability to effectively raise capital in the U.S.
In response to the SEC's July 30 statement, the CSRC announced on August 1, 2021, that the CSRC will continue to collaborate "closely with different stakeholders including investors, companies, and relevant authorities to further promote transparency and certainty of policies and implementing measures." There is no assurance that the tension between the two nations will ease soon.
If any new legislation, executive orders, tariffs, laws and/or regulations are implemented, if existing trade agreements are renegotiated or if the U.S. or Chinese governments take retaliatory actions due to the U.S.-China tension, such changes could have an adverse effect on our business, financial condition and results of operations, our ability to raise capital and the market price of our ordinary shares.
Regulation - Risk 4
Recent regulatory developments in China may subject us to additional regulatory review and disclosure requirements, expose us to government interference, or otherwise restrict or completely hinder our ability to offer securities and raise capital outside China, which could adversely affect our business operations and cause the value of our securities to significantly decline or become worthless.Added
As substantially all of our business is conducted in China, we are exposed to legal and other risks associated with our operations in China. The PRC government has significant authority to exert influence on the ability of a company with operations in China, including us, to conduct its business, and may exert substantial intervention and influence over the manner of our operations. Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas or foreign investment in companies having operations in China, including us, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors, and cause the value of our securities to significantly decline or become worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews and new laws and regulations related to data security, and expanding the efforts in anti-monopoly enforcement. While we do not believe that these regulatory changes would have any material impact on us, we cannot guarantee that the authorities will agree with us or will not promulgate new regulations that restrict our business operations or access to capital.
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. These opinions and any related implementation rules to be enacted may subject us to additional compliance requirement in the future. As these opinions were recently issued, official guidance and interpretation of the opinions remain unclear at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions or any future implementation rules on a timely basis, or at all.
With the trend of strengthening anti-monopoly supervision around the world, the PRC government has issued a series of anti-monopoly laws and regulations in 2021, paying more attention to corporate compliance. On February 7, 2021, the Anti-monopoly Commission of the State Council of the PRC promulgated the Guidelines for Anti-monopoly in the field of Platform Economy. On November 15, 2021, the State Administration for Market Regulation of the PRC promulgated the Guidelines for the Overseas Anti-monopoly Compliance of Enterprises. We believe that these regulations have little impact on us, but we cannot guarantee that regulators will agree with us or that these regulations will not affect our business operations in the future.
On December 28, 2021, 13 government departments including the CAC jointly issued the Measures for Cybersecurity Review (2021 version), which became effective on February 15, 2022 and superseded the Measures for Cybersecurity Review promulgated on April 13, 2020. The Measures for Cybersecurity Review (2021 version) provides that, a cybersecurity review is required, when national security has been or may be affected and where critical information infrastructure operators purchase network products or services and network platform operators process data. When a platform operator in possession of personal information of over one million users applies for listing abroad, it must apply for cybersecurity review. On July 30, 2021, the State Council promulgated the CII Regulation, which became effective on September 1, 2021. Pursuant to the CII Regulation, "critical information infrastructures" refers to important network facilities and information systems of key industries such as public communications and information services, energy, transportation, irrigation, finance, public services, e-government and science, technology and industry for national defense, as well as other important network facilities and information systems that may seriously endanger national security, national economy and citizens' livelihood and public interests if they are damaged or suffer from malfunctions, or if any leakage of data in relation to them occurs. The CII Regulation also provides that competent authorities shall promulgate detailed rules in designating critical information infrastructure, identify critical information infrastructure in the relevant industries, and notify operators of such critical information infrastructure in a timely manner. As of the date of this report, the responsible authorities have not promulgated any implementation provisions or identification rules, and cord blood banking services have not been included in the relevant scope of "critical information infrastructure." In addition, as of the date of this report, we have not been notified by any authorities of being classified as a critical information infrastructure operator, involved in any cybersecurity review or received any investigation, inquiry, notice, warning or sanctions made by the CAC on such basis. As advised by our PRC counsel, Commerce & Finance Law Offices, we should not be identified as a "critical information infrastructure operator" or a "network platform operator" as mentioned above.
However, Measures for Cybersecurity Review (2021 version) were recently adopted, and there remain uncertainties as to their implementation and interpretation and how they will affect us. If applicable laws, regulations, or interpretations change and it is determined in the future that the Measures for Cybersecurity Review (2021 version) become applicable to us, we may be subject to review when conducting data processing activities, and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices. We may incur substantial costs in complying with the Measures for Cybersecurity Review (2021 version), which could result in material adverse changes in our business operations and financial position. If we are not able to fully comply with the Measures for Cybersecurity Review (2021 version), our ability to offer or continue to offer securities to investors may be significantly limited or completely hindered, and our securities may significantly decline in value or become worthless.
On November 14, 2021, the CAC released the Regulation on Network Data Security Management (draft for public comments) and accepted public comments until December 13, 2021. The draft Regulations on Network Data Security Management provides that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor that processes personal data of more than one million users intends to list overseas, it shall apply for a cybersecurity review. In addition, data processors that process important data or are listed overseas shall carry out an annual data security assessment on their own or by engaging a data security services institution, and the data security assessment report for the prior year shall be submitted to the local cyberspace affairs administration department before January 31 of each year. Since the Draft Regulation on Network Data Security Management (draft for public comments) is in the process of being formulated, it remains unclear on its final form, promulgation schedule, implementation and interpretation by the relevant PRC governmental authorities.
On September 1, 2021, the PRC Data Security Law became effective, which imposes data security and privacy obligations on entities and individuals conducting data-related activities, and introduces a data classification and hierarchical protection system. In addition, the Standing Committee of the PRC National People's Congress promulgated the PIPL on August 20, 2021, which took effect on November 1, 2021. The PIPL further emphasizes processors' obligations and responsibilities for personal information protection and sets out the basic rules for processing personal information and the rules for cross-border transfer of personal information. On July 7, 2022, the CAC promulgated the Assessment Measures which will be effective on September 1, 2022. According to the Assessment measures, a data processor shall declare security assessment for its outbound data transfer to the CAC through the local cyberspace administration at the provincial level under any of the following circumstances: (a) where a data processor provides critical data abroad; (b) where a critical information infrastructure operator or a data processor processing the personal information of more than one million individuals provides personal information abroad; (c) where a data processor has provided personal information of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of the previous year; and (d) other circumstances prescribed by the CAC for which declaration for security assessment for outbound data transfers is required. We have the opportunity to contact, obtain or be exposed to personal information of our subscribers and their close relatives. We may be required to declare security assessment once we fall under any of the aforementioned circumstances and our business operations may be restricted according to the regulations abovementioned.
Since these legislative and regulatory actions are new, it is highly uncertain as to how soon legislative or administrative regulation making bodies will respond and how existing or new laws or regulations or detailed implementation and interpretations will be modified or promulgated. Moreover, PRC laws and their interpretations and enforcement will continue to develop and change, and the PRC government may adopt other rules and restrictions in the future, which may subject us to additional regulatory review and disclosure obligations.
Regulation - Risk 5
Future equity offerings by us may be subject to approval of the CSRC and other regulatory authorities in China, which could impose uncertainty on our capital raising activities.Added
?
On December 24, 2021, the CSRC released the Draft Overseas Listing Regulations which had a comment period that expired on January 23, 2022, and if enacted, may subject us to additional compliance requirements in the future. Thus, it is still uncertain as to how the PRC governmental authorities will regulate overseas listings in general and whether we will be required to obtain any specific regulatory approvals. Furthermore, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for offering our securities to our investors, we may be unable to obtain such approvals, which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors. Furthermore, the PRC government authorities may strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Such actions taken by the PRC government authorities may intervene or influence our operations at any time, which are beyond our control. Therefore, any such action may adversely affect our operations and significantly impair our ability to raise funds and reduce the value of our securities.
On April 2, 2022, the CSRC promulgated Provisions on Strengthening the Confidentiality and Archives Administration of Overseas Securities Issuance and Listing by Domestic Enterprises (Draft for Comments), according to which, a domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas regulators, documents and materials that contain state secrets or government work secrets, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level. A domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas regulators, other documents and materials that, if divulged, will jeopardize national security or public interest, shall strictly fulfil relevant procedures stipulated by applicable national regulations. Archives, including working papers, that have been produced in mainland China by securities companies and securities service providers for overseas securities offering and listing by domestic companies shall be retained in mainland China, and, without prior approval by competent authorities, must not be brought, mailed or otherwise transferred to outside mainland China, or transmitted to any institutions or individuals outside mainland China through any methods including via the use of information technologies. Overseas securities regulators and competent overseas authorities may request to investigate, including to collect evidence for investigation purpose, or inspect a domestic company that has been listed or offered securities in an overseas market or securities companies and securities service providers that undertake securities business for such domestic companies. Such inspection, investigation and evidence collection shall be conducted under a cross-border regulatory cooperation mechanism, and the CSRC and competent authorities of the Chinese government will provide necessary assistance pursuant to bilateral and multilateral cooperation mechanisms. Before cooperating with the investigation and inspection by, or providing documents and materials to overseas securities regulators or other competent overseas authorities, such domestic companies, securities companies and securities service providers shall report to the CSRC or other competent authorities. As of the date of this document, this draft has not been formally adopted and the final version and effective date of such measures are subject to change with substantial uncertainty.
Regulation - Risk 6
Our business activities are subject to regulations that may impose significant costs and restrictions.As the healthcare industry in China is monitored closely by regulatory authorities, our operations are constrained in many aspects. In particular:
- Stringent regulations and standards apply to various aspects of our operations, including workers' safety, the maintenance of premises, and the handling and disposal of waste materials and hazardous substances. Failure to maintain the required standards can result in fines, an order to suspend the operations of our facilities until corrective measures are implemented, or the revocation of our operating permits for such facilities or the denial of permission for their renewal. A failure in complying with these regulations may have a material adverse effect on our operations.
- All collection devices and reagents used in our handling of cord blood units are regulated by the State Food and Drug Administration (which has been reorganized as the National Medical Products Administration since March 2018, or "NMPA"), and we require our suppliers to comply with all applicable regulations. The NMPA could at any time require our suppliers to obtain prior approval or additional clearance with regard to the materials, reagents, appliances, consumables, devices or containers which we are currently using or prepare to use. Such requirements may affect the shipment timing of our suppliers which in turn may materially and adversely affect our operations.
- We are required by PRC law to hire professional medical waste disposal firms to collect and dispose of medical waste produced in the process of collection, transportation, testing, processing and cryopreservation of cord blood. Such compliance costs may put extra strain on our financial resources.
Regulations of cord blood banking services in China are still evolving and there are uncertainties in relation to the application and interpretation of the relevant regulations. We may be required to devote significant time and attention to comply with the applicable requirements, and our compliance costs may increase in future periods.
Regulation - Risk 7
If we become directly subject to the scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or defend the matter, which could harm our business operations, stock price and reputation.U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S.-listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Regulation - Risk 8
Changes in PRC laws and regulations on labor and employee benefits may adversely affect our business and results of operations.As we conduct a significant portion of our business through our subsidiaries in China, we are subject to PRC laws and regulations on labor and employee benefits. In recent years, the PRC government has implemented policies to strengthen the protection of employees and obligate employers to provide more benefits to their employees. In addition, an employment contract law came into effect in China on January 1, 2008. The PRC Employment Contract Law and related legislations require more benefits to be provided to employees, such as an increase in pay or compensation for termination of employment contracts. As a result, we expect to incur higher labor costs, which would have an adverse impact on our business and results of operations.
Regulation - Risk 9
It may be difficult for overseas regulators to conduct investigation or collect evidence within China.Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC territory. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests. See also "-Risks to Our Shareholders-Your ability to bring an action against us or against our directors and executive officers, or to enforce a judgment against us or them, will be limited" for risks associated with investing in us as a Cayman Islands company.
Regulation - Risk 10
PRC regulations relating to the establishment of offshore companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into the PRC subsidiaries, limiting our subsidiaries' ability to distribute profits to us or otherwise adversely affect us.SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or "Notice 75", on October 21, 2005, which became effective as of November 1, 2005 and the operating procedures in May 2007.
In July 2014, SAFE issued the Circular on Issues Relating to the Administration of Foreign Exchange in Overseas Investment and Financing and Reverse Investment Activities of Domestic Residents Conducted via Special Purpose Companies, or "Circular 37", which superseded Notice 75. According to Circular 37, PRC residents (including PRC institutions and individuals) shall, among other things, (i) register with the local SAFE branch regarding offshore enterprises they, for purpose of financing or/and investment, directly established or indirectly control using assets and interests in onshore enterprises or offshore assets or interests they legally possess ("Special Purpose Vehicle"); (ii) amend registration regarding changes in the Special Purpose Vehicle, including the basic information of the Special Purpose Vehicle, and material changes such as the increase or decrease of capital contributed by PRC individuals, equity transfer or exchange, merger or division; (iii) amend registration or deregister where, as a result of equity transfer, bankruptcy, dissolution, liquidation, expiration of business term, change of personal identity and etc., PRC individuals no longer possess rights and interests in the Special Purpose Vehicles, or where filings are no longer required.
On February 13, 2015, SAFE released the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment (the "Circular 13"), which became effective on June 1, 2015. According to Circular 13, local banks shall examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration under Circular 37.
Under Circular 37, failure to comply with the registration requirements will result in administrative penalties under Administrative Regulations on the Foreign Exchange of PRC. To the extent possible, we urge our PRC shareholders to make necessary registrations as required under Circular 37, however, it is unclear how it will be interpreted and implemented by the local branches of SAFE. Therefore, we cannot assure you that all relevant shareholders have made or will make and obtain all registrations required. In addition, under Circular 37, registrations are prerequisites for conducting subsequent businesses. Therefore, the inflow and outflow of funds and the settlement of foreign exchange will be limited should any PRC shareholder fail to make such registration.
To date, we have not received any communications from, or had contact with, the PRC government with respect to SAFE Rules. Neither do we have information regarding whether our shareholders who may be subject to SAFE Rules have made necessary applications, filings and amendments as required under SAFE Rules. However, to the extent possible, we urge our shareholders and beneficial owners who may be subject to SAFE Rules to make the necessary applications, filings and amendments as required under SAFE Rules. However, we cannot provide any assurance that all of our shareholders and beneficial owners who may be PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by SAFE Rules. The failure or inability of our PRC resident shareholders or beneficial owners to make any required registrations or comply with other requirements may subject such shareholders or beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans, including cash of GCBC, to our PRC subsidiaries, limit the ability of our PRC subsidiaries to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.
In January 2007, SAFE promulgated the Detailed Rules for the Implementation of the Measures for the Administration of Individual Foreign Exchange, and the Operating Rules on the Foreign Exchange Administration of the Evolvement of Domestic Individuals in the Employee Stock Ownership Plans and Share Option Schemes of Overseas Listed Companies, or "Circular 78". Circular 78 has then been superseded by the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals' Participation in Equity Incentive Plans of Overseas Listed Companies, or "Circular 7", which became effective from February 15, 2012. Under Circular 7, domestic individuals who participate in equity incentive plans of an overseas listed company shall, through the domestic company to which the said company is affiliated, collectively entrust a domestic agency to handle regarding issues and entrust an overseas institution to process the exercise of options, purchase and sale of corresponding stocks or equity, and transfer of proceeds. The domestic agency shall go through the foreign exchange registration procedures with the local office of the SAFE at the place where it is located for all individuals participating in the equity incentive plans and shall submit certain forms to the local office of the SAFE periodically to report and declare such plans. Moreover, any substantial or material change and termination or expiration of the equity incentive plans shall be reported to the local office of the SAFE by the domestic agency within time limitation. In respect of all the proceeds obtained by such employees from the overseas listed company through the equity incentive plans, the domestic agency may convert such proceeds into RMB for all the individuals with the bank and then transfer the proceeds obtained from such conversion to the respective domestic RMB accounts of the domestic individuals.
To implement the Incentive Plan, GCBC established The Magnum Opus International Trust (the "Trust"); and according to the Incentive Plan, the trustee, Magnum Trustee, subscribed a total of 7,080,000 shares for facilitating the grant and vesting of incentive RSUs and hold such shares for the benefit of such executives, directors and key employees as a class. During the year ended March 31, 2018, all the 7,080,000 RSUs granted and deposited in the Trust were fully vested. The form and structure of the Incentive Plan is not the same with the equity incentive plans under Circular 7, therefore we did not go through the procedures required by Circular 7. However, we cannot assure you that the arrangement of the Incentive Plan will not be identified by relevant authorities as an equity incentive plan under Circular 7, and thus that the procedures required by Circular 7 are applicable. Under such circumstance, we will incur costs to fulfill the procedural requirements, and may also be subject to regulatory measures and administrative sanctions, including, but not limited to fines, imposed by SAFE and its local branches.
Regulation - Risk 11
China's legal system is different from those in some other countries.It is especially difficult for us to accurately predict the potential impact to us of new legal requirements in China because China is a civil law jurisdiction. Under the civil law system, prior court decisions may be cited but do not have binding precedential effect. Although progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade, China's legal system remains less developed than the legal systems in many other developed countries. Furthermore, because many laws, regulations and legal requirements have been recently adopted, their interpretation and enforcement by the courts and administrative agencies may involve uncertainties. Sometimes, different government departments may have different interpretations. Licenses and permits issued or granted by one government authority may be revoked by a higher government authority at a later time. The PRC legal system is based in part on government policies and internal rules (some of which may not be published on a timely manner or at all) that may have a retroactive effect. We may not be aware of our violation of these policies and rules until the time after the violation. Rules and regulations in China can change quickly with little advance notice. Changes in China's legal and regulatory framework, the promulgation of new laws and possible conflicts between national and provincial regulations may adversely affect our financial condition and results of operations. Recently, Chinese regulators have announced regulatory actions aimed at providing the Chinese government with greater oversight over certain sectors of China's economy, including the for-profit education sector and technology platforms that have a quantitatively significant number of users located in China. Although the cord blood banking related businesses do not appear to be the focus of these regulatory actions, we cannot guarantee that the Chinese government will not in the future take regulatory actions that materially adversely affect the business environment and financial markets in China as they relate to us, our ability to operate our business, our liquidity and our access to capital. In addition, any litigation in China may result in substantial costs and diversion of resources and management attention.
Litigation & Legal Liabilities2 | 3.6%
Litigation & Legal Liabilities - Risk 1
We treat cord blood units abandoned by our former subscribers as donated property and release such units to our cord blood inventory available for patients in need of transplants. This practice may subject us to criticism that could damage our reputation.Litigation & Legal Liabilities - Risk 2
Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.Changed
In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC.
In February 2014, the initial decision was appealed. While under appeal and in February 2015, four of these PRC-based accounting firms (the "Chinese member firms of "Big Four" accounting firms") reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of "Big Four" accounting firms agreed to settlement terms that include a censure; undertakings to make a payment to the SEC; procedures and undertakings as to future requests for documents by the SEC; and possible additional proceedings and remedies should those undertakings not be adhered to.
If the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements not in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ordinary shares may be adversely affected.
If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary shares from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ordinary shares in the United States.
Taxation & Government Incentives3 | 5.4%
Taxation & Government Incentives - Risk 1
The discontinuation of any preferential tax treatment currently available to us and the increase in the enterprise income tax in the PRC could in each case result in a decrease in our profits and materially and adversely affect our results of operations.Taxation & Government Incentives - Risk 2
Under the PRC EIT Law, we and/or our non-PRC subsidiaries may be classified as a "resident enterprise" of the PRC. Such classification could result in PRC tax consequences to us, our non-PRC resident enterprise investors and/or our non-PRC subsidiaries.Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of the PRC with "de facto management bodies" within the PRC is considered a "resident enterprise", meaning that it can be treated in a manner similar to a PRC enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define "de facto management bodies" as the managing bodies that in practice exercise "substantial and overall management and control over the production and operations, personnel, accounting, and properties" of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body or the managing body of any of our non-PRC subsidiaries as being located within the PRC. Due to the lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a non-PRC company on a case-by-case basis.
If the PRC tax authorities determine that we are, or any of our non-PRC subsidiaries is, a "resident enterprise" for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we and/or such subsidiary may be subject to the enterprise income tax at a rate of 25% on our and/or such subsidiary's worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between "qualified resident enterprises" are exempt from enterprise income tax. As a result, if we and each of our non-PRC subsidiaries are treated as "qualified resident enterprises", all dividends from our PRC subsidiaries to us (through our non-PRC subsidiaries) should be exempt from PRC tax.
If we or any of our non-PRC subsidiaries is determined to be a PRC "non-resident enterprise" and receives dividends from a subsidiary that is determined to be a PRC "resident enterprise" (assuming such dividends were considered sourced within the PRC), such dividends may be subject to a 10% PRC withholding tax. Any such tax on dividends could materially reduce the amount of dividends, if any, we could pay to our investors.
If we are determined to be a "resident enterprise" under the EIT Law, this could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our enterprise (but not individual) investors that are not tax residents of the PRC ("non-resident investors") and gains derived by them from transferring our ordinary shares, if such income is considered PRC-sourced income by the relevant PRC tax authorities. In such event, we may be required to withhold a 10% PRC tax on any dividends paid to our non-resident investors. Our non-resident investors also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our ordinary shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws.
Moreover, on February 3, 2015, the SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Transfers of Properties by Non-Resident Enterprises ("Circular 7", which is partly abrogated in 2017). Pursuant to Circular 7, in the event that non-residential enterprises indirectly transfer PRC taxable properties ("PRC Taxable Properties") without reasonable commercial purposes in order to evade PRC enterprise income tax, such indirect transfer will be deemed as a direct transfer of PRC Taxable Properties and, therefore, will be subject to PRC enterprise income tax. Circular 7 provides clearer criteria on how to assess reasonable commercial purposes and allows for safe harbor scenarios applicable to internal group restructurings. In addition, Circular 7 does not apply to situations where (1) the non-resident enterprise transferor obtains income from purchase and sale of equity interests of the same publicly-listed overseas enterprise in a public securities market; or (2) under the circumstance that the non-resident enterprise directly holds and transfers the PRC Taxable Property, income obtained from such transfer could be exempted from enterprise income tax in China in accordance with the applicable provisions of the applicable tax treaty or tax arrangement. Under Circular 7 and subject to the above exceptions, an indirect transfer of PRC Taxable Properties shall be directly deemed as having no reasonable commercial purposes if the following circumstances are satisfied: (i) more than 75% of the value of overseas enterprises' shares directly or indirectly comes from PRC Taxable Properties; (ii) at any time within one year before the indirect transfer of PRC Taxable Properties, more than 90% the total amount of overseas enterprises' assets (excluding cash) are directly or indirectly constituted by their investment within the PRC, or within one year before the indirect transfer of PRC Taxable Properties, more than 90% of the overseas enterprises' income directly or indirectly derive from the PRC; (iii) the overseas enterprises and their controlling enterprises, which directly or indirectly hold PRC Taxable Properties, cannot justify the economic substance of the corporate structure; and (iv) overseas tax payment regarding indirect transfer of PRC Taxable Properties is lower than PRC tax payment regarding direct transfer of PRC Taxable Properties. Circular 7 also brings uncertainties to the offshore transferor and transferee of the indirect transfer of PRC Taxable Properties as they have to make self-assessment on whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or the "Circular 37", which came into effect on December 1, 2017. Circular 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Pursuant to Circular 7 and Circular 37, 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 file the taxes.
As a result, where non-resident investors are involved in our private equity financing or share transfer of our company between two or more offshore parties, if such transactions are determined by the tax authorities as lack of reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under SAT Circular 7 and Circular 37, and may be required to expend valuable resources to comply with SAT Circular 7 and Circular 37 or to establish that we/our non-resident investors should not be taxed under SAT Circular 7 and Circular 37, which may have an adverse effect on our financial condition and results of operations.
If any PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax against such investor's domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor's domestic income tax liability (subject to applicable conditions and limitations). Investors should consult their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits.
Taxation & Government Incentives - Risk 3
If we grant additional RSUs in the future, our net income could be adversely affected.In February 2011, at our annual general meeting, our shareholders approved an Incentive Plan which has a mandate limit of granting rights to receive ordinary shares not exceeding 10.0% of our issued and outstanding share capital, to directors, officers, employees and/or consultants of GCBC and our subsidiaries. Certain administrative provisions of the Incentive Plan were subsequently amended by our Board of Directors in August 2014. The Incentive Plan is intended to enable the Company to attract, motivate, reward and retain the services of executives, directors and key employees. The Incentive Plan provides for the granting of RSUs, which may vest upon satisfaction of certain conditions set by the Compensation Committee of the Company. A total of 7,300,000 RSUs were issued to certain executives, directors and key employees under the Incentive Plan for the year ended March 31, 2015. During the year ended March 31, 2018, an aggregate of 7,300,000 RSUs were fully vested, and a reversal of RMB1.5 million was recorded in sales and marketing expenses which was resulted from a write back of previously recognized share-based compensation expense due to the forfeiture of RSUs on the resignation of one of the grantees. Share-based compensation expenses of RMB84.3 million were recognized for the year ended March 31, 2018. We did not issue any RSUs subsequently and had no RSUs outstanding as of March 31, 2022. If we grant additional RSUs in the future, we could incur significant compensation charges and our net income could be adversely affected.
Environmental / Social1 | 1.8%
Environmental / Social - Risk 1
Our management capability is confronted with challenges due to requirements by PRC government in relation to protection of personal information.Ability to Sell
Total Risks: 9/56 (16%)Above Sector Average
Competition1 | 1.8%
Competition - Risk 1
We may face unfair competition from competitors with or without licenses in our target markets.Demand2 | 3.6%
Demand - Risk 1
The profitability of our business is subject to market acceptance of cord blood banking in China.Demand - Risk 2
If demand for our matching services is significantly different from our management's expectations, the valuation of donated cord blood units could be materially impacted, which could affect our financial performance.A significant portion of our inventories, which consist of cord blood units donated by the public, consists of the handling costs attributable to the testing, processing and preservation of donated cord blood units. The handling costs include direct material costs and direct labor costs incurred in handling of donated cord blood units. Cost of inventories also comprises an allocation of production overheads. Donated cord blood units are valued at the lower of cost or net realizable value using the weighted average cost method. Since we do not expect to recognize revenue from such inventories within 12 months from the balance sheet date, we classify donated cord blood units as non-current assets on our consolidated balance sheets. The carrying value of our donated cord blood units was RMB95.2 million (US$15.0 million) as of March 31, 2022. Our management periodically reviews quantities of donated cord blood stored in our banks to determine if a write-down on inventories is necessary based on estimated demand for our matching services and other industry knowledge. We did not record any write-downs on our inventories for the years ended March 31, 2020, 2021 and 2022. If demand for our matching services is significantly different from our management's expectations, the valuation of donated cord blood units could be materially impacted.
Sales & Marketing3 | 5.4%
Sales & Marketing - Risk 1
Changes in the cord blood banking industry dynamics and technologies could render our services uncompetitive or obsolete, which could cause our revenues to decline.Sales & Marketing - Risk 2
If we fail to maintain and strengthen our service platform, our new subscriber sign-ups may decline and our growth may be impaired.Sales and marketing activities are conducted by our own direct sales force through a network of collaborating hospitals. As of March 31, 2022, we had collaborative relationships with 434 major hospitals in Beijing, Guangdong and Zhejiang. We conduct a significant portion of our sales and marketing activities through these hospitals and rely on them for cord blood collection. Our ability to maintain and strengthen our relationships with these hospitals is critical to our success and will be affected by the following:
- For the year ended March 31, 2022, the top ten of these hospitals handled the collection procedures for approximately 15.0% of our new subscribers, and the top hospital accounted for 2.5% of our new subscribers. We expect that a substantial portion of our collection procedures will continue to be generated by a relatively small group of collaborating hospitals that may change from year to year. There is no assurance that the hospitals will continue to collaborate with us at the same levels as in prior years or such relationships will continue.
- As part of our growth plan, we expect to increase the number of collaborating hospitals in Guangdong and Zhejiang and further strengthen our relationships with the collaborating hospitals on our existing platform. We have limited experience in managing a large service platform in Guangdong and Zhejiang. We cannot assure you that we will be able to maintain or develop our relationships with various hospitals.
The expansion of our service platform is also likely to require a significant investment of financial resources and management efforts, and the benefits, if any, that we gain from such an expansion may not be sufficient enough to justify our investment. If we fail to do so, our sales could fail to grow or could even decline, and our ability to grow our business could be adversely affected.
Sales & Marketing - Risk 3
Our financial condition and results of operations may be materially and adversely affected if a significant number of our subscribers terminate their contracts with us prior to the end of a typical contract period.Changed
The contracts we entered into with our subscribers are typically for an initial period of 18 years. The contract period may be shorter if the cord blood unit stored with us is needed for transplants by the child or a family member. The contract period may also be shorter if our subscribers terminate their contracts with us prior to the end of the contract period for any reason. No penalties will be imposed for early termination. This effectively results in an annual election by our subscribers to renew their subscription contracts for storage services, which may result in more of our subscribers terminating the contract prior to the end of contract period.
In the event of termination by our subscribers prior to the end of contract period, we are unable to continue to collect storage fees on an annual basis. There is no guarantee that all of our subscribers will fulfill their contract obligations by continuing to pay storage fees on an annual basis during the contract period. If we experience early termination by a significant number of our subscribers prior to the end of a typical contract period, we will lose revenues from storage fees payable by these subscribers for the remaining contract period.
Effective from April 1, 2021, we provide further storage service with a contact period for 10 or 20 years to subscribers who completed the first 18-year contract period. As more contracts expire over time, if subscribers elect not to purchase further storage service after the expiration of the initial period of 18 years, we will lose storage fees revenues from these subscription service contracts.
If the above-mentioned risks occur, our revenues will decrease and our financial condition and results of operations will be materially and adversely affected.
Brand / Reputation3 | 5.4%
Brand / Reputation - Risk 1
Our prospects and business may be materially and adversely affected by negative publicity involving cell related therapies.Changed
Brand / Reputation - Risk 2
We are exposed to the risk of a deterioration or sudden dramatic decline in our reputation among our target subscribers due to failure in the performance of our cord blood banks.Our reputation among clients and the medical community is extremely important to our success. Our future success depends on acknowledging and actively monitoring the concerns of our target subscribers, regulatory agencies, medical practitioners, civil society groups and non-government organizations. Failure to take appropriate consideration of legitimate corporate responsibility issues in our day-to-day operations could have a material adverse impact on our reputation and business prospects. In particular:
- To retain adequate sterility and stem cell viability, cord blood deposits in our cord blood banks are stored inside liquid nitrogen tanks at minus 196 degrees Celsius. To the extent the storage environment of our cord blood deposits is disrupted or impaired due to any software, hardware or equipment failure, our target subscribers may lose confidence in our services.
- Our subscribers and donors provide us with extensive personal data, which are stored in our database. Any leakage or sabotage of such information could have significant legal implications, and materially and adversely affect our reputation and our ability to attract new subscribers and donors. See "-Risk Relating to Operations in China-Recent regulatory developments in China may subject us to additional regulatory review and disclosure requirements, expose us to government interference, or otherwise restrict or completely hinder our ability to offer securities and raise capital outside China, which could adversely affect our business operations and cause the value of our securities to significantly decline or become worthless" for more information on recent regulatory changes related to personal information protection and cybersecurity review.
Any problems with our services, if publicized in the media or otherwise, could negatively impact our reputation. Similarly, inappropriate or inadequate communication following a major crisis, such as a major operational incident, cybersecurity breach, breach of law or ethics or leak of market-sensitive confidential information, could quickly and seriously impair our reputation. Depending on the nature of such crisis, effective communication may not mitigate serious damage to our reputation and may render us subject to criminal and civil prosecution or class action suits by shareholders and other interested parties. Any of these risks can have a material adverse impact on our business.
Brand / Reputation - Risk 3
Unauthorized use of our brand name by third parties may adversely affect our business.We consider our brand name critical to our success. Due to the nature of our business, we do not have any patents, administrative protection or trade secrets covering our use of cord blood collection, processing, storage or retrieval technologies. Our continued ability to differentiate ourselves from the other cord blood banking operators and other potential new entrants would depend substantially on our ability to preserve the value of our brand name.
We rely on trademark law, company brand name protection policies, and agreements with our employees, subscribers and business partners to protect the value of our brand name. In particular, we have completed the trademark registration process and have been licensed by the Trademark Office of the State Administration for Industry and Commerce of the People's Republic of China (which has been reorganized as the Trademark Office of National Intellectual Property Administration since March 2018) to use our trademarks, as of the date of issuance of this report, we had 86 registered trademarks. However, there can be no assurance that the measures we take in this regard are adequate to prevent or deter infringement or other misappropriation of our brand name. Among others, we may not be able to detect unauthorized use of our brand name or copycat in a timely manner because our ability to determine whether other parties have infringed our brand name is generally limited to information from publicly available sources.
In order to preserve the value of our brand name, we may need to take legal actions against third parties. Nonetheless, because certain aspects such as validity, enforceability and scope of trademark protection in the PRC still remain unclear and the relevant legal framework is still evolving, we may not be successful in litigation. Further, future litigation may also result in substantial costs and diversion of our resources and disrupt our business.
Production
Total Risks: 4/56 (7%)Below Sector Average
Employment / Personnel1 | 1.8%
Employment / Personnel - Risk 1
As our success depends on several key management personnel, our business may be adversely affected if we fail to retain them.Supply Chain1 | 1.8%
Supply Chain - Risk 1
Suppliers of equipment and consumables necessary for the examination, processing, collection and preservation of cord blood stem cells may become limited, which could adversely affect our operations.Costs2 | 3.6%
Costs - Risk 1
Our insurance coverage may not be sufficient to cover the risks related to our business, and our insurance costs may increase significantly.Costs - Risk 2
We incurred additional costs as a result of being a public company in the United States, which affected our profits.We are subject to the reporting obligations of the SEC, which many consider to be more stringent, rigorous and expensive than operating a privately held company. In particular:
- We incur costs in order to comply with U.S. corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as new rules implemented by the SEC and the Financial Industry Regulatory Authority, or "FINRA".
- We incur costs in implementing and verifying internal control procedures as required by section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder.
- We are required under U.S. rules and regulations to attract and retain additional independent directors to serve on our Board of Directors. We may encounter difficulty in attracting and retaining qualified independent directors to serve on our Board of Directors and our Audit Committee.
If we fail to attract and retain independent directors, we may be subject to SEC enforcement proceedings and delisting by the exchange on which we are listed at the time. The costs incurred to comply with various listing requirements, including but not limited to, U.S. corporate governance compliance related expenses, internal control expense, and directors' and officers' insurance related expenses may continue to increase in the future, and, in turn, will increase our operating expenses and reduce our profit.
Macro & Political
Total Risks: 4/56 (7%)Above Sector Average
Economy & Political Environment3 | 5.4%
Economy & Political Environment - Risk 1
We currently operate our business only in Beijing, Guangdong and Zhejiang. As a result of this geographic concentration, a downturn in the local economy or birthrate level of these regions could impair our growth and adversely affect our financial results.Economy & Political Environment - Risk 2
Our investment in Qilu may be materially and adversely affected due to a downturn in the local economy or birthrate level in the Shandong province, which may result in an impairment of our investment.Changed
We invested in Qilu, the exclusive cord blood banking operator in the Shandong province, with an equity interest of 24.0%; its remaining 76.0% equity interest is owned by our controlling shareholder. Due to the lack of geographical diversity, Qilu may be unable to mitigate the effects of any adverse trends in local economic development, disposable income or birthrate level. Any slowdown in the Shandong province's economic development, unfavorable demographic trend, decline in disposable income of expectant parents or adverse change in consumer behavior will adversely affect Qilu's capability to penetrate its local market. As such, our investment in Qilu may be materially and adversely affected or severely impaired.
Economy & Political Environment - Risk 3
Changes in political, economic and legal developments in China may adversely affect our business.As we derive substantially all of our revenues in China and substantially all of our assets and operations are in China, our continued growth would depend heavily on China's general economic conditions. We, however, cannot assure you that the Chinese economy will continue to grow, or that such growth will be steady or in geographic regions or economic sectors to our benefit. The global recovery from the lows of 2008 and 2009 was uneven, including the escalation of the European sovereign debt crisis since 2011, the impact of COVID-19, the impact of the recent Russia-Ukraine crisis and the related sanctions and other conflicts between Russia and Western countries, and the slowdown of the Chinese economy in the recent years. It is unclear whether the Chinese economy will continue slowing down. There is also considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world's leading economies, including China's. Inflation has accelerated in many economies, in particular the United States, and policy actions to address inflation may slow or reverse economic growth or have other negative effects on economic conditions. A downturn in China's economic growth or a decline in economic condition may have material adverse effects on our results of operations.
Further, we will continue to be affected by the political, social and legal developments of China. Since the late 1970s, the PRC government has introduced a series of economic and political reforms, including measures designed to effectuate the country's transitioning from a planned economy to a more market-oriented economy. During such economic and political reforms, a comprehensive system of laws was promulgated, including many new laws and regulations seeking to provide general guidance on economic and business practices in China and to regulate foreign investment.
In the past forty years, the growth of the Chinese economy has been uneven across different geographic regions and different economic sectors. In order to stabilize national economic growth, the PRC government adopted a series of macroeconomic policies. These policies include measures that restricted excessive growth and investment in specific sectors of the economy. We cannot predict the future direction of economic reforms or the effects that any such measures may have on our business, financial condition or results of operations.
Natural and Human Disruptions1 | 1.8%
Natural and Human Disruptions - Risk 1
Our business and financial results may be materially and adversely affected by the current COVID-19 pandemic outbreak.Changed
Tech & Innovation
Total Risks: 2/56 (4%)Below Sector Average
Innovation / R&D1 | 1.8%
Innovation / R&D - Risk 1
Our prospects may be adversely affected if there are no or limited new developments in medical science to overcome some of the current technical and therapeutic limitations on the use of cord blood in medical treatment.Changed
Cyber Security1 | 1.8%
Cyber Security - Risk 1
We are subject to cybersecurity risks and other cyber incidents, including the misappropriation of our information and other breaches of information security, which could adversely affect our business and disrupt our operations.Changed
See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.