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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 20-F
 
 
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021.
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
                    
For the transition period from
                    
to
                    
Commission file number:
001-40376
 
 
Waterdrop Inc.
(Exact name of Registrant as specified in its charter)
 
 
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Block C, Wangjing Science and Technology Park
No. 2 Lize Zhonger Road
Chaoyang District, Beijing 100102
People’s Republic of China
+86 10 5339-4997
(Address of principal executive offices)
Kangping Shi, Chief Financial Officer
Telephone: +86 10 5339-4997
Email:
IR@shuidi-inc.com
Block C, Wangjing Science and Technology Park
No. 2 Lize Zhonger Road
Chaoyang District, Beijing 100102
People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
American depositary shares (each ADS represents ten of our
Class A ordinary
shares, par value US$0.000005 per share)
 
WDH
 
New York Stock Exchange
Class A ordinary shares, par value
US$0.000005 per share*
 
 
 
New York Stock Exchange
 
*
Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
3,140,896,631 Class A ordinary shares (excluding 65,757,070 Class A ordinary shares, comprising of Class A ordinary shares issued to the depositary for bulk issuance of ADSs and reserved for future issuances upon the exercise or vesting of awards granted under share incentive plans, and Class A ordinary shares in the form of ADSs held in treasury), and 801,904,979 Class B ordinary shares, par value US$0.000005 per share, as of December 31, 2021.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer  ☐
 
Accelerated filer  ☐
  
Non-accelerated filer  ☒
 
Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    ☐  Yes    ☒  No
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☐  Yes      No
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP
 
 
        International Financial Reporting Standards as issued
  
Other  ☐
       
 
 
 
 
        by the International Accounting Standards Board  ☐
  
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17    ☐  Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    ☐  Yes      No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ☐  Yes    ☐  No
 
 
 

TABLE OF CONTENTS
 
 
 
 
  
Page
 
  
 
1
 
  
 
2
 
 
  
 
3
 
Item 1.
 
  
 
3
 
Item 2.
 
  
 
3
 
Item 3.
 
  
 
3
 
Item 4.
 
  
 
60
 
Item 4A.
 
  
 
97
 
Item 5.
 
  
 
98
 
Item 6.
 
  
 
114
 
Item 7.
 
  
 
124
 
Item 8.
 
  
 
126
 
Item 9.
 
  
 
127
 
Item 10.
 
  
 
128
 
Item 11.
 
  
 
142
 
Item 12.
 
  
 
143
 
 
  
 
146
 
Item 13.
 
  
 
146
 
Item 14.
 
  
 
146
 
Item 15.
 
  
 
146
 
Item 16A.
 
  
 
147
 
Item 16B.
 
  
 
148
 
Item 16C.
 
  
 
148
 
Item 16D.
 
  
 
148
 
Item 16E.
 
  
 
148
 
Item 16F.
 
  
 
149
 
Item 16G.
 
  
 
149
 
Item 16H.
 
  
 
149
 
Item 16I.
 
  
 
149
 
 
  
 
150
 
Item 17.
 
  
 
150
 
Item 18.
 
  
 
150
 
Item 19.
 
  
 
150
 
 
  
 
154
 

INTRODUCTION
Except where the context otherwise requires and for purposes of this annual report only:
 
   
“ADRs” are to the American depositary receipts which may evidence the ADSs;
 
   
“ADSs” are to the American depositary shares, each of which represents ten Class A ordinary shares;
 
   
“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
 
   
“Class A ordinary shares” refer to our Class A ordinary shares, par value US$0.000005 per share;
 
   
“Class B ordinary shares” refer to our Class B ordinary shares, par value US$0.000005 per share;
 
   
“FYP” are to first year premiums, which include all premiums that policyholders are obligated to pay for short-term policies and the premiums that policyholders are obligated to pay in the first policy year for long-term policies;
 
   
“ordinary shares” are to our Class A ordinary shares and Class B ordinary shares, par value US$0.000005 per share;
 
   
“the VIEs” are to Beijing Zhuiqiu Jizhi Technology Co., Ltd., or Zhuiqiu Jizhi, Beijing Shuidi Hubao Technology Co., Ltd., or Shuidi Hubao, Beijing Shuidi Hulian Technology Co., Ltd., or Shuidi Hulian, Beijing Zongqing Xiangqian Technology Co., Ltd., or Zongqing Xiangqian, and Beijing Guangmu Weichen Technology Co., Ltd., or Guangmu Weichen;
 
   
“our WFOE” are to Beijing Absolute Health Co., Ltd., or Absolute Health;
 
   
“RMB” and “Renminbi” are to the legal currency of China;
 
   
“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States; and
 
   
“Waterdrop,” “we,” “us,” “our company” and “our” are to Waterdrop Inc., our Cayman Islands holding company and its subsidiaries, and, in the context of describing the consolidated financial information, its consolidated variable interest entities and the subsidiaries of the consolidated variable interest entities in China, including, but not limited to, the VIEs.
Our reporting currency is the Renminbi. This annual report also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that the Renminbi or U.S. dollars amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.
Due to rounding, numbers presented throughout this annual report may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
 
1

FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
 
   
our mission, goals and strategies;
 
   
our future business development, financial conditions and results of operations;
 
   
the expected growth of the insurance and online healthcare industry in China;
 
   
our expectations regarding demand for and market acceptance of our products and services;
 
   
our expectations regarding our relationships with consumers, insurance carriers and other partners;
 
   
competition in our industry;
 
   
our proposed use of proceeds; and
 
   
relevant government policies and regulations relating to our industry.
You should read this annual report and the documents that we refer to in this annual report with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
This annual report also contains statistical data and estimates that we obtained from government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The industries in which we operate may not grow at the rate projected by market data, or at all. Failure of those industries to grow at the projected rate may have a material and adverse effect on our business and the market price of the ADSs. In addition, the rapidly evolving nature of such industries result in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report. You should not place undue reliance on these forward-looking statements.
 
2

PART I
 
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
 
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
 
Item 3.
Key Information
Waterdrop Inc. is not an operating company in China but rather a Cayman Islands holding company with no material operations of its own and no equity ownership in the VIEs (defined below). We conduct our operations primarily through (i) our PRC subsidiaries and (ii) the VIEs, with which we maintain contractual agreements. PRC laws and regulations restrict and impose conditions on foreign direct investment in companies involved in the provision of value-added telecommunication services, insurance brokerage services or insurance agency services. Therefore, we operate such businesses in China through the variable interest entities, Zhuiqiu Jizhi, Shuidi Hubao, Shuidi Hulian, Zongqing Xiangqian and Guangmu Weichen, which we refer to as the VIEs in this annual report, and rely on contractual arrangements among our PRC subsidiaries, the VIEs and their shareholders to control the business operations of the VIEs. Revenues contributed by the VIEs accounted for 100.0%, 99.5% and 99.6% of our total net revenues for the fiscal years 2019, 2020 and 2021, respectively. As used in this annual report, “Waterdrop,” “we,” “us,” “our company” or “our” refers to Waterdrop Inc., its subsidiaries, and, in the context of describing the consolidated financial information, the VIEs and their subsidiaries in China. Investors in our ADSs thus are not purchasing equity interest in the VIEs in China but instead are purchasing equity interest in Waterdrop Inc., a Cayman Islands holding company.
Our corporate structure is subject to risks associated with our contractual arrangements with the VIEs. Investors may not directly hold equity interests in the VIEs or in the businesses that are conducted by the VIEs, and the VIE structure provides contractual exposure to foreign investment in the companies which involve foreign investment restrictions. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. This may result in the VIEs being deconsolidated, which would materially and adversely affect our operations, and our ADSs may decline significantly in value or become worthless. Our holding company, our PRC subsidiaries, the VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect the financial performance of the VIEs and our company as a whole. The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material adverse change in our operations, and our ordinary shares or our ADSs may decline significantly in value or become worthless. As such, the VIE structure involves unique risks to investors of our holding company. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”
 
3

Our Holding Company Structure and VIE Contractual Arrangements
Waterdrop Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries and the VIEs. Our value-added telecommunication services, insurance brokerage services or insurance agency services in the PRC have been conducted through the VIEs in order to comply with the PRC laws and regulations, which restrict and impose conditions on foreign direct investment in companies involved in the provision of value-added telecommunication services, insurance brokerage services or insurance agency services.
The following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries, the VIEs and the VIEs’ principal subsidiaries:
 

 
 
Notes:
(1)
Mr. Peng Shen holds 100% of the equity interests in Beijing Shuidi Hubao Technology Co., Ltd.
(2)
Mr. Peng Shen and Mr. Wei Ran, an employee of the Company, each holds 99% and 1% of the equity interests in Beijing Shuidi Hulian Technology Co., Ltd.
(3)
Mr. Peng Shen and Mr. Guang Yang, each holds 99% and 1% of the equity interests in Beijing Zhuiqiu Jizhi Technology Co., Ltd.
(4)
Mr. Peng Shen and Mr. Wei Ran, an employee of the Company, each holds 99% and 1% of the equity interests in Beijing Zongqing Xiangqian Technology Co., Ltd.
(5)
Ms. Xiaolei Sun and Ms. Nian Liu, both employees of the Company, each holds 99% and 1% of the equity interests in Beijing Guangmu Weichen Technology Co., Ltd.
 
4

Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our PRC subsidiaries, the VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries, the VIEs and their subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, the VIEs and their subsidiaries in the PRC, including, among others, licenses to conduct insurance brokerage business and insurance agency business, license for provision of internet information services, or ICP License and Internet Pharmaceutical Information Service Qualification Certificate. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations.”
As of the date of this annual report, except for the licenses and approvals that have been granted, we, our PRC subsidiaries and the VIEs are not required to obtain approval or permission from China Securities Regulatory Commission, or the CSRC, the Cyberspace Administration of China, or the CAC or any other entity that is required to approve the VIEs’ operations or required for us to offer securities to foreign investors under any currently effective PRC laws, regulations, and regulatory rules. However, in connection with any future overseas capital markets activities, we may need to obtain permission from the CSRC, undergo a cybersecurity review conducted by the CAC, or meet other regulatory requirements that may be adopted in the future by PRC authorities. To the extent such requirements are or become applicable, we cannot assure you that we would be able to comply with them. Any failure to obtain or delay in obtaining such approval or completing such procedures could subject us to restrictions and penalties imposed by the CSRC, the CAC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, delays of or restrictions on the repatriation of the proceeds from our offshore offerings into China, or other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.”
Furthermore, in connection with issuance of securities to foreign investors, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to conduct future offerings of securities to investors and accept foreign investments. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China— The filing, approval or other administration requirements of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to complete such filing, obtain such approval or meet such requirements.”
The Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (United States), or the PCAOB, for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB, which may impact our ability to remain listed on a United States. The related risks and uncertainties could cause the value of our ADSs to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The identification by the HFCAA to its lists, delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
 
5

Cash Transfers and Dividend Distribution
Waterdrop Inc., our Cayman Islands holding company, or the Parent, transfers cash to our wholly-owned Hong Kong subsidiary, by making capital contributions or providing loans, and our Hong Kong subsidiary transfers cash to our PRC subsidiaries by making capital contributions or providing loans to them.
Because the Parent and its subsidiaries control the VIEs through contractual arrangements, they are not able to make direct capital contribution to the VIEs and their subsidiaries. However, they may transfer cash to the VIEs by loans or by making payment to the VIEs for inter-group transactions.
The following table sets forth the amount of the transfers for the periods presented.
 
    
Years Ended December 31,
 
    
2019
    
2020
    
2021
 
    
(RMB in millions)
 
Capital contributions from Parent to its subsidiaries
     1,468        1,555        2,679  
Loans from its subsidiaries to Parent
     —          —          382  
Loans repayment received by its subsidiaries from Parent
     —          —          35  
Loans from its subsidiaries to the VIEs and their subsidiaries
     892        1,477        4,418  
Loans repayment received by subsidiaries from VIEs and their subsidiaries
     367        372        3,010  
Service fees received by WOFE from the VIEs and their subsidiaries *
     —          455        718  
 
Note:
*
The cash flows between our WFOE, and the VIEs and their subsidiaries included the service fees paid for services contemplated by the exclusive business cooperation agreements.
The VIEs may transfer cash to our WFOE by paying service fees according to the exclusive business cooperation agreements. Pursuant to these agreements between the VIEs and our WFOE, our WFOE has the exclusive right to provide the VIEs with consulting, technical services and other services required by the VIEs’ business. Without our WFOE’s prior written consent, the VIEs may not accept the same or similar consulting, technical services and other services provided by any third party during the term of the agreement. The VIEs agree to pay our WFOE service fees based on the operating profit generated by the VIEs on an annual basis. For the years ended December 31, 2019, 2020 and 2021, service fees of nil, RMB455 million, and RMB718 million were paid to the WFOE by the VIEs under the agreements.
For the years ended December 31, 2019, 2020 and 2021, no dividends or distributions were made to the Parent by our subsidiaries. For the years ended December 31, 2019, 2020 and 2021, no dividends or distributions were made to U.S. investors.
For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:
 
    
Taxation Scenario
(1)
 
    
Statutory Tax and Standard Rates
 
Hypothetical
pre-tax
earnings
(2)
     100
Tax on earnings at statutory rate of 25%
(3)
     (25 %) 
Net earnings available for distribution
     75
Withholding tax at standard rate of 10%
(4)
     (7.5 %) 
Net distribution to Parent/Shareholders
     67.5
 
Notes:
(1)
For purposes of this example, the tax calculation has been simplified. The hypothetical book
pre-tax
earnings amount, not considering timing differences, is assumed to equal taxable income in China.
(2)
Under the terms of VIE agreements, our WFOE may charge the VIEs for services provided to the VIEs. These fees shall be recognized as expenses of the VIEs, with a corresponding amount as service income by our WFOE and eliminate in consolidation. For income tax purposes, our our WFOE and the VIEs file income tax returns on a separate company basis. The fees paid are recognized as a tax deduction by the VIEs and as income by our WFOE and are tax neutral.
(3)
Certain of our subsidiaries qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.
 
6

(4)
The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied.
The table above has been prepared under the assumption that all profits of the VIEs will be distributed as fees to our WFOE under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the VIE exceed the fees paid to our WFOE (or if the current and contemplated fee structure between the intercompany entities is determined to be
non-substantive
and disallowed by Chinese tax authorities), the VIEs could, as a matter of last resort, make a
non-deductible
transfer to our PRC subsidiaries for the amounts of the stranded cash in the VIEs. This would result in such transfer being
non-deductible
expenses for the VIEs but still taxable income for our WFOE.
As Waterdrop Inc. is a Cayman Islands holding company with no material operations of its own, its ability to pay dividends depends upon dividends paid by our PRC subsidiaries. Our PRC subsidiaries in turn generate income from their own operations, and in addition enjoy all economic benefit and receive service fees from the VIEs pursuant to the exclusive business cooperation agreement with the VIEs. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to distribute earnings or pay dividends to us. Under PRC law, each of our subsidiaries and the VIEs in China is required to set aside at least 10% of its
after-tax
profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries and the VIEs in China may allocate a portion of its
after-tax
profits based on PRC accounting standards to a surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the State Administration of Foreign Exchange, or the SAFE and declaration and payment of withholding tax. Additionally, if our PRC subsidiaries and the VIEs incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until it generates accumulated profits and meets the requirements for statutory reserve funds. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies may delay us from using the proceeds of financing activities to make loans or additional capital contributions to our PRC subsidiaries and to make loans to the VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”
 
7

Financial Information Related to the VIEs
The following table presents the condensed consolidating balance sheet data for the VIEs and other entities as of the dates presented.
 
    
As of December 31, 2021
    
As of December 31, 2020
 
    
Parent
    
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
    
Elimination
   
Consolidated
    
Parent
    
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
    
Elimination
   
Consolidated
 
     (RMB in thousands)  
Cash and cash equivalents
     8,483        78,047       731,189        —         817,719        32,145        273,876       755,941        —         1,061,962  
Restricted cash
     —          —         667,664        —         667,664        —          7,830       253,557        —         261,387  
Short-term investments
     414,921        1,202,990       351,451        —         1,969,362        653,609        265,161       274,390        —         1,193,160  
Accounts receivable
     —          8,608       635,235        —         643,843        —          3,147       536,644        —         539,791  
Current contract assets
     —          —         563,611        —         563,611        —          —         824,544        —         824,544  
Amount due from related parties
     —          —         1,049        —         1,049        —          —         813        —         813  
Prepaid expense and other assets
     14,993        39,361       315,440        —         369,794        —          31,183       619,897        —         651,080  
Amounts due from the entities within our Group
     1,786        4,323,023       121        (4,324,930     —          2,073        2,517,756       127,405        (2,647,234     —    
Non-current
contract assets
     —          —         29,889        —         29,889        —          —         24,006        —         24,006  
Property, equipment and software, net
     —          31,506       13,256        —         44,762        —          19,553       9,171        —         28,724  
Intangible assets, net
     —          20,535       53,202        (16,984     56,753        —          25,986       49,406        (22,358     53,034  
Long-term investments
     1,912        —         9,900        —         11,812        1,957        —         784        —         2,741  
Investment in Non-VIE subsidiaries
     3,883,806        —         —          (3,883,806     —          2,551,008        —         —          (2,551,008     —    
Investment in VIEs
     —          (1,341,046     —          1,341,046       —          —          (87,217     —          87,217       —    
Right of use assets, net
     —          28,503       30,578        —         59,081        —          39,940       20,754        —         60,694  
Deferred tax assets
     —          —         11,840        —         11,840        —          —         —          —         —    
Goodwill
     —          —         3,420        —         3,420        —          —         3,119        —         3,119  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total assets
  
 
4,325,901
 
  
 
4,391,527
 
 
 
3,417,845
 
  
 
(6,884,674
 
 
5,250,599
 
  
 
3,240,792
 
  
 
3,097,215
 
 
 
3,500,431
 
  
 
(5,133,383
 
 
4,705,055
 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Amount due to related parties
     —          20,449       —          —         20,449        —          9,789       —          —         9,789  
Insurance premium payables
     —          —         685,028        —         685,028        —          —         607,326        —         607,326  
Deferred revenue
     —          —         803        —         803        —          —         22,017        —         22,017  
Accrued expenses and other current liabilities
     3,734        81,580       413,438        —         498,752        60,480        87,915       447,211        —         595,606  
Current lease liabilities
     —          27,661       16,452        —         44,113        —          25,957       10,594        —         36,551  
Amounts due to the entities within our Group
     348,741        1,491       3,617,123        (3,967,355     —          —          21,559       2,266,999        (2,288,558     —    
Non-current
lease liabilities
     —          1,556       12,921        —         14,477        —          19,528       8,181        —         27,709  
Deferred tax liabilities
     —          —         13,126        425       13,551        —          425       225,320        —         225,745  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total liabilities
  
 
352,475
 
  
 
132,737
 
 
 
4,758,891
 
  
 
(3,966,930
 
 
1,277,173
 
  
 
60,480
 
  
 
165,173
 
 
 
3,587,648
 
  
 
(2,288,558
 
 
1,524,743
 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
8

The following table presents the condensed consolidating statements of operations for the VIEs and other entities for the periods presented.
 
    
For the year ended December 31, 2021
   
For the year ended December 31, 2020
   
For the year ended December 31, 2019
 
    
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
   
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
   
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
 
     (RMB in thousands)  
Operating revenue, net
  
 
2,279
 
 
 
757,798
 
 
 
3,193,807
 
 
 
(747,970
 
 
3,205,914
 
 
 
—  
 
 
 
535,486
 
 
 
3,035,904
 
 
 
(543,442
 
 
3,027,948
 
 
 
—  
 
 
 
154,890
 
 
 
1,511,010
 
 
 
(154,935
 
 
1,510,965
 
Operating costs
     —         (171,728     (882,747     —         (1,054,475     —         (150,457     (591,801     —         (742,258     —         (62,659     (228,651     —         (291,310
Sales and marketing expenses
     (10,902     (161,598     (2,932,269     —         (3,104,769     (4,538     (59,354     (2,066,643     —         (2,130,535     (1,927     (40,540     (1,014,027     —         (1,056,494
General and administrative expenses
     (214,856     (208,605     (853,908     746,847       (530,522     (211,596     (123,631     (583,583     511,639       (407,171     (19,834     (87,915     (201,044     165,798       (142,995
Research and development expenses
     (25,056     (329,291     (24,643     —         (378,990     (13,279     (202,495     (28,456     —         (244,230     (8,329     (152,291     (54,026     —         (214,646
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating costs and expenses
  
 
(250,814
 
 
(871,222
 
 
(4,693,567
 
 
746,847
 
 
 
(5,068,756
 
 
(229,413
 
 
(535,937
 
 
(3,270,483
 
 
511,639
 
 
 
(3,524,194
 
 
(30,090
 
 
(343,405
 
 
(1,497,748
 
 
165,798
 
 
 
(1,705,445
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating (loss)/income
  
 
(248,535
 
 
(113,424
 
 
(1,499,760
 
 
(1,123
 
 
(1,862,842
 
 
(229,413
 
 
(451
 
 
(234,579
 
 
(31,803
 
 
(496,246
 
 
(30,090
 
 
(188,515
 
 
13,262
 
 
 
10,863
 
 
 
(194,480
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Equity in loss of subsidiaries and VIEs
     (1,332,101     (1,250,773     —         2,582,874       —         (286,022     (287,649     —         573,671       —         (292,523     (116,494     —         409,017       —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net (loss)/income
  
 
(1,574,080
 
 
(1,332,101
 
 
(1,253,808
 
 
2,585,909
 
 
 
(1,574,080
 
 
(663,869
 
 
(286,022
 
 
(253,807
 
 
539,829
 
 
 
(663,869
 
 
(321,535
 
 
(292,523
 
 
(184,632
 
 
477,155
 
 
 
(321,535
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The following table presents condensed consolidating cash flow data for the VIEs and other entities for the years ended presented.
 
    
For the year ended December 31, 2021
   
For the year ended December 31, 2020
   
For the year ended December 31, 2019
 
    
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
   
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
   
Parent
   
Non-VIE

subsidiaries
   
VIEs and
their
subsidiaries
   
Elimination
   
Consolidated
 
     (RMB in thousands)  
Net cash provided by/(used in) operating activities
     320,097       (497,069     (919,680     —         (1,096,652     (28     (224,548     (552,532     —         (777,108     (2,827     (148,151     (381,917     —         (532,895
Net cash (used in)/provided by investing activities
     (2,458,126     (2,376,786     (99,240     4,087,254       (846,898     (2,209,098     (1,391,055     (277,521     2,659,973       (1,217,701     (1,434,140     (680,046     75,528       1,992,703       (45,955
Net cash provided by/(used in) financing activities
     2,128,529       2,670,120       1,408,275       (4,087,254     2,119,670       2,048,986       1,556,899       1,104,978       (2,659,973     2,050,890       1,491,983       1,467,522       505,973       (1,992,703     1,472,775  
 
9

A. Selected Financial Data
The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2019, 2020 and 2021, selected consolidated balance sheet data as of December 31, 2020 and 2021 and selected consolidated cash flow data for the years ended December 31, 2019, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statements of comprehensive loss data for the year ended December 31, 2018, selected consolidated balance sheet data as of December 31, 2018 and 2019 and selected consolidated cash flow data for the year ended December 31, 2018 have been derived from our audited consolidated financial statements not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. You should read this “Selected Financial Data” section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily indicative of results expected for future periods.
The following table sets forth a summary of our consolidated statements of comprehensive loss for the years ended December 31, 2018, 2019, 2020 and 2021.
 
    
For the Year Ended December 31,
 
    
2018
   
2019
   
2020
   
2021
 
    
RMB
   
RMB
   
RMB
   
RMB
   
US$
 
    
(in thousands, except for share and per share data)
 
Operating revenue, net
  
 
238,149
 
 
 
1,510,965
 
 
 
3,027,948
 
 
 
3,205,914
 
 
 
503,078
 
Operating costs and expenses
          
Operating costs
     (45,932     (291,310     (742,258     (1,054,475     (165,470
Sales and marketing expenses
     (184,943     (1,056,494     (2,130,535     (3,104,769     (487,206
General and administrative expenses
     (126,242     (142,995     (407,171     (530,522     (83,250
Research and development expenses
     (69,196     (214,646     (244,230     (378,990     (59,472
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating costs and expenses
  
 
(426,313
 
 
(1,705,445
 
 
(3,524,194
 
 
(5,068,756
 
 
(795,398
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating loss
  
 
(188,164
 
 
(194,480
 
 
(496,246
 
 
(1,862,842
 
 
(292,320
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income/(expenses)
          
Interest income
     2,428       10,533       26,515       48,662       7,636  
Fair value change of warrant
     —         —         (150,685     —         —    
Foreign currency exchange gain/(loss)
     66       4,152       (1,335     9,349       1,467  
Others, net
     (1,967     817       8,052       9,764       1,532  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income tax, and share of results of equity method investee
  
 
(187,637
 
 
(178,978
 
 
(613,699
 
 
(1,795,067
 
 
(281,685
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Income tax (expense)/benefit
     (21,503     (142,528     (50,155     220,987       34,678  
Share of results of equity method investee
     (54     (29     (15     —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to Waterdrop Inc.
  
 
(209,194
 
 
(321,535
 
 
(663,869
 
 
(1,574,080
 
 
(247,007
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Deemed dividend on modification on preferred shares
  
 
—  
 
 
 
—  
 
    (67,975     —         —    
Deemed dividend upon issuance of warrants
     —         —         (90,268     —         —    
Preferred shares redemption value accretion
     (22,230     (136,839     (285,668     (152,287     (23,897
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to ordinary shareholders
  
 
(231,424
 
 
(458,374
 
 
(1,107,780
 
 
(1,726,367
 
 
(270,904
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average number of ordinary shares used in computing net loss per share
          
Basic and diluted
     839,572,645       1,203,526,000       1,174,583,516       2,990,507,749       2,990,507,749  
Net loss per share attributable to ordinary shareholders
          
Basic and diluted
     (0.28     (0.38     (0.94     (0.58     (0.09
 
10

The following table presents our selected consolidated balance sheet data as of December 31, 2019, 2020 and 2021.
 
    
As of December 31,
 
    
2019
    
2020
    
2021
 
    
RMB
    
RMB
    
RMB
    
US$
 
    
(in thousands)
 
Selected Consolidated Balance Sheet Data:
           
Cash and cash equivalents
     964,476        1,061,962        817,719        128,318  
Restricted cash
     329,676        261,387        667,664        104,771  
Short-term investments
     60,278        1,193,160        1,969,362        309,036  
Accounts receivable
  
 
252,499
 
     539,791        643,843        101,033  
Contract assets
     617,688        848,550        593,500        93,133  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total assets
  
 
2,555,906
 
  
 
4,705,055
 
  
 
5,250,599
 
  
 
823,933
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Insurance premium payables
(1)
     320,327        607,326        685,028        107,496  
Deferred revenue
(2)
     21,670        22,017        803        126  
Accrued expenses and other current liabilities
(3)
     496,530        595,606        498,752        78,265  
Deferred tax liabilities
(4)
     167,601        225,745        13,551        2,126  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total liabilities
  
 
1,054,394
 
  
 
1,524,743
 
  
 
1,277,173
 
  
 
200,416
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total mezzanine equity
  
 
2,207,831
 
  
 
4,837,336
 
  
 
—  
 
  
 
—  
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total shareholders’ (deficit)/equity
  
 
(706,319
  
 
(1,657,024
  
 
3,973,426
 
  
 
623,517
 
  
 
 
    
 
 
    
 
 
    
 
 
 
 
Notes:
 
(1)
Includes amounts of the consolidated VIEs and subsidiaries of VIEs without recourse to the Company of RMB320.2 million, RMB607.3 million and RMB685.0 million as of December 31, 2019, 2020 and 2021, respectively.
 
(2)
Includes amounts of the consolidated VIEs and subsidiaries of VIEs without recourse to the Company of RMB21.7 million, RMB22.0 million and RMB0.8 million as of December 31, 2019, 2020 and 2021, respectively.
 
(3)
Includes amounts of the consolidated VIEs and subsidiaries of VIEs without recourse to the Company of RMB428.8 million, RMB447.2 million and RMB413.4 million as of December 31, 2019, 2020 and 2021, respectively.
 
(4)
Includes amounts of the consolidated VIEs and subsidiaries of VIEs without recourse to the Company of RMB167.2 million, RMB225.3 million and RMB13.1 million as of December 31, 2019, 2020 and 2021, respectively.
The following table sets forth our selected consolidated cash flow data for the years ended December 31, 2018, 2019, 2020 and 2021.
 
    
For the Year Ended December 31,
 
    
2018
   
2019
   
2020
   
2021
 
    
RMB
   
RMB
   
RMB
   
RMB
   
US$
 
    
(in thousands)
 
Net cash used in operating activities
     (211,029     (532,895     (777,108     (1,096,652     (172,089
Net cash provided by/(used in) investing activities
     31,988       (45,955     (1,217,701     (846,898     (132,897
Net cash provided by financing activities
     362,669       1,472,775       2,050,890       2,119,670       332,622  
Effect of exchange rate changes on cash and cash equivalents
     (1,973     27,342       (26,884     (14,086     (2,209
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net increase in cash and cash equivalents and restricted cash
     181,655       921,267       29,197       162,034       25,427  
Total cash and cash equivalents and restricted cash at beginning of year
     191,230       372,885       1,294,152       1,323,349       207,662  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total cash and cash equivalents and restricted cash at end of year
     372,885       1,294,152       1,323,349       1,485,383       233,089  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Summary of Risk Factors
Investing in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ADSs. The following list summarizes some, but not all, of these risks.
 
11

Risks Related to Our Business and Industry
 
   
Our business and growth are significantly affected by the future prospects of third-party insurance brokerage and agency, medical crowdfunding and healthcare industries, which are rapidly evolving.
 
   
Our limited operating history and evolving business model make it difficult to evaluate our business and future prospects and the risks and challenges we may encounter.
 
   
We face intense competition and could lose market share, which could adversely affect our results of operations.
 
   
We have a history of net losses and negative cash flows from operating activities, which may continue in the future.
 
   
We face uncertainties relating to the change of regulatory regime.
 
   
We face reputational, monetary, and legal risks in relation to our discontinuation of the Waterdrop Mutual Aid business.
 
   
The administration, interpretation and enforcement of the regulations applicable to us are evolving and involve uncertainties. We may not be able to stay in constant compliance with the rapidly evolving regulations.
 
   
Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations.
 
   
We have been or may be subject to penalties for failure to manage our personnel engaging in insurance brokerage activities.
 
   
We face reputational, monetary, and legal risks in relation to our discontinuation of the Waterdrop Mutual Aid business.
 
   
Our historical growth rate may not be indicative of our future performance and if we fail to effectively manage our growth, our business, financial condition and results of operations could be adversely affected.
Risks Related to Our Corporate Structure
 
   
We are a Cayman Islands holding company with no equity ownership in the VIEs and we conduct our operations in China primarily through (i) our PRC subsidiaries and (ii) the VIEs, with which we have maintained contractual arrangements. Investors in our ADSs thus are not purchasing equity interest in our operating entities in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with the PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect the financial performance of the VIEs and our company as a whole.
Risks Related to Doing Business in China
 
   
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
 
   
PRC government’s significant authority in regulating our operations and its oversight and control over securities offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline.
 
   
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs.
 
   
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
 
   
Our auditor is currently not subject to inspections by the PCAOB. Our ADSs may be delisted under the Holding Foreign Companies Accountable Act. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
 
12

   
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Risks Related to Our ADSs
 
   
The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.
 
   
If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
 
   
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Risks Relating to Our Business and Industry
Our business and growth are significantly affected by the future prospects of third-party insurance brokerage and agency, medical crowdfunding and healthcare industries, which are rapidly evolving.
We primarily operate in three rapidly evolving industries. Our business and growth are highly dependent on the future growth and proliferation of third-party insurance brokerage and agency, medical crowdfunding and healthcare industries in China, which could be affected by many factors beyond our control.
Firstly, third-party insurance brokerage and agency industry in China could be affected by, from the insurance carrier side, the close integration with and improvements in online infrastructure and technology, efficient access to insurance consumers, consumer base and insights, consumer acquisition costs and the separation of insurance product design and sales; and from the consumer side, by the continued formation of consumers’ online insurance policy purchasing habits, the selection, price and popularity of insurance products offered by insurance carriers, the demand for convenience, the reliability and security of third-party insurance brokerage and agency platforms and online insurance policy buying or claim settlement experience. In addition, third-party insurance brokerage and agency industry may also be affected by the overall prosperity of health and life insurance industry and the regulatory regime.
Secondly, the medical crowdfunding industry in China could be affected by the medical cost borne by patients, development of self-discipline conventions driven by industry leaders, the coverage of China’s national social medical insurance provided by the Chinese government and regulatory policies.
Thirdly, our operation could also be significantly affected by the development of the healthcare industry, an adjacent industry to third-party insurance brokerage and agency and medical crowdfunding industries, in China. Healthcare related business is subject to multiple regulations in China, such as regulations governing pharmacy, distribution of pharmaceutical and healthcare products, healthcare, internet healthcare, and insurance claim processing. New laws, regulations and regulatory requirements have been and may continue to be promulgated and implemented from time to time. We face challenges brought by these new laws, regulations and regulatory requirements, as well as significant uncertainties in the interpretation and application thereof. Moreover, there exist uncertainties as to how the regulatory environment might change. Any violation of the relevant laws, rules and regulations may result in penalties and, under certain circumstances, criminal liabilities. Major internet companies or traditional online healthcare service providers in China may start to offer or strengthen their offerings of competing products and services in the healthcare industry, utilizing their large user base and cross-selling advantages. As a result, our business and growth potential could be materially and adversely affected.
Our limited operating history and evolving business model make it difficult to evaluate our business and future prospects and the risks and challenges we may encounter.
We commenced our operation in 2016. Our evaluations of the business and prediction about our future performance may not be as accurate as they would be if we had a longer operating history. In the event that actual results differ from our expectation or we adjust our estimates in future periods, the investors’ perceptions of our business and future prospects could change materially, which may adversely affect our ADS price.
We have been actively exploring boundaries and synergy values of our business and expanding our services. We started with the mutual aid plan services in May 2016, under which we generated management fee income as an operator of the mutual aid plans, and then launched Waterdrop Medical Crowdfunding in July 2016. We began to distribute insurance products underwritten by insurance carriers in our Waterdrop Insurance Marketplace in May 2017, through which we earn brokerage income. As trial operation, we started to charge service fees for medical crowdfunding services in early 2022. There is no assurance that we could bring in new patients to our Waterdrop Medical Crowdfunding platform at the scale as before if patients alternatively initiate crowdfunding campaigns on other platforms providing free crowdfunding services. See “—If we fail to bring in new patients to our Waterdrop Medical Crowdfunding platform, our business and results of operations could be adversely affected.” In addition, we may also encounter reputational risks, negative feedback from patients and donors, and regulatory uncertainties as we start charging service fees for medical crowdfunding services. Further, we may also enter into other healthcare related industries under our mission to bring insurance and healthcare service to billions through technology. If our healthcare related products and services do not maintain and drive customers’ engagement or if we fail to provide superior customer experience, we may fail to attract new customers or retain sufficient customers for our healthcare related business. Our healthcare business may become increasingly complex in terms of both business model and scale. Moreover, if we are unable to boost the growth of our healthcare related business and operations, or implement our business strategies successfully, we may discontinue or adjust the relevant business model. Our constantly evolving business model makes it difficult to evaluate the risks and challenges we may encounter.
 
13

We face intense competition and could lose market share, which could adversely affect our results of operations.
The third-party insurance brokerage and agency industry in China is intensely competitive. Our current or potential competitors include (i) online third-party brokers and agents such as Ant Group and WeSure; and (ii) offline third-party brokers and agents such as Fanhua, Everpro and Datong. New competitors may emerge at any time. We also face competition from traditional insurance intermediaries such as bancassurance, tied agency channel of insurance carriers and direct sales channel of insurance carriers.
Additional players may also enter into the rapidly evolving medical crowdfunding space from time to time. We also face intensive competition as more companies tap into the global clinical research and development third-party service market where many market players exist.
Existing or potential competitors may have substantially greater brand recognition and possess more financial, marketing and research resources than we do. Our competitors may introduce platforms with more attractive products, content and features, or services or solutions with competitive pricing or enhanced performance that we cannot match. Some of our competitors may have more resources to develop or acquire new technologies and react quicker to changing requirements of consumers.
In addition, for the online insurance marketplace industry we operate in, our target insurance policy purchasers, PRC residents with potential insurance needs, may seek insurance products and services in well-equipped and developed neighboring insurance markets. We may fail to compete effectively with our competitors and industry participants in neighboring insurance markets.
We have a history of net losses and negative cash flows from operating activities, which may continue in the future.
We have incurred net losses and negative cash flows from operating activities each year since our inception and we may not be able to achieve or maintain profitability or positive cash flow in the future. We incurred net losses of RMB321.5 million, RMB663.9 million and RMB1,574.1 million (US$247.0 million) in 2019, 2020 and 2021, respectively. Net cash used in our operating activities was RMB532.9 million, RMB777.1 million and RMB1,096.7 million (US$172.1 million) in 2019, 2020 and 2021, respectively.
Our operating costs and expenses may increase in the foreseeable future as we continue to grow our business, acquire new users, invest and innovate in our technology infrastructure and further develop our product and service offering and increase brand recognition. Any of these efforts may incur significant capital investment and recurring costs, have different revenue and cost structures, and take time to achieve profitability. If we continue to have net loss and negative cash flows from operating activities, we may have to finance ourselves with equity or debt financing, which may not be available at price term favorable to us or at all.
We face uncertainties relating to the change of regulatory regime.
We operate in a highly regulated industry in China, and the regulatory regime continues to evolve. The China Banking and Insurance Regulatory Commission, or the CBIRC, has extensive authority to supervise and regulate the insurance industry in China. Since the online insurance industry in China is evolving rapidly, the CBIRC has been enhancing its supervision over this industry in recent years, and new laws, regulations and regulatory requirements have been promulgated and implemented from time to time. We face challenges brought by these new laws, regulations and regulatory requirements, as well as significant uncertainties in the interpretation and application thereof. Moreover, there exist uncertainties as to how the regulatory environment might change.
 
14

On December 7, 2020, the CBIRC published the Regulatory Measures for Online Insurance Business, or the Regulatory Measures, which became effective on February 1, 2021. Shuidi Insurance Brokerage (as defined below) conducts online insurance brokerage business in the PRC and is subject to the Regulatory Measures. The Regulatory Measures significantly changes regulatory regime for online insurance business in various aspects. For example, the Regulatory Measures requires insurance institutions (including insurance carriers and insurance intermediary service providers, such as insurance brokerage companies and insurance agency companies) to (i) establish internal policies with regard to personnel management, customer information protection and internal control, (ii) enhance compliance management of promotional materials and marketing activities, (iii) meet certain detailed requirements for sales activities, and (iv) protect the information right of consumers by making appropriate disclosure. In particular, the Regulatory Measures requires online insurance transactions being conducted through online interfaces operated by insurance institutions only, and prohibits insurance institutions to set default option for customer and impose any restriction on the cancellation of automatic payment to affect customer’s choice during the sales process of insurance products. The Regulatory Measures does not explicitly allow the entities which are not insurance institutions to conduct marketing activities for online insurance products. The Regulatory Measures prohibits entities which are not insurance institutions from conducting insurance businesses, such as consultation of insurance products, comparison of insurance products, trial calculation of insurance premiums, quotation and comparison of quotations, drafting insurance plans for policyholders, processing insurance application formalities and premium collection.
We currently engage third party user acquisition channels to attract consumers for the insurance products offered on our platform. If our cooperation with such user acquisition channels is deemed to be in violation of the Regulatory Measures, we may be required to modify our business practice, which may result in reduction in our attraction to consumers. In addition, the Regulatory Measures sets a higher standard for insurance institutions and online industry participants to improve IT infrastructure and cybersecurity protection. For example, insurance institutions engaged in online insurance products sales business shall have IT systems that are certified as Safety Level III Computer Information Systems or above level. It might be costly for us to stay in compliance with the heightened requirements and standards in the Regulatory Measures. According to Regulatory Measures, we had certain insufficiencies in term of compliance, e.g., deficiency in registration, disclosure, operation and marketing management. The Regulatory Measures sets out a
ramp-up
process allowing market participants to achieve full compliance in phases until February 1, 2022. As of the date of this annual report, we have taken measures to comply with the requirements in the Regulatory Measures. We, however, cannot assure you that our current business operations will remain fully compliant with the Regulatory Measures at all times, or we will be able to rectify the
non-compliance
incidents in a timely manner. For details of the Regulatory Measures, see “Item 4.B. Information on the Company—Business Overview—Regulations—Regulations on Internet Insurance Business.”
The regulatory framework in China’s insurance industry is evolving and undergoing significant changes. Further development of regulations applicable to us may result in additional restrictions on our business operations. We may have to adjust our business practice and operations to comply with the continuously changing regulatory requirements. On October 12, 2021, the CBIRC published the Circular on Further Regulating Certain Issues on Internet Life Insurance Business, or the CBIRC Circular 108. The CBIRC Circular 108 requires that each installment of premium of certain insurance products less than one year term, such as accident insurance and health insurance, shall be equal. We used to provide our consumers the option of monthly payments and the first month payment of premium of certain insurance products is typically lower than subsequent installments. We were subject to administrative penalties imposed by the CBIRC in connection with such past
non-compliance
incident in November 2021. As of the date of this annual report, we have adjusted the payment regime and are in compliance with the CBIRC Circular 108. The adjustment of such payment regime may result in reduction in our attraction to potential consumers. The CBIRC Circular 108 also provides the upper limit for the predetermined fee rate and average supplemental fee rate for certain insurance products, which may affect the amount of insurance brokerage commission we charge on the relevant insurance products and adversely affect our financial condition. In addition, pursuant to the CBIRC Circular 108, insurance intermediary institutions that conduct the sales of ordinary life insurance products (excluding fixed term life insurance) and annuity and pension insurance products longer than
ten-year
term shall meet certain conditions, including, among others, having not received any material administrative penalty or regulatory actions imposed or taken by any governmental authorities over the last twelve months. We have been, and may from time to time in the future be, subject to administrative penalties imposed by the relevant authorities under PRC laws. For example, Shuidi Insurance Brokerage was subject to administrative penalties imposed by the local counterpart of the CBIRC in July 2020, June 2021 and November 2021 due to certain
non-compliance
incidents identified in its past business operations, including failure to provide legally required disclosure on our platform to our consumers, and inaccurate or incomplete information of insurance products on our platform in our past practice, responding to customers’ inquiries on insurance products without prior customer consent, conducting insurance brokerage business in areas where it did not have branches, and not completing practice registration for some insurance brokerage personnel. Although these administrative penalties do not constitute material administrative penalties as defined in the CBIRC Circular 108, we would be restricted from selling such insurance products under the CBIRC Circular 108 if we are imposed with material administrative penalty imposed by PRC governmental authorities. As the CBIRC Circular 108 is newly issued, it remains uncertain as to how the circular will be implemented and whether the circular will have a material impact on our business, financial conditions, result of operations and prospects. The attention of our management team could be diverted to these efforts to cope with an evolving regulatory or competitive environment. Meanwhile, staying compliant with the restriction may result in limitation to our business scope, limitation to our product and service offerings, and reduction in our attraction to consumers. As a result, our business and results of operations might be materially and adversely affected.
 
15

Furthermore, our medical crowdfunding business currently has no specific governing laws and regulations as such industries are relatively nascent and are at their early stages of development, and we expect to experience strengthened regulatory environment along with rapid industry evolution. Regulatory or administrative authorities may impose new requirements relating to, among other things, new and additional licenses, permits and approvals or governance or ownership structures on us for operating medical crowdfunding business in the future. For example, if the competent PRC authorities promulgate new laws or regulations in future which require approvals, licenses or permits to operate our medical crowdfunding business, we may not be able to obtain the required approvals, licenses or permits in a timely manner, or at all. In addition, for the funds contributed by donors in our medical crowdfunding platform, we have entered into agreements with a commercial bank, under which the bank provides fund custodian services. If regulatory authorities in China promulgate new laws or regulations regulating online crowdfunding business, including but not limited to the custodian mechanism, in the future, we may need to amend the relevant agreements or modify our current business practices to comply with new regulatory requirements, the process of which could be costly and uncertain, or even discontinue the relevant business. If any of the foregoing or other changes of the applicable PRC laws and regulations that have any adverse impact on our businesses was to occur, our business and financial condition might be materially and adversely affected.
The administration, interpretation and enforcement of the regulations applicable to us are evolving and involve uncertainties. We may not be able to stay in constant compliance with the rapidly evolving regulations.
Our business is subject to governmental supervision and regulation by various PRC governmental authorities, and regulatory bodies may view matters or interpret laws and regulations differently than they have in the past or in a manner adverse to our business. The CBIRC and its local counterparts have wide discretion in administration, interpretation and enforcement of these laws, regulations and regulatory requirements, as well as the authority to impose regulatory sanctions on industry participants. In certain circumstances it may be difficult to determine which actions or omissions may be deemed to be in violation of applicable laws, regulations or regulatory requirements. For example, historically, we have offered certain insurance consumers free insurance coverage upgrades as part of our sales and marketing activities and the outreaching and conversation by our customer service personnel with such users were considered as conducting telesales of insurance products business by the local regulatory authorities. Pursuant to the relevant PRC laws, insurance companies can operate telesales of insurance products business through establishing call centers or collaborating with insurance agencies. We have implemented various measures in response to the alleged
non-compliance.
As of the date of this annual report, we have cooperated with insurance companies to conduct telesales of insurance products business through Tairui Insurance Agency Co., Ltd., a wholly-owned subsidiary of Zongqing Xiangqian. In particular, we also examined our practice and set up strict internal control policies to deter our customer service personnel misconduct, including among others, prohibiting our customer service personnel from active calling out without the prior consent of users. However, we cannot assure you that our customer service personnel will not engage in any misconduct, and we are uncertain as to whether our rectification measures will be sufficient to ensure full compliance with the regulatory requirements due to the lack of detailed interpretation and implementation of these requirements. Furthermore, due to the lack of further interpretations, the exact definition and scope of “conducting telesales of insurance products business” under the current regulatory regime is unclear. It is uncertain whether we would be deemed to operate telesales of insurance products business because of the conversation by our customer service personnel. In addition, the current PRC laws and regulations remain unclear as to whether our customer service personnel are required to complete the qualification registration as insurance brokerage practitioners in accordance with the relevant PRC laws and regulations. Given the evolving regulatory environment of the insurance industry, we cannot assure you that we will not be required in the future by the relevant governmental authorities to obtain approval or license to continue our customer services or complete qualification registration for our customer service personnel in a timely manner. If we fail to comply with these laws and regulations, we could be subject to penalties and operational disruption and our financial condition and results of operations could be adversely affected.
 
16

Moreover, we have from time to time been subject, and are likely again in the future to be subject to PRC regulatory inquiries, inspections and investigations. If any
non-compliance
incidents in our business operation are identified, we may be required to take certain rectification measures in accordance with applicable laws and regulations, or we may be subject to other regulatory actions such as administrative penalties. For example, we were identified
non-compliance
incidents with respect to conducting insurance business in areas where we do not have branches. We are in the process of rectifying relevant
non-compliance
incidents that we are aware of under the changing regulatory environment. Recently, the local counterpart of the CBIRC conducted inspections on us and identified certain
non-compliance
incidents in our business operation and internal control, including failure to disclose information of our insurance brokerage personnel when conducting internet insurance marketing activities in accordance with applicable laws and failure to take effective measures to protect rights of consumers required by relevant laws. As of the date of this annual report, we are in the process of rectifying such
non-compliance
incidents identified in the inspections. However, we cannot assure you that we will be able to fully rectify all
non-compliance
incidents in a timely manner or fully satisfy the regulatory requirements, or we will not be subject to any future regulatory reviews and inspections where other
non-compliance
incidents might be identified, which might materially and adversely affect our business, financial condition, results of operations and prospects.
In addition, we have been expanding our businesses and may enter into new business areas as we see fit. Due to the complexities and uncertainties of PRC laws and regulations governing the new industries we are going to operate our business in, we cannot assure you that all our new business operations in the future will be in compliance with the relevant laws and regulations applicable to the new industries.
Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations.
Our business is subject to regulation, and we are required to obtain applicable licenses, permits and approvals from different PRC regulatory authorities in order to conduct or expand our business, including, but not limited to, licenses to conduct insurance brokerage and insurance agency businesses, license for provision of internet information services, or ICP License and Internet Pharmaceutical Information Service Qualification Certificate. We have obtained and maintained all licenses and permits material to our business as described above as required by the PRC regulatory authorities. We cannot assure you that we will be able to maintain existing licenses and permits or renew any of them when their current term expires. If we are unable to maintain one or more of the current licenses and permits, or obtain such renewals, the operations and prospects of our business could be materially disrupted. Furthermore, if the relevant governmental authorities consider that we were operating without the proper approvals, licenses or permits, or the relevant governmental authorities promulgate new laws and regulations that require additional approvals or licenses or impose additional restrictions on the operation of any part of our business and we are not able to obtain such approvals, licenses or permits or adjust our business model in a timely manner, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business. Any of these actions by the relevant governmental authorities may have a material adverse effect on our business and results of operations.
We have been or may be subject to penalties for failure to manage our personnel engaging in insurance brokerage activities.
The practice of insurance intermediary personnel is strictly regulated under the PRC laws and regulations. Personnel who engage in insurance brokerage activities are required to be registered with the insurance intermediary regulatory information system of the CBIRC. Insurance brokerage companies that engage in unregistered personnel may be subject to warnings, fines and other penalties by regulatory authorities. On March 12, 2019, the CBIRC issued the Notice for Professional Insurance Intermediaries to Conduct the Verification of Insurance Practitioners’ Practice Registration, requiring that all insurance intermediary institutions to complete the registration for their personnel with the local branches where such personnel are practicing and to complete self-check and verification of the registration of all of the registered personnel by July 31, 2019. Some of our insurance brokerage personnel were found being registered with Shuidi Insurance Brokerage rather than its branches where such personnel were practicing. We have been subject to administrative penalties for failure to complete practice registration for our insurance brokerage personnel. As of the date of this annual report, we are in the process of rectification of
non-compliance
matter related to registration for some of our insurance brokerage personnel, while it takes time to complete the registration procedures for newly joined personnel. We cannot assure you that we will be able to complete the registration for all of our insurance brokerage personnel in a timely manner due to the increasing number of our insurance brokerage personnel, or that the relevant regulatory authorities would not retrospectively find deficiency in the registration of these personnel and subject us to penalties. Furthermore, the personnel can only practice within the scope specified by the insurance brokerage company that he/she is registered with. We have implemented policies to ensure our insurance brokerage personnel to practice in compliance with the relevant PRC regulations. Nevertheless, there can be no assurance that all of such personnel will not practice outside the scope specified by us, or that such personnel will strictly abide by these policies or take their responsibilities under the applicable laws and regulations in connection with insurance brokerage services, which may subject to fines and other administrative proceedings.
 
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We face reputational, monetary, and legal risks in relation to our discontinuation of the Waterdrop Mutual Aid business.
In March 2021, we ceased the operation of our Waterdrop Mutual Aid platform in order to focus on our core businesses and offer enhanced protection to our users. We have offered to migrate all mutual aid participants as insurance policyholders of our Waterdrop Insurance Marketplace service. In connection with this change, we will voluntarily cover mutual aid participants’ medical expenses arising from medical conditions diagnosed by March 31, 2021 that would have been covered by the ceased mutual aid plan, subject to certain procedural requirements and eligibility criteria, and in addition offered a
one-year
complementary health insurance policy to each participant with a similar coverage as the participant’s original mutual aid plan. Despite our good intention, our mutual aid participants or general public may view our action as adversely affecting the actual or expected interests of mutual aid participants, which may in turn harm our reputation. In the worst scenario, participants may choose to bring complaints and lawsuits against us. Although we were contractually permitted to terminate the mutual aid plans any time in our discretion, lawsuits may nevertheless be time consuming and costly, and distract our management’s attention.
Our historical growth rate may not be indicative of our future performance and if we fail to effectively manage our growth, our business, financial condition and results of operations could be adversely affected.
We have experienced rapid growth since our inception, particularly in terms of the number of insurance consumers, the FYP generated through us, and cumulative fund we help patients raise. However, there is no assurance that we will be able to maintain our historical growth rates in future periods. If our growth rates slow or decline, investors’ perceptions of our business and prospects may be adversely affected and the market price of our ADSs could decline.
We cannot assure you that we will be able to effectively manage the future growth of our rapidly evolving business. We started with the mutual aid plan services in May 2016, under which we generate management fee income as an operator of the mutual aid plans, and then launched Waterdrop Medical Crowdfunding in July 2016. We began to distribute insurance products underwritten by insurance carriers in our Waterdrop Insurance Marketplace in May 2017, through which we earn brokerage income, and we had experienced significant business growth in the past. However, due to the uncertainty of the macroeconomy, industry and regulatory conditions, we expect our FYP and revenue from the insurance business may decline in the foreseeable future. We have also proactively adjusted our customer acquisition strategy to reduce reliance on third-party user acquisition channels, which leads to the decrease in the number of new users on our Waterdrop Insurance Marketplace and in turn negatively affects the amount of our FYP and revenue as well. While we plan to further expand user coverage and engagement to improve mindshare, penetrate further into the insurance value chain with strategic partners, invest in data analysis and technology infrastructure and deepen partnership with medical institutions to build up health ecosystem, we cannot assure you that our growth initiatives will succeed.
Any harm to our brand or reputation may materially and adversely affect our business.
The brand recognition and reputation of our ‘Waterdrop” brand and the successful maintenance and enhancement of our brand and reputation have contributed and will continue to contribute significantly to our success and growth.
 
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Any negative perception and publicity, whether or not justified, such as complaints and accidents in relation to user experience or quality of services, including inappropriate behavior of the crowdfunding consultants and sales personnel, could tarnish our reputation and reduce the value of our brand. Further, our competitors may fabricate complaints or negative publicity about us for the purpose of vicious competition. With the increased use of social network, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to respond and mitigate effectively.
We are also subject to negative publicity regarding our platform participants, whose activities are out of our control. Negative public perception on the insurance products by insurance carriers on our platform or that insurance carriers on our platform do not provide satisfactory customer services, even if factually incorrect or based on isolated incidents, could undermine the trust and credibility we have established and have a negative impact on our ability to attract new users or retain our current users.
Our Waterdrop Insurance Marketplace business may be negatively affected if the insurance carriers on our platform do not continue their relationship with us or if their operations fail.
Our relationship with insurance carriers is crucial to our success. We generate a substantial portion of our revenues from commission fees paid by insurance carriers. Certain insurance carriers have accounted for a significant portion of our revenues in the past. Anxin Insurance accounted for 44.2%, 19.9% and 7.5% of our total operating revenue in 2019, 2020 and 2021, respectively. China Taiping Insurance accounted for 21.9%, 24.9% and 14.3% of our total operating revenue in 2019, 2020 and 2021, respectively. Hongkang Life Insurance accounted for 11.1% and 11.5% of our total operating revenue in 2020 and 2021, respectively. If one or more of them fail to make payments to us, the settlement of our accounts receivable and financial position would be materially and adversely affected. While we continually seek to diversify insurance carriers on our platform, there can be no assurance that the concentration will decrease.
Our arrangements with insurance carriers are typically not exclusive, and they may have similar arrangements with our competitors. If insurance carriers are dissatisfied with our services and solutions or find us ineffective in enhancing their profitability, they may terminate their relationships with us. Moreover, insurance carriers we work with may develop their own technology capabilities to serve policy holders online.
Furthermore, if insurance carriers or the reinsurance companies they partner with fail to properly fulfill their obligations as insurers under the insurance policies sold on our platform, our users may lose faith in our platform.
A significant portion of the FYP generated through us is contributed by a limited number of insurance products. If we cannot continue to offer these insurance products on our platform for any reason or the popularity of these products declines, our brokerage income may decrease.
A significant portion of the FYP generated through us is from a limited number of popular insurance products, primarily our health and life insurance products. We believe the concentration was partially due to the comprehensive protection coverage with reasonable policy terms which makes these insurance products more attractive than others. Although we plan to continue diversifying our product offerings, launch more tailor-made insurance products, expand our user base and generate brokerage income from a wider variety of insurance products, we cannot guarantee you that we will be able to succeed, and that such concentration will decrease. If we cannot continue to offer these popular insurance products for any reason or the popularity of these products decline, our brokerage income may decrease.
Our revenue and profitability might be adversely impacted if the commission level of our insurance brokerage service declines.
We are engaged in the insurance brokerage business and derive revenues primarily from commission fees paid by the insurance carriers whose insurance policies our consumers purchase. The commission fee rates are negotiated between insurance carriers and us, and are based on the premiums that the insurance products charge. Commission fee rates and premiums can change based on the prevailing economic, regulatory, taxation and competitive factors that affect insurance carriers. These factors, which are beyond our control, include the capacity of insurance carriers to place new business, profits of insurance carriers, consumer demand for insurance products, the availability of comparable products from other insurance carriers at lower costs, and the availability of alternative insurance products, such as government benefits and self-insurance plans, to consumers. In addition, premium rates for certain insurance products are tightly regulated by the CBIRC. Because we do not determine, and cannot predict, the timing or extent of premium or commission fee rate changes, we cannot predict the effect any of these changes may have on our operations. Any decrease in premiums or commission fee rates may significantly affect our profitability.
 
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We may not be successful in increasing the sales of long-term health and life insurance products.
As the consumers’ awareness for health protection and insurance products in China were still substantially lower than in developed countries, many insurance consumers on our platform start with purchases of short-term protection products. We began to offer long-term health and life insurance products in the end of 2018, and we have been endeavoring to raise consumer awareness, and demonstrate the value and importance of long-term health and life insurance, through our interactions with them. The FYP of long-term health and life insurance products generated through us increased from RMB550.0 million in 2019 to RMB2,646 million in 2021. The increasing sales of long-term health and life insurance products is beneficial to our business as it brings us a steady cash flow during the whole insurance period. If we fail to migrate our insurance consumers to long-term health and life insurance products, our results of operation may be adversely affected.
If we fail to bring in new patients to our Waterdrop Medical Crowdfunding platform, our business and results of operations could be adversely affected.
We mainly rely on our offline crowdfunding consultants to bring in new patients and rely on social network link sharing practice to reach potential donors. The success of our Waterdrop Medical Crowdfunding platform largely depends on our ability to bring in new patients to our platforms. We must continue to help patients efficiently launch crowdfunding campaigns and withdraw the funds raised for medical treatments. The number of donors and amount of fund raised largely depend on the wide dissemination starting from the patients’ relatives, friends and acquaintances, and expansion of outreach through the social network, which may be beyond our control. If we fail to bring in new patients to our Waterdrop Medical Crowdfunding platform, our business, financial condition and results of operations will be adversely affected.
Our offline crowdfunding consultancy at hospitals by crowdfunding consultants may be restricted or banned.
The operation of our Waterdrop Medical Crowdfunding platform largely relies on offline crowdfunding consultancy at hospitals by crowdfunding consultants. Our crowdfunding consultants play an important role in discovering the patients in need of medical funds, helping patients fill in personal information and upload medical documentation and verification of the patients’ medical records and financial status. If our relationship with hospitals worsens, the crowdfunding consultants may be banned from entering the hospitals or patients’ wards, which may materially affect our offline crowdfunding consultancy of our crowdfunding business.
If we fail to bring in and retain new consumers and increase engagement of existing users on our Waterdrop Insurance Marketplace platform, our business and results of operations could be adversely affected.
Our future growth depends on our ability to continue to bring in and retain consumers and increase engagement of existing consumers on our Waterdrop Insurance Marketplace platform. We may not able to locate or have access to sufficient number of new consumers. In addition, we must stay abreast of emerging user preferences and product trends that will appeal to existing and potential participants and consumers. Our platforms make personalized recommendations of and insurance products to users based on their needs, and offer a comprehensive suite of services to ensure a smooth and efficient experience. For users on our insurance marketplace, we also develop insurance products in cooperation with insurance carriers to meet their evolving needs. Our ability to provide these products and services is dependent on our expertise and our data analytical capabilities. However, there is no assurance that the products and services that we offer will cater to the needs of potential or existing users, sustain for a period of time that we expect them to, or be welcomed or accepted by the market at all. If we cannot acquire new users or if users cannot find their desired insurance products on our platform at attractive prices and terms, or if they find their experience with us dissatisfactory, they may have limited access to our products and services, lose trust in us, terminate their memberships, surrender their existing policies and turn to other platforms, which in turn may materially and adversely affect our business, financial condition and results of operations.
 
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Failure to deal effectively with any fraud perpetrated on our platforms could harm our business and reputation.
We face risks with respect to fraudulent activities on our platforms. We cannot fully eliminate insurance fraud and adverse selection insurance behaviors. Some patients on Waterdrop Medical Crowdfunding platform have been reportedly falsifying medical or financial records to raise funds. Some participants of Waterdrop Mutual Aid platform may make false medical payout applications.
Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our platform, there can be no assurance that these measures will be effective in combating fraudulent transactions. In addition, illegal, fraudulent or collusive activities by our employees, crowdfunding consultants or third party agents could also subject us to liability and negative publicity. Any illegal, fraudulent or collusive activity could severely damage our brand and reputation as an operator of a trusted online platform, which could adversely affect our business.
Regulatory actions, legal proceedings and customer complaints against us could harm our reputation and have a material adverse effect on our business, results of operations, financial condition and prospects.
We were involved in litigations and other disputes in the ordinary course of our business, which include lawsuits, arbitration, regulatory proceedings and other disputes relating to our business. Along with growth and expansion of our business, we may be involved in litigations, regulatory proceedings and other disputes arising outside the ordinary course of our business. Such litigations and disputes may result in claims for actual damages, freezing of our assets, diversion of our management’s attention and reputational damage in to us and our management, as well as legal proceedings against our directors, officers or employees, and the probability and amount of liability, if any, may remain unknown for long periods of time. Given the uncertainty, complexity and scope of many of these litigation matters, their outcome generally cannot be predicted with any reasonable degree of certainty. Therefore, our reserves for such matters may be inadequate. Moreover, even if we eventually prevail in these matters, we could incur significant legal fees or suffer significant reputational harm, or we may be unable to enforce the prevailing judgement.
We have been named as a defendant in a putative shareholder class action lawsuit that could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.
We are defending against the putative shareholder class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings,” including any appeals of such lawsuit, should our initial defense be successful. We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of this lawsuit. In the event that our initial defense of this lawsuit is unsuccessful, there can be no assurance that we will prevail in any appeal. Any adverse outcome of this case, including any plaintiff’s appeal, could have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. We are also subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
Our current risk management system may not be able to exhaustively identify or mitigate all risks to which we are exposed.
We have established risk management, quality control and internal control systems, consisting of policies and procedures that we believe are appropriate for our business. However, the implementation of such policies and procedures may involve human error and mistakes. Moreover, we may be exposed to fraud or other misconduct committed by our employees, crowdfunding consultants, customer service personnel or other third parties, including but not limited to our users and business partners, or other events that are out of our control.
 
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We may fail to accurately and timely process payout applications under mutual aid plans.
We must accurately and timely evaluate and process payout applications that are made under mutual aid plans that existed prior to our discontinuation of the mutual aid business in March 2021. Many factors affect our ability to process payout applications accurately and timely, including the efficacy of our artificial intelligence payout applications processing, the training and experience of our payout application reviewers and independent third-party application investigators, and our ability to develop or select and implement appropriate procedures and systems to support our payouts functions.
We may also encounter errors in any of the large number of payouts applications we process through our complex administrative systems. Any mistakes during the payout process may harm our business, reputation, results of operations, or financial condition. In addition, if we are unable to obtain necessary and accurate information from participants, we may be unable to process payout applications, which may harm our business, reputation, results of operations, or financial condition. Furthermore, any failure to payout accurately or timely could also lead to material litigation, or result in damage to our reputation, any one of which could materially and adversely affect our business, financial condition and results of operations.
We may not be able to ensure the accurate and complete disclosure of insurance product information.
Our users rely on the insurance product information we provide on our platform. We had in the past failed to provide legally required disclosure on our platform to the attention of our users, including failure to indicate name of certain insurance products for filing on visible place of our platform and failure to indicate payment methods for insurance premiums, issuance and delivery methods for insurance documentation, the procedure for policy cancellation and payment method for refund of cancelled policies and had been subject to fines. We had rectified the abovementioned failure in disclosure. If we provide any inaccurate or incomplete information on our platform due to either our own fault or that of insurance carriers, our consumers making the insurance purchase relying on the information may fail to receive the protection they expect and we may be warned or penalized by regulatory authorities, and our reputation could be harmed and we could experience reduced user traffic to our platform.
We may not be able to recommend the insurance products most suitable to our users.
Our search and recommendation engine may fail to function properly. The data provided to us by our users, insurance carriers and user acquisition channels may not be accurate or up to date. Our insurance agents and consultants may not fully understand users’ insurance needs and recommend suitable products to them. If our users are recommended insurance products that do not suit their protection needs, they may lose trust in our platform. Meanwhile, insurance carriers may find our recommendation ineffective. Our users and insurance carriers may consequently be reluctant to continue to use our platform.
Some of our shareholders offer similar products or services competing with ours.
Some of our shareholders also offer products and services competing with ours. For example, WeSure, Tencent’s online insurance brokerage platform offers online insurance distribution services as we do. As of March 31, 2022, Tencent beneficially owns 21.1% of our ordinary shares. Internet conglomerates in China, such as Tencent and Meituan, have strong technological capabilities, and may independently develop more products and services competing with ours in the future. If competition between us and our shareholders becomes more intense in the future or they cease to cooperate with or provide support to us, our business and results of operations may be materially and adversely affected.
We face risks in properly managing the large amount of cash contributed by donors in our crowdfunding platform and participants of mutual aid plans.
The funds contributed by donors in our crowdfunding platform and participants of mutual aid plans are deposited in segregated bank accounts. We have entered into agreements with a commercial bank to act as a custodian bank and manage the different accounts. The bank follows our instruction with regard to withdrawal or transfer of funds. If we send incorrect instructions to the bank, the funds may be mistakenly withdrawn or transferred, which may give rise to disputes and claims against us.
 
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We may face disruption to our technology systems and resulting interruptions in the availability of our services.
The satisfactory performance, reliability and availability of our technology systems are critical to our success. We rely on our scalable technology infrastructure and corresponding mobile apps, Weixin Mini Programs and Official Accounts connecting our network with those of our various platform users. However, our technology systems or infrastructure may not function properly at all times. We may be unable to monitor and ensure high-quality maintenance and upgrade of our technology systems and infrastructure, and users may experience service outages and delays in accessing and using our platforms as we seek to source additional capacity. For instance, our medical crowdfunding needs constant calculation of amounts donated by donors and distributed to patients and our mutual aid businesses need constant calculation about the payouts to and allocated payout amounts from mutual aid participants, which may require additional capacity as our businesses further scale.
Our technology systems may also experience telecommunications failures, computer viruses, failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, user errors, or other attempts to harm our technology systems, which may result in the unavailability or slowdown of our platform or certain functions, delays or errors in transaction processing, loss of data, inability to accept and fulfill user request, reduced fund raised, FYP or size of mutual plans and the attractiveness of our platform. Further, hackers, acting individually or in coordinated groups, may also launch distributed denial of service attacks or other coordinated attacks that may cause service outages or other interruptions in our business.
Our business is subject to complex and evolving laws and regulations regarding data privacy and cybersecurity. Failure to protect confidential information of our users and network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.
Our platform stores and processes certain personal and other sensitive data provided by users on our platforms, and we make certain personal information provided by the user or third party data providers available to banks or insurance carriers with user consent. Personally identifiable and other confidential information is increasingly subject to legislation and regulations in China and numerous foreign jurisdictions. The PRC government authorities have enacted a series of laws and regulations relating to the protection of privacy and personal information, under which internet service providers and other network operators are required to clearly indicate the purposes, methods and scope of any information collection and usage, to obtain appropriate user consent and to establish user information protection systems with appropriate remedial measures. However, this regulatory framework for privacy issues in China and worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. For example, on August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection. Our mobile apps and websites only collect basic user personal information that is necessary to provide the corresponding services. We do not collect any sensitive personal information or other excessive personal information that is not related to the corresponding services. We update our privacy policies from time to time to meet the latest regulatory requirements of the governmental authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified by governmental authorities and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations. See “Item 4.B. Information on the Company—Business Overview—Regulations.”
In addition, regulatory requirements on cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations or significant changes. PRC regulators have been increasingly focused on regulation in the areas of cybersecurity and data protection in recent years. For example, on June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021. The Data Security Law, among others, provides for a security review procedure for the data activities that may affect national security. On December 28, 2021, the CAC, the National Development and Reform Commission, or the NDRC, the Ministry of Industry and Information Technology, or the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, which provide that critical information infrastructure operators that procure internet products and services and network platform operators engaging in data processing activities must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulate that network platform operators holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before public offering at a foreign stock exchange. However, given the Cybersecurity Review Measures recently promulgated, there are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures.
 
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Furthermore, on November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Regulations, and will accept public comments until December 13, 2021. The Draft Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. In accordance with the Draft Regulations, data processors shall apply for a cybersecurity review for the following activities: (i) merger, reorganization or division of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which process over one million users’ personal information; (iii) the listing of data processors in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security. However, there have been no clarifications from the authorities as of the date of this annual report as to the standards for determining such activities that “affects or may affect national security.” See “Item 4.B. Information on the Company—Business Overview—Regulations.” As of the date of this annual report, the Draft Regulations were released for public comment only, and its provisions and the anticipated adoption or effective date may be subject to change with substantial uncertainty. The Draft Regulations remain unclear on whether the relevant requirements will be applicable to companies that have been listed in the United States, such as us. We cannot predict the impact of the Draft Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Regulations mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all. As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis. However, if we are not able to comply with the cybersecurity and network data security requirements in a timely manner, or at all, we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our
non-compliant
operations, or removal of our app from the relevant application stores, among other sanctions, which could materially and adversely affect our business and results of operations. In addition to the cybersecurity review, the Draft Regulations requires that data processors processing “important data” or listed overseas shall conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. If a final version of the Draft Regulations is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing.
The PRC laws and regulations relating to data privacy and cybersecurity, including, among others, PRC Cyber Security Law and the Data Security Law are relatively new and subject to interpretation by the regulators. Although we have taken various measures to comply with all applicable laws and regulations regarding cybersecurity and data privacy in China, we cannot assure you that the measures we have taken or will take are adequate under the relevant laws, and we may be held liable in the event of any breach of the relevant requirements under the relevant laws and regulations. We expect that these areas will receive greater public scrutiny and attention from regulators and more frequent and rigid investigation or review by regulators, which will increase our compliance costs and subject us to heightened risks and challenges. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. We cannot assure you that our existing privacy and personal protection system and technical measures will always be considered sufficient under applicable laws, regulations and other privacy standards. We could be adversely affected if legislation or regulations in China are expanded to require changes in business practices or privacy policies, or if the PRC governmental authorities interpret or implement their legislation or regulations in ways that negatively affect our business. We may also be subject to additional regulations, laws and policies adopted by the PRC government to apply more stringent social and ethical standards in data privacy resulting from the increased global focus on this area.
 
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We may not be able to access or accumulate sufficient data for business analysis.
We highly rely on our data in every step of our business, in particular, the entire insurance value chain, including research and
co-design
of insurance products, risk management, claim settlement, and policy holder services. We also rely on our data in the development and operation of mutual aid plans and medical crowdfunding business. We currently also use external data sources for our business analysis, which can become unavailable due to regulatory restrictions or other reasons.
Our business may be negatively impacted if the information that we receive from third parties for user verification purpose is inaccurate.
In order to verify the personal and financial information provided by our users, we obtain information from independent third-party data providers. We accordingly establish personal profiles for users and process the users’ crowdfunding campaigns, mutual aid plan enrollment, insurance policy purchase request and claims settlement applications based on such information we collect and the comparison of the information from third parties against those provided by the users themselves. However, as credit reporting systems for individuals in China are in their early stages of development, there are limited public sources available to verify the financial and other information of individual user, and the systems may not be able to reflect the actual profiles of these users constantly and accurately. Although we have developed our risk management and control procedures and policies and have devoted efforts to verifying the information provided by the users before we offer them our products or services, the effectiveness of such risk management is conditioned on the accuracy and completeness of the user information we obtain. We cannot guarantee the completeness or accuracy of any information we obtain with respect to any particular user. If the data and information we rely on are inaccurate or obsolete, we are exposed to higher risks of fraudulent user behavior. As a result, our business and operations could be materially and adversely affected.
We may fail to maintain the capability and accuracy in actuarial analysis.
We operate an intelligent system where we code underwriting criteria set by insurance carriers in our system and the system automatically generates eligibility for purchasing insurance products. Leveraging our deep understanding of consumer needs and actuarial capabilities, we also collaborate with some insurance carriers to
co-design
new insurance products. The proper functioning of our actuarial and statistical analysis, products pricing suggestion, risk management, financial control, accounting, user database, user service and other data processing systems is highly critical to our business and our ability to compete effectively. We rely on our dedicated talents with actuarial expertise to conduct actuarial analysis, and we rely on our research and development team to enhance our data capabilities to perform pricing modeling. We cannot guarantee you that we will successfully retain our employees with actuarial expertise or to hire new ones.
We leverage third-party user acquisition channels to bring in some of new users to our platforms and may incur significant costs on paying our user acquisition channels service fees.
In addition to growing our user base organically, we also cooperate with our user acquisition channels to convert their user traffic to user base of our platform. If our user acquisition channels do not renew their agreements with us, choose to work with our competitors, or terminate their cooperation with us, we may lose potential users and our business and results of operations will be negatively affected. In addition, if our user acquisition channels lose influence over their traffic or otherwise fail to effectively convert their users to our users, our business and results of operations may suffer.
Furthermore, we have incurred significant expenses on paying third-party user acquisition channels marketing fees. If certain of existing third-party user acquisition channels require higher rates of marketing fees or we fail to negotiate favorable terms with them or find new third-party user acquisition channels, our cost of user acquisition may increase, and our results of operations may be adversely affected.
 
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If insurance carriers, user acquisition channel partners, other business partners, outsourced customer service personnel or other ecosystem participants engage in any misconduct or cause errors to occur in our operation, our business could be materially and adversely affected.
We are exposed to the risk of misconduct by third-party user acquisition channel partners, outsourced customer service personnel or other ecosystem participant and/or business partners to interact with users and provide various services. Misconduct could include making misrepresentations when marketing insurance products to users, recommending mutual aid plans, hiding or falsifying material information in relation to insurance contracts and mutual aid plans terms, colluding with applicants, insureds, or beneficiaries to obtain insurance or mutual aid benefits, failing to disclose legally required information to users, engaging in false claims or otherwise not complying with laws and regulations or our internal policies or procedures. Any of the aforementioned misconduct by parties we cooperate with may cause potential liabilities of us, and further subject us to regulatory actions and penalties. If any third parties that are important to our operations are sanctioned by regulatory actions, our business operations will be disrupted or otherwise negatively affected.
We are subject to payment processing risk.
We accept a wide variety of payment methods, including bank transfers and online payments through third-party online payment platforms such as Weixin Pay, UnionPay and Alipay, in order to ensure smooth user experience. For certain payment methods, we pay varying transaction fees, which may increase over time and increase our operating costs and lower our profit margins. We may also be subject to fraud, money laundering and other illegal activities in connection with the various payment methods we accept if we cannot implement risk management measures effectively.
We are also subject to various regulations, rules and requirements, regulatory or otherwise, governing online payment processing and fund transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply with. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from users, process electronic fund transfers or facilitate other types of online payments.
Our future growth depends on the further acceptance of the internet as an effective platform for distributing insurance products and content.
The internet, and particularly the mobile internet, has gained increasing popularity in China as a platform for insurance products and content in recent years. However, certain participants in the industry, especially traditional insurance companies, and many insurance clients have limited experience in handling insurance products and content online, and some insurance customers may have reservations about using online platforms. For example, clients may not find online content to be reliable sources of insurance product information. Some insurance companies and reinsurance companies may not believe online platforms are secure for risk assessment and risk management. Others may not find online platforms effective when promoting and providing their products and services, especially to targeted clients in lower-tier cities or rural areas. If we fail to educate the insurance customers about the value of our platform and our products and services, our growth will be limited and our business, financial performance and prospects may be materially and adversely affected. The further acceptance of the internet and particularly the mobile internet as an effective and efficient platform for insurance products and content is also affected by factors beyond our control, including negative publicity and restrictive regulatory measures. If online and mobile networks do not achieve adequate acceptance in the market, our growth prospects, results of operations and financial condition could be harmed.
User growth and activity on mobile devices depend upon effective use of our mobile applications and third-party mobile operating systems that we do not control.
We are dependent on our users’ downloading and effective use of our mobile applications for their particular devices. We are further dependent on the interoperability of our mobile applications with third-party mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our mobile applications could adversely affect the usage of our applications on mobile devices.
 
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As new mobile devices and operating platforms are released, we may experience delay or difficulties in updating and integrating our mobile applications for these alternative devices and platforms and we may need to devote significant resources to the development, support and maintenance of such applications. Problems may also arise with our relationships with providers of mobile operating systems or mobile application download stores, such as our applications may receive unfavorable treatment compared to competing applications on the download stores. In the event that it becomes difficult for our consumers to access and use our applications on their mobile devices, our consumer growth could be harmed and our business and results of operations may be adversely affected.
We may fail to protect our intellectual properties.
We regard our software registrations, trademarks, patents, domain names,
know-how,
proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and
non-compete
agreements with our employees and others to protect our proprietary rights. See “Item 4. Information On the Company—B. Business Overview—Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages.
It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently. Confidentiality, invention assignment and
non-compete
agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.
Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. In particular, some of our trademark applications for certain categories have been rejected, and we have applied for administrative reviews on such rejections. However, there can be no assurance that we will obtain such trademarks and any other trademarks that are crucial to our business in the future. Thus, we may be unable to prevent others from using such trademarks or suing us for infringement, or even unable to continue to use such trademarks in our business.
Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can also provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors.
We may be subject to intellectual property infringement claims.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights,
know-how
or other intellectual property rights held by third parties. As of the date of this annual report, we are still in the process of applying for one trademark, which may be considered to resemble the trademarks held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights,
know-how
or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.
We may fail to make necessary or desirable strategic alliance, acquisition or investment, and we may not be able to achieve the benefits we expect from the alliances, acquisition or investments we make.
We may pursue selected strategic alliances and potential strategic acquisitions that are supplemental to our business and operations, including opportunities that can help us further expand our product and service offerings and improve our technology system. However, strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information,
non-performance
or default by counterparties, and increased expenses in establishing these new alliances, any of which may materially and adversely affect our business. In addition, we may have limited ability to control or monitor the actions of our strategic partners. To the extent a strategic partner suffers any negative publicity as a result of its business operations, our reputation may be negatively affected by virtue of our association with such party.
 
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The costs of identifying and consummating strategic acquisitions may be significant and subsequent integrations of newly acquired companies, businesses, assets and technologies would require significant managerial and financial resources and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our growth and business operations. In addition, investments and acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities and exposure to potential unknown liabilities of the acquired business. The acquired businesses or assets may not generate the financial results we expect and may incur losses. The cost and duration of integrating newly acquired businesses could also materially exceed our expectations. If our portfolios do not perform as we expect, our results of operation and profitability may be adversely affected.
Failure to maintain our cooperation with Tencent could have a material adverse effect on our business and prospects for growth.
Our business has benefited from our collaboration with Tencent, one of our principal shareholders, and we expect to continue to be leverage our collaboration with Tencent in the foreseeable future. As of March 31, 2022, Tencent holds approximately 21.1% equity interests of our company.
The user acquisition of our medical crowdfunding business largely relies on Weixin-based link sharing practice. Once a crowdfunding campaign is launched, a link to the crowdfunding campaign will be created and available for sharing. Starting from sharing by the patients’ relatives, friends and acquaintances, the link will be widely disseminated to a broader social network, which greatly helps the increase of number of donors and amount of fund raised. If the link sharing practice is restricted or becomes otherwise unavailable, the patients may not be able to raise enough funds for medical treatment, which may divert them to other crowdfunding platforms and the user acquisition of our medical crowdfunding business will be materially affected. Our insurance marketplace which partially relies on traffic from our medical crowdfunding business may also suffer.
In addition, we also operate our business through our Weixin Official Accounts and Mini Programs. Users may access our products or services through Weixin Mini Programs, operated by us. Furthermore, there are links embedded in the publications on our Official Accounts or Mini Programs which will direct the users to download or launch our Apps. If our Official Accounts or Mini Programs cannot work due to service shutdown or the links directing to our own Apps are not available, our users may not be able to use or easily access our products or services.
We cannot assure you that we will be able to maintain the current level of cooperation with Tencent in the future. If our collaborative relationship with Tencent, particularly regarding the Weixin-based link sharing practice, is terminated or curtailed, or if any of the commercial terms between us and Tencent are revised or made less favorable to us, or if Tencent does not continue to or adequately promote our products and services, our ability to operate our business may be impaired and we may, in the worst case scenario, completely lose our ability to conduct links sharing practice, operate our Official Accounts and Mini Programs or promote our business on Tencent platforms. In addition, Tencent may invest in our direct or indirect competitors, and may devote resources or attention to the other companies it has an interest in.
Our success depends on the continuing efforts of our senior management and key employees.
Our future success is significantly dependent upon the continued service of our senior management and other key employees. If we lose their service, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new staff, which could severely disrupt our business and growth. Our founder and chief executive officer, Mr. Peng Shen, and other management members are critical to our vision, strategic direction, culture and overall business success. If there is any internal organizational structure change or change in responsibilities for our management or key personnel, or if one or more of our senior management members were unable or unwilling to continue in their present positions, the operation of our business and our business prospects may be adversely affected. Our employees, including members of our management, may choose to pursue other opportunities. If we are unable to motivate or retain key employees, our business may be severely disrupted and our prospects could suffer. In addition, although we have entered into confidentiality and
non-competition
agreements with our management, there is no assurance that our management members would not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may not be able to enforce them at all.
 
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If we are unable to recruit, train and retain talents, our business may be materially and adversely affected.
We believe our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for personnel with expertise in insurance, sales and marketing, technology and risk management is extremely intense in China. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and resources in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training new employees, and our ability to serve users and business partners could diminish, resulting in a material adverse effect to our business.
We may not be able to raise additional capital when desired, on favorable terms or at all.
We need to make continued investments in facilities, hardware, software, technological systems and to retain talents to remain competitive. Due to the unpredictable nature of the capital markets and our industry, there can be no assurance that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges on par with or senior to those of existing shareholders.
Our insurance coverage may not be adequate, which could expose us to significant costs and business disruptions.
We maintain certain insurance policies to safeguard us against risks and unexpected events. We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees pursuant to applicable PRC laws. We do not maintain business interruption insurance. We consider our insurance coverage to be sufficient for our business operations in China. However, we cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2018, 2019 and 2020, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
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The material weakness that has been identified relates to our lack of sufficient skilled staff with appropriate knowledge of U.S. GAAP for the purpose of financial reporting and our lack of formal accounting policies and procedures manual to ensure proper financial reporting to comply with U.S. GAAP and SEC requirements. The material weakness, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future. Following the identification of the material weakness, we have taken measures and plan to remediate these control deficiencies. See “Item 15. Controls and Procedures—Internal Control Over Financial Reporting.” As of December 31, 2021, based on our management’s assessment on the performance of the remediation measures, we determined that the material weakness had been remediated. In the future we may determine that we have additional material weaknesses, or our independent registered public accounting firm may disagree with our management assessment of the effectiveness of our internal controls.
We are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules and regulations of the New York Stock Exchange. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. We are required by Section 404 of the Sarbanes-Oxley Act to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form
20-F
beginning with our annual report in our second annual report after becoming a public company. We may experience difficulty in meeting these reporting requirements in a timely manner.
Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue an adverse report if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to produce timely and accurate financial statements and may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If that were to happen, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which could lead to a decline in the market price of our ADSs and we could be subject to sanctions or investigations by the New York Stock Exchange, SEC or other regulatory authorities. We may also be required to restate our financial statements for prior periods.
We have granted and may continue to grant awards under our share incentive plans.
We adopted our 2018 Share Incentive Plan, as amended and restated, which we refer to as the 2018 Plan, and our 2021 Share Incentive Plan, as amended and restated, which we refer to as the 2021 Plan, for the purpose of granting share-based compensation awards to employees, directors and consultants to secure and retain the services of eligible award recipients and to provide incentives for such persons to exert maximum efforts for our success. We recognize expenses in our consolidated financial statements in accordance with U.S. GAAP. Under the 2018 Plan and the 2021 Plan, we are authorized to grant options, restricted shares, restricted share units and other types of share awards. As of March 31, 2022, the maximum aggregate number of Class A ordinary shares which may be issued pursuant to all awards under the 2018 Plan is 384,159,746 Class A ordinary shares, and we have outstanding options with respect to 318,707,760 Class A ordinary shares and outstanding restricted share units with respect to 2,902,000 Class A ordinary shares granted to our employees, directors and consultants under the 2018 Plan. As of March 31, 2022, the maximum aggregate number of Class A ordinary shares that may be issued pursuant to all awards under the 2021 Plan is 159,364,533 Class A ordinary shares, and no award has been granted under the 2021 Plan. We expect to incur substantial share-based compensation expenses in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations. Further, we may
re-evaluate
the vesting schedules,
lock-up
period, exercise price or other key terms applicable to the grants under our equity incentive plan from time to time. If we choose to do so, we may experience substantial change in our share-based compensation charges in the future reporting periods. For further information on our equity incentive plan and information on our recognition of related expenses, please see “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans.”
 
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Our business has been and may continue to be adversely affected by the outbreak of
COVID-19.
The current
COVID-19
pandemic has already adversely affected our business.
COVID-19
caused temporary closures of our offices and implementation of short-term measures for employees to work remotely from home in our headquarter and other offices, which resulted in decreased productivity of our workforce. As the hospitals were locked down from time to time according to government orders, our crowdfunding consultants could not enter the hospitals or patients’ wards during the lock-down period, which to certain extent adversely impacted the leads-sourcing activities in our crowdfunding business. We, insurance carriers and user acquisition channels and other business partners have been gradually recovering from the general shutdown and delay in commencement of operations in China since the beginning of March 2021. Even though our business is currently operational, our operating efficiency and capacity may still be adversely affected by the
COVID-19
pandemic mainly due to the necessity to comply with disease control protocols in business facilities and hospitals. Recently, there has been an increasing number of
COVID-19
cases, including the
COVID-19
Delta and Omicron variant cases, in multiple cities in China. The Chinese local authorities have reinstated certain measures to keep
COVID-19
in check, including travel restrictions and
stay-at-home
orders, and we may have to adjust various aspects of our operations. In addition, the highly-transmissible Delta and Omicron variants of
COVID-19
have caused authorities in various countries to reimpose restrictions such as mask mandates, curfews and prohibitions on large gatherings. There remain significant uncertainties surrounding
COVID-19,
including the existing and new variants of
COVID-19,
and its further development as a global pandemic, including the effectiveness of vaccine programs against existing and any new variants of
COVID-19.
The global spread of
COVID-19
pandemic in major countries of the world may also result in global economic distress, and the extent to which it may affect our results of operations will depend on future developments of the
COVID-19
pandemic, which are highly uncertain and difficult to predict. There may be potential impacts on our results of operations if the pandemic and the resulting disruption were to extend over a prolonged period.
In addition, if the global spread of
COVID-19
and deterioration cannot be contained, risks set forth in this annual report may be exacerbated or accelerated at a heightened level.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
In addition to the impact of
COVID-19,
our business could be materially and adversely affected by natural disasters, health epidemics or other public safety concerns affecting China. Natural disasters may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to operate our platform and provide services and solutions. In recent years, there have been outbreaks of epidemics in China and globally, such as H1N1 flu, avian flu or another epidemic. Our business operations could be disrupted by any of these epidemics. In addition, our results of operations could be adversely affected to the extent that any health epidemic harms the Chinese economy in general. A prolonged outbreak of any of these illnesses or other adverse public health developments in China or elsewhere in the world could have a material adverse effect on our business operations. Such outbreaks could significantly impact the insurance industry, which could severely disrupt our operations and adversely affect our business, financial condition and results of operations. Our headquarters are located in Beijing, where most of our management and employees currently reside. Most of our system hardware and
back-up
systems are hosted in facilities located in Shanghai. Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect Beijing, our operation may experience material disruptions, which may materially and adversely affect our business, financial condition and results of operations.
 
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A severe or prolonged downturn in Chinese or global economy could materially and adversely affect our business and financial condition.
COVID-19
had a severe and negative impact on the Chinese and the global economy in 2021. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of
COVID-19,
the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2021. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.
Healthcare-related businesses, such as clinical trial patient recruitment services, are subject to risks of customer needs, industry trends, trade secrets, data compliance and regulatory changes, which could adversely affect our reputation, business, financial condition, results of operations and prospects.
We are exploring healthcare-related businesses, such as clinical trial patient recruitment services starting from December 2021. The success of such new business depends primarily on the number of pharmaceutical companies and patients engaged. There can be no assurance that these industries will continue to grow at the rates we expect. Any slowdown or reversal of any of these trends could materially and adversely affect demand for our services. Furthermore, if investments in pharmaceutical industries were to decrease, the demand for outsourced biopharmaceutical R&D services may also decrease. The services we provide are complex and often time-sensitive. We cannot assure you that we will always be able to deliver the quality of services that meets our clients’ standards and evolving needs. We may make material mistakes, including in managing and conducting a project, that could negatively impact or obviate the usefulness of results of the project or cause the results of the project to be reported improperly. In such cases, we may incur significant costs from reperforming the project and liability to the clients for any failure to meet contractually agreed standards. We may incur losses if we lose existing clients, or fail to attract new clients. In order to meet the increasing demands arising from our business growth, we may be required to increase the outsourcing of patient recruitment services. There is no assurance that we will always be able to secure subcontractors who provide services at the specification, quantity and quality levels required by us. In addition, any failure of our suppliers or subcontractors to continue to obtain requisite licenses or approvals, or to provide satisfactory products or services, or their misconduct, may result in interruption in their business operations, which may delay or disrupt the progress of our projects. In addition, we may not be able to seek adequate compensation from our suppliers and subcontractors for losses caused by them. During initial stage of business development, we cannot assure you that we will be able to manage growth effectively.
In addition to the protection afforded by our registered intellectual property rights, we rely on unpatented trade secret protection, unpatented
know-how
and continuing technological innovation to develop and maintain our competitive position. However, trade secrets and
know-how
can be difficult to protect. Healthcare-related businesses are also subject to privacy protection and data compliance risks. Before patients and healthy volunteers enroll in clinical trials, we collect and maintain medical data, treatment records and other personal data. We are subject to relevant privacy laws and regulations. Although we have taken measures to maintain the confidentiality of medical records and personal data of patients and healthy volunteers prior to enrolling in clinical trials so that they cannot be viewed without proper authorization, we cannot assure you that such measures are effective in ensuring our compliance with relevant laws and regulations, or that we are able to prevent the enrolled subjects’ private or medical records being divulged without their consent. For example, our information technology systems may be hacked, and personal data could leak due to theft or misuse of personal information arising from misconduct or negligence, leading to disclosure. In addition, our clinical trials often involve professionals from third-party institutions working
on-site
with our staff and enrolled subjects. We cannot ensure that such persons will always comply with our data privacy measures. Furthermore, any changes in relevant laws and regulations may affect our ability to use medical data and subject us to liability for the use of such data for previously permitted purposes. Any failure to protect the confidentiality of the medical records and personal data of patients and healthy volunteers or any restrictions on our use of medical data or any liability arising therefrom could materially and adversely affect our business, financial condition and results of operations. Furthermore, as the hospitals may be locked down from time to time due to COVID-19 epidemic prevention orders in China, our patient recruitment consultants cannot enter the hospitals or patients’ wards during the lock-down period, which to certain extent may adversely impact the leads-sourcing activities in our patient recruitment business. If our relationship with hospitals worsens, the patient recruitment consultants may be banned from entering the hospitals or patients’ wards, which may materially affect our offline patient recruitment consultancy of our business.
Government agencies and industry regulatory bodies impose strict rules, regulations or industry standards on how customers develop, test, research and manufacture drugs, medical devices and biologics, and how third parties perform related services on customers’ behalf. The services we provide to our clients are subject to and must comply with various applicable legal and regulatory requirements. Any adverse findings by such regulatory authorities or other regulatory or legal noncompliance may result in severe penalties against us. In addition, regulatory authorities may change the laws and regulations from time to time. As a result, our existing compliance procedures may not be adequate for new legal and regulatory requirements, and we may need to incur additional compliance costs and become exposed to negative findings from relevant government authorities.
 
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If we are unable to manage the risks presented by our international expansion, our financial results and future prospects will be adversely impacted.
As of the date of this annual report, we have expanded business operations into overseas markets. However, we have limited history and experience operating in jurisdictions outside of China. We have made certain investment, and may further make significant investments to expand our international operations and compete with local competitors. Such investments may not be successful and may negatively affect our operating results. Conducting our business internationally, particularly in countries in which we have limited experience, subjects us to risks that we do not face to the same degree in China. These risks include, among others:
 
   
operational and compliance challenges caused by distance, language, and cultural differences;
 
   
the resources required to build a local management team in each new market and to localize our service offerings to appeal to consumers in that market;
 
   
compliance challenges caused by unfamiliar laws and regulations;
 
   
competition with businesses that understand local markets better than we do, that have pre-existing relationships with potential consumers in those markets, or that are favored by government or regulatory authorities in those markets;
 
   
international geopolitical tensions;
 
   
political, social and economic instability in any jurisdiction where we operate;