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345 Park Avenue New York, NY 10154 |
Main 212.407.4000 Fax 212.407.4990 jwww.loeb.com |
| November 1, 2022 |
Via EDGAR
| Division of Corporation Finance | ||
| Office of Manufacturing | ||
| U.S. Securities and Exchange Commission | ||
| 100 F Street, N.E. | ||
| Washington, DC 20549 | ||
| Attn: | Jordan Nimitz | |
| Christine Westbrook | ||
| Re: | ETAO International Co., Ltd. | |
| Draft Registration Statement on Form F-4 | ||
| Submitted September 30, 2022 | ||
| CIK 0001939696 | ||
Dear Ms.Nimitz and Ms. Westbrook:
On behalf of ETAO International Co., Ltd. (the “Company”), we are hereby responding to the letter dated October 18, 2022 (the “Comment Letter”) from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), regarding the Company’s Draft Registration Statement on Form F-4 confidentially submitted to the Commission on September 30, 2022 (the “Draft Registration Statement”). In response to the Comment Letter and to update certain information in the Draft Registration Statement, the Company is confidentially submitting its revised draft registration statement on Form F-4 (the “Revised Draft Registration Statement”) to the Commission today.
For ease of reference, the text of the Staff’s comment is included in bold-face type below, followed by the Company’s response.
Amendment No. 1 to Draft Registration Statement on Form F-4 Submitted September 30, 2022
Cover Page
| 1. | We have reviewed your revisions in response to our prior comment 3, which we reissue in part. We note the use of "ETAO's VIEs" on page 143 and "its VIEs" on page F-55 to describe the business operations of the VIEs. Please revise to remove these possessive terms. We note also the reference to "our VIEs" on page 68. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures throughout the Revised Draft Registration Statement.
Questions and Answers About the Proposals
What equity stake will current shareholders of the Company and ETAO Equityholders hold in the Combined Entity after the Closing ?, page 7
| 2. | We note your response to our prior comment 8, which we reissue. Our comment requested disclosure of the impact of redemptions on the effective underwriting fee, i.e., disclosure of the fact that as redemptions increase, the effective underwriting fee per share will increase for each non-redeeming shareholder. Please revise to present the effective underwriting fee on a percentage basis at each redemption level. |
RESPONSE: The disclosure has been revised on pages 8 and 9 of the Revised Draft Registration Statement to include an additional sensitivity table showing the impact on the effective underwriting fee at different redemption levels. The impact is also shown on a percentage basis for each redemption level.
Summary of the Proxy Statement/Prospectus, page 19
| 3. | We note your revisions in response to our prior comment 9 and reissue in part. Please explain in your prospectus what the percentages in your organization chart on page 20 represent. To the extent that those percentages correspond to the contractual interest that ETAO has in the VIE, please say so. Additionally, please revise to disclose the person or entity that owns the equity in each depicted entity. We also note your disclosure that "ETAO may have to incur substantial costs and expend additional resources to enforce such arrangements" under the risk factor titled, "ETAO relies on contractual arrangements with the VIEs and their shareholders for a large portion of ETAO’s business operations. These arrangements may not be as effective as direct ownership in providing operational control. Any failure by the VIEs or their shareholders to perform their obligations under such contractual arrangements would have a material and adverse effect on ETAO’s business." Please include this statement in the section titled, "Summary of challenges and risks involved in the VIE Arrangements and enforcing the VIE Agreements" within the Summary of the Prospectus. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on pages 20, 21 and 22 of the Revised Draft Registration Statement. The Company is in ongoing discussions with the SEC on how best to provide “the person or entity that owns the equity in each depitcted entity”.
| 4. | We have reviewed your revisions in response to our prior comment 11. We note your disclosure that you relied on advice from your PRC counsel, Jingtian & Gongcheng to determine that you were not required to obtain permissions from PRC governmental authorities. Please file a consent from Jingtian & Gongcheng as an exhibit. |
RESPONSE: The Company acknowledges the Staff’s comment and has supplemented the exhibit index with Exhibit 23.4 as a Consent from Jintian & Gongcheng.
Parties to the Business Combination
High Tech Drug Development/Telemedicine, page 26
| 5. | Please expand your disclosure to describe in more detail the business of DNurse and DTalks. Address in your revisions the extent to which these entities rely on the collection of user data. |
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RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on pages 26, 27, 199, and 201 of the Revised Draft Registration Statement.
Risks Related to Doing Business in China, page 42
| 6. | We note your response to our prior comment 19, which we reissue in part. Please revise your summary of risk factors to specifically discuss risks arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and that rules and regulations in China can change quickly with little advance notice; and the risk that the Chinese government may intervene or influence your operations at any time. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on pages 43 and 79 and 80 of the Revised Draft Registration Statement.
Risk Factors
Risk Factors Relating to ETAO's Corporate Structure
ETAO is subject to significant challenges and risks involved in the VIE Arrangements and enforcing the VIE Agreements..., page 68
| 7. | We have reviewed your revisions in response to our prior comment 24 and reissue in part. We note your statement that ETAO is subject to the risk of "regulatory review of overseas listing of PRC companies through a special purpose vehicle . . . " that is "due to the uncertainty of the interpretation and application of the PRC laws and regulations." Please revise these statements to acknowledge the risk that the Chinese government may exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers and acknowledge the risk that any such action could significantly limit or completely hinder your ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on page 70 of the Revised Draft Registration Statement.
Risks Related to Government Regulation
Our business is subject to complex and evolving Chinese and international laws and regulations , page 90
| 8. | We note your response to comment 25, which we reissue in part. Revise your disclosure to affirmatively disclose to what extent you believe that you are compliant with the regulations or policies that have been issued by the CAC to date. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on page 95 of the Revised Draft Registration Statement.
Background of the Business Combination, page 135
| 9. | We note your revisions in response to our prior comment 33. Please revise to specify which individuals from ETAO and MCAE attended the due diligence meetings disclosed on pages 137 and 138. Please also specify who attended the January 20, 2022 group videoconference. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on pages 143 and 144 of the Revised Draft Registration Statement.
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| 10. | We note your revisions in response to our prior comment 34 and reissue in part. Please revise to include the financial projections provided to MCAE from ETAO. In this regard, we note that you have provided a summary of the financial projections. To provide investors with sufficient information to evaluate the forecasted financial information and its reasonableness, please discuss the material assumptions and underlying bases of any financial projections, including the earnings, cashflow, valuation multiples, growth rates, revenue growth, operating costs, gross margins, net income, etc. and the limitations of the forecasts. |
RESPONSE: The disclosure has been revised on page 149 of the Revised Draft registration Statement to include the revenue projections and underlying assumptions provided to MCAE from ETAO in November 2021. We note that only revenue projections, and no other projections including earnings, cashflow, growth rates, operating costs, gross margins, net income, etc. were provided. We further note that while the revenue projections were considered, they were not used for the Board’s examination of valuation. For this, the Board relied on ETAO’s estimated 2021 performance and estimated P/S multiple in comparison to Yidu, the most comparable telemedicine focused company to ETAO that the Board considered.
| 11. | We note your revisions in response to our prior comment 28. Please revise your description of the September 22, 2021 videoconference to disclose what was discussed. |
RESPONSE: The Company acknowledges the Staff’s comment and has added disclosure on page 142 of the Revised Draft Registration Statement.
The Board of Directors' Reasons for the Approval of the Business Combination, page 140
| 12. | We note your revisions to our prior comment 35 and reissue. Please revise this section to discuss in more specific detail how each factor risk and uncertainty impacted your decision to recommend the Business Combination. |
RESPONSE: The Company acknowledges the Staff’s comment and has added disclosure on pages 150 and 151 of the Revised Draft Registration Statement.
Information About ETAO, page 185
| 13. | We note your revisions in response to prior comment 10 and your statement there that, "The VIE Agreements are designed to provide the WFOEs with the power, rights and obligations equivalent in all material respects to those it would possess as the controlling equity holder of the VIEs, including majority control rights and the rights to the assets, property and revenue of the VIEs." Please revise to remove the implication that the contractual agreements are equivalent to equity ownership in the business of the VIEs. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on page 193 of the Revised Draft Registration Statement.
Intellectual Property, page 215
| 14. | We note your revisions in response to our prior comment 38. We note that Patent Nos. 21 - 28 are undergoing substantive examination and do not include expiration dates. Please revise to include the anticipated expiration dates if issued. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on page 227 and 228 of the Revised Draft Registration Statement.
Industry Overview, page 227
| 15. | Please tell us why you have included a discussion of challenges in the U.S. healthcare system. Please revise to address your markets or advise. |
RESPONSE: The Company acknowledges the Staff’s comment and has revised disclosures on page 235 of the Revised Draft Registration Statement to revise our discussion of the healthcare systems and markets to reflect China.
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Management's Discussion and Analysis of Financial Condition and Results of Operations of ETAO
Key Components of Results of Operations Revenue
4. Provision of medical technology services, page 255
| 16. | As previously requested in prior comment 41, please tell us your basis of accounting, citing relevant authoritative literature, for recognizing revenue related to commissions collected from services provided by doctors through your APP on a gross basis as principal instead of on a net basis as agent. |
RESPONSE: The Company has revised the disclosure on page 262 as it does not believe fees should be recognized on a net basis. The revenues generated related to fees received through the APP are present on a gross fee. The Company has applied the guidance under ASC 606 whereby the Company acts as a principal for the medical visits, and the medication sold; the rationale for such an approach is based on several factors: 1.) the APP adding value to the process of the medical visit as the Doctor’s ability to treat is no longer constrained by geography and reduced travel times for patient visits and increased access to different medications, supplies and doctors across the VIEs procurement and service provider network, 2.) the VIEs’ exercise of control over the pricing of products and services delivered to patients, 3.) the VIEs’ purchase commitments with pharmacies to procure a fixed amount of products each year, and base payout to doctors conducting consultations through the APP for each year regardless of total units sold.
Gross revenues generated by such activities by the VIEs from the date of acquisition to December 31, 2021 was approximately USD $116,000 which is immaterial to the consolidated results of ETAO. Should the Commission disagree with the analysis based on the evidence above, the Company is willing to amend the revenue and costs of sales; the Company does not expect any impact to net income (loss) for results of operations for 2021.
Security Ownership of Certain Beneficial Owners and Management, page 299
| 17. | We have reviewed your revisions in response to our prior comment 46 and reissue in part. We note the disclosure throughout your prospectus of the convertible promissory note entered into by and between the Company and the Sponsor on June 15, 2022. However, it appears that the convertible promissory note and the 10,000 shares issuable to the Sponsor is dated February 4, 2021. Please revise to resolve this apparent discrepancy. |
RESPONSE: The Company acknowledges the Staff’s comment and has added disclosure on pages 310 of the Revised Draft Registration Statement.
ETAO International Group, Subsidiaries, And Variable Interest Entities Statements of Changes in Shareholders' Equity, page F-47
| 18. | We note your revisions to prior comment 47. In this regard, we note your disclosure on page F-76 stating that share based compensation expenses for 2020 related to the shares issued to executives and employees, that there was no established fair market for the shares issued, and that they were recognized at par value. However, we note on your statement of shareholder's equity that you reported APIC of approximately $1.2 million. Please advise, and tell us your consideration of providing the disclosures required by ASC 718-10-50, as applicable. |
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RESPONSE: The Company has amended the descriptions and disclosures on page F-48 and F-76. The valuation of $1.2 million is based on shares issued for cash proceeds from financing transaction which is assumed to be a fair market value transaction. The previous description of share compensation was an error.
General
| 19. | With a view toward disclosure, please tell us whether your sponsor is, is controlled by, has any members who are, or has substantial ties with, a non-U.S. person. Please also tell us whether anyone or any entity associated with or otherwise involved in the transaction, is, is controlled by, or has substantial ties with a non-U.S. person. If so, please revise your filing to include risk factor disclosure that addresses how this fact could impact your ability to complete your initial business combination. For instance, discuss the risk to investors that you may not be able to complete an initial business combination with a target company should the transaction be subject to review by a U.S. government entity, such as the Committee on Foreign Investment in the United States (CFIUS), or ultimately prohibited. Further, disclose that the time necessary for government review of the transaction or a decision to prohibit the transaction could prevent you from completing aninitial business combination and require you to liquidate. Disclose the consequences of liquidation to investors, such as the losses of the investment opportunity in a target company and any price appreciation in the combined company. |
RESPONSE: The Company acknowledges the Staff’s comment and has added disclosure on the page 113 of the Revised Draft Registration Statement.
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Please call Andrei Sirabionian of Loeb & Loeb LLP at (212) 407-4089 or Huan Lou of Sichenzia Ross Ference LLP at (212) 930-9700 if you would like additional information with respect to any of the foregoing. Thank you.
| Sincerely, | |
| /s/ Loeb & Loeb LLP | |
| Loeb & Loeb LLP |
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