Securities registered or to be registered
pursuant to Section 12(b) of the Act:
* Not for trading, but only in connection with the listing on
the Nasdaq Global Market of American depository shares, each representing 180 ordinary shares
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.
1,476,208,670 Ordinary Shares (excluding ordinary
shares in the form of ADS that are reserved for issuance upon the exercise of share awards) as December 31, 2018.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
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.
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.
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.
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.
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
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.
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).
(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.
In this annual report, unless otherwise
indicated or the context otherwise requires, references to:
Our reporting and functional currency is
U.S. dollar. This annual report 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 the rate of RMB6.8755 to US$1.00,
the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect
as of December 31, 2018. The PRC government imposes control over its foreign currency reserves in part through direct regulation
of the conversion of RMB into foreign exchange and through restrictions on foreign trade.
This annual report contains forward-looking
statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates
and projections about us and our industry. In some cases, these forward-looking statements can be identified by words or phrases
such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “going
forward,” “intend,” “ought to,” “plan,” “project,” “potential,”
“seek,” “may,” “might,” “can,” “could,” “will,” “would,”
“shall,” “should,” “is likely to” and the negative form of these words and other similar expressions.
The forward-looking statements included in this annual report relate to, among others:
These forward-looking statements involve
various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable,
our expectations could later be found to be incorrect. Our actual results could be materially different from our expectations.
You should thoroughly read this annual report and the documents that we refer to with the understanding that our actual future
results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these
cautionary statements.
This annual report contains certain data
and information that we obtained from various government and private publications. Statistical data in these publications also
include projections based on a number of assumptions. Our industry might not grow at the rate projected by market data, or at all.
Failure of our industry to grow at the projected rate may have a material adverse effect on our business and the market price of
our ADSs. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual
results could differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking
statements.
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
|
A.
|
Selected Financial Data
|
The following selected consolidated
statements of operations data for the years ended December 31, 2016, 2017 and 2018, and selected consolidated balance sheet
data as of December 31, 2017 and 2018, have been derived from our audited consolidated financial statements included
elsewhere in this annual report. The selected consolidated statements of operations data for the years ended December 31,
2014 and 2015, and consolidated balance sheet data as of December 31, 2014, 2015 and 2016 are derived from our consolidated
financial statements not included in this annual report, the first year of which have been restated due to the divestment of
the discontinued operations in the year of 2015. Our consolidated financial statements are prepared and presented in
accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical
results are not necessarily indicative of results expected for future periods. 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.
Selected Consolidated Financial Data
|
|
For the Year Ended
December 31,
|
|
|
|
2014
(1)
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
(in US$ thousands, except share and share related data)
|
|
Selected consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
—
|
|
|
|
542
|
|
|
|
10,078
|
|
|
|
17,485
|
|
|
|
10,873
|
|
Third parties
|
|
|
—
|
|
|
|
10,935
|
|
|
|
63,123
|
|
|
|
71,251
|
|
|
|
25,582
|
|
Cost of revenues
|
|
|
—
|
|
|
|
(13,220
|
)
|
|
|
(72,857
|
)
|
|
|
(88,187
|
)
|
|
|
(35,579
|
)
|
Gross (loss)/profit
|
|
|
—
|
|
|
|
(1,743
|
)
|
|
|
344
|
|
|
|
549
|
|
|
|
876
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
|
—
|
|
|
|
(5,360
|
)
|
|
|
(20,405
|
)
|
|
|
(15,207
|
)
|
|
|
(5,792
|
)
|
General and administrative
|
|
|
(4,323
|
)
|
|
|
(12,911
|
)
|
|
|
(7,531
|
)
|
|
|
(6,697
|
)
|
|
|
(4,303
|
)
|
Impairment loss
|
|
|
—
|
|
|
|
(85,935
|
)
|
|
|
—
|
|
|
|
(147,018
|
)
|
|
|
(115,179
|
)
|
Total operating expenses
|
|
|
(4,323
|
)
|
|
|
(104,206
|
)
|
|
|
(27,936
|
)
|
|
|
(168,922
|
)
|
|
|
(125,274
|
)
|
Loss from operations
|
|
|
(4,323
|
)
|
|
|
(105,949
|
)
|
|
|
(27,592
|
)
|
|
|
(168,373
|
)
|
|
|
(124,398
|
)
|
Interest income/(expense), net
|
|
|
—
|
|
|
|
7
|
|
|
|
26
|
|
|
|
(411
|
)
|
|
|
(907
|
)
|
Other income/(expense), net
|
|
|
—
|
|
|
|
46
|
|
|
|
39
|
|
|
|
28
|
|
|
|
(33
|
)
|
Loss before provision for income taxes
|
|
|
(4,323
|
)
|
|
|
(105,896
|
)
|
|
|
(27,527
|
)
|
|
|
(168,756
|
)
|
|
|
(125,338
|
)
|
Income tax benefits
|
|
|
—
|
|
|
|
1,250
|
|
|
|
2,234
|
|
|
|
6,857
|
|
|
|
2,098
|
|
Net loss
|
|
|
(43,869
|
)
|
|
|
(93,570
|
)
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
Net loss attributable to holders of ordinary shares of JMU Limited
|
|
|
(84,670
|
)
|
|
|
(95,935
|
)
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.28
|
)
|
|
|
(0.09
|
)
|
|
|
(0.02
|
)
|
|
|
(0.11
|
)
|
|
|
(0.08
|
)
|
Diluted
|
|
|
(0.28
|
)
|
|
|
(0.09
|
)
|
|
|
(0.02
|
)
|
|
|
(0.11
|
)
|
|
|
(0.08
|
)
|
Weighted average shares used in calculating net loss per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
1,474,087,060
|
|
|
|
1,476,144,194
|
|
|
|
1,476,801,177
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
1,474,087,060
|
|
|
|
1,476,144,194
|
|
|
|
1,476,801,177
|
|
(1) Due to the divestment of our group buying business in 2015,
the results of operations from the group buying business is reclassified as discontinued operations and the consolidated statements
of operations for the year ended December 31, 2014 have been restated to reflect such reclassification.
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(in US$ thousands)
|
|
Selected consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,306
|
|
|
|
41,083
|
|
|
|
13,428
|
|
|
|
14,055
|
|
|
|
4,619
|
|
Total assets
|
|
|
20,343
|
|
|
|
342,774
|
|
|
|
274,045
|
|
|
|
136,142
|
|
|
|
5,025
|
|
Total current liabilities
|
|
|
67,500
|
|
|
|
24,950
|
|
|
|
15,227
|
|
|
|
22,806
|
|
|
|
20,289
|
|
Total liabilities
|
|
|
129,466
|
|
|
|
38,093
|
|
|
|
25,648
|
|
|
|
32,592
|
|
|
|
27,211
|
|
Total shareholders’ equity/(deficit)
|
|
|
(233,776
|
)
|
|
|
304,681
|
|
|
|
248,397
|
|
|
|
103,550
|
|
|
|
(22,186
|
)
|
Total liabilities and shareholders’ equity
|
|
|
20,343
|
|
|
|
342,774
|
|
|
|
274,045
|
|
|
|
136,142
|
|
|
|
5,025
|
|
|
B.
|
Capitalization and indebtedness.
|
Not applicable.
|
C.
|
Reasons for the offer and use of proceeds.
|
Not applicable.
Risks Relating to Our Business and Industry
We have a limited operating history and our business model
is subject to uncertainties, which makes it difficult to evaluate our business.
We disposed of our group buying business
in September 2015. Our current business of providing integrated B2B services to food service suppliers and customers only started
in late 2014, and we have only owned it since June 2015. The limited history of our current operations makes it difficult for you
to evaluate our business, financial performance and prospects, and our historical growth rate might not be indicative of our future
performance. We cannot assure you that our current business of providing integrated B2B services to food service suppliers and
customers will grow as rapidly as we expect or achieve the critical mass needed for long-term success. Our business model of building
a fair business ecosystem for food service businesses in China and cultivating the traditional offline food service businesses
using internet tools is still a new business model in China, while the catering and hotel industries in China are growing rapidly
and we face consistent challenges to innovate our business and service model to serve our customers. Given the limited history
of our business model and its fast and iterative developments, it is difficult to predict if our growth will be sustainable in
the future, and the market might evolve in ways that are difficult to anticipate. You should consider our prospects in light of
the risks and uncertainties that fast-growing companies in a rapidly evolving market might encounter. These risks and difficulties
include, but are not limited to:
|
·
|
a new and relatively unproven business model;
|
|
·
|
our ability to anticipate and adapt to a developing market and industry;
|
|
·
|
high expenditures associated with our geographic expansion, brand promotion and marketing activities;
|
|
·
|
our need to achieve greater brand recognition;
|
|
·
|
our ability to attract sufficient suppliers and customers in the food services industry and generate sufficient net sales or
cash flow;
|
|
·
|
market acceptance of our business model;
|
|
·
|
difficulties in managing rapid growth in personnel and operations; and
|
|
·
|
our ability to compete in the market.
|
Currently we are charging our customers
low margin in our direct sales operation, and not charging any commission or service fees for third-party sellers to use our platform.
There is no assurance that we can keep the expansion of our B2B business at the current pace after we start to apply higher margins
to transactions in our direct sales business and charge service fees for third-party sellers, and our ability to leverage our scale
of business to have our platform users to continue using our services with margins and service charges is uncertain.
We cannot be certain that our business strategy
will be successful or that we will successfully address these risks. Failure to address any of the risks described above could
have an adverse effect on our business, financial condition and results of operations.
We have a history of losses, have spent substantial amounts
in operating expenses and could require additional funding in the future.
We have invested substantial amounts
of cash into research and development and business development to take the market share and develop our business at a fast
pace. Our current food-industry B2B service business has incurred net loss in the amount of US$415.1 million since we
acquired it in June 2015, primarily due to goodwill impairment of US$319.0 million and impairment of US$28.4 million provided
for long-lived assets, and because we have not been charging service fees or margins for a majority of all transactions on
our platform as part of our strategy to achieve scale of business. We have incurred net losses and experienced negative cash
flow from operating activities since our inception. In addition, we had net current liabilities as of December 31, 2018. As
we continue to expand and develop, we expect to continue to incur losses in the near future.
We expect to continue to spend additional
amounts in operating expenses in line with our projected growth. We received net proceeds of US$37.3 million from our initial
public offering on April 8, 2015 and the underwriters’ exercise of the over-allotment option, after deducting underwriting
discounts and commissions and offering expenses payable by us. Additionally, we received US$15.0 million in a private placement
transaction with Mr. Maodong Xu in September 2015. In May 2017, we received a loan of RMB35.0 million (US$5.4 million) from one
of our principal shareholders. In April 2018, we received additional loans of RMB70.0 million (US$11.1 million) from Ms. Xiaoxia
Zhu and Ms. Huimin Wang. We believe that our current cash and cash equivalents and anticipated cash flow from operations, together
with commitments by Ms. Xiaoxia Zhu to provide the necessary financial support, will be sufficient to meet our anticipated cash
needs until June 28, 2020 and as long as Ms. Xiaoxia Zhu remains director and chief executive officer of our company. However,
we may require additional cash due to changing business conditions or other future developments, including any investments we
may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility
or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing
shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating
and financing covenants that would restrict our operations. We cannot be certain that additional funding will be available to
us on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to
us when needed, we may have to significantly delay, scale back or discontinue a certain portion of our operations. Any of these
events could significantly harm our business, financial condition and prospects.
We may need to recognize significant impairment losses
in connection with past and future acquisitions, which may have a material and adverse effect on our financial results.
We acquired Join Me Group (HK)
Investment Company Limited, or JMU HK, in June 2015 to establish our food-industry B2B services. We may acquire other
companies that are complementary to our business in the future. We record goodwill if the purchase price paid in an
acquisition exceeds the amount assigned to the fair value of the assets acquired and liabilities assumed, and we also
obtained long-lived intangible assets in some acquisitions. We are required to test goodwill and long-lived assets for
impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired in
accordance with ASC 350 was nil, “Intangibles – Goodwill and Other” and ASC 360-10, “Impairment
and Disposal of Long-Lived Assets.” The carrying amount of goodwill was nil as of December 31, 2018 after the annual
impairment test, and the impairment losses of nil, US$127.3 million and US$105.8 million were recognized during the years
ended December 31, 2016, 2017 and 2018, respectively. We have also provided impairment of US$19.8 million and US$8.6
million for long-lived assets other than goodwill during the year ended December 31, 2017 and 2018. If the carrying amount
of goodwill or long-lived assets in connection with past or future acquisitions is determined to be further impaired, we will
be required to recognize additional impairment losses and our financial results will be adversely and materially
affected.
If we are unable to provide superior customer experience,
our business and reputation may be materially and adversely affected.
The success of our business hinges on our
ability to provide superior customer experience, which in turn depends on a variety of factors. These factors include our ability
to continue to attract suppliers and third-party sellers that can offer high quality products at competitive prices, source products
to respond to customer demands, maintain the quality of products and services provided on our platform, and provide timely and
reliable delivery, flexible payment options and superior after-sales service.
We rely completely on third-party
couriers to deliver products, particularly a logistic company which delivered 90% of our online direct sale orders in 2018.
Although we have implemented quality control policies for selecting third-party couriers and for monitoring services rendered
by them, we cannot assure you that third-party couriers can meet our requirement at all times. If products purchased by
customers at our platform are not delivered on time or are delivered in a damaged state, customers may refuse to accept
products and have less confidence in our services. See “—We rely on service from couriers to deliver our orders,
and our third-party sellers use couriers to deliver a significant number of orders for them. If these third-party service
providers fail to provide reliable delivery services, our business and reputation may be materially and adversely
affected.” Furthermore, employees of contracted third-party couriers interact with our customers
personally. We maintain cooperation arrangements with a number of third-party couriers to deliver products to our customers
and we need to effectively manage these third-party service providers to ensure the quality of customer services. We have in
the past received customer complaints from time to time regarding our delivery and return and exchange services. Any failure
to provide high-quality delivery services to our customers may negatively impact the purchase experience of our customers,
damage our reputation and cause us to lose customers.
Our customer service center in Shanghai
provides real-time assistance to our customers during working hours. If our customer service representatives fail to provide satisfactory
service, or if waiting times are too long due to the volume of calls from customers at peak times, our brand and customer loyalty
may be adversely affected. In addition, any negative publicity or poor feedback regarding our customer service may harm our brand
and reputation and in turn cause us to lose customers and market share.
Any harm to our JMU brand or reputation may materially
and adversely affect our business and results of operations.
We believe that the recognition and reputation
of our JMU brand among our customers, suppliers and third-party sellers has contributed to the growth and success of our business.
Maintaining and enhancing the recognition and reputation of our brand is critical to our business and competitiveness. Many factors,
some of which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability to:
|
·
|
provide a compelling online purchase experience to customers;
|
|
·
|
maintain the popularity, attractiveness, diversity, quality, safety and authenticity of the products that we or third-party
sellers offer;
|
|
·
|
maintain the efficiency, reliability and quality of the delivery services;
|
|
·
|
maintain or improve customers’ satisfaction with our after-sale services;
|
|
·
|
increase brand awareness through marketing and brand promotion activities; and
|
|
·
|
preserve our reputation and goodwill in the event of any negative publicity on customer service, internet security, product
quality, price or authenticity, or other issues affecting us or other e-commerce businesses in China.
|
A public perception that low-quality or
defective goods are sold on our platform or that we or third-party service providers do not provide satisfactory customer service,
even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine
the trust and credibility we have established and have a negative impact on our ability to attract new customers or retain our
current customers. If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of
our website, products and services, it may be difficult to maintain and grow our customer base, and our business and growth prospects
may be materially and adversely affected.
Our quality control might not always be sufficient to ensure the goods and services offered to the customers, which could affect our profits and brand.
We create, promote and help operate online
storefronts in our JMU Mall in collaboration with our suppliers in our direct sales business. Once customers purchase goods through
our website, we rely on our suppliers to provide goods to customers. Any customer dissatisfaction resulting from poor quality of
goods provided by our suppliers could have an adverse effect on our reputation or revenue. Our business depends on our ability
to ensure that high-quality goods are provided to customers on a consistent basis. This has placed, and will continue to place,
substantial demands on our operational, technological and other resources.
In particular, the food service industry
is susceptible to the risk of food-borne illnesses. As with any food service operation we cannot guarantee that our internal controls
will be fully effective in preventing all food-borne illnesses, food contamination or food tampering, which may be caused by the
products of the third-party food suppliers and distributors or the supply chain of goods such as the food storage or the delivery.
Reports in the media or on social media of one or more instances of food-borne illness from the products offered at our platform
could negatively affect our sales. This risk exists even if it were later determined that the illness had been wrongly attributed
to us.
We cannot assure you that such measures
will always be sufficient in discovering and remedying problems with merchandise, some of which are out of our control. Any losses
that we may suffer from customers’ request for a large amount of refunds or replacement of goods or future liability claims,
including the successful assertion against us of one or a series of large claims, could adversely affect our cash flows, financial
conditions and results of operations. In addition, as we expand the types of goods and services for which we offer, the operational
cost of quality control will also likely increase, which will have a negative effect on our profits.
If we are unable to offer products that attract new customers
and new purchases from existing customers, our business, financial condition and results of operations may be materially and adversely
affected.
Our future growth depends on our ability
to continue to attract new customers as well as new purchases from existing customers. Our website makes recommendations to customers
based on our understanding of the market as well as the popularity of products on our platform, and we also send product recommendations
regularly to our customers through various means, such as emails, social network media and hardcopy catalogues. Our customers choose
to purchase products on our website due in part to the attractive prices that we offer, and they may choose to shop elsewhere if
we cannot match the prices offered by other websites or by offline suppliers. If our customers cannot find their desired products
on our website at attractive prices, they may lose interest in us and visit our website less frequently or even stop visiting our
website altogether, which in turn may materially and adversely affect our business, financial condition and results of operations.
We face intense competition. We may lose market share
and customers if we fail to compete effectively.
The e-commerce industry in China is intensely
competitive. We compete for customers, orders, suppliers and third-party sellers. Our current or potential competitors include
traditional offline food service suppliers and other internet companies who develop their business and tap into the market we are
operating in. In addition, new and enhanced technologies may increase the competition in the e-commerce industry and new competitive
business models may appear.
Increased competition may reduce our margins,
market share and brand recognition, or result in significant losses. When we set prices, we have to consider how competitors have
set prices for the same or similar products. When they cut prices or offer additional benefits to compete with us, we may have
to lower our own prices or offer additional benefits or risk losing market share, either of which could harm our financial condition
and results of operations.
Some of our current or future competitors
have or may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases or
greater financial, technical or marketing resources than we do. Smaller companies or new entrants may be acquired by, receive
investment from or enter into strategic relationships with well-established and well-financed companies or investors which would
help enhance their competitive positions. Some of our competitors may be able to secure more favorable terms from suppliers, devote
greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and devote substantially
more resources to their website, mobile application and systems development than us. We cannot assure you that we will be able
to compete successfully against current or future competitors, and competitive pressures may have a material and adverse effect
on our business, financial condition and results of operations.
If we fail to manage our inventory effectively, our results
of operations, financial condition and liquidity may be materially and adversely affected.
Although our inventory was relatively small
as of December 31, 2018, our business model may require us to increase our inventory as our business expands and we will need to
manage our inventory effectively. We depend on our understanding of the food service industry as well as demand forecasts for various
kinds of products to make purchase decisions and to manage our inventory. Demand for products, however, can change significantly
between the time inventory is ordered and the date by which we hope to sell it. Demand may be affected by seasonality, new product
launches, changes in product cycles, pricing, product defects, changes in customer spending patterns, and other factors, and our
customers may not order products in the quantities that we expect. Customers are extremely strict about the expiration date of
food products, and poor inventory management might lead to products expiring and becoming unacceptable in the market. In addition,
when we begin selling a new product, it may be difficult to establish supplier relationships, determine appropriate product selection,
and accurately forecast demand. The acquisition of certain types of inventory may require significant lead time and prepayment
and they may not be returnable.
Substantial future sales of our shares in the public market,
or the perception that these sales could occur, could cause our share price to decline.
Additional sales of our shares in the public
market, or the perception that these sales could occur, could cause the market price of our shares to decline. As of the date
of this annual report, we had 2,108,869,528 ordinary shares outstanding (excluding 759,600 ordinary shares in the form of ADSs
that are reserved for issuance upon the exercise of share awards), of which 569,783,423 ordinary shares or approximately 38.6%
were held by previous shareholders of JMU HK before our acquisition of JMU HK in 2015. Pursuant to a Registration Rights Agreement
we entered into with these former JMU HK shareholders on June 8, 2015, we agreed to provide them with certain registration rights
in respect of our ordinary shares held by them, subject to certain limitations. See “Item 7. Major Shareholders and Related
Party Transactions—B. Related Party Transactions—Registration Rights Agreement.” Registration of these shares
under the Securities Act would result in these shares becoming freely tradable without restriction immediately upon the effectiveness
of the registration statement. If part or all of these shares are sold in the public market or if any existing shareholder or
shareholders sell a substantial amount of shares, the prevailing market price for our shares could be adversely affected. Such
sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
If we fail to manage and expand our relationships with
suppliers, or otherwise fail to procure products at favorable terms, our business and growth prospects may suffer.
We had 17 suppliers for our online direct
sales business as of December 31, 2018. Our suppliers include food producers, manufacturers, distributors and resellers. Maintaining
strong relationships with these suppliers is important to the growth of our business. In particular, we depend significantly on
our ability to procure products from suppliers on favorable pricing terms. We typically enter into framework agreements with suppliers,
and these framework agreements do not ensure the availability of products or the continuation of particular pricing practices or
payment terms beyond the end of the contractual term. In addition, our agreements with suppliers typically do not restrict the
suppliers from selling products to other buyers. We cannot assure you that our current suppliers will continue to sell products
to us on commercially acceptable terms, or at all, after the term of the current agreement expires, and we cannot assure you that
our current suppliers will honor such framework agreements within the terms of such agreements. Any breach of such framework agreements
by our suppliers may lead to the monetary damages as we may not be able to fully recover our deposits and adversely impact our
operation. Even if we maintain good relations with our suppliers, their ability to supply products to us in sufficient quantity
and at competitive prices may be adversely affected by economic conditions, labor actions, regulatory or legal decisions, natural
disasters or other causes. In the event that we are not able to attract suppliers or third-party sellers that can provide merchandise
at favorable prices, our revenues and cost of revenues may be materially and adversely affected. In the event any distributor or
reseller does not have authority from the relevant manufacturer to sell certain products to us, such distributor or reseller may
cease selling such products to us at any time. If our suppliers cease to provide us with favorable payment terms, our requirements
for working capital may increase and our operations may be materially and adversely affected. We will also need to establish new
supplier relationships to ensure that we have access to a steady supply of products on favorable commercial terms. If we are unable
to develop and maintain good relationships with suppliers that would allow us to obtain a sufficient amount and variety of authentic
and quality merchandise on acceptable commercial terms, it may inhibit our ability to offer sufficient products sought by our customers,
or to offer these products at competitive prices. Any adverse developments in our relationships with suppliers could materially
and adversely affect our business and growth prospects. In addition, as part of our growth strategy, we plan to further expand
our product offerings. If we fail to attract new suppliers to sell their products to us due to any reason, our business and growth
prospects may be materially and adversely affected.
If we are unable to conduct our marketing activities cost-effectively,
our results of operations and financial condition may be materially and adversely affected.
We have incurred a great amount of expenses
on a variety of different marketing and brand promotion efforts, and recommendation for trial use of our new products, designed
to enhance our brand recognition and increase sales of our products. Our brand promotion and marketing activities may not be well
received by customers and may not result in the levels of product sales that we anticipate. We incurred US$5.8 million of selling
and marketing expenses in 2018. Marketing of food products online to food service customers is evolving. This further requires
us to enhance our marketing approaches and experiment with new marketing methods to keep pace with customer preferences. Failure
to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner could reduce our
market share, cause our revenues to decline and negatively impact our profitability.
We rely on service from couriers to deliver our orders,
and our third-party sellers use couriers to deliver a significant number of orders for them. If these third-party service providers
fail to provide reliable delivery services, our business and reputation may be materially and adversely affected.
We rely completely on third-party couriers
to deliver products, particularly a logistic company which delivered 90% of our online direct
sale orders in 2018. We maintain cooperation arrangements with a number of third-party couriers to deliver our products to our
customers and sometimes suppliers in our direct sales operation deliver products to our customers themselves. Third-party sellers
on our marketplace also use their own logistics network or other third-party couriers. Interruptions to or failures in these third
parties’ delivery services could prevent the timely or proper delivery of products offered at our platform to customers.
These interruptions may be due to events that are beyond our control or the control of these delivery companies, such as inclement
weather, natural disasters, transportation disruptions or labor unrest. In addition, if our third-party delivery service providers
fail to comply with applicable rules and regulations in China, our delivery services may be materially and adversely affected.
We may not be able to find alternative delivery companies to provide delivery services in a timely and reliable manner, or at all.
Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or government shut-down of
the delivery companies we engage to make deliveries, especially those local companies with relatively small business scales. If
products offered at our platform are not delivered in proper condition or on a timely basis, our business and reputation could
suffer.
Our online marketplace is subject to risks associated
with third-party sellers.
As of December 31, 2018 there were
approximately 3,779 third-party sellers on our online marketplace. We do not exercise control over the storage and delivery
of products sold by third-party sellers on our online marketplace. Our third-party sellers use their own or third-party
storage facilities and delivery systems to store and deliver their products, which makes it more difficult for us to ensure
that our customers get high quality service for all products sold on our website. If any third-party seller fails to
effectively control the quality of the products that it sell on our website, or if it does not deliver the products
or delivers them late or delivers products that are materially different from its description of them, or if it sells
low quality products on our website, the reputation of our online marketplace and our JMU brand may be materially and
adversely affected and we could face claims that we should be held liable for any losses. Moreover, despite our efforts to
prevent it, some products sold on our online marketplace may compete with the products we sell directly, which may
cannibalize our online direct sales. In addition, the supplier relationships, customer acquisition dynamics and other
requirements for our online marketplace may not be the same as those for our online direct sales operations, which may
complicate the management of our business. In order for our online marketplace to be successful, we must continue to identify
and attract third-party sellers, and we may not be successful in this regard.
The successful operation of our business depends upon
the performance and reliability of the internet and mobile telecommunications infrastructures in China.
Our business depends on the performance
and reliability of the internet and mobile telecommunications infrastructures in China. Almost all access to the internet is maintained
through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of
Industry and Information Technology of China. In addition, the national networks in China are connected to the internet through
state-owned international gateways, which are the only channels through which a domestic user can connect to the internet outside
of China. We might not have access to alternative networks in the event of disruptions, failures or other problems with China’s
internet infrastructure. In addition, the internet infrastructure in China might not support the demands associated with continued
growth in internet usage.
The failure of telecommunications network
operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites. We have
no control over the costs of the services provided by the national telecommunications operators. If the prices that we pay for
telecommunications and internet services rise significantly, or if the telecommunication network in China is disrupted or failed,
our gross margins could be adversely affected. Technical limitations on internet use could also be developed or implemented. For
example, restrictions could be implemented on personal internet use in the workplace in general or access to our website in particular.
This could lead to a reduction of customers’ activities or a loss of customers altogether, which in turn could have an adverse
effect on our financial position and results of operations. In addition, if internet access fees or other charges to internet users
increase, our user traffic might decrease, which in turn could significantly decrease our revenues.
The proper functioning of our technology platform is essential
to our business. Any failure to maintain the satisfactory performance of our website and systems could materially and adversely
affect our business and reputation.
The satisfactory performance, reliability
and availability of our technology platform are critical to our success and our ability to attract and retain customers and provide
quality customer service. Most of our sales of products are made online through our website and mobile applications. Any system
interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result
in the unavailability or slowdown of our website or reduced order fulfillment performance could reduce the volume of products sold
and the attractiveness of product offerings on our website. Our servers may also be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays
or errors in transaction processing, loss of data or the inability to accept and fulfill customer orders. Security breaches, computer
viruses and hacking attacks have become more prevalent in our industry. We have experienced in the past, and may experience in
the future, such attacks and unexpected interruptions. We can provide no assurance that our current security mechanisms will be
sufficient to protect our IT systems from any third-party intrusions, viruses or hacker attacks, information or data theft or other
similar activities. Any such future occurrences could reduce customer satisfaction, damage our reputation and result in a material
decrease in our revenue.
Additionally, we must continue to upgrade
and improve our technology platform to support our business growth, and failure to do so could impede our growth. However, we cannot
assure you that we will be successful in executing these system upgrades and improvement strategies. In particular, our systems
may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the
existing systems on a timely basis, or at all. If our existing or future technology platform does not function properly, it could
cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect
our business, financial condition and results of operations.
If we fail to adopt new technologies or adapt our website,
mobile applications and systems to changing customer requirements or emerging industry standards, our business may be materially
and adversely affected.
To remain competitive, we must continue
to enhance and improve the responsiveness, functionality and features of our website and mobile applications. The internet and
the e-commerce industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent
introductions of new products and services embodying new technologies and the emergence of new industry standards and practices,
any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify,
develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry
standards and practices, such as mobile internet, in a cost-effective and timely way. The development of websites, mobile applications
and other proprietary technology entails significant technical and business risks. We cannot assure you that we will be able to
use new technologies effectively or adapt our website, mobile applications, proprietary technologies and systems to meet customer
requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing
market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects,
financial condition and results of operations may be materially and adversely affected.
If internet search engines’ ranking methodologies
are modified or our search result page rankings decline, our user traffic could decrease.
We depend in part on various internet companies
in China, such as Baidu, to direct traffic to our website. Our ability to maintain and increase the number of visitors directed
to our website is not entirely within our control. Our competitors’ search engine optimization efforts could result in their
websites receiving a higher search result page ranking than ours, or internet companies could revise their methodologies in an
attempt to improve their search results, which could adversely affect the placement of our search result page ranking. If internet
companies modify their search algorithms in ways that are detrimental to our customer growth or in ways that make it harder for
customers to find our website, or if our competitors’ search engine optimization efforts are more successful than ours, our
overall growth in user traffic could slow down or decrease, and we could lose existing customers. Our website has experienced fluctuations
in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of visitors
directed to our website could harm our business, financial condition and results of operations.
Failure to protect confidential information of our customers
and network against security breaches could damage our reputation and brand and substantially harm our business and results of
operations.
A significant challenge to the e-commerce
industry is the secure storage of confidential information and its secure transmission over public networks. All of the orders
for products we offer are made through our website and our mobile applications. In addition, some transactions are settled through
third-party online payment services. We also share certain personal information about our customers with contracted third-party
couriers, such as their names, addresses, phone numbers and transaction records. Maintaining complete security for the storage
and transmission of confidential information on our technology platform, such as customer names, personal information and billing
addresses, is essential to maintaining customer confidence.
We have adopted security policies and measures,
including encryption technology, to protect our proprietary data and customer information. However, advances in technology, the
expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise
or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially
hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private
information we hold as a result of our customers’ visits to our website and use of our mobile applications. Such individuals
or entities obtaining our customers’ confidential or private information may further engage in various other illegal activities
using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party
providers of online payment services through which some of our customers may elect to make payment for purchases. The contracted
third-party couriers we use may also violate their confidentiality obligations and disclose or use information about our customers
illegally. Any negative publicity on our website’s or mobile applications’ safety or privacy protection mechanisms
and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, could have
a material and adverse effect on our public image, reputation, financial condition and results of operations. We have experienced
breaches of our information security measures in our B2C business in the past, and we cannot assure you that similar events will
not occur in our B2B business in the future. If we give third parties greater access to our technology platform in the future as
part of providing more technology services to third-party sellers and others, it may become more challenging for us to ensure the
security of our systems. Any compromise of our information security or the information security measures of our contracted third-party
couriers or third-party online payment service providers could have a material and adverse effect on our reputation, business,
prospects, financial condition and results of operations.
Practices regarding the collection, use,
storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently
come under increased public scrutiny. As e-commerce continues to evolve, we believe that increased regulation by the PRC government
of data privacy on the internet is likely. We may become subject to new laws and regulations applying to the solicitation, collection,
processing or use of personal or consumer information that could affect how we store, process and share data with our customers,
suppliers, third-party sellers and third-party service providers like couriers. We generally comply with industry standards and
are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions
on the conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations
could also result in regulatory enforcement actions against us.
Significant capital and other resources
may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply
with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used
by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure
or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal
obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information
or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception by the
public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could
inhibit the growth of e-commerce and other online services generally, which may reduce the number of orders we receive.
We rely on third-party online payment processors
to provide payment processing services, and any disruption to the provision of these services to us could adversely affect
our business and results of operations.
We rely on third-party online payment
processors to provide payment processing services, including the processing of credit card and debit card transactions.
Customers can make purchases through all major online payment systems in China, including Alipay and the online banking
systems of most commercial banks in China. Each online payment system provides payment processing services to us and we pay
service fees pursuant to our agreements with the payment system operators. Typically the term of each of these agreements is
one year, and would be automatically renewed for a term of one year unless otherwise requested by the payment system operator
or us in writing at least one month prior to the expiration date. Our business could be disrupted if any of these
online payment system operators becomes unwilling or unable to provide payment processing services to us, and we could incur
additional cost as we seek alternative payment processing service providers. Moreover, the third-party online
payment processors could fail to obtain, maintain or renew their required qualifications, which could result in a disruption
in their services to us.
For all the online payment transactions,
secured transmission of confidential information, such as customers’ bank account numbers, personal information and billing
addresses, over public networks is essential to maintain customers’ confidence in us. Our current security measures and those
of the third-parties online payment processors might not be adequate. We must be prepared to increase and enhance our security
measures and efforts so that suppliers, third-party sellers and customers have confidence in the reliability of the online payment
systems that we use, which will impose additional costs and expenses and might still not guarantee complete security. In addition,
we do not have control over the security measures implemented by our third-party payment processors. Security breaches of the online
payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information
and could, among other things, damage our reputation and the perceived security of the online payment systems that we use.
In addition, we may in the future increase
the variety of payment methods accepted on our website. As we offer new payment options to customers, we could be subject to additional
regulations and compliance requirements. We pay payment processing fees and other fees to third-party payment channels, which would
increase over time and raise our operating costs and lower profitability.
If our senior management is unable to work together effectively
or efficiently or if we lose their services, our business may be severely disrupted.
Our success heavily depends upon the continued
services of our management. In particular, we rely on the expertise and experience of Ms. Xiaoxia Zhu, our chairperson and chief
executive officer, and our other executive officers. The majority of our senior management joined us in 2015. If they cannot work
together effectively or efficiently, our business may be severely disrupted. If one or more of our senior management were unable
or unwilling to continue in their present positions, we might not be able to replace them easily or at all, and our business, financial
condition and results of operations may be materially and adversely affected. If any of our senior management joins a competitor
or forms a competing business, we may lose customers, suppliers, know-how and key professionals and staff members. Our senior management
has entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute arises
between our officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or
we may be unable to enforce them at all.
In addition, while we formulate the overall
business strategy at our headquarters in Shanghai, we also give latitude to our regional supply chain subsidiaries to manage the
daily operations in their respective cities. We cannot assure you that communications between the senior management team and the
local management teams will always be effective, or the executions at the local levels will always have the results that the senior
management team expects.
We have limited insurance coverage and could incur losses
resulting from liability claims or business interruptions.
As the insurance industry in China
is still developing, insurance companies in China currently offer limited business insurance products. We do not have any
product liability insurance or business interruption insurance. As we continue to expand the offerings by our suppliers
and third-party sellers, we could be increasingly exposed to various liability claims related to the products provided by
our suppliers and third-party sellers. Any liability claims, business disruption, or natural disaster could result in
substantial costs and the diversion of resources, which would have an adverse effect on our business and results of
operations.
We might not be able to adequately protect our intellectual
property rights.
We believe our domain names, trademarks,
technology know-how and other intellectual properties enhance our competitive advantages and are important to our success to date
and our future prospects. We have been investing resources to develop our own intellectual properties and we take prudent steps
to protect our intellectual properties and know-how. But we cannot assure you such steps would be sufficient to prevent the infringement
of our intellectual properties. If we fail to adequately protect our intellectual property rights, including our rights in know-how
or our trademark, it could have an adverse effect on our operations.
The validity, enforceability and scope of
protection available under intellectual property laws with respect to the internet industry in China are uncertain and still evolving.
Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly,
protection of intellectual property rights in China might not be as effective as in the United States or other western countries.
Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation
to enforce or defend our intellectual property rights or to determine the enforceability, scope and validity of our proprietary
rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial
costs and the diversion of resources and management’s attention.
Companies in the internet and technology
industries are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition
and other violations of third parties’ rights. From time to time, we could face allegations of trademark, copyright, patent
and other intellectual property rights infringement of third parties. Such allegations of intellectual property rights infringements
could come from our competitors and there could also be allegations that we are involved in unfair trade practices.
We may be subject to product liability claims if people
or properties are harmed by the products we sell.
We sell products manufactured by third parties,
some of which may be defective. As a result, sales of such products could expose us to product liability claims relating to personal
injury or property damage and may require product recalls or other actions. Third parties subject to such injury or damage may
bring claims or legal proceedings against us as the retailer of the product. Although we would have legal recourse against the
manufacturer of such products under PRC law, attempting to enforce our rights against the manufacturer may be expensive, time-consuming
and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance
in relation to products we sell. As a result, any material product liability claim or litigation could have a material and adverse
effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure
of funds and managerial efforts in defending them and could have a negative impact on our reputation.
We depend on regulatory approvals and licenses to operate
in our existing markets and to gain access to new markets.
The internet, telecommunication and food
service industries in China are highly regulated by the PRC government and numerous regulatory authorities of the central PRC government
are empowered to issue and implement regulations governing various aspects of the internet and food service industries including
foreign ownership of and licensing and permit requirements pertaining to companies in the internet and food service industries.
The relevant laws and regulations are relatively
new or evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances,
it could be difficult to determine what actions or omissions could be deemed to be in violation of applicable laws and regulations.
Our VIE is required to obtain and maintain the applicable ICP license for value-added Internet services and the applicable license
or permit for selling food, liquor and nutritional supplements through our website. Furthermore, Our VIE could be required to obtain
additional licenses. If Our VIE fails to obtain or maintain any of the required licenses or approvals, its continued business operations
on the internet and the food service industries could subject it to various penalties, such as confiscation of illegal net sales,
fines and the discontinuation or restriction of its operations. Any such disruption in the business operations of Our VIE will
materially and adversely affect our business, financial condition and results of operations.
We are subject to changing laws and regulations regarding
regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.
We are subject to rules and regulations
by various governing bodies, including, for example, the Securities and Exchange Commission, which is charged with the protection
of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China
and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing
laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their
application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty
regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.
If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business
may be harmed.
Certain
audit reports included in this annual
report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board, and consequently you are
deprived of the benefits of such inspection.
One of our independent registered
public accounting firms that issues certain audit reports included in our annual report filed with the U.S. Securities and
Exchange Commission, as auditors of companies that are traded publicly in the United States and firms registered with the
U.S. Public Company Accounting Oversight Board, or the PCAOB, are required by the laws of the United States to undergo
regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards.
Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections
without the approval of the PRC authorities, our auditors are not inspected by the PCAOB. On December 7, 2018, the
SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight
of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a
heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further
actions the SEC and PCAOB will take to address the problem.
Inspections of other firms that the PCAOB
has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China
prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors
are deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our
reported financial information and procedures and the quality of our consolidated financial statements.
Proceedings instituted by the SEC against certain PRC-based
accounting firms, including our previous independent registered public accounting firm, could result in financial statements being
determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
In December 2012, the SEC brought administrative
proceedings against five accounting firms in China, including our previous independent registered public accounting firm, Erns
& Young Hua Ming LLP, or Ernst Young, which provided audit services for the years ended December 31, 2016 and 2017, alleging
that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation
by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending
four of these firms from practicing before the SEC for a period of six months. On February 12, 2014, four of these PRC-based accounting
firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure
and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement
requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents
via the CSRC. If the firms fail to meet specified criteria, during a period of four years starting from the settlement date, the
SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.
Additional remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s
performance of certain audit work, commencement of additional proceedings against a firm, or in extreme cases the resumption of
the current proceeding against all four firms.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our ADSs may be adversely affected.
If our previous independent registered
public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely
find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements for the
years ended December 31, 2016 and 2017, our consolidated financial statements could be determined not to be in compliance with
the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of
our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce
or effectively terminate the trading of our ADSs in the United States.
We face risks related to natural disasters, health epidemics
and other outbreaks, which could significantly disrupt our operations.
Our business could be materially and adversely
affected by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, influenza A (H1N1),
Ebola or another epidemic. Any such occurrences could cause severe disruption to our daily operations, including our fulfillment
infrastructure and our customer service center, and may even require a temporary closure of our facilities. Earthquakes or other
similar disasters affecting cities where we have major operations in China could materially and adversely affect our operations
due to loss of personnel and damages to property, including our inventory and our technology systems. Our operation could also
be severely disrupted if our suppliers, customers or business partners were affected by health epidemics or other natural disasters.
Risks Related to Our Corporate Structure and Dependence on
our Contractual Arrangements with our Affiliates
If the PRC government finds that the agreements that establish
the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in internet
business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations.
Current PRC laws and regulations place
certain restrictions on foreign ownership of companies that engage in internet businesses, including the provision of
internet content distribution services. Foreign investors are limited to services sections opened up in China's WTO
commitments and are not allowed to own more than 50% of the equity interests in any entity conducting internet content
distribution business or other value-added telecom businesses, except e-commerce business, for which there is no upper limit
to the shareholding percentage for foreign investors. Additionally, any such foreign investor must have experience in
providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance
Catalog of Industries for Foreign Investment promulgated in 2017, as amended, and other applicable laws and regulations. We
conduct our operations in China principally through contractual arrangements between our wholly-owned PRC subsidiary,
Shanghai Zhongming, and our consolidated affiliated entity in China, Shanghai
Zhongmin Supply Chain Management Co., Ltd., and Beijing Lianji Technology Co., Ltd., or Our VIEs, and their respective
shareholders. Our contractual arrangements with Our VIEs and their respective shareholders enable us to exercise effective
control over it and hence treat it as our consolidated affiliated entity and consolidate their results. For a detailed
discussion of these contractual arrangements, see “Item 4. Information on the Company—A. History and Development
of the Company.”
In the opinion of our PRC counsel,
Beijing Dacheng Law Offices, LLP (Shanghai), our current ownership structure, the ownership structure of Our WFOEs and Our
VIEs, and the contractual arrangements between Our WFOEs, Our VIEs, and their respective shareholders are in compliance
with existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations. Thus, we cannot assure you, however, that we will be able
to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that
the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other
regulatory requirements, with existing policies or with requirements or policies that might be adopted in the future. PRC
laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government
authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we are
not in compliance with applicable laws and regulations, it could revoke our business and operating licenses, require us
to discontinue or restrict our operations, restrict our right to collect revenues, restrict or prohibit us to finance
our business and operations in China, shut down our servers or block our website, require us to restructure our
operations, impose additional conditions or requirements with which we might not be able to comply, levy fines, confiscate
our income or the income of our PRC subsidiary or affiliated PRC entities, or take other regulatory or enforcement actions
against us that could be harmful to our business. The imposition of any of these penalties would result in an adverse effect
on our ability to conduct our business.
Substantial uncertainties exist with respect to the PRC
Foreign Investment Law (Draft) and how it may impact the viability of our current corporate structure, corporate governance and
business operations.
The Standing Committee of the National People’s
Congress adopted the PRC Foreign Investment Law of PRC (Draft), or the Draft, in March 2019, aiming to, upon its enactment in
January 2020, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture
Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together
with their implementation rules and ancillary regulations. The Draft embodies an expected PRC regulatory trend to rationalize its
foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic investments.
Among other things, the Draft expands
the definition of foreign investment and introduces the principle for determining whether a company is considered a
foreign-invested enterprise, or an FIE. The Draft specifically provides that an FIE refers to an enterprise all or part of
whose capital is invested by foreign investor(s) and duly registered and established within China in accordance with Chinese
law. “Foreign investment” in the Draft refers to investment activities directly or indirectly conducted by one or
more natural persons, business entities, or otherwise organizations of a foreign country, or the Foreign Investor, within
China, with the investment activities including the following situations: (i) a Foreign Investor, individually or
collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a Foreign Investor acquires
stock shares, equity shares, interests in assets, or other similar rights to and interests in an enterprise within China;
(iii) a Foreign Investor, individually or collectively with other investors, invests in a new project within China; and (iv)
foreign investments in other forms as provided by law, administrative regulations, or by the State Council.
Once an entity is determined to be an FIE,
it shall be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” which was
separately issued by the National Development and Reform Commission and the Ministry of Commerce. If the underlying business of
the FIE falls within the negative list, the relevant market entry clearance, prior approval from the government authorities as
mandated by the existing foreign investment legal regime would be required for establishment of the FIE.
The provision of value-added telecommunication
services, which we conduct through Our VIEs, is currently subject to foreign investment restrictions set forth in the Catalogue
of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform Commission and the
Ministry of Commerce, as amended in June 2017 and subsequently partially amended by Special Administrative Measures (Negative List)
for Foreign Investment Access in June 2018.
Considering the possibility that
any future law, administrative regulations or provisions of the State Council may put foreign companies with PRC VIEs under
the supervision of the Draft, It is unclear whether Our VIEs would be determined to be FIEs. Therefore, it is also unclear
whether the market entry clearance shall be completed by companies with existing VIE structures like us. If such clearance
is required, we will face uncertainties as to whether it can be timely obtained, or at all.
We rely on contractual arrangements with Our VIEs in
China and their respective shareholders for our operations, which might not be as effective as direct ownership in providing
operational control.
Since PRC laws restrict foreign
equity ownership in companies engaged in certain internet businesses in China, we rely on contractual arrangements with
our consolidated affiliated entity, in which we do not hold shares, and its shareholder to operate our business in China. If
we held the shares of Our VIEs, we would be able to exercise our rights as a shareholder to effect changes in their
respective board of directors, which in turn could effectuate changes at the management level, subject to any applicable
fiduciary obligations. However, under the current contractual arrangements, we rely on Our VIEs and their shareholders’
performance of their contractual obligations to exercise effective control. Our contractual arrangements are
generally effective for the complete period Our VIEs exists. In general, neither Our VIEs nor their respective shareholders could
terminate the contracts prior to the expiration date. However, the shareholders of Our VIEs might not act in the best interests
of our company or might not perform its obligations under these contracts. Such risks exist throughout the period in which
we intend to operate our business through the contractual arrangements with our consolidated affiliated entity. We can
replace the shareholder of Our VIEs at any time pursuant to our contractual arrangements with it and its
shareholders. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights
under these contracts through the operation of PRC law and courts and therefore will be subject to uncertainties in the PRC
legal system. See “—Any failure by Our VIEs or its shareholder to perform their obligations under our contractual
arrangements with them could have an adverse effect on our business.” Therefore, these contractual arrangements might
not be as effective as the direct holding of shares.
Any failure by Our VIEs or their shareholders to perform their
obligations under our contractual arrangements with them could have an adverse effect on our business.
Our VIEs and their shareholders could fail to
take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they
fail to perform their obligations under their respective agreements with us, we might have to rely on legal remedies under PRC
law, including seeking specific performance or injunctive relief, which might not be effective.
All of these contractual arrangements are
governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would
be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements, which could make it difficult to exert
effective control over our consolidated affiliated entity, and our ability to conduct our business could be adversely affected.
Additionally, under PRC law, rulings by arbitrators are final. Parties cannot appeal the arbitration results in courts. If the
losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may enforce the
arbitration awards only in PRC courts through arbitration award recognition proceedings, which could require additional expenses
and delay.
Contractual arrangements with Our VIEs might result in
adverse tax consequences to us.
Under applicable PRC tax laws and
regulations, arrangements and transactions among related parties could be subject to audit or scrutiny by the PRC tax
authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face
adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements between Our WFOEs,
Our VIEs and their respective shareholders were not entered into on an arms-length basis and therefore constituted unfavorable
transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward
adjustment on taxation. In addition, the PRC tax authorities could impose late payment fees and other penalties on our
consolidated affiliated entity for the adjusted but unpaid taxes. Our results of operations could be adversely affected if
our consolidated affiliated entity’s tax liabilities increase significantly or if it is required to pay late payment
fees or other penalties.
The ultimate beneficial owners of Zhongmin,
Ms. Xiaoxia Zhu and Ms. Huimin Wang, could have potential conflicts of interest with us, and if any such conflicts of
interest are not resolved in our favor, our business could be adversely affected.
Our chairperson and chief executive officer,
Ms. Xiaoxia Zhu, and our director, Ms. Huimin Wang, each hold 48.75% of the equity interests in Shanghai Zhongmin Investment and
Development Group Co., Ltd., or Zhongmin, which in turn holds 100% of equity interests in Our VIE. The interests of
Ms. Zhu and Ms. Wang as the ultimate beneficial owners of Zhongmin could differ from the interests of our company as a whole, notwithstanding
both Ms. Zhu and Ms. Wang are our directors. We cannot assure you that when conflicts of interest arise, Ms. Zhu and
Ms. Wang will act in the best interests of our company or that conflicts of interests will always be resolved in our favor. In
addition, Ms. Zhu and Ms. Wang could cause Zhongmin and Zhongmin to breach or refuse to renew the existing contractual
arrangements with us. Currently, we do not have existing arrangements to address potential conflicts of interest Ms. Zhu and Ms.
Wang could encounter in their capacity as beneficial owners of Zhongmin. We rely on Ms. Zhu and Ms. Wang to comply with the laws
of China, which protect contracts, including the contractual arrangements that Our VIE and its shareholder have entered into with
us, provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest
and not to take advantage of their positions for personal gains. We also rely on Ms. Zhu and Ms. Wang to abide by the laws of the
Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view
to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts
in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes
between us and Ms. Zhu and Ms. Wang, we would have to rely on legal proceedings, which could result in disruption of our business
and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
We rely principally on dividends and other distributions
on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation
on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct
our business.
We are a holding company, and we rely principally
on dividends and other distributions on equity paid by Our WFOE, and our wholly-owned Hong Kong subsidiary, JMU HK, which is the
direct holding company of Our WFOE, for our cash and financing requirements, including the funds necessary to pay dividends and
other cash distributions to our shareholders and service any debt we might incur. If Our WFOE or JMU HK, as the case may be, incurs
debt on their own behalf in the future, the instruments governing the debt could restrict their ability to pay dividends or make
other distributions to us. In addition, the PRC tax authorities could require us to adjust our taxable income under the contractual
arrangements Our WFOE currently has in place with our consolidated affiliated entity in a manner that would adversely affect its
ability to pay dividends and other distributions to us.
Under PRC laws and regulations, Our WFOE,
as a wholly foreign-owned enterprise in China, can pay dividends only out of its accumulated profits as determined in accordance
with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise such as Our WFOE is required to
set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until
the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its
after-tax profits based on PRC accounting standards to other funds. These statutory reserve funds and other funds are not distributable
as cash dividends. As of December 31, 2018, the paid-in registered capital of Our WFOE was US$26.6 million. Any limitation on
the ability of Our WFOE or JMU HK to pay dividends or make other distributions to us could adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
We could lose the ability to use and enjoy assets held
by Our VIE that are important to the operation of our business if such entities go bankrupt or become subject to dissolution or
liquidation proceedings.
As part of our contractual arrangements
with Our VIE, such entity holds certain assets that are important to the operation of our business. If Our VIE goes bankrupt and
all or part of its assets become subject to liens or rights of third-party creditors, we might not be able to continue some or
all of our business activities, which could adversely affect our business, financial condition and results of operations. If Our
VIE undergoes voluntary or involuntary liquidation proceedings, the unrelated third-party creditors could claim rights to some
or all of these assets, thereby hindering our ability to operate our business, which could adversely affect our business, financial
condition and results of operations.
Risks Relating to Doing Business in China
We could be adversely affected by the complexity, uncertainties
and changes in PRC regulation of internet businesses and companies.
The PRC government extensively regulates
the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the
internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement
involve significant uncertainties. As a result, in certain circumstances it could be difficult to determine what actions or omissions
could be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation
of internet businesses include, but are not limited to, the following:
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there are uncertainties relating to the regulation of internet businesses in China, including evolving licensing practices.
This means that permits, licenses or operations at some of our companies could be subject to challenge, or we could fail to obtain
permits or licenses that would be deemed necessary for our operations, or we might not be able to obtain or renew certain permits
or licenses or the government might revoke the certain permits or licenses of us. The major permits and licenses that could be
involved include, without limitation, the ICP license. If we fail to maintain any of these required licenses or approvals, we could
be subject to various penalties, including fines and the discontinuation of or restrictions on our operations. Any such disruption
in our business operations could have an adverse effect on our results of operations;
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new laws and regulations could be promulgated that will regulate internet activities, including online services. If these new
laws and regulations are promulgated, additional licenses could be required for our operations. If our operations do not comply
with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and
regulations, we could be subject to penalties; and
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Our VIE owns the operating website,
www.ccjoin.com
. We do not own the website due to the restriction of foreign investment
in businesses providing value-added telecom services in China, including internet content distribution services. This could significantly
disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful
effects on us.
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The interpretation and application of existing
PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities
of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses
required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses required
under any new laws or regulations. There are also risks that we could be found to violate the existing or future laws and regulations
given the uncertainty and complexity of China’s regulation of internet businesses.
On July 13, 2006, the Ministry of Industry
and Information Technology, or the MIIT, the successor of the Ministry of Information Industry, issued the Notice of the Ministry
of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecom Services. This notice prohibits
domestic telecom services providers from leasing, transferring or selling telecom business operating licenses to any foreign investor
in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecom business
in China. According to this notice, either the holder of a value-added telecom business operating license or its shareholders must
directly own the domain names and trademarks used by such license holders in their provision of value-added telecom services. The
notice also requires each license holder to have the necessary facilities, including servers, for its approved business operations
and to maintain such facilities in the regions covered by its license. Currently, Our VIE owns the related domain names, holds
the ICP licenses necessary for the operation of our
www.ccjoin.com
website, and has applied for related trademarks with
the Trademark Office of the State Administration for Industry and Commerce. Pursuant to the Administrative Measures on Internet
Information Services effective since January 2011, as amended, commercial internet information services are subject to the licensing
system. In case the operator provides commercial internet information services without obtaining an operation license or the services
provided by the operator exceed the scope of the services as permitted by the operation license, the relevant telecom administrative
agency could order to have such act corrected within a specified period. Where there is illegal income, the illegal income could
be confiscated and a fine of no less than three times but no more than five times the value of the illegal income would be imposed;
where there is no illegal income or the illegal income does not exceed RMB50,000, a fine of no less than RMB100,000 but no more
than RMB1,000,000 could be imposed; in the event of a serious case, the operator shall be ordered to close down its website.
Uncertainties with respect to the PRC legal system could
have an adverse effect on us.
The PRC legal system is a civil law system
based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited for reference
but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal
system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always consistent, and enforcement
of these laws, regulations and rules involves uncertainties, which could limit the available legal protections.
In addition, the PRC administrative and
court authorities have significant discretion in interpreting and implementing or enforcing statutory rules and contractual terms,
and it could be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection
we could enjoy in the PRC than under some more developed legal systems. These uncertainties could affect our judgment on the relevance
of legal requirements and our decisions on the measures and actions to be taken to fully comply therewith, and could affect our
ability to enforce our contractual or tort rights. Such uncertainties could therefore increase our operating costs and expenses
as well as adversely affect our business and results of operations.
Furthermore, the PRC legal system is based
in part on government policies and internal rules, some of which are not published on a timely basis or at all, and could have
a retroactive effect. As a result, we might not be aware of our violation of any of these policies and rules until sometime after
the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual
property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could adversely affect
our business and impede our ability to continue our operations.
Regulation and censorship of information distribution
over the internet in China could adversely affect our business, and we could be liable for information displayed on, retrieved
from or linked to our website.
China has enacted laws and regulations governing
internet access and the distribution of products, services, news, information and other content through the internet. In the past,
the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC
laws and regulations. If any of our internet content was deemed by the PRC government to violate any content restrictions, we would
not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines,
suspension of business and revocation of required licenses, which could adversely affect our business, financial condition and
results of operations. We could also be subject to potential liability for any unlawful actions of users of our website or for
content we distribute that is deemed inappropriate. It could be difficult to determine the type of content that could result in
liability to us, and if we are found to be liable, we could be prevented from operating our website in China.
Regulation of food services in China could adversely affect
our business, and we could be liable for food business operations.
China has enacted laws and regulations governing
the sale of food. In accordance with the Food Safety Law of the People’s Republic of China, the Administrative Measures for
the Licensing of Food Business Operations, the Implementing Regulations for the Food Safety Law of the People’s Republic
of China and other relevant laws and regulations, business operators of food services shall carry out production and operation
in accordance with the laws, regulations and food safety standards, ensure food safety, uphold integrity and self-discipline, be
accountable to the public and society at large, accept public supervision and assume social responsibility. We have already obtained
a Food Distribution Permit, a Retailing License for Liquor and a Wholesale License for Liquor. We believe we now possess all necessary
licenses and permits to sell all categories of food products on our website. However, it is possible that the PRC government will
require us to apply for additional licenses for certain specific categories of products. We cannot assure you that we can obtain
any such additional permits from the PRC government at reasonable cost, or at all. Additionally, if any food product we sold is
found unsafe by the PRC government, we will be punished under the relevant laws and regulations, and we may have to cease the sale
of the whole category that contains the unsafe food product.
Governmental control of currency conversion could affect
the value of your investment.
The PRC government imposes controls on the
convertibility between the Renminbi and foreign currencies despite the significant reduction over the years by the PRC government
of control over routine foreign exchange transactions under current accounts. Substantially all of our revenues are denominated
in Renminbi. Under our current holding company corporate structure, our income is primarily derived from dividend payments from
our PRC subsidiary. Shortages in the availability of foreign currency or other restrictions could restrict the ability of our PRC
subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-
denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from
SAFE by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where Renminbi
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated
in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account
transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we might not be able to pay dividends in foreign currencies to our shareholders, including holders of our
ADSs.
Fluctuations in exchange rates of the Renminbi could affect
our reported results of operations.
Substantially all of our revenues and expenses
are denominated in RMB. The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s
political and economic conditions and by China’s foreign exchange policies, among other things. Since June 2010, the RMB
has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces
or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
As we rely on dividends and other fees paid
to us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi could adversely
affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S.
dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive
from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would
have a negative effect on the U.S. dollar amount available to us. In addition, since our functional and reporting currency is the
U.S. dollar while the functional currency of our subsidiary and consolidated affiliated entities in China is Renminbi, appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative effect on our reported
financial results, which might not reflect any underlying change in our business, financial condition or results of operations.
Our operations could be adversely affected by changes
in China’s political, economic and social conditions.
Substantially all of our assets and operations
are located in China. Accordingly, our business, financial condition, results of operations and prospects could be influenced to
a significant degree by political, economic and social conditions in China generally and by continued economic growth in China
as a whole.
The Chinese economy differs from the economies
of most developed countries in many respects, including the level of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization
of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved
corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government.
In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial
policies. The PRC government also exercises significant control over China’s economic growth through allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment
to particular industries or companies.
While the Chinese economy has experienced
significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of
these measures might benefit the overall Chinese economy, but could have a negative effect on us. For example, our financial condition
and results of operations could be adversely affected by government control over capital investments or changes in tax regulations.
In the past the PRC government has implemented certain measures, including interest rate increases, to control the pace of economic
growth. These measures could cause decreased economic activity in China, which could adversely affect our business and operating
results. Any significant increase in China’s inflation rate could increase our costs and have an adverse effect on our operating
margins. In addition, any sudden changes to China’s political system or the occurrence of widespread social unrest could
have negative effects on our business and results of operations.
Under the PRC enterprise income tax law, we could be classified
as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences to us and our
non-PRC shareholders.
Under the PRC Enterprise Income Tax
Law and its implementation rules, or the Enterprise Income Tax Rules, an enterprise established outside of the PRC with
“de facto management bodies” within the PRC is considered a resident enterprise and is subject to PRC enterprise
income tax at the rate of 25% on its global income. The Enterprise Income Tax Rules define the term “de facto
management bodies” as “establishments that carry out substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The only detailed
guidance currently available regarding the definition of “de facto management body” as well as the determination
of the tax residence of offshore incorporated enterprises whose primary controlling shareholder is a PRC company or a PRC
corporate group, and such enterprises’ tax administrations are set forth in two notices, the Notice On Issues Relating
to Determination of Chinese-Controlled Offshore Enterprise as PRC Resident Enterprises by applying the “De Facto
Management Body,” or Circular 82, and the Administrative Measures of Enterprise Income of Chinese Controlled Offshore
Incorporated Resident Enterprise (Trial), or Circular 45, issued by the PRC State Administration of Taxation, or the
Circulars. The Circulars provide that a foreign enterprise controlled by a PRC enterprise or a PRC enterprise group would be
classified as a “resident enterprise” with its “de facto management body” located within China if all
of the following requirements are satisfied: (i) the enterprise’s day-to-day operations management is primarily
exercised in China, (ii) decisions relating to the enterprise’s financial and human resource matters are made or
subject to approval by organizations or personnel in China, (iii) the enterprise’s primary assets, accounting books and
records, company seals, board and shareholders’ meeting minutes are located or maintained in China, and (iv) 50% or
more of voting board members or senior executives of the enterprise habitually reside in China. If all of these criteria are
met, the relevant offshore enterprise controlled by PRC enterprises or PRC enterprise groups would be deemed to have its
“de facto management body” in China and therefore be deemed a PRC resident enterprise. The Circulars made a
clarification in the areas of resident status determination, post-determination administration, as well as the exercise of
competent tax authorities’ procedures. The Circulars also specify that when provided with a copy of PRC tax resident
determination certificate from a resident Chinese controlled offshore incorporated enterprise, a payer of PRC-sourced
dividends, interest, royalties, etc. should not withhold 10% income tax on such payments to such Chinese controlled offshore
incorporated enterprise. Although the Circulars apply only to offshore enterprises controlled by PRC enterprises and not
those controlled by PRC individuals such as us, the determination criteria and administration clarification made in the
Circulars reflect the PRC State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax residency status of offshore enterprises and how the administration
measures should be implemented. There is no assurance that the PRC State Administration of Taxation will not apply the same
or similar criteria as stated in the Circulars to determine whether the “de facto management body” of an offshore
incorporated enterprise controlled by PRC individuals (like us) is located within the PRC in the future. If the PRC
authorities were to determine that we should be treated as a PRC resident enterprise for the purpose of PRC enterprise income
tax, a 25% enterprise income tax on our global income could significantly increase our tax burden and adversely affect our
financial condition and results of operations.
Pursuant to the Enterprise Income Tax Law
and the Enterprise Income Tax Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to
its foreign enterprise investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a reduced withholding arrangement. We are a Cayman Islands holding
company and substantially all of our income comes from dividends from our PRC subsidiary through our Hong Kong holding company.
To the extent these dividends are subject to withholding tax, the amount of funds available to us to meet our cash requirements,
including the payment of dividends to our shareholders and ADS holders, will be reduced.
The Enterprise Income Tax Rules provide that, (i)
if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring equity interests
of enterprises domiciled in the PRC, then such dividends or capital gains are treated as PRC-sourced income. It is not clear how
“domicile” might be interpreted under the Enterprise Income Tax Law, and it could be interpreted as the jurisdiction
where the enterprise is a tax resident. Therefore, if we are considered to be a PRC resident enterprise for tax purposes, any dividends
we pay to our overseas corporate shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from
the transfer of our shares or ADSs could be regarded as PRC-sourced income and as a result subject to PRC withholding tax at a
rate of up to 10%, subject to the provisions of any applicable tax treaty. If dividends we pay to our overseas individual shareholders
or ADS holders, or gains realized by such holders from the transfer of our shares or ADSs, are treated as China-sourced income,
the withholding rate would be 20%, subject to the provisions of any applicable tax treaty.
If we are required under the Enterprise
Income Tax Law to withhold PRC income tax on any dividends paid to our non-PRC shareholders and ADS holders or if gains from dispositions
of our shares or ADSs are subject to PRC tax, your investment in our ADSs or ordinary shares could be adversely affected.
Furthermore, the State Administration
of Taxation promulgated the Announcement of the State Administration of Taxation on Issues concerning the Beneficial Owners
in Tax Treaties in April 2018, or Circular 9, which provides guidance for determining whether a resident of a contracting
state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements.
According to Circular 9, there exist many factors to exclude a resident of a contracting state from being treated as a
beneficial owner, including but not limited to the following situations: (i) such resident of a contracting state is obliged
to pay more than 50% of the income to the resident(s) of a third state (region) within 12 months of receipt of the income;
and (ii) the business activities undertaken by such resident do not constitute substantive business activities. We cannot
assure you that any dividends distributed by us to our non-PRC shareholders and ADS holders whose jurisdiction of
incorporation has a tax treaty with China providing for the avoidance of double taxation will be entitled to the benefits
under the relevant withholding arrangement.
A failure by our shareholders or beneficial owners who
are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute
profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely
affect our business and financial condition.
The State Administration of Foreign Exchange,
or SAFE, issued the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and Return Investment
by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular 37, that was promulgated and become effective on July
14, 2014. It requires a PRC natural person or a PRC company, or a PRC Resident, to file a “Registration Form of Overseas
Investments Contributed by PRC Resident” and register with the local SAFE branch before it contributes assets or equity interests
in an overseas special purpose vehicle, or SPV, that is directly established and controlled by PRC Resident for the purpose of
conducting investment or financing. Following the initial registration, the PRC resident is also required to register with the
local SAFE branch timely for any major change in respect of SPV, including, among other things, any major change of SPV’s
PRC Resident shareholder, name of the SPV, term of operation or any increase or reduction of the SPV’s registered capital,
share transfer or swap, and merger or division. Failure to comply with the registration procedures of Circular 37 could result
in the penalties including the imposition of restrictions on the ability of SPV’s PRC subsidiaries to dividends to its overseas
parent company.
It remains unclear how this regulation
and any future related legislation will be interpreted, amended and implemented by the relevant PRC government authorities. As
of December 31, 2018, to the best of our knowledge, most of our PRC Resident shareholders with offshore investments had not registered
their offshore investments with SAFE according to the predecessor regulation of Circular 37, namely the Notice on Relevant Issues
Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special
Purpose Vehicles, or SAFE Circular 75, which was replaced by the SAFE Circular 37 but still effective when the relevant PRC shareholders
made their investments. If PRC government determined that our PRC Resident shareholders are required to make the registration
regarding their offshore investment under Circular 37, both they and us may be subject to fines by PRC government.
We are committed to complying, and to ensuring
that our shareholders and beneficial owners who are PRC citizens or residents comply with SAFE Circular 37 requirements. The rest
of our PRC citizen or resident beneficial owners are also applying for registrations under SAFE Circular 37 with the relevant local
counterpart of SAFE. However, we might not be fully informed of the identities of all our beneficial owners who are PRC citizens
or residents, and we cannot compel our beneficial owners to comply with SAFE Circular 37 requirements. As a result, we cannot assure
you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, or will in the future
make or obtain the necessary any applicable registrations or approvals as required by, SAFE Circular 37 or other related regulations.
Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or failure by us to amend the foreign exchange
registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which
could adversely affect our business and prospects. Failure by us to amend the foreign exchange registrations in compliance with
SAFE Circular 37 could subject us to fines or legal sanctions restrict our overseas or cross-border ownership structure, which
could adversely affect our business and prospects. See “—We rely principally on dividends and other distributions on
equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on
the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct
our business.”
A failure to comply with PRC regulations regarding the
registration of shares and share options held by our employees who are PRC citizens could subject such employees or us to fines
and legal or administrative sanctions.
Pursuant to the Implementation Rules of
the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules, promulgated by SAFE on January
5, 2007 and amended on May 2016, a relevant guidance issued by SAFE in March 2007 and Notices on Issues concerning the Foreign
Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or
the Stock Option Rules, on February 15, 2012 that replaces the guidance issued in March 2007, PRC citizens who are granted shares
or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through
the PRC subsidiary of such overseas-listed company or other qualified PRC agents selected by such PRC subsidiary, to register with
SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the PRC agent
is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock
incentive plan, the PRC agent or the overseas entrusted institution or other material changes. For participants who had already
participated in an employee share option or share incentive plan before the date of the guidance, the guidance requires their PRC
employers or PRC agents to complete the relevant formalities within three months of the date of the guidance. We and our PRC citizen
employees who have been granted share options, or PRC option holders, are subject to these rules. If we or our PRC option holders
fail to comply with these rules, we or our PRC option holders could be subject to fines and legal or administrative sanctions.
The heightened scrutiny over acquisition transactions
by the PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring strategy or
the value of your investment in us.
The State Administration of Taxation has
issued several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on
Certain Corporate Income Tax Matters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises issued in February
2015, or SAT Circular 7. Pursuant to SAT Circular 7, except for a few circumstances falling into the scope of the safe harbor provided
by SAT Circular 7, such as open market trading of stocks in public companies listed overseas, if a non-PRC resident enterprise
indirectly transfers PRC taxable properties (i.e. properties of an establishment or a place in the PRC, real estate properties
in the PRC or equity investments in a PRC tax resident enterprise) by disposing of equity interest or other similar rights in an
overseas holding company, without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax,
such indirect transfer should be deemed as a direct transfer of PRC taxable properties and gains derived from such indirect transfer
may be subject to the PRC withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to be taken into consideration
by tax authorities in determining whether an indirect transfer has a reasonable commercial purpose, such as whether the main value
of equity interest in an overseas holding company is derived directly or indirectly from PRC taxable properties. An indirect transfer
satisfying all the following criteria will be deemed to lack reasonable commercial purpose and be taxable under PRC law without
considering other factors set out by SAT Circular 7: (i) 75% or more of the equity value of the intermediary enterprise being transferred
is derived directly or indirectly from the PRC taxable properties; (ii) at any time during the one-year period before the indirect
transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of
investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed
and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties
are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the
indirect transfer of the PRC taxable properties is lower than the potential PRC income tax on the direct transfer of such assets.
SAT Circular 7 also introduces an interest regime by providing that where a transferor fails to file and pay tax on time, and where
a withholding agent fails to withhold the tax, interest will be charged on a daily basis. If the transferor has provided the required
documents and information or has filed and paid the tax within 30 days from the date that the share transfer contract or agreement
is signed, then interest shall be calculated based on the benchmark interest rate; otherwise, the benchmark interest rate plus
5% will apply. Further, SAT Circular 7 embodies a voluntary reporting regime, and both the foreign transferor and the transferee,
and the PRC tax resident enterprise whose equity interests are being transferred may voluntarily report the transfer by submitting
the documents required in SAT Circular 7.
Although SAT Circular 7 provides clarity
in many important areas, such as reasonable commercial purpose, there are still uncertainties on the tax reporting and payment
obligations with respect to future private equity financing transactions, share exchange or other transactions involving the transfer
of shares in non-PRC resident companies. Our company and other non-resident enterprises in our group may be subject to filing obligations
or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be
subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions.
For the transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested
to assist in the filing under the rules and notices. As a result, we may be required to expend valuable resources to comply with
these rules and notices or to request the relevant transferors from whom we purchase taxable assets to comply, or to establish
that our company and other non-resident enterprises in our group should not be taxed under these rules and notices, which may have
a material adverse effect on our financial condition and results of operations.
We cannot assure you that the PRC tax authorities
will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide
assistance for the investigation of PRC tax authorities with respect thereto. We acquired JMU HK in June 2015 and divested our
B2C business in September 2015, and we may pursue acquisitions in the future that may involve complex corporate structures. If
we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments
to the taxable income of these transactions under SAT Circular 7, our income tax expenses associated with such potential acquisitions
will be increased, which may have an adverse effect on our financial condition and results of operations.
PRC laws and regulations establish complex procedures
for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through
acquisitions in China.
PRC laws and regulations, such as the 2006
M&A Rules, the Anti-Monopoly Law promulgated by the PRC National People’s Congress in 2007 and the Notice on the Establishment
of the Security Review System in Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the State
Council, or the Security Review Rule, establish procedures and requirements that could make some acquisitions of Chinese companies
by foreign investors and companies more time-consuming and complex, including requirements in some instances that various governmental
authorities be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise. For example, on February 3, 2011, the State Council promulgated the Security Review Rule, which provides, among other
things, that merger and acquisition transactions by foreign investors of PRC enterprises in sensitive sectors or industries, such
as internet information service industry, which our operations fall within, could be subject to security review. Consequently,
any such transaction could be blocked due to their effect on the national defense security, national economic stability, basic
social life order, or capacity of indigenous research and development of key technologies. On August 25, 2011, the Ministry of
Commerce promulgated the Regulations on Implementing the Security Review System in Mergers and Acquisition of Domestic Enterprises
by Foreign Investors, which, among other things, set forth detailed provisions on how the security review of relevant transactions
would be conducted, and provide for that foreign investors could not for any reason evade the security review process through entrustment,
phased-in investment, leasing, loans and control agreement, and overseas transactions. We could expand our business in part by
acquiring complementary businesses. Complying with the requirements of the relevant PRC laws and regulations to complete such transactions
could be time-consuming, and any required approval processes could delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
Increases in labor costs in the PRC may adversely affect
our business and results of operations.
The economy of China has been experiencing
increases in inflation and labor costs in recent years. As a result, the average wages in the PRC are expected to continue to grow.
In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing
fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments
of the requisite statutory employee benefits, and those employers who fail to make adequate payments could be subject to late payment
fees, fines and/or other penalties. If the relevant PRC authorities determine that we should make supplemental social insurance
and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition and results
of operations could be adversely affected. We expect that our labor costs, including wages and employee benefits, would continue
to increase. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products
and services, our financial condition and results of operations could be adversely affected.
We are subject to consumer protection laws that could
require us to modify our current business practices and incur increased costs.
We are subject to numerous PRC laws
and regulations that govern e-commerce business, such as the Consumer Protection Law. If these regulations were to change or
if we or our merchant clients were to violate them, the costs of certain products or services could increase, or we could be
subject to fines or penalties or suffer reputational harm, which could reduce demand for the products or services offered on
our website and adversely affect our business and results of operations. For example, the amended Consumer Protection Law,
which became effective in March 2014, further strengthens the protection of consumers and imposes more stringent requirements
and obligations on business operators, especially for businesses that operate on the internet. We do not maintain product
liability insurance for products and services transacted on our platform, and our rights of indemnity from the vendors and
service providers might not adequately cover us for any liability we incur. Even unsuccessful claims could result in the
expenditure of funds and management time and resources and could reduce our net income and profitability. In addition, The
PRC E-Commerce Law, which was issued on August 31, 2018 and came into effect on January 1, 2019, imposes further obligations
on e-commerce business operators, such as protecting consumer rights and interests, protecting the environment,
protecting intellectual property rights, protecting cybersecurity and individual information, assuming responsibility for
the quality of products or services, and accepting the supervision by the government and the public. Legal requirements are
frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these
requirements or their effect on our operations. We could be required to make significant expenditures or modify our business
practices to comply with existing or future laws and regulations, which could increase our costs and limit our ability to
operate our business.
Risks Relating to Our ADSs
The trading price of our ADSs could be volatile, which
would result in substantial losses to investors.
The trading price of our ADSs could be volatile
and could fluctuate widely in response to factors relating to our business as well as external factors beyond our control. Factors
such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment
or departure of key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities
analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs to change
substantially. At the same time, securities markets could from time to time experience significant price and volume fluctuations
that are not related to the operating performance of particular companies, as they did for example in late 2008 and early 2009.
These market fluctuations could also have an adverse effect on the market price of our ordinary shares.
The performance and fluctuation of the market
prices of other companies with business operations located mainly in China that have listed their securities in the United States
could affect the volatility in the price of and trading volumes for our ADSs. In recent years, a number of PRC companies have listed
their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies
have experienced significant volatility, including significant price declines in connection with their initial public offerings.
The trading performances of these PRC companies’ securities at the time of or after their offerings could affect the overall
investor sentiment towards PRC companies listed in the United States and consequently could affect the trading performance of our
ADSs. These broad market and industry factors could significantly affect the market price and volatility of our ADSs, regardless
of our actual operating performance. Any of these factors could result in large and sudden changes in the trading volume and price
for our ADSs.
If we fail to maintain Nasdaq minimum
market value of publicly held shares or minimum bid requirements, our ADSs could be delisted.
According
to the Nasdaq listing standards, if the market value of publicly held shares falls below US$5 million for 30 consecutive
business days, such company’s securities may be subject to delisting from Nasdaq Global Market, unless such failure is cured
within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such failure.
On December 10, 2018, we received a letter from Nasdaq advising us that the market value of our publicly held shares was below
US$5 million for the last 30 consecutive business days and we had been granted a grace period of 180 calendar days, expiring on
June 10, 2019, in which to regain compliance. We will regain compliance if at any time during such 180-day period, the market value
of the our publicly held shares closes at US$5 million or more for a minimum of ten consecutive business days. In the event that
we do not regain compliance, we may consider applying to transfer our ADSs to the NASDAQ Capital Market, or delist our ADSs.
Furthermore.
according to the Nasdaq listing standards, if the trading price of a listed company’s listed securities falls below US$1.00
per share for a period of 10 consecutive business days, such company’s securities may be subject to delisting unless such
failure is cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company
of such failure. On January 4, 2019 we received a letter from Nasdaq advising us that our ADS had been trading at a price
that would subject our ADSs to delisting if we fail to regain compliance with the Nasdaq minimum bid price requirements. We have
been granted a grace period of 180 calendar days, expiring on July 3, 2019, in which to regain compliance. We will regain compliance
if, at any time during this 180-day period, the closing bid price of the Company’s ADSs is at least US$1.00 for a minimum
of ten consecutive business days. In the event we do not regain compliance within 180 calendar days, we may be eligible
for additional time.
We
have not regained compliance with these two requirements as of the date of annual report. We intend to monitor the market
value of our publicly held shares and the closing bid price of our ADSs between now and June 10, 2019 and July 3,
2019, respectively, and consider available options to cure the deficiency and regain compliancee within the prescribed
grace periods. If we fail to regain compliance, our ADSs could be subject to delisting. There can be no assurance that we
will meet the requirements for continued listing.
We are an emerging growth company and cannot be certain
if the reduced disclosure requirements applicable to emerging growth companies will make our ADSs less attractive to investors.
We are an “emerging growth company”
under the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other
public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act. The JOBS Act also provides that an emerging growth company does
not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required
to comply with such new or revised accounting standards.
We have not yet opted out of these exemptions
available to the emerging growth companies. This decision would allow us to delay the adoption of new or revised accounting standards
that have different effective dates for public and private companies until those standards apply to private companies or otherwise
become applicable to us. As a result, our consolidated financial statements might not be comparable to public companies or other
emerging growth companies that have opted out of this provision. We cannot predict if investors will find our ADSs less attractive
because we will rely on these exemptions. If some investors find our ADSs less attractive as a result, our stock price could be
lower than it otherwise would be, there could be a less active trading market for our ADSs and our stock price could be more volatile.
We will remain an emerging growth company
until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion;
(ii) the last day of our fiscal year ending after the fifth anniversary of the completion of our initial public offering; (iii)
the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv)
the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.
We are a foreign private issuer within the meaning of
the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private
issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States
that are applicable to U.S. domestic issuers, including:
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the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on
Form 8-K;
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the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security
registered under the Exchange Act;
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the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities
and liability for insiders who profit from trades made in a short period of time; and
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the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
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We are required to file an annual report
on Form 20-F within four months of the end of each fiscal year. In addition, press releases relating to financial results and material
events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC
will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result,
you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic
issuer.
As a foreign private issuer, we are permitted to, and
we plan to, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement
that a majority of an issuer’s directors consist of independent directors. This might afford less protection to holders of
our ordinary shares and ADSs.
Section 5605(b)(1) of the Nasdaq Listing
Rules requires listed companies to have, among other things, a majority of its board members to be independent, and Section 5605(d)
and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination of directors.
As a foreign private issuer, however, we are permitted to, and we plan to follow home country practice in lieu of the above requirements.
The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist
of independent directors or the implementation of a nominating and corporate governance committee. We have informed Nasdaq that
we will follow home country practice in place of all of the requirements of Rule 5600 other than those rules which we are required
to follow pursuant to the provisions of Rule 5615(a)(3).
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Rule 5605(b), pursuant to which (i) a majority of the board of directors must be comprised of Independent Directors, and (ii)
the Independent Directors must have regularly scheduled meetings at which only Independent Directors are present.
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Rule 5605(c) (other than those parts as to which the home country exemption is not applicable), pursuant to which each company
must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must meet
criteria set forth in Rule 5605(c)(2) (A).
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Rule 5605(d), pursuant to which each company must (i) certify that it has adopted a formal written compensation committee charter
and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis, and
(ii) have a compensation committee of at least two members, each of whom must be an Independent Director.
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Rule 5605(e), pursuant to which director nominees must be selected, or recommended for the Board’s selection, either
by Independent Directors constituting a majority of the Board’s Independent Directors in a vote in which only Independent
Directors participate, or a nominations committee comprised solely of Independent Directors.
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Rule 5610, pursuant to which each company shall adopt a code of conduct applicable to all directors, officers and employees.
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Rule 5620(a), pursuant to which each company listing common stock or voting preferred stock, or their equivalents, shall hold
an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end.
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Rule 5620(b), pursuant to which each company shall solicit proxies and provide proxy statements for all meetings of shareholders
and shall provide copies of such proxy solicitation to Nasdaq.
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Rule 5620(c), pursuant to which each company that is not a limited partnership shall provide for a quorum as specified in its
by-laws for any meeting of the holders of common stock; provided, however, that in no case shall such quorum be less than 33
1
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3
%
of the outstanding shares of the company’s common voting stock.
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Rule 5630, pursuant to which each company that is not a limited partnership shall conduct an appropriate review and oversight
of all related party transactions for potential conflict of interest situations on an ongoing basis by the company’s audit
committee or another independent body of the board of directors.
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Rule 5635(a), pursuant to which shareholder approval is required in certain circumstances prior to an issuance of securities
in connection with the acquisition of the stock or assets of another company.
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Rule 5635(b), pursuant to which shareholder approval is required prior to the issuance of securities when the issuance or potential
issuance will result in a change of control of the company.
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Rule 5635(c), pursuant to which shareholder approval is required prior to the issuance of securities when a stock option or
purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant
to which stock may be acquired by officers, directors, employees, or consultants, subject to certain exceptions.
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Rule 5635(d), pursuant to which shareholder approval is required prior to the issuance of securities in connection with a transaction
other than a public offering involving:
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the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for
common stock) at a price less than the greater of book or market value which together with sales by officers, directors or Substantial
Shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance;
or
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the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable common
stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than
the greater of book or market value of the stock.
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Anti-takeover provisions in our charter documents could
discourage a third-party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.
Our fourth amended and restated memorandum
and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure
or cause us to engage in change-of-control transactions. For example, our board of directors will have the authority, without further
action by our shareholders, to issue preferred shares in one or more series and to fix the designations, powers, preferences and
relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any,
including, without limitation, the number of shares constituting each such class or series, dividend rights, conversion rights,
redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, any or all of which could
be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated
to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues
preferred shares, the market price of our ordinary shares could fall and the voting and other rights of the holders of our ordinary
shares could be adversely affected. These provisions could have the effect of depriving our shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a
tender offer or similar transaction.
You might not receive certain distributions we make on
our ordinary shares or other deposited securities if the depositary decides not to make such distributions to you.
The depositary of our ADSs has agreed to
pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your
ADSs represent. However, the depositary may, at its discretion, decide that it is not lawful or reasonably practicable to make
a distribution available to any holders of ADSs. For example, the depositary could determine that it is not practicable to distribute
certain property through the mail, or that the value of certain distributions could be less than the cost of mailing them. In these
cases, the depositary could decide not to distribute such property and you will not receive such distribution.
We are a Cayman Islands company and, because judicial
precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you could have less
protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our
fourth amended and restated memorandum and articles of association, the Cayman Islands Companies Law (2018 Revision), as amended,
and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by noncontrolling
shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed
by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial
precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.
In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly
less protection to investors. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted
bodies of corporate law than the Cayman Islands.
There is uncertainty with regard to Cayman
Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws
will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts
of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the
courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts
under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman
Islands. Maples and Calder (Hong Kong) LLP has advised us that although there is no statutory enforcement in the Cayman Islands
of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction will be recognized
and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute,
by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:
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is given by a foreign court of competent jurisdiction;
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imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;
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is not in respect of taxes, a fine or a penalty; and
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was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy
of the Cayman Islands.
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You should also read “Item 10. Additional
Information—A. Share Capital—Ordinary Shares—Differences in Corporate Law” for some of the differences
between the corporate and securities laws in the Cayman Islands and the United States.
Your ability to protect your rights as shareholders through
the U.S. federal courts could be limited because we are incorporated under Cayman Islands law.
Cayman Islands companies might not have
the standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your
interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court could be limited
to direct shareholder lawsuits.
You will have limited ability to bring an action against
us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman
Islands, because we conduct a majority of our operations in China and because all of our directors and officers reside outside
the United States.
We are incorporated in the Cayman Islands
and conduct our operations exclusively in China. All of our assets are located outside the United States. All of our officers and
directors reside outside the United States and a substantial portion of the assets of those persons are located outside of the
United States. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals
in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities
laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China could
render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty
as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such
persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain
whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or China against
us or such persons predicated upon the securities laws of the United States or any state.
Shareholders of Cayman Islands exempted
companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain
copies of lists of shareholders of these companies. Our directors have discretion under Cayman Islands law to determine whether
or not, and under what conditions, our corporate records could be inspected by our shareholders, but are not obliged to make them
available to our shareholders. This could make it more difficult for you to obtain the information needed to establish any facts
necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, public
shareholders might have more difficulty in protecting their interests in the face of actions taken by management, members of the
board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
The voting rights of holders of ADSs are limited in several
significant ways by the terms of the deposit agreement.
Holders of our ADSs will only be able to
exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement.
Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of voting instructions
from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary
shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the
underlying shares unless you cancel your ADSs and withdraw the underlying shares and follow the requisite steps to be recognized
as a holder of shares entitled to vote such shares. Under our fourth amended and restated memorandum and articles of association
and Cayman Islands law, the minimum notice period required for convening a general meeting is 10 clear days. When a general meeting
is convened, you might not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares
to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary might not be able
to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts
to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting
materials in time to ensure that you can instruct the depositary to vote the shares representing your ADSs. Furthermore, the depositary
will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for
the effect of any such vote. As a result, you might not be able to exercise your right to vote and you could lack recourse if your
ordinary shares are not voted as you requested.
Except as described in this annual report
and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced
by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise
the voting rights attaching to the ordinary shares represented by the ADSs. You might not receive voting materials in time to instruct
the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties,
will not have the opportunity to exercise a right to vote. The deposit agreement provides that if the depositary does not timely
receive valid voting instructions from the ADS holders, then the depositary must, with certain limited exceptions, give a discretionary
proxy to a person designated by us to vote such shares. Furthermore, as a party to the deposit agreement, you waive your right
to trial by jury in any legal proceedings arising out of the deposit agreement or the ADRs against us and/or the depositary.
You might not receive distributions on our ordinary shares
or any value for them if it is unlawful or impractical for us to make them available to you.
The depositary of our ADSs has agreed to
pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited
securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary
shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution
available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of
securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an
applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of
ADSs, if any government approval or registration is required for such distribution. We have no obligation to take any other action
to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you might
not receive the distributions we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make
them available to you. These restrictions could have an adverse effect on the value of your ADSs.
You might be subject to limitations on the transfer of
your ADSs.
Your ADSs are transferable on the books
of the depositary. However, the depositary could close its books at any time or from time to time when it deems expedient in connection
with the performance of its duties. The depositary could close its books from time to time for a number of reasons, including in
connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number
of ADS holders on its books for a specified period. The depositary could also close its books in emergencies, and on weekends and
public holidays. The depositary could refuse to deliver, transfer or register transfers of our ADSs generally when our books or
the books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do
so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government
or governmental body, or under any provision of the deposit agreement.
Compliance with rules and requirements applicable to public
companies could cause us to incur increased costs, which could negatively affect our results of operations.
As a public company, we incur significant
legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as
rules subsequently implemented by the SEC and Nasdaq Global Market, has required changes in corporate governance practices of public
companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain
corporate activities more time-consuming and costly. Complying with these rules and requirements could be especially difficult
and costly for us because we might have difficulty locating sufficient personnel in China with experience and expertise relating
to U.S. GAAP and U.S. public company reporting requirements, and such personnel could command higher salaries relative to what
similarly experienced personnel would command in the United States. If we cannot employ sufficient personnel to ensure compliance
with these rules and regulations, we might need to rely more on outside legal, accounting and financial experts, which could be
very costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are evaluating
and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we might
incur or the timing of such costs.
We could be a passive foreign investment company, or PFIC,
which would result in adverse United States tax consequences to United States investors
We will be classified as a “passive
foreign investment company,” or “PFIC” if, in the case of any particular taxable year, either (a) 75% or more
of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly
value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of
passive income. Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or
exchange of passive assets (including property producing passive income) and net foreign currency gains. For this purpose, cash
is categorized as a passive asset and the company’s unbooked intangibles associated with active business activity are taken
into account as a non-passive asset. We will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Based on our current income and assets and
the value of our ADSs and outstanding ordinary shares, we do not believe that we were a PFIC for our taxable year ended December
31, 2018 and we do not expect to be classified as a PFIC for our taxable year ending December 31, 2019 or in the foreseeable future.
With respect to our 2019 taxable year and
foreseeable future taxable years, we presently do not anticipate that we will be a PFIC based upon the expected value of our assets,
including goodwill (determined, in part, based on the price of our ADSs), and the expected future composition of our income and
assets. However, we might be a PFIC for our 2019 taxable year or any future taxable years due to changes in our asset or income
composition, or the value of our assets, including if our market capitalization is less than anticipated or subsequently declines.
Although the law in this regard is not entirely
clear, we treat Our VIE as being owned by us for United States federal income tax purposes because we control its management decisions
and we are entitled to substantially all of its economic benefits and, as a result, we consolidate its results of operations in
our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of Our VIE for United
States federal income tax purposes, we could be treated as a PFIC for our taxable year ended December 31, 2018 and for subsequent
taxable years.
If we were or are a PFIC for any taxable
year during which you hold our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to you for all succeeding
taxable years during which you hold our ADSs or ordinary shares, except if you have made a mark-to-market election. Because there
are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual
basis, no assurance can be given that we will not be or have not been a PFIC for any year. If we were or are a PFIC, U.S. holders
of our ADSs or ordinary shares could be subject to increased tax liabilities under United States federal income tax laws and could
be subject to burdensome reporting requirements. See “Item 10. Additional Information—E. Taxation—Material United
States Federal Income Tax Considerations—Passive Foreign Investment Company.”
ITEM 4. INFORMATION
ON THE COMPANY
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A.
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History and Development of the Company.
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We commenced business in March 2010, operating
a group buying and B2C e-commerce platform through Beijing Wowo Tuan Information Technology Co., Ltd. In order to facilitate investment
in our company, we incorporated our holding company Wowo Limited in July 2011.
In April 2015, we completed our initial
public offering and listed our ADSs on the Nasdaq Global Market under the symbol “WOWO.” We raised approximately US$37.3
million in net proceeds from our initial public offering after deducting underwriting commissions and the offering expenses payable
by us.
In June 2015, we acquired Join Me Group
(HK) Investment Company Limited to establish our food services industry B2B business. We issued 741,422,780 ordinary shares and
paid US$30.0 million as consideration for the acquisition.
In September 2015, we divested our group
buying and B2C e-commerce businesses to focus our efforts on our food services industry B2B business.
In September 2015, we raised US$15.0 million
in a private placement transaction with Mr. Maodong Xu.
In June 2016, we changed the trading symbol
for our ADSs listed on the Nasdaq Global Market to “JMU.” In December 2016, we also changed our company name to “JMU
Limited.”
In August 2016, TANSH Global Food
Group Co., Ltd, which was formerly known as Xiao Nan Guo Restaurants Holdings Limited, a Hong Kong Stock Exchange listed
company (Stock Code: 3666), through its wholly-owned subsidiary, acquired a 9.82% stake in our company via secondary
transfers for a total consideration of HK$368 million (approximately US$47.5 million).
In July 2018, we changed the ratio
of our ADSs to ordinary shares from one ADS representing 18 ordinary shares to one ADS representing 180 ordinary shares.
In May 2019, we acquired Unicorn Investment
Limited, or Unicorn, to establish our blockchain-based technology business. We issued 632,660,858 new ordinary shares as consideration
for the acquisition.
We currently conduct our operations in
China through contractual arrangements between our wholly-owned PRC subsidiaries, Shanghai Zhongming and Lianji Future, on
the one hand, and our consolidated affiliated entities in China, Zhongmin, Lianji and their respective shareholders on the
other.
Our principal executive offices are located
at 2/F, No. 608, Macau Road, Putuo District, Shanghai 200060, People's Republic of China. Our registered office
in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman,
KY1-1104, Cayman Islands. Our investor relationship website is
http://ir.ccjmu.com/
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We currently operate an online platform
for providing B2B services to food-industry suppliers and customers in China. We acquired this business in a merger with Join
Me Group (HK) Investment Company Limited, or JMU HK, in June 2015. Our B2B online platform recorded gross billing of RMB7.7 billion
(US$1.1 billion) in 2018, measured in terms of gross merchandise value.
We connect suppliers and customers in the
food service industry through our online platform. Our customers include restaurants, restaurant chains, hotels, food product manufacturers
and others. We offer a wide selection of products at competitive prices through our website
www.ccjoin.com
and our mobile
applications. We also offer convenient payment options and customer services. Our customers are focused on the quality of raw materials
that they source for their businesses, and we provide more comfort and confidence to our customers by verifying the qualification
of suppliers. In addition to our online services, we also host offline auction events to afford suppliers and customers the opportunity
to meet in person and establish connections and in the meantime give traditional food service businesses the chances to adopt the
online purchase process in a gradual manner.
We started with the mission to transform
the connection between suppliers and customers in the food service industry into a more transparent and efficient form, and we
also leverage our supplier and customer base to further provide value-added services such as logistics and trade financing.
We are a technology-driven company and we
have made investments in developing our own scalable proprietary technology platform that supports our growth and enables us to
provide technology services. In 2015, we developed our cloud procuring system, which can be both integrated into our customers’
existing enterprise resource systems or be used independently as procurement management software.
Previously, we had operated a B2C e-commerce
platform for local entertainment and lifestyle services. Although we disposed of this business in September 2015, we are still
utilizing the experience we gained in operating an e-commerce platform as well as our capacity to leverage the big data from online
purchases in our current B2B services business. We have classified our B2C business as discontinued operations in our consolidated
financial statements.
We had revenues of US$36.5 million and a
net loss of US$123.2 million in 2018.
Our Business Model
Since the acquisition of our current B2B
business, we have focused on developing an online marketplace that can connect suppliers and customers in the food service industry
in China, while in the meantime developing our own online direct sales business. Leveraging our platform and the scale of our business,
we have also begun to offer other services that are complementary to our core business and create significant value to our business
partners, including third-party sellers and suppliers, and ultimately benefit our business and customers.
Currently substantially all of our
business is carried out within China and Hong Kong. The total revenue of the food service industry in China was approximately
RMB4,271.6 billion (US$634.5 billion) in 2018, of which raw material procurement constituted approximately 25% - 30%,
according to National Bureau of Statistics of China. Most of this spending has been in the traditional offline form. Our
B2B platform was started with the vision of reshaping industrial rules and building a more transparent and more
efficient business ecosystem for food service businesses in China. Through cooperation with industry associations and
hundreds of leading restaurants across China, we believe that we can create significant network effects with our B2B
platform. We work closely with various reputable buyers and suppliers in the food service industry, providing one-stop
procurement services, as well as product development, marketing and other value-added services, for a variety of food service
businesses via the B2B platform
www.ccjoin.com
.
Online Direct Sales
In our online direct sales business,
we acquire products from suppliers and sell them directly to customers. We have been continually expanding our offering in
direct sales since the acquisition of our B2B business in June 2015. As of December 31, 2018, we offered approximately 1,482
kinds of products in ten product categories through our online direct sales business model. We focus on the sale of standard
new ingredients by conducting research and developments of new products and organizing the manufacture by factories to ensure
the standardized process of operation.
Online Marketplace
In our online marketplace business,
third-party sellers offer products to customers over our online marketplace. We acquired our B2B online marketplace in June
2015, and have been bringing new products and services to our online marketplace since then. As of December 31, 2018, there
were approximately 3,779 third-party sellers in our online marketplace. Our B2B online platform recorded gross billing of
RMB7.7 billion (US$1.1 billion) in 2018, measured in terms of the gross merchandise value. In order to attract more
third-party sellers, we currently do not charge commission on transactions on our online marketplace. We provide transaction
processing and billing services on all orders on our online marketplace. We require third-party sellers to meet our standards
of quality. We aim to offer customers the same high quality customer experience regardless of the source of the products they
choose.
Customer Experience
We are committed to optimizing customer
experience and achieving customer satisfaction. This commitment drives every aspect of our operations, which are focused on four
core components: product offerings, pricing, online experience and customer services.
Products
We continually seek to add more products
that appeal to our target customers. Our offerings (including both online direct sales and online marketplace offerings) are organized
into ten product categories on our website:
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alcoholic and non-alcoholic drinks;
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hotel and restaurant information systems; and
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hotel and restaurant decoration.
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Each of these categories is further divided
into numerous subcategories to facilitate browsing.
Pricing
We offer competitive pricing to attract
and retain customers. We make continual efforts to maintain and improve an efficient cost structure and create incentives for our
suppliers to provide us with competitive prices.
Pricing policy
. For some of our
products, we set our prices to be competitive against those on other major e-commerce websites and in physical stores in China. We
typically negotiate with our suppliers for prices that are comparable to or lower than those offered to retailers in other sales
channels. Currently, third-party sellers are free to set their own prices on our online marketplace.
Special promotions
. We highlight
top-selling products, in our marketing campaigns and make promotion and marketing plans
accordingly.
Online Experience
We believe that online experience
is important to attracting and retaining customers and increasing orders. Our website offers site navigation, search functions
and product information. These features address customers’ desire to view, understand and compare products before purchasing.
With the increasing popularity of mobile internet-enabled devices, we have also developed applications and features adapted to
mobile internet users, and we currently offer mobile access through our mobile website and our mobile applications.
Customer Service
Providing satisfactory customer services
is a high priority. Our commitment to customers is reflected in the high level of service provided by our customer service staff
as well as in our product return and exchange policies.
Customer service center
. Our sales
representative will provide customer service directly to our customers. As of December 31, 2018, we have 30 sales representatives.
Meanwhile, we have set up our “400 hotline” for customer service, and we have a “400 hotline”
call center service team of two employees. Customers can call our telephone hotline, ask questions and leave complaints in writing
through our website, or send us e-mails.
Returns and exchanges
. We
generally allow customers to return defective products within 7 days or exchange them within 15 days, counting from the date
when the customer receives the product. We will generally arrange our third-party courier partners to pick up defective items
for return or exchange at the customer’s address. The policies apply to products sold by ourselves while third-parties
sellers apply their own policies on returns and exchanges for transactions on our online marketplace.
Membership program
. We have established
a membership program to cultivate customer loyalty and encourage our customers to make additional purchases. There are three levels
of members, and promotion to higher levels is based on the amount that the customer has spent with us. Members get a variety of
benefits that increase with level, and generally higher level members can enjoy a lower purchase price even for the same item.
Third-party Seller Experience
We are also endeavoring to make the
transactions by third-party sellers on our platform convenient. For example, we link third-party sellers on our online marketplace
to third-party service providers that offer either delivery services or a combination of warehousing plus delivery services as
well as trade financing. Moreover, we also provide offline exhibition marketing services to sellers ourselves, in addition to the
basic transaction processing and billing services that we provide them at no extra cost.
We also provide certain premium customers,
suppliers and third-party sellers with reports on a regular basis as to recent procurement data and trends in the food services
industry, to assist them to better develop their products and manage their inventory.
Our finance business unit is in the process
of developing various financial products and services in addition to trade financing as additional services we provide to our business
partners, including third-party sellers. We will continue to develop innovative financial products that can further leverage our
strengths in e-commerce and our technology platform.
Currently some of the services mentioned
above have been provided to third-party sellers free of charge as part of our strategy to grow the scale of our business.
Merchandise Sourcing
In our online direct sales business,
we sourced products from 17 suppliers as of December 31, 2018. Procuring products for the food services industry requires considerable
specialized expertise, which is provided by our seller team. We negotiate with the higher-level distributor where possible in order
to obtain the most favorable terms. In addition, we had approximately 3,779 third-party sellers on our online marketplace as of
December 31, 2018.
We have created a vendor interface
on our website where our third-party sellers can access reports regarding inventory status, purchase history and customer reviews
of their products. Third-party sellers can use this information in their marketing and product development efforts and also in
managing their own inventory, which helps them manage costs.
We select suppliers and third-party sellers
on the basis of brand, reliability, volume and price. They must be able to meet our demands for timely supply of high quality products
and also provide high-quality post-sale customer service. We perform background checks on each supplier and third-party seller
and the products they provide before we enter into any agreement. We examine their business licenses and the qualification certificates
for their products, and check their brand recognition and make inquiries about the market acceptance of their products among players
in the same industry. We also conduct on-site visits to assess certain suppliers and third-party sellers and verify their location,
scale of business, production capacity, property and equipment, human resources, research and development capability, quality control
system and fulfillment capability. We also require all vendors to upload their business license, tax registration certificate and
organization code certificate for our verification. Our standard form contract requires suppliers and third-party sellers to represent
that their goods are from lawful sources and do not infringe upon lawful rights of third parties and to pay us liquidated damages
for any breach. We normally enter into framework agreements with our suppliers and third-party sellers and renew them after expiration.
We have also put stringent rules in place governing the operations of third-party sellers on our online marketplace. Third-party
sellers will be subject to penalties or be asked to end their operations on our online marketplace if they violate the marketplace
rules, for example by selling food beyond its expiration date.
Technology Platform
We have built our technology platform
relying primarily on software and systems that we have developed in-house and to a lesser extent on third-party software that we
have modified and incorporated. Our platform is based on cloud-computing and cloud-storing technology to fully support our needs
for industry big-data analysis. Equipped with the advanced technology and designed with scalability, our platform is capable of
supporting our business and providing seamless access for any third-party platforms. Our server fleet consisted of approximately
25 servers, fire-wall and network switches as of December 31, 2018, and we employed 12 IT professionals to design, develop, maintain,
and operate our technology platform as of the same date.
Our proprietary technology platform
supports our growing processing capacity requirements, provides us accurate information throughout our operation value chain, and
enables harnessing of insightful data analytics.
Our strong technology platform is
vital in supporting our pursuit of a continually improving customer experience, including the customer experience of our mobile
users. From our website, the primary customer interface, to the back end management systems, our technology platform supports accurate
operational execution as well as information flow, data consistency and analytics. We are also working with our key customers to
integrate our platform into their own ERP system to facilitate their management of food supplies.
We have adopted security policies and measures,
including encryption technology, to protect our proprietary data and customer information, and we back up our database, including
customer data, every day with both on-site and off-site storage.
Marketing
We engage various marketing channels
to expand our business to more suppliers and customers. We provide various incentives to our customers to increase their spending
and loyalty, and we send e-mails to our customers periodically with product recommendations or promotions. To enhance our brand
awareness, we also have engaged in brand promotion activities.
In addition to the online marketing
activities, we also utilize offline activities to attract more users and promote our brand recognition. For example, we organize
offline auction events for food service businesses to purchase their supplies in bulk.
We also utilize industrial associations
to extend our services to an ever increasing number of food service business. Our services are recommended by the China Hotel Association,
the China Cuisine Association and the China Tourist Hotel Association.
Competition
The e-commerce industry in China is
intensely competitive. Our current or potential competitors include traditional offline food service suppliers and other internet
companies tipping in the online food service industry.
We anticipate that the e-commerce
market will continually evolve and will continue to experience rapid technological change, evolving industry standards, shifting
customer requirements, and frequent innovation. We must continually innovate to remain competitive. We believe that the principal
competitive factors in our industry are:
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brand recognition and reputation;
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product quality and selection;
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fulfillment capabilities; and
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In addition, new and enhanced technologies
may increase the competition in the online retail industry. New competitive business models may appear, for example based on new
forms of social media or social commerce.
We believe that we are well-positioned to
effectively compete on the basis of the factors listed above. However, some of our current or future competitors have or may have
longer operating histories, greater brand recognition, better supplier relationships, larger customer bases or greater financial,
technical or marketing resources than we do.
Seasonality
We believe that we experience seasonality
in our business that reflects seasonal fluctuations in purchase patterns for food service business. In general, the fourth quarter
is the high season for the food service industry in China, and consequently we expect the purchases on our B2B platform to be higher
in the fourth quarter of each year compared to the first three. However, due to our limited operating history, the seasonal trends
that we experience in the future may not match our expectations.
Intellectual Property
We regard our trademarks, copyrights,
domain names, know-how, proprietary technologies, and similar intellectual property as critical to our success, and we rely on
copyright and trademark law and confidentiality, invention assignment and non-compete agreements with our employees and others
to protect our proprietary rights. As of December 31, 2018, we owned 14 computer software copyrights in China relating to various
aspects of our operations. We had 123 trademark applications inside China and six outside China. As of December 31, 2018, we had
registered five generic top-level domain names. Our registered domain names include
www.ccjoin.com
and
www.ccjmu.com
,
among others.
Regulation
This section sets forth a summary
of the most significant rules and regulations that affect our business activities in China.
Regulations Relating to Foreign Investment
Industry Catalogue Relating to Foreign
Investment
. Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue
of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry
of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories:
encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted”
category. Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some
restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to
hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government
approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the
Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
Through Our WFOEs and Our VIEs, we are
engaged in certain industries that are classified as “restricted” under the Catalogue. Pursuant to the latest Catalogue
amended in June 2017, the provision of value-added telecommunications services falls in the restricted category and the percentage
of foreign ownership cannot exceed 50% (excluding e-commerce), the purchase of grains, wholesale of grains and cotton fall in the
restricted category. We engage in the online wholesale and retail of products (except the grains and cotton), the development of
computer network technology, technical consultancy and technical services, which are in the permitted category. Under PRC law,
the establishment of a wholly foreign owned enterprise is subject to the approval of, or the requirement for record filing with,
the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry
and commerce bureau. We have duly obtained the approvals from the Ministry of Commerce or its local counterparts for our interest
in our wholly owned PRC subsidiaries and completed the registration of these PRC subsidiaries with the competent industry and commerce
bureau.
The Ministry of Commerce issued the
Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, as amended in
June 2018. Pursuant to FIE Record-filing Interim Measures, the establishment and change of foreign-invested enterprises are subject
to record-filing procedures, instead of prior approval requirements, provided that the establishment or change does not involve
special entry administration measures. If the establishment or change of FIE matters involves the special entry administration
measures, the approval of the Ministry of Commerce or its local counterparts is still required. Pursuant to the Announcement [2016]
No. 22 of the National Development and Reform Commission and the Ministry of Commerce dated October 8, 2016, the special entry
administration measures for foreign investment apply to restricted and prohibited categories specified in the Catalogue, and the
encouraged categories are subject to certain requirements relating to equity ownership and senior management under the special
entry administration measures.
Foreign Investment in Value-Added
Telecommunications Businesses
. The Regulations for Administration of Foreign-invested Telecommunications Enterprises
promulgated by the PRC State Council in December 2001 and subsequently amended in September 2008 and February 2016 set
forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with
the establishment of a foreign-invested telecommunications enterprise. These regulations prohibit a foreign entity from owning
more than 50% of the total equity interest in any value-added telecommunications service business in China and require the major
foreign investor in any value-added telecommunications service business in China have a good and profitable record and operating
experience in this industry. Due to these regulations, we operate our website
www.ccjoin.com
through Zhongmin.
In July 2006, the Ministry of
Information Industry, the predecessor of the Ministry of Industry and Information Technology, or the MIIT, issued the Circular
on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, pursuant
to which a domestic PRC company that holds an operating license for value-added telecommunications business, which we refer to
as an ICP License, is prohibited from leasing, transferring or selling the ICP License to foreign investors in any form and from
providing any assistance, including resources, sites or facilities, to foreign investors that conduct a value-added telecommunications
business illegally in China. Further, the domain names and registered trademarks used by an operating company providing value-added
telecommunications services must be legally owned by that company or its shareholders. In addition, the company’s operational
premises and equipment must comply with the approved coverage region on its ICP License, and the company must establish and improve
its internal internet and information security policies and standards and emergency management procedures. If an ICP License holder
fails to comply with the requirements and also fails to remedy such non-compliance within a specified period of time, the MIIT
or its local counterparts have the discretion to take administrative measures against the license holder, including revoking its
ICP license. Zhongmin, the operator of our website, owns the relevant domain names and registered trademarks and has the necessary
personnel to operate the website.
Licenses and Permits
We are required to hold a variety
of licenses and permits in connection with various aspects of our business, including the following:
Value-added Telecommunication License
.
The Telecommunications Regulations promulgated by the State Council and its related implementation rules, including the Catalogue
of Classification of Telecommunications Business issued by the MIIT, categorize various types of telecommunications and telecommunications-related
activities into basic or value-added telecommunications services, and internet information services, or ICP services, are classified
as value-added telecommunications businesses. Under the Telecommunications Regulations, commercial operators of value-added telecommunications
services must first obtain an ICP License from the MIIT or its provincial level counterparts. In 2000, the State Council also
issued the Administrative Measures on Internet Information Services, which was amended in 2011. According to these measures, a
commercial ICP service operator must obtain an ICP License from the relevant government authorities before engaging in any commercial
ICP service in China. When the ICP service involves areas of news, publication, education, medical treatment, health, pharmaceuticals
and medical equipment, and if required by law or relevant regulations, specific approval from the respective regulatory authorities
must be obtained prior to applying for the ICP License from the MIIT or its provincial level counterpart. In 2009, the MIIT promulgated
the Administrative Measures on Telecommunications Business Operating Licenses, which, as amended in 2017, set forth more specific
provisions regarding the types of licenses required to operate value-added telecommunications services, the qualifications and
procedures for obtaining such licenses and the administration and supervision of such licenses. Zhongmin, as our ICP operator,
holds an ICP License issued by the Shanghai Telecommunications Administration for the provision of information services through
the internet and also a value-added telecommunication license issued by the MIIT for the provision of information services through
a mobile network, the provision of internet data center services, internet access services, and online data processing and
transaction processing services.
Food Distribution Permit
.
China has adopted a licensing system for food supply operations under the Food Safety Law and its implementation rules. Entities
or individuals that intend to engage in food production, food distribution or food service businesses must obtain licenses or permits
for such businesses. Pursuant to the Administrative Measures on Food Distribution Licensing issued and amended by the SFDA in August 2015
and November 2017, an enterprise needs to obtain a Food Distribution Permit from the local food and drug administration, and the
permits already obtained by food business operators prior to the effective date of these new measures will remain valid for their
originally approved validity period. We sell food and nutritional supplements through our website. Zhongmin has obtained Food Distribution
Permits.
License or Registration for
Wholesale and Retail of Liquor
. Certain provinces in the PRC have adopted a licensing system for the wholesale or
retail of liquor. For example, the Regulation of Shanghai Municipality on Alcoholic Goods Production and Operation, issued by the
Standing Committee of Shanghai Municipal People’s Congress, which was amended in September 2010, stipulates that any entity
engaged in the production, wholesale or retail of liquor within the area of Shanghai municipality is subject to a licensing system.
We sell liquor through our website. Our VIE has obtained the license for engaging in the wholesale or retail of liquor.
Regulations Relating to E-Commerce
China’s e-commerce industry
is at a relatively early stage of development and there are few PRC laws or regulations specifically regulating the e-commerce
industry. In May 2010, the State Administration of Industry and Commerce adopted the Interim Measures for the Administration
of Online Commodities Trading and Relevant Services, which took effect in July 2010. Under these measures, enterprises or
other operators which engage in online commodities trading and other services and have been registered with the State Administration
of Industry and Commerce or its local branches must make the information stated in their business license available to the public
or provide a link to their business license on their website. Online distributors must adopt measures to ensure safe online transactions,
protect online shoppers’ rights and prevent the sale of counterfeit goods. Information on products and transactions released
by online distributors must be authentic, accurate, complete and sufficient.
In January 2014, the State Administration
of Industry and Commerce promulgated the Administrative Measures for Online Trading, which terminated the above interim measures
and became effective in March 2014. The Administrative Measures for Online Trading further strengthen the protection of consumers
and impose more stringent requirements and obligations on online business operators and third-party online marketplace operators.
For example, online business operators are required to issue invoices to consumers for online products and services. Consumers
are generally entitled to return products purchased from online business operators within seven days upon receipt, without giving
any reason. Online business operators and third-party online marketplace operators are prohibited from collecting any information
on consumers and business operators, or disclosing, selling or providing any such information to any third-party, or sending commercial
electronic messages to consumers, without their consent. Fictitious transactions, deletion of adverse comments and technical attacks
on competitors’ websites are prohibited as well. In addition, third-party online marketplace operators are required to examine
and verify the identifications of the online business operators and set up and keep relevant records for at least two years. Moreover,
any third-party online marketplace operator that simultaneously engages in online trading for products and services should clearly
distinguish itself from other online business operators on the marketplace platform. We are subject to these measures as a result
of our online direct sales and online marketplace.
In addition, The PRC E-Commerce
Law, which was issued on August 31, 2018 and came into effect on January 1, 2019, imposes further obligations on the
e-commerce business, such as protecting consumer rights and interests, protecting the environment, protecting
intellectual property rights, protecting cybersecurity and individual information, assuming responsibility for the quality of
products or services, and accepting the supervision by the government and the public.
Regulations Relating to Internet Content and Information
Security
The Administrative Measures on Internet
Information Services specify that internet information services regarding news, publications, education, medical and health care,
pharmacy and medical appliances, among other things, are to be examined, approved and regulated by the relevant authorities. Internet
information providers are prohibited from providing services beyond those included in the scope of their ICP licenses or filings.
Furthermore, these measures clearly specify a list of prohibited content. Internet information providers are prohibited from producing,
copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights
and interests of others. Internet information providers that violate the prohibition may face criminal charges or administrative
sanctions by the PRC authorities. Internet information providers must monitor and control the information posted on their websites.
If any prohibited content is found, they must remove the offending content immediately, keep a record of it and report to the relevant
authorities.
Internet information in China is also
regulated and restricted from a national security standpoint. The National People’s Congress, China’s national legislative
body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal punishment in China for
any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically
disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual
property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among
other things, result in a leakage of state secrets or a spread of socially destabilizing content.
Regulations Relating to Internet Privacy
In recent years, PRC government authorities
have enacted laws and regulations on internet use to protect personal information from any unauthorized disclosure. The Administrative
Measures on Internet Information Services prohibit ICP service operators from insulting or slandering a third-party or infringing
upon the lawful rights and interests of a third-party. Under the Several Provisions on Regulating the Market Order of Internet
Information Services, issued by the MIIT in 2011, an ICP operator may not collect any user personal information or provide any
such information to third parties without the consent of a user. An ICP service operator must expressly inform the users of the
method, content and purpose of the collection and processing of such user personal information and may only collect such information
necessary for the provision of its services. An ICP service operator is also required to properly keep the user personal information,
and in case of any leak or likely leak of the user personal information, the ICP service operator must take immediate remedial
measures and, in severe circumstances, to make an immediate report to the telecommunications regulatory authority. In addition,
pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National
People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal
Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the consent
of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes.
An ICP service operator must also keep such information strictly confidential, and is further prohibited from divulging, tampering
or destroying of any such information, or selling or proving such information to other parties. Any violation of the above decision
or order may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, closedown of websites or even criminal liabilities. Furthermore, in June 2016, the State Internet Information Office
issued the Administrative Provisions on Mobile Internet Applications Information Services, which became effective on August 1,
2016, to further strengthen the regulation of the mobile application information services. Pursuant to these provisions, owners
or operators of mobile internet applications that provide information services are required to be responsible for information security
management, establish and improve the protective mechanism for user information, observe the principles of legality, rightfulness
and necessity, and expressly state the purpose, method and scope of, and obtain user consent to, the collection and use of users’
personal information. In addition, the new Cyber Security Law, which became effective on June 1, 2017, also requires network operators
to strictly keep confidential users’ personal information that they have collected and to establish and improve user information
protective mechanism. We have required our users to consent to our collecting and using their personal information, and established
information security systems to protect user’s privacy.
Regulations Relating to Product Quality and Consumer
Protection
The Product Quality Law applies to
all production and sale activities in China. Pursuant to this law, products offered for sale must satisfy relevant quality and
safety standards. Enterprises may not produce or sell counterfeit products in any fashion, including forging brand labels or giving
false information regarding a product’s manufacturer. Violations of state or industrial standards for health and safety and
any other related violations may result in civil liabilities and administrative penalties, such as compensation for damages, fines,
suspension or shutdown of business, as well as confiscation of products illegally produced and sold and the proceeds from such
sales. Severe violations may subject the responsible individual or enterprise to criminal liabilities. Where a defective product
causes physical injury to a person or damage to another person’s property, the victim may claim compensation from the manufacturer
or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear the liability, the
seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller
that should bear the liability, the manufacturer has a right of recourse against the seller.
The Consumer Protection Law sets out
the obligations of business operators and the rights and interests of the consumers in China. Pursuant to this law, business operators
must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide consumers with
authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities.
Failure to comply with the Consumer Protection Law may subject business operators to civil liabilities such as refunding purchase
prices, replacement of commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business
operators or the responsible individuals to criminal penalties when personal damages are involved or if the circumstances are severe.
The Consumer Protection Law was further amended in October 2013 and became effective in March 2014. The amended Consumer
Protection Law further strengthen the protection of consumers and impose more stringent requirements and obligations on business
operators, especially on the business operators through the internet. For example, the consumers are entitled to return the goods
(except for certain specific goods) within seven days upon receipt without any reasons when they purchase the goods from business
operators on the internet. The consumers whose interests have been damaged due to their purchase of goods or acceptance of services
on online marketplace platforms may claim damages from sellers or service providers. Where the providers of the online marketplace
platforms are unable to provide the real names, addresses and valid contact details of the sellers or service providers, the consumers
may also claim damages from the providers of the online marketplace platforms. Providers of online marketplace platforms that know
or should have known that sellers or service providers use their platforms to infringe upon the legitimate rights and interests
of consumers but fail to take necessary measures must bear joint and several liabilities with the sellers or service providers.
Moreover, if business operators deceive consumers or knowingly sell substandard or defective products, they should not only compensate
consumers for their losses, but also pay additional damages equal to three times the price of the goods or services.
The Provisional Measures for 7-day
Unconditional Return of Online Purchased Goods came effective on May 15, 2017, which provides detailed regulations on and ensures
the implementation of the rules of "7-day Unconditional Return of Purchased Goods" provided for in the Consumer Protection
Law to protect the legitimate rights and interests of consumers. Pursuant to this regulation, online goods sellers shall lawfully
perform their duties of "7-day Unconditional Return of Purchased Goods," and the online trading platforms shall guide
and urge the online goods sellers who use the platform to perform the duties of "7-day Unconditional Return of Purchased Goods,"
conduct supervisions and inspections, and provide technical support. This measure also encourages online goods sellers to make
a commitment of "unconditional return policy" that are more favorable to consumers than the Measures' requirements. Fresh
or perishable goods are inapplicable to the return policy. The online goods sellers who refuse the returning of goods in violation
of the provisions, shall, in addition to bearing the corresponding civil liability, be ordered by the administration for industry
and commerce or other relevant administrative authorities to make correction, and may be subject to warning and/or confiscation
of illegal income, a fine ranging from one to 10 times the amount of illegal income based on the circumstances, where there is
no illegal income, a fine of not more than RMB500,000; in serious cases, the business operator shall be ordered to suspend business
operation for correction and its business license shall be revoked.
We are subject to the Product Quality
Law, the Consumer Protection Law and the Provisional Measures for 7-day Unconditional Return of Online Purchased Goods as an online
supplier of commodities and a provider of online marketplace platform and believe that we are currently in compliance with these
regulations in all material aspects.
Regulations Relating to Pricing
In China, the prices of a very small
number of products and services are guided or fixed by the government. According to the Pricing Law, business operators must, as
required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production,
specifications, and other related particulars clearly. Business operators may not sell products at a premium or charge any fees
that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding
with others to manipulate the market price, using false or misleading prices to deceive consumers to transact, or conducting price
discrimination against other business operators. Failure to comply with the Pricing Law may subject business operators to administrative
sanctions such as warning, ceasing unlawful activities, compensation, confiscating illegal gains, fines. The business operators
may be ordered to suspend business for rectification, or have their business licenses revoked if the circumstances are severe.
We are subject to the Pricing Law as an online retailer and believe that our pricing activities are currently in compliance with
the law in all material aspects.
Regulations Relating to Leasing
Pursuant to the Law on Administration
of Urban Real Estate, when leasing premises, the lessor and lessee are required to enter into a written lease contract, containing
such provisions as the leasing term, use of the premises, rental and repair liabilities, and other rights and obligations of both
parties. Both lessor and lessee are also required to register the lease with the real estate administration department. If the
lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to fines.
According to the PRC Contract Law,
the lessee may sublease the leased premises to a third-party, subject to the consent of the lessor. Where the lessee subleases
the premises, the lease contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the lease
contract if the lessee subleases the premises without the consent of the lessor. In addition, if the lessor transfers the premises,
the lease contract between the lessee and the lessor will still remain valid.
Pursuant to the PRC Property Law,
if a mortgagor leases the mortgaged property before the mortgage contract is executed, the previously established leasehold interest
will not be affected by the subsequent mortgage; and where a mortgagor leases the mortgaged property after the creation and registration
of the mortgage interest, the leasehold interest will be subordinated to the registered mortgage.
Regulations Relating to Intellectual Property
Rights
The PRC has adopted comprehensive
legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.
Copyright
. Pursuant
to the Copyright Law and its implementation rules, creators of protected works enjoy personal and property rights, including,
among others, the right of disseminating the works through information networks. Pursuant to the relevant PRC regulations, rules and
interpretations, internet service providers will be jointly liable with the infringer if they (a) participate in, assist
in or abet infringing activities committed by any other person through the internet, (b) are or should be aware of the infringing
activities committed by their website users through the internet, or (c) fail to remove infringing content or take other
action to eliminate infringing consequences after receiving a warning with evidence of such infringing activities from the copyright
holder. In addition, where an ICP service operator is clearly aware of the infringement of certain content against another’s
copyright through the internet, or fails to take measures to remove relevant contents upon receipt of the copyright owner’s
notice, and as a result, it damages the public interest, the ICP service operator could be ordered to stop the tortious act and
be subject to other administrative penalties such as confiscation of illegal income and fines. To comply with these laws and regulations,
we have implemented internal procedures to monitor and review the content we have licensed from content providers before they
are released on our website and remove any infringing content promptly after we receive notice of infringement from the legitimate
rights holder.
Trademark
. The Trademark
Law and its implementation rules protect registered trademarks. The PRC Trademark Office of State Administration of Industry
and Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted
a “first-to-file” principle with respect to trademark registration. As of December 31, 2018, we had approximately
23 trademark applications in China.
Domain Name
. Domain
names are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT on November 1, 2017.
The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names, under supervision of
which the CNNIC is responsible for the daily administration of .cn domain names and Chinese domain names. CNNIC adopts the “first
to file” principle with respect to the registration of domain names. We have registered
www.ccjoin.com
and other
domain names.
On November 27, 2017, the MITT issued
the Notice of the Ministry of Industry and Information Technology on Regulating the Use of Domain Names in Providing Internet-based
Information Services. Pursuant to this notice, internet access service providers shall, via the Record-filing System, regularly
check the use of domain names by Internet-based information service providers, and shall, in the case that a domain name does not
exist or is expired or has no real identity information, cease the provision of access services for the Internet-based information
service provider concerned. Therefore, we have to extend the expiration of the
www.ccjoin.com
and other domain names to
avoid to be ceased to the access services,
Regulations Relating to Employment
The Labor Contract Law and its implementation
rules provide requirements concerning employment contracts between an employer and its employees. If an employer fails to
enter into a written employment contract with an employee within one year from the date on which the employment relationship is
established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the
employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment
of the employment relationship to the day prior to the execution of the written employment contract. The Labor Contract Law and
its implementation rules also require compensation to be paid upon certain terminations, which significantly affects the cost
of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision with an employee in
an employment contract or non-competition agreement, it has to compensate the employee on a monthly basis during the term of the
restriction period after the termination or ending of the labor contract. Employers in most cases are also required to provide
a severance payment to their employees after their employment relationships are terminated.
Enterprises in China are required
by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension
plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance
plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including
bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate
their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance
contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee. If the
employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject
to a fine ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise
that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within
a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement. We have not made adequate
contributions to employee benefit plans, as required by applicable PRC laws and regulations.
Regulations Relating to Dividend Withholding
Tax
Pursuant to the Enterprise Income
Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC,
or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment,
it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding
tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard
rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State
Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81,
a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax:
(i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and
(ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving
the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For
Trial Implementation), which became effective in October 2009, require that non-resident enterprises must obtain approval
from the relevant tax authority in order to enjoy the reduced withholding tax rate. There are also other conditions for enjoying
the reduced withholding tax rate according to other relevant tax rules and regulations. In November 2015, the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties became effective and repealed the Trial Implementation.
Pursuant to the new Measures, non-resident taxpayers who satisfy the criteria for entitlement to tax treaty benefits may, at the
time of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits, instead of being
subject to approvals, and be subject to follow-up administration by the tax authorities.
Pursuant to the Notice of the Ministry
of Finance, the State Administration of Taxation, the National Development and Reform Commission, and the Ministry of Commerce
on the Applicable Scope of the Policy of Temporary Exemption of Withholding Taxes on the Direct Investment Made by Overseas Investors
with Distributed Profits, or Circular 102, which became effective in January 2018, where an overseas investor uses profits distributed
by a resident enterprise in China for direct investment in an encouraged investment project, deferred tax payment policy shall
apply if the stipulated criteria is satisfied, and withholding of income tax shall be waived in the interim.
Accordingly, Join Me Group (HK)
Investment Company Limited may be able to enjoy the 5% withholding tax rate for the dividends it receives from Shanghai
Zhongming, if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations, and the
approvals are no longer needed. Furthermore, if it satisfies the criteria of Circular 102, the withholding of income tax may
be waived in the interim. However, according to Circular 81, if the relevant tax authorities consider the transactions or
arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may
adjust the favorable withholding tax in the future.
Regulations Relating to Foreign Exchange
The principal regulations governing
foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008.
Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans.
In August 2008, SAFE issued the
Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign
Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested
enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142
provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used
for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered
capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such
RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. In March 2015,
SAFE issued SAFE Circular No.19, which took effect and replaced SAFE Circular No. 142 from June 1, 2015. Although SAFE
Circular No.19 allows for the use of RMB converted from the foreign currency-denominated capital for equity investments in the
PRC, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond
the business scope, for entrusted loans or for inter-company RMB loans.
In November 2012, SAFE promulgated
the Circular on Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, and amended
it in May 2015, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the
opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital
account, guarantee account), the reinvestment of lawful incomes derived by foreign investors in the PRC (e.g. profit, proceeds
of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign
exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise
no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which
was not possible before. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies
that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted
by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on
the registration information provided by SAFE and its branches.
In February 2015, SAFE promulgated
the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment, or SAFE
Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 delegates the authority to enforce the
foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain
banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment.
|
C.
|
Organizational Structure.
|
The following diagram illustrates our corporate
structure as of the date of this annual report.
|
(1)
|
The
shareholder of Zhongmin is Shanghai Zhongmin Investment and Development Group Co., Ltd. (formerly known as Shanghai Zhongmin Investment
and Development Co., Ltd.), or Zhongmin Investment, whose shareholders includes Ms. Xiaoxia Zhu, our chairperson and chief executive
officer, Ms. Huimin Wang, our director and Mr. Feng Pan, our director, holding 48.75%, 48.75% and 2.5% equity interests of Zhongmin
Investment, respectively.
|
|
(2)
|
The
shareholders of Lianji are Ms. Hong Zhou and Mr. Longming Wu, holding 1.0% and 99.0% equity
interests of Lianji, respectively.
|
Contractual Arrangements with Zhongmin and its
shareholder
Foreign investment in
internet companies is currently subject to significant restrictions under PRC laws and regulations. As a Cayman Islands
holding company, we do not qualify to conduct these businesses under PRC regulations. In addition, foreign investment in the
online service industry requires the foreign investor to possess certain qualifications, which we do not have, and our
PRC subsidiary, Shanghai Zhongming, is considered a foreign-invested enterprise which is restricted from holding the
licenses that are essential to the operation of our business, such as licenses for operating our website. As a result,
Shanghai Zhongming has entered into a series of contractual arrangements with Zhongmin and its shareholder described below,
through which we exercise effective control over the operations of Zhongmin and its subsidiaries. We conduct a part of our
operations in China through Zhongmin and its subsidiaries, which we treated as our consolidated affiliated
entities in China. Each of the contractual arrangements between Shanghai Zhongming, Zhongmin and its shareholder was executed
in May 2015. These contractual arrangements enable us to exercise effective control over these entities and receive
substantially all of the economic benefits from them.
Agreements that Transfers Economic Benefits and Risks
to Us
Master Exclusive Service Agreement
and Business Cooperation Agreement.
Pursuant to the Master Exclusive Service Agreement and Business Cooperation
Agreement, Zhongmin and its shareholder, including its subsidiaries or any companies or entities under its control, agrees to
engage Shanghai Zhongming as its provider for technical and business support services. Zhongmin and its shareholders will pay
Shanghai Zhongming service fees determined based on the audited consolidated net profit of Zhongmin. Shanghai Zhongming will
exclusively own any intellectual property arising from the performance of the services set forth in the agreement. Shanghai
Zhongming will provide financial support to Zhongmin and its shareholder in the form of bank loans or others forms as
permitted under the PRC laws. The service agreements will remain effective upon the written confirmation issued by Shanghai
Zhongming to Zhongmin and its shareholder and/or its shareholder 30 days before the termination. Neither Zhongmin nor its
shareholder has the right to unilaterally terminate the agreement.
In connection with the master
service agreement, we also entered into financial support undertaking letter with Zhongmin and agrees to provide unlimited
financial support to the Zhongmin and its shareholder, to the extent permissible under the applicable PRC laws and regulations,
whether or not any such operational loss is actually incurred. We will not request repayment of the loans or borrowings if
the Zhongmin or its shareholder do not have sufficient funds or are otherwise unable to repay.
Agreements that Provide Us with Effective Control over
Zhongmin
Proxy Agreement and Power of
Attorney
. Zhongmin’s shareholder has signed an Irrevocable Proxy Agreement and Power of Attorney to
appoint Shanghai Zhongming, or its designee, as the attorney-in-fact to act on Zhongmin’s shareholder's behalf on all
rights that the shareholder has in respect of such shareholder's equity interest in Zhongmin conferred by relevant laws and
regulations and the articles of association of Zhongmin. The rights include but not limited to attending shareholders
meeting, exercising voting rights and transferring all or a part of the equity interests of Zhongmin held by the shareholder.
The proxy and power of attorney will remain effective upon written confirmation issued by Shanghai Zhongming to Zhongmin and
its shareholder 30 days before the termination. Neither Zhongmin nor its Shareholder has the right to unilaterally terminate
the agreement.
Exclusive Option
Agreement
. Zhongmin’s shareholder has entered into an Exclusive Option Agreement with Shanghai Zhongming, pursuant
to which Shanghai Zhongming has an exclusive option to purchase, or to designate other persons to purchase, to the extent
permitted by applicable PRC laws, rules and regulations, all of the equity interest in Zhongmin from the shareholder. The
purchase price for the entire equity interest is to be the minimum price permitted by applicable PRC laws and
administrative regulations. If there is no minimum price under PRC laws or administrative regulations, the price shall be
determined by the Our WFOE or on a basis of the registered capital of Zhongmin. The term of the exclusive option agreement
will remain effective upon written confirmation issued by the Shanghai Zhongming to Zhongmin and its shareholder 30 days
before the termination. Neither Zhongmin nor its shareholder has the right to unilaterally terminate the agreement.
Equity Interest
Pledge Agreement.
Zhongmin’s shareholder has entered into an equity pledge agreement with the Shanghai Zhongming,
under which the shareholder pledged all of the equity interests in Zhongmin to Shanghai Zhongming as collateral to secure
performance of all obligations under the Master Exclusive Service Agreement, Business Cooperation Agreement, Proxy Agreement
and Power of Attorney and the Exclusive Option Agreement (collectively, the "Principal Agreement"). Pursuant to
this Equity Interest Pledge Agreement, dividends generated by the pledged equity interests shall be deposited into the
account designated by the Shanghai Zhongming and shall be used to pay the secured indebtedness prior and in preference to
any other payment during the term of the pledge. If any event of default incurred under the Principal Agreement,
Shanghai Zhongming, as the pledgee, will be entitled to dispose of the pledged equity interests and shall be paid in priority
with the proceeds recovered from the disposal.
Contractual Arrangements with Lianji and its shareholders
Following our acquisition of Unicorn in May 2019, we gained effective control over and received substantially
all the economic benefits from Lianji through a series of contractual arrangements among our wholly-owned subsidiary Lianji Future,
Lianji and its shareholders.
Agreements that Transfers Economic Benefits and Risks
to Us
Exclusive Business Operation
Agreement.
Lianji Future and Lainji have entered into an exclusive business operation agreement, pursuant to
which Lianji Future has the exclusive right to provide Lianji with technology development and application services. Without
Lianji Future’s written consent, Lianji shal not accept any technology development and application services covered by
this agreement from any third party. Lianji agrees to pay comprehensive service charges on an annual basis and up to the
full balance of Lianji’s total income after deduction of its costs and expenses. In addition, Lainji undertakes that
without Lianji Future’s prior written consent, Lainji shall not enter into any transactions that may have material
effect on Lainji’s assets, obligations, rights or business operations. Unless otherwise agreed by the parties, this agreement will remain effective until Lianji Future ceases
business operations.
Agreements that Provide Us with Effective Control over
Lainji
Powers of Attorney
. Each shareholder of Lainji has issued
a power of attorney, irrevocably appointing Lianji Future, as such shareholder’s attorney-in-fact to exercise all shareholder
rights, including, but not limited to, the right to call shareholders’ meeting, the right to vote on all matters of Lainji
that require shareholder approval, and the right to dispose of all or part of the shareholder’s equity interest in Lainji,
on behalf of such shareholder. Other than the foregoing circumstances, the power of attorney will remain in force until the termination
of the business operation agreement and during its effective term, shall not be amended or terminated without the consent of Lianji
Future.
Exclusive Option Agreement
. Lianji Future, Lainji and
each of Lainji’s shareholders have entered into an option agreement, pursuant to which Lainji’s shareholder has irrevocably
granted Lianji Future an exclusive option, to the extent permitted by PRC law, to purchase, or have its designated person or persons
to purchase, at its discretion all or part of the shareholder’s equity interests in Lainji or all or part of Lainji’s
assets. The purchase price shall be a nominal price unless where PRC laws and regulations require valuation of the equity interests
or the assets, or promulgates other restrictions on the purchase price, or otherwise prohibits purchasing the equity interests
or the assets at a nominal price. If the PRC laws and regulations prohibit purchasing the equity interests or the assets at a nominal
price, the purchase price shall be equal to the original investment of the equity interests made by such shareholders or the book
value of the assets. Where PRC laws and regulations require valuation of the equity interests or the assets or promulgates other
restrictions on the purchase price, the purchase price shall be the minimum price permitted under PRC laws and regulations. However,
if the minimum price permitted under PRC laws and regulations exceed the original investment of the equity interests or the book
value of the assets, Lainji shall reimburse Lianji Future the exceed amount after deducting all taxes and fees paid under PRC laws
and regulations. The shareholders of Lainji undertake, among other things, that without Lianji Future’s prior written consent,
they shall not take any actions that may have material effect on Lainji’s assets, businesses and liabilities, nor shall
they appoint or replace any directors, supervisors and officers of Lainji. These agreements have terms of ten years, which may
be extended upon Lianji Future’s written confirmation prior to the expiry.
Equity Interest
Pledge Agreement
. Each shareholder of Lainji has entered into an equity interest pledge agreement with Lianji Future and
Lainji, pursuant to which, the shareholder has pledged all of his or her equity interest in Lainji to Lianji Future to
guarantee the performance by Lainji and its shareholders of their obligations under the master agreements, which include the
business operation agreement the power of attorney and the exclusive option agreement. Each shareholder of Lainji agrees
that, during the term of the equity interest pledge agreement, he or she will not dispose of the pledged equity interests or
create or allow any encumbrance on the pledged equity interests without the prior written consent of Lianji Future. The
equity interest pledge agreement remain effective until Lainji and its shareholders discharge all of their obligations under
the master agreements.
We have been advised by our PRC legal
counsel, Beijing Dacheng Law Offices, LLP, that the ownership structure and the contractual arrangements among
Our WFOEs, Our VIEs and their respective shareholders will not result in any violation of PRC laws or regulations currently in
effect. However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the
interpretation and application of current and future PRC laws, rules and regulations. Accordingly, there can be no assurance
that the PRC regulatory authorities will not take a view that is contrary to or otherwise different from the above opinion of
our PRC legal counsel. Our PRC legal counsel has further advised that if the PRC government authority finds that our
corporate structure, the contractual arrangements or the reorganization to establish our current corporate structure do not
comply with any applicable PRC laws, rules or regulations, the contractual arrangements will become invalid or unenforceable,
and we could be subject to severe penalties including being prohibited from continuing operations. See “Item 3.
Key Information—D. Risk Factors— Risks Related to Our Corporate Structure— If the PRC government finds that
the agreements that establish the structure for operating our businesses in China do not comply with PRC
governmental restrictions on foreign investment in internet business, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests
in those operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business
in China—Uncertainties with respect to the PRC legal system could have an adverse effect on us.”
|
D.
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Property, plants and equipment.
|
Our executive offices are located at 2/F,
No. 608, Macau Road, Putuo District, Shanghai 200060, People's Republic of China and occupy a total of 200,500
square meters. The lease of our headquarter office has a term of two years.
The servers that we use to provide our products
and services are primarily maintained at China Telecom and China Unicom branches in cities across China, including Shanghai and
Kunshan.
ITEM 4A. UNRESOLVED
STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
Overview
We currently operate an online platform
for providing B2B services to food-industry suppliers and customers in China. We acquired this business in an acquisition with JMU HK
in June 2015. Our B2B online platform recorded gross billing of RMB7.7 billion (US$1.1 billion) in 2018, measured in terms of
the gross merchandise value.
We incurred losses from operations of US$27.6
million, US$168.4 million and US$124.4 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Factors Affecting Our Results of Operations
Besides the operating metrics that
directly affect our revenues, there are a number of factors that affect our results of operations, including:
Continued growth of China’s economy
and food service industry in general
. Our results of operations and financial condition are affected by the general factors
driving China’s food industry, including levels of procurement spending by restaurants in China. In addition, they are also
affected by factors driving online B2B business in China, such as the adoption of online procurement strategies by restaurants
or adoption of online sales strategies by suppliers, the availability of improved delivery services and the increasing variety
of payment options. Our results of operations are also affected by general economic conditions in China. In particular, we have
experienced and expect to continue to experience upward pressure on our operating expenses.
Competitive pressure
. We operate
in a highly competitive market. We compete with a number of other e-commerce service providers that have significant capital and
human resources, some of which have also launched initiatives in direct competition with our business. The terms and conditions
we offer our suppliers and customers are affected by our competitors’ strategies, which, as a result, affect our cost of
operation. The competition also has a direct effect on our ability to retain existing customers and attract new customers.
Marketing expense
. We engage in
a variety of different online marketing efforts tailored to our targeted customers and suppliers to expand our customer and supplier
base. Expenses incurred for marketing and other promotional efforts may have a negative impact on our profitability, if they prove
to be ineffective and do not expand our customer base as intended.
Seasonality
. We believe that we
experience seasonality in our business that reflects seasonal fluctuations in purchase patterns for food services businesses.
In general, the fourth quarter is the high season for the food service industry in China, and consequently we expect the purchases
on our B2B platform to be higher in the fourth quarter of each year compared to the first three. However, due to our limited operating
history, the seasonal trends that we experience in the future may not match our expectations.
While our business is influenced by
general factors affecting our industry, our operating results are more directly affected by company specific factors, including
the following major factors:
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·
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our ability to increase customer accounts and orders from customers;
|
|
·
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our ability to manage our mix of product and service offerings;
|
|
·
|
our ability to further increase and leverage our scale of business.
|
Our Ability to Increase Customer Accounts and Orders from
Customers
Growth in the number of our customer accounts
and orders are key drivers of our revenue growth. The B2B business for food service industry that we are currently operating was
only started in late 2014, and in 2018 we had more than 10,300 customer accounts. Gross billing on our online B2B platform reached
RMB7.7 billion (US$1.1 billion) in 2018, measured in terms of the gross merchandise value.
Our ability to attract new customer
accounts and new orders from existing customer accounts depends on our ability to provide superior customer experience. To this
end, we offer a wide selection of products at competitive prices on our website and mobile applications and provide speedy and
reliable delivery, convenient payment options and comprehensive customer services. We have benefited from word-of-mouth viral marketing
in winning new customers, and we also conduct online and offline marketing and brand promotion activities to attract new customers.
In addition, we encourage existing customers to place more orders with us through a variety of means, including loyalty points.
Our Ability to Manage Our Mix of Product Offerings
Our results of operations are also
affected by the mix of products we offer. We commenced our B2B business for food service industry with sales to restaurants. We
are gradually expanding our offerings to hotel-related products. The extent and mix of products we provided will influence our
users’ willingness to utilize our online platform for more of their needs. In addition, our mix of products also affects
our gross margin, as different products have different gross margins.
Our Ability to Further Increase and Leverage our Scale
of Business
Our results of operations are directly
affected by our ability to further increase and leverage our scale of business. As our business further grows in scale, we expect
to obtain more favorable terms from our suppliers, including pricing terms and volume-based rebates. In addition, we aim to create
value for our suppliers by providing an effective channel for selling large volumes of their products online and by offering them
comprehensive information on customer preferences and market demand and ensuring the high quality of storage and delivery services.
We believe this value proposition also helps us obtain favorable terms from suppliers.
Currently we are selling products in our
direct sales business at low margin, and we are not charging any commission or service fees for third-party sellers to use our
platform. There is no assurance that we can keep the expansion of our B2B business at the current pace after we start to apply
higher margins to transactions in our direct sale business and charge commission or service fees to third-party sellers. Our ability
to leverage our scale of business to induce our platform users to continue using our services with margins and service charges
is one key factor affecting our future operational and financial performance.
Revenues
We derive our revenues from direct sales
and online platform services. We record revenue from online direct sales on a gross basis and revenue from the online platform
services that we provide to third-party sellers and purchasers for their transactions on a net basis. Revenue is recorded net of
surcharges and value-added tax, or VAT, and related surcharges.
Our revenues were US$73.2 million,
US$88.7 million and US$36.5 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Cost of Revenues
Our cost of revenues are direct and
indirect costs incurred to generate revenues, and acquiring the products that we sell directly and the overhead expenses incurred
for IT personnel, as well as inventory write-downs. The rebates and subsidies we receive from suppliers are accounted as a reduction
to the purchase price and will be recorded as a reduction of cost of revenues when the product is sold.
Our cost of revenues was US$72.9 million,
US$88.2 million and US$35.6 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Operating Expenses
The following table sets forth our
operating expenses by the amount and as a percentage of total operating expenses for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
20,405,602
|
|
|
|
73.0
|
|
|
|
15,206,658
|
|
|
|
9.0
|
|
|
|
5,792,802
|
|
|
|
4.6
|
|
General and administrative
|
|
|
7,530,851
|
|
|
|
27.0
|
|
|
|
6,696,601
|
|
|
|
4.0
|
|
|
|
4,303,062
|
|
|
|
3.4
|
|
Impairment loss
|
|
|
—
|
|
|
|
0.0
|
|
|
|
147,018,425
|
|
|
|
87.0
|
|
|
|
115,178,704
|
|
|
|
91.9
|
|
Total operating expenses
|
|
|
27,936,453
|
|
|
|
100
|
|
|
|
168,921,684
|
|
|
|
100
|
|
|
|
125,274,568
|
|
|
|
100
|
|
Our operating expenses consist of
selling and marketing expenses and general and administrative expenses as well as impairment loss. Our total operating expenses
were US$27.9 million, US$168.9 million and US$125.3 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Selling and marketing expenses
Our selling and marketing expenses
primarily consist of expenses incurred in connection with advertisements and market promotion events, loyalty program, as well
as other overhead expenses incurred for our sales and marketing personnel.
Our selling and marketing expenses were
US$20.4 million, US$15.2 million and US$5.8 million for the years ended December 31, 2016, 2017 and 2018, respectively.
General and administrative expenses
Our general and administrative expenses
primarily consist of:
|
·
|
salaries and benefits for employees, which are the salaries and benefits for our management, merchant service representatives
and general administrative staff;
|
|
·
|
share-based compensation to employees, which is the expense incurred in connection with the grant of share options and RSUs
to our directors, officers and other employees pursuant to our share incentive plan; and
|
|
·
|
office expenses, which consist primarily of office rental, maintenance and utilities expenses, depreciation of office equipment
and other office expenses.
|
Our general and administrative
expenses were US$7.5 million, US$6.7 million and US$4.3 million, for the years ended December 31, 2016, 2017 and 2018,
respectively.
Impairment loss
Our impairment loss primarily consists of loss recognized in
connection of the long-lived assets, goodwill and long-term investment.
Our impairment loss was nil, US$147.0 million and US$ 115.2 million,
for the years ended December 31, 2016, 2017 and 2018.
Taxation
We are incorporated in the Cayman
Islands. Under Cayman Islands law, we are not subject to income or capital gains tax.
Our subsidiary incorporated in the
Cayman Islands is not subject to income or capital gains tax in the Cayman Islands, and dividend payments by this subsidiary to
us are not subject to withholding tax in the Cayman Islands.
Our subsidiary in Hong Kong is subject
to a profit tax at the rate of 16.5% on assessable profit determined under relevant Hong Kong tax regulations. Dividend payments
by this subsidiary to us are not subject to withholding tax in Hong Kong.
Our subsidiary and our consolidated
variable interest entities in China are subject to value-added tax, or VAT, at rates of 0%, 10%, 11%, 16% or 17%. In
addition, they are generally subject to the standard enterprise income tax in China at a rate of 25%.
Under the Enterprise Income Tax Law
and its implementation regulations, a 10% PRC income tax is applicable to dividends payable to investors that are “non-resident
enterprises,” enterprises that do not have an establishment or place of business in the PRC, to the extent such dividends
have their sources within the PRC. Such dividends are also subject to the 10% tax even if the recipient has an establishment or
place of business in the PRC if the relevant income is not effectively connected with the establishment or place of business. Under
a special arrangement between China and Hong Kong, dividends from our PRC subsidiary paid to our Hong Kong subsidiary, which would
otherwise be subject to a 10% withholding tax, may be subject to a 5% preferential withholding tax if our Hong Kong subsidiary
can be considered as a “beneficial owner” of our PRC subsidiary and is otherwise entitled to the benefits under the
special arrangement. The State Administration for Taxation promulgated the Notice Regarding Interpretation and Recognition of Beneficial
Owners under Tax Treaties on October 27, 2009, which provides guidance on the determination of “beneficial owner.”
If our Hong Kong subsidiary is not considered to be the “beneficial owner” of our PRC subsidiary under this notice,
any dividends paid by our PRC subsidiary to our Hong Kong subsidiary would be subject to withholding tax at a rate of 10%.
If our Cayman Islands holding company or
our Hong Kong subsidiary is deemed to be a “resident enterprise” under the Enterprise Income Tax Law, then it is not
clear whether or how the PRC tax authorities would apply the PRC tax on dividends payable by our PRC subsidiary to our Hong Kong
subsidiary or by our Hong Kong subsidiary to us. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to Doing Business in China—Under the PRC enterprise income tax law, we could be classified as a ‘resident enterprise’
of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
Provision for Income Tax Benefit
We are subject
to PRC Enterprise Income Tax Law on taxable income in accordance with the relevant PRC income tax laws. We incurred net losses
of US$25.3 million, US$161.9 million and US$123.2 million for the years ended December 31, 2016, 2017 and 2018, respectively. Our
provision for income tax benefit were US$2.2 million, US$6.9 million and US$2.1 million for the years ended December 31, 2016,
2017 and 2018, respectively.
Critical Accounting Policies
The preparation of our consolidated
financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts
of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based our
estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Our management has discussed the development, selection and disclosure of these estimates with our board of
directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered
to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at
the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
We believe that the following critical
accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our
consolidated financial statements.
You should read the following descriptions
of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures
included in this annual report.
Revenue Recognition
We recognize revenue from the sales
of rice, flavoring, oil, seafood, wine and other types of generic food and beverage products through our online platform www.ccjoin.com.
The website also serves as an online platform to connect third-party vendors and customers. We recognize revenue when the following
four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services
have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
We recognize revenue when the customers
confirm the acceptance of the goods once they receive the delivered goods. The sales returns are considered and estimated when
the related revenue is recognized.
Revenue is recorded net of surcharges
and value-added tax ("VAT") and related surcharges.
We primarily generate revenue from
online direct sales and online platform services.
Online direct sales
We primarily sell rice, flavoring,
oil, seafood, wine and other products relating to catering and hotel industries through online direct sales. There is a separate
channel on our online platform designated for our online direct sales, and we record revenue from online direct sales on a gross
basis as we act as the principal in these arrangements: we are the primary obligor in the sales arrangements, have latitude in
establishing prices and have discretion in suppliers' selection. On certain transactions, we also retain some of general inventory
risk and physical inventory loss risk.
Online platform services
We also provide the online platform
services to connect third-party sellers and purchasers for their transactions via our online marketplace. Online platform
sales are made from the online stores under the third-party sellers’ names, and we record the related revenue on a net
basis as we act as the agent in these arrangements: we are not the primary obligor, do not bear inventory risk, and do not
have the ability to establish the price or discretion in supplier selection. For the years ended December 31, 2016, 2017 and
2018, revenues related to the online platform services were nil, as we did not charge any service fees to the third-party sellers
and purchasers.
Impairment of Goodwill and Long-lived Assets
Goodwill represents the cost of an
acquired business in excess of the fair value of tangible and identifiable intangible net assets purchased. We seek the assistance
of an independent valuation firm in determining the fair value of the identifiable intangible net assets of the acquired business.
We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units.
Some of the significant estimates
and assumptions inherent in the discounted cash flow, or DCF method or other methods include the amount and timing of projected
future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the
asset’s economic life cycle and the competitive trends impacting the asset, including consideration of any technical, legal,
regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment, as different
types of intangible assets will have different useful lives.
Specifically, the income approach
involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts developed by us. The
financial projections used in deriving the fair values of intangible assets were consistent with our business plan. However, these
assumptions were inherently uncertain and highly subjective. These assumptions include: no material changes in the existing political,
legal and economic conditions in China; no major changes in the tax rates applicable to our subsidiaries and consolidated affiliated
entities in China; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no
material deviation in market conditions from economic forecasts.
Goodwill is tested for impairment
at least once annually or more frequently if we believe indications of impairment exist. Impairment is tested using a two-step
process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. We currently
have one reporting unit, which recorded goodwill in relation to the acquisition of JMU HK in June 2015.
If the fair value of each reporting
unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying
amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying
value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting
for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities
is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the
implied fair value of goodwill. Estimating the fair value of reporting unit is performed by the DCF method.
For the years ended 2013 and 2014
and through the date of completion of the merger with JMU, we had one reporting unit, the group buying business. We estimated that
there was no impairment of goodwill as of December 31, 2013 and 2014 as the fair value of the reporting unit exceeded the carrying
amount.
After the divestiture of the group buying
business, we had one reporting unit, our B2B business for the food service industry. We measures goodwill at fair value on a non-recurring
basis when it is annually evaluated or whenever events or changes in circumstances indicate that carrying amount of a reporting
unit exceeds its fair value. The fair value was determined using models with significant unobservable input (Level 3 inputs) and
the cash flow projections were based on past experience, actual results of operations and management best estimates about future
developments as well as certain market assumptions. Goodwill impairment loss of nil, $127.3 million and $105.8 million were recognized
for the years ended December 31, 2016, 2017 and 2018, respectively.
We estimated the fair values of the intangible
assets with the assistance from an independent third-party appraiser. We are ultimately responsible for the determination of all
amounts related to the intangible assets recorded in the financial statements.
Acquired intangible assets are amortized
over their useful lives. Useful lives are based on our management’s estimates of the period that the assets will generate
revenue. We amortize intangible assets with determinable useful lives on a straight-line basis. We evaluate intangible assets with
determinable useful lives for recoverability whenever events or changes in circumstances indicate that their carrying amounts may
not be recoverable. We measure recoverability of long-lived assets to be held and used as part of an asset group by comparing the
carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If we believe the
assets are impaired, the impairment will equal the amount by which the carrying value of the assets exceeds the fair value of the
assets.
Considering that we have incurred
operating losses, we have determined to perform the annual impairment tests on acquired intangible assets on December 31 of
each year. As a result of the annual impairment test, impairment loss of nil, US$19.8 million, and US$8.6 million
for acquired intangible assets was recognized during the year ended December 31, 2016, 2017 and 2018, respectively. Estimates
of fair value involve a complex series of judgments about future events and uncertainties and rely heavily on estimates
and assumptions. Our judgments in determining an estimate of fair value can materially impact our results of operations. We
base these valuations on information available as of the impairment review date and on expectations and assumptions
that management deems reasonable. Any changes in key assumptions, including unanticipated events and circumstances, may
affect the accuracy or validity of such estimates and could potentially result in impairment charges.
Income Taxes
We follow the liability method in accounting
for income taxes in accordance with ASC topic 740 (“ASC 740”), Income Taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation
allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion,
or all, of the deferred tax assets will not be realized.
We apply the provision of ASC 740
to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements.
We have elected to classify interest
and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements
of operations.
Share-based payments
Share-based payment
awards with employees are measured based on the grant date fair value of the equity instrument issued, and recognized as compensation
costs using the straight-line method over the requisite service period, which is generally the vesting period of the options, with
a corresponding impact reflected in additional paid-in capital. For share-based payment awards with market conditions, such market
conditions are included in the determination of the estimated grant-date fair value. In the second quarter of 2017, we elected
to early adopt ASU No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting
,
to account for forfeitures as they occur. The cumulative-effect adjustment to accumulated deficits was nil as a result of the adoption
of ASU 2016-09.
A change in any of the terms or conditions
of share-based payment awards is accounted for as a modification of awards. The Company measures the incremental compensation cost
of a modification as the excess of the fair value of the modified awards over the fair value of the original awards immediately
before its terms are modified, based on the share price and other pertinent factors at the modification date. For vested awards,
the Company recognizes incremental compensation cost in the period the modification occurred. For unvested awards, the Company
recognizes, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized
compensation cost for the original award on the modification date.
Fair Value of Our Ordinary Shares and Share-Based Compensation
Since our initial public offering
in April 2015, the determination of the fair value of the ordinary shares has been based on the market price of our ADSs, each
representing 18 ordinary shares, traded on the Nasdaq Global Market. In July 2018, we changed the ratio of our ADSs to ordinary
shares from one ADS representing 18 ordinary share to one ADS representing 180 ordinary shares.
The following table sets forth certain
information regarding the share options granted to our employees at different dates in the past three fiscal years prior to December
31, 2018:
Grant/Re-
measurement
date
|
|
Type of award
|
|
Number of
awards
|
|
|
Exercise price
|
|
|
Fair value of
ordinary
share
|
|
|
Intrinsic value
|
|
|
Type of valuation
|
|
July 1, 2016
|
|
Share option granted to executives
|
|
|
11,633,400
|
|
|
US$
|
0.20
|
|
|
US$
|
0.1196
|
|
|
|
-
|
|
|
|
Contemporaneous
|
|
July 1, 2016
|
|
Share option granted to staffs
|
|
|
20,395,300
|
|
|
US$
|
0.20
|
|
|
US$
|
0.0945
|
|
|
|
-
|
|
|
|
Contemporaneous
|
|
July 1, 2016
|
|
Employee restricted share units
|
|
|
10,430,000
|
|
|
|
N/A
|
|
|
US$
|
0.1328
|
|
|
US$
|
1,385,202
|
|
|
|
Contemporaneous
|
|
In determining the value of share options
to employees, we have used the binomial option-pricing model, with assistance from the independent third-party appraiser. Under
this option pricing model, certain assumptions, including risk-free interest rate, the contractual life of the options, the expected
dividends on the underlying ordinary shares, the expected volatility of the price of the underlying shares for the contractual
life of the options, the post-vesting forfeiture rate and the expected exercise multiple are required in order to determine the
fair value of our options. Changes in these assumptions could significantly affect the fair value of share options and hence the
amount of compensation expense we recognize in our consolidated financial statements.
In determining the value of ordinary
shares to directors and executives, we have considered the fair value of the ordinary share and the expected dividend paid-out
ratio. Because we have no plan to pay dividend, the fair value of the share granted to directors and executives is the fair value
of the ordinary share.
The key assumptions used in the valuation
of the employee share options are summarized in the following table:
|
|
Modification on
September 1,
2015
|
|
|
|
|
|
Modification on June 20, 2017
|
|
Risk-free rate of return
(1)
|
|
|
0.47%
- 0.88
|
%
|
|
|
1.46
|
%
|
|
|
1.25
|
%
|
Contractual life of the options
(2)
|
|
|
5.0 years
|
|
|
|
10 years
|
|
|
|
5.0 years
|
|
Volatility
(3)
|
|
|
60% - 65
|
%
|
|
|
54.78
|
%
|
|
|
41
|
%
|
Expected dividend yield
(4)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Post-vesting forfeiture rate
(5)
|
|
|
N/A
|
|
|
|
36.1
|
%
|
|
|
N/A
|
|
Exercise multiple
(6)
|
|
|
3x / 2x
|
|
|
|
3x / 2x
|
|
|
|
3x / 2x
|
|
|
(1)
|
The risk-free rate of return is based on the yield curve
of USD China Sovereign Bonds as of the valuation dates as extracted from Bloomberg.
|
|
(2)
|
The contractual life of the options is based on the option
grant letter.
|
|
(3)
|
The volatility of the underlying ordinary shares during
the life of the options was estimated based on the historical stock price volatility of listed guideline companies over a period
comparable to the contractual life of the options.
|
|
(4)
|
We estimate the dividend yield based on our expected dividend
policy over the expected term of the options.
|
|
(5)
|
The post-vesting forfeiture rate applied to options granted
to general staff was based on our historical statistical data. 0% was applied to options granted to executive management with
expectation that the executive management will not quit from the company over the contractual life of the options.
|
|
(6)
|
Exercise multiple is the ratio of the fair value of a share
over the exercise price at the time which the option will be exercised, estimated based on a consideration of research study regarding
exercise pattern from historical statistical data. A multiple of three was used for the executive management and a multiple of
two was used for general staff.
|
Loyalty program
In 2016, we launched a customer
loyalty program to certain qualified customers, who can earn customer credits from purchases if their annual spending with us
exceeds RMB10 million. In 2017, we announced our revised customer loyalty program to certain qualified customers for granting
customer credits only if their annual spending with the Group exceeds RMB100 million. The customers can redeem the earned
credits for gift merchandise, and we account for such credits by recording a liability and corresponding selling expenses for
the estimated incremental cost of outstanding credits earned that are expected to be redeemed. In 2018, we discontinued
the customer loyalty program.
During 2016, we negotiated a
settlement of earned loyalty credits with 13 of our customers in our ordinary shares. As part of the settlement, we agreed to
issue 4.42 million of our ordinary shares, and recognized US$1,377,503 in paid-in capital and selling expenses based on the
grant date fair value of the ordinary shares. We are not legally obligated, nor do we expect, to continue the redemption of
the credits for the ordinary shares in the future.
Recent Accounting Pronouncements
Please see Note 3 to our consolidated
financial statements included elsewhere in this annual report.
Results of Operations
The following table presents selected financial
data from our consolidated statements of operations for the periods indicated.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
( in US$ thousands)
|
|
Consolidated statements of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
10,078
|
|
|
|
17,485
|
|
|
|
10,873
|
|
Third parties
|
|
|
63,123
|
|
|
|
71,251
|
|
|
|
25,582
|
|
Cost of revenues
|
|
|
(72,857
|
)
|
|
|
(88,187
|
)
|
|
|
(35,579
|
)
|
Gross profit
|
|
|
344
|
|
|
|
549
|
|
|
|
876
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(20,405
|
)
|
|
|
(15,207
|
)
|
|
|
(5,792
|
)
|
General and administrative
|
|
|
(7,531
|
)
|
|
|
(6,697
|
)
|
|
|
(4,303
|
)
|
Impairment loss
|
|
|
—
|
|
|
|
(147,018
|
)
|
|
|
(115,179
|
)
|
Total operating expenses
|
|
|
(27,936
|
)
|
|
|
(168,922
|
)
|
|
|
(125,274
|
)
|
Loss from operations
|
|
|
(27,592
|
)
|
|
|
(168,373
|
)
|
|
|
(124,398
|
)
|
Interest income/(expense), net
|
|
|
26
|
|
|
|
(411
|
)
|
|
|
(907
|
)
|
Other income/(expense), net
|
|
|
39
|
|
|
|
28
|
|
|
|
(33
|
)
|
Loss before provision for income tax
|
|
|
(27,527
|
)
|
|
|
(168,756
|
)
|
|
|
(125,338
|
)
|
Income tax benefits
|
|
|
2,234
|
|
|
|
6,857
|
|
|
|
2,098
|
|
Loss from continuing operations
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Provision for income tax benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
Year Ended December 31, 2018 Compared to Year Ended December
31, 2017
Revenues
Our revenues decreased by 58.9%
from US$88.7 million for the year ended December 31, 2017 to US$36.5 million for the year ended December 31, 2018. This
decrease was primarily due to the businesses suspension we carried out in 2018 where we suspended the businesses that were
strategically misaligned and ceased to provide products with lower gross profit.
Cost of revenues
Our cost of revenues decreased by
59.6% from US$88.2 million for the year ended December 31, 2017 to US$35.6 million for the year ended December 31, 2018, which
was generally in line with the decrease in revenue.
Operating expenses
Our total operating expenses decreased
by 25.8% from US$168.9 million for the year ended December 31, 2017 to US$125.3 million for the year ended December 31, 2018. This
change was primarily because the decrease in the selling and marketing expenses from US$15.2 million in 2017 to US$5.8 million
in 2018 as well as the decrease in the general and administrative expenses from US$6.7 million in 2017 to US$4.3 million in 2018.
Selling and marketing
expenses
. Our selling and marketing expenses decreased by 61.8% from US$15.2 million for the year ended December 31, 2017
to US$5.8 million for the year ended December 31, 2018. The decrease was mainly due to the decrease in the advertising and
promotional expenses, including expenses on advertisements through various media and marketing and
promotional activities.
General and administrative
expenses
. Our general and administrative expenses decreased by 35.8% from US$6.7 million for the year ended December 31,
2017 to US$4.3 million for the year ended December 31, 2018, primarily due to the optimization of the administrative
efficiency of the Company.
Impairment loss
. During
the year ended December 31, 2018, we provided impairment loss of US$115.2 million. We performed our annual impairment test
for goodwill and long-lived assets as of December 31, 2018 and accordingly recognized an impairment loss of US$105.8 million
in goodwill and an impairment loss of US$8.6 million in long-lived assets based on the valuation report issued by a
third-party valuer. We performed impairment test for long-term investment and accordingly recognized an impairment loss of
$0.7 million for the year ended December 31, 2018. For the year ended December 31, 2017, we recognized an impairment loss of
US$127.3 million in goodwill and an impairment loss of US$19.8 million in long-lived assets.
Net Loss
As a result of the foregoing, our net loss
from continuing operations decreased by 23.9% from US$161.9 million for the year ended December 31, 2017 to US$123.2 million for
the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to Year Ended December
31, 2016
Revenues
Our revenues increased by 21% from
US$73.2 million for the year ended December 31, 2016 to US$88.7 million for the year ended December 31, 2017. This increase was
primarily due to the growing orders placed on our platform, which was in turn as a result of the increase in the average number
of orders placed by our customers.
Cost of revenues
Our cost of revenues increased by
21% from US$72.9 million for the year ended December 31, 2016 to US$88.2 million for the year ended December 31, 2017, which was
generally in line with the increase in revenue.
Operating expenses
Our total operating expenses increased
significantly by 505% from US$27.9 million for the year ended December 31, 2016 to US$168.9 million for the year ended December
31, 2017. This change was primarily because we incurred impairment of US$127.3 million and US$19.8 million for goodwill and long-lived
assets in 2017, respectively.
Selling and marketing
expenses
. Our selling and marketing expenses decreased by 25% from US$20.4 million for the year ended December 31, 2016
to US$15.2 million for the year ended December 31, 2017. This decrease was mainly due to (i) a decrease of US$4.2 million
expense related to loyalty program and (ii) a decrease of US$0.6 million in the cost of advertisement campaigns and
promotions.
General and administrative
expenses
. Our general and administrative expenses decreased by 11% from US$7.5 million for the year ended December 31,
2016 to US$6.7 million for the year ended December 31, 2017, primarily due to the decrease of our consulting, meeting and
other administrative expenses by US$0.8 million.
Impairment loss
. During the year
ended December 31, 2017, we provided impairment loss of US$19.8 million for our long-lived assets to write down their
carrying amounts to their fair value, which was determined using models with significant unobservable inputs and the cash
flow projections based on past experience, actual results of operations and management best estimates about future
developments as well as certain market assumptions. No impairment loss was provided for long-lived assets during the year
ended December 31, 2016 based on our recoverability test.
We performed our annual impairment
test for goodwill as of December 31, 2017 and accordingly, impairment loss of US$127.3 million was recognized based on the excess
in the carrying value of goodwill over the implied fair value of goodwill. No impairment loss was recognized for goodwill during
the year ended December 31, 2016 based on our annual impairment test.
Loss
As a result of the foregoing, our
loss from continuing operations increased by 540% from US$25.3 million for the year ended December 31, 2016 to US$161.9 million
for the year ended December 31, 2017.
|
B.
|
Liquidity and Capital Resources.
|
We had US$2.6 million, US$4.9 million and
US$0.4 million in cash and cash equivalents as of December 31, 2016, 2017 and 2018, respectively.
The following table sets forth a summary
of our cash and cash equivalents inside and outside the PRC as of December 31, 2018:
|
|
Total cash and cash equivalents
|
|
|
|
(in US$ thousands)
|
|
Zhongmin
|
|
|
231
|
|
PRC entities other than Zhongmin
|
|
|
16
|
|
Entities inside of the PRC
|
|
|
247
|
|
Entities outside of the PRC
|
|
|
110
|
|
Total
|
|
|
357
|
|
We have incurred net losses and experienced
negative cash flows from operating activities since our inception. Our net losses were US$25.3 million, US$161.9 million and US$123.2
million for the years ended December 31, 2016, 2017 and 2018, respectively, and our net cash used in operating activities in these
three years were US$5.8 million, US$9.9 million and US$4.3 million, respectively. We believe that our current cash balance, anticipated
cash flows from operations, and the financial support obtained from Ms. Xiaoxia Zhu, our chairperson of the board of directors
and chief executive officer, will be sufficient to meet our anticipated capital needs until June 28, 2020 as long as Ms. Xiaoxia
Zhu remains a director and chief executive officer of our company. This commitment is for an amount subject to our actual deficiency
without any limitation. In April 2018, we received loans of RMB50.0 million and RMB20.0 million from Ms. Huimin Wang and Ms. Xiaoxia
Zhu, respectively, to enable us to meet the working capital requirements to fund our daily operations.
If there is any change in business conditions
or other future developments, including any investments we may decide to pursue, and if our existing cash balance and commitment
from Ms. Xiaoxia Zhu is insufficient to meet our requirements, we may also seek to sell additional equity
securities or debt securities or borrow from lending institutions. Financing may be unavailable in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our
earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations
and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders.
If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.
In the future, we may rely on
dividends and other distributions on equity paid by our wholly-owned PRC subsidiary for our cash and financing requirements.
There are potential restrictions on the dividends and other distributions by our PRC subsidiary. For instance, if our
wholly-owned PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt could restrict
its ability to pay dividends or make other distributions to us. The PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements that Our WFOEs currently has in place with Our VIEs in a way that could adversely
affect the latter’s ability to pay dividends and other distributions to us. In addition, under PRC laws and
regulations, our wholly-owned PRC subsidiary, as a wholly foreign-owned enterprise in the PRC, may only pay dividends out of
its accumulated profits. Wholly foreign-owned enterprises such as our wholly-owned PRC subsidiary are required to set aside
at least 10% of their accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate
amount of such fund reaches 50% of their respective registered capital. At their discretion, wholly foreign-owned enterprises
may allocate a portion of their after-tax profits to staff welfare and bonus funds. These reserve funds and staff welfare and
bonus funds are not distributable as cash dividends. See “Item 3. Key Information—D. Risk factors—Risks
Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—We rely
principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash
and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay
dividends to us could have an adverse effect on our ability to conduct our business.” In addition, our investment made
as registered capital and additional paid-in capital of Our WFOEs and Our VIEs are also subject to restrictions in their
distribution and transfer according to the laws and regulations in China. Owing to the above, Our WFOEs and Our VIEs in China
are restricted in their ability to transfer their net assets to us in terms of cash dividends, loans or advances. As of
December 31, 2018, the restricted net assets of Zhonming and Zhonmin, which represents registered capital and
additional paid-in capital, was US$28.2 million. Any limitation on the ability of Zhonming or our Hong Kong subsidiary, JMU
HK, to pay dividends or make other distributions to us could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
We are an offshore holding company
conducting our operations in China through Our WFOEs and Our VIEs. The functional and reporting currency of our company is US Dollars.
The financial records of Our WFOEs and Our VIEs located in the PRC are maintained in Renminbi. Fluctuation in the exchange rate between
the Renminbi and other foreign currency may affect our ability to inject capital in Our WFOEs and Our VIEs. We could lend to Our
WFOEs and Our VIEs, or we could make additional capital contributions to Our WFOEs, or we could establish new PRC subsidiary and make
capital contributions to these new PRC subsidiary, or we could acquire offshore entities with business operations in China in an
offshore transaction. Most of these uses are subject to PRC regulations and approvals. For example, loans by us to Our WFOEs to
finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to
finance Our WFOEs by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or
its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we
are unlikely to lend money to Our VIEs and its subsidiaries which are PRC domestic companies. See “Item 3. Key Information—D.
Risk factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—PRC
regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency
conversion could limit our use of the proceeds we receive from our initial public offering to fund our expansion or operations.”
The following table sets forth a summary
of our cash flows for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(in US$ thousands)
|
|
Net cash used in operating activities
|
|
|
(5,826
|
)
|
|
|
(9,874
|
)
|
|
|
(4,331
|
)
|
Net cash used in investing activities
|
|
|
(2,581
|
)
|
|
|
(741
|
)
|
|
|
(13
|
)
|
Net cash provided by financing activities
|
|
|
—
|
|
|
|
12,643
|
|
|
|
1,686
|
|
Effect of exchange rate changes
|
|
|
(140
|
)
|
|
|
280
|
|
|
|
(1,897
|
)
|
Increase/(decrease) in cash and cash equivalents
|
|
|
(8,547
|
)
|
|
|
2,307
|
|
|
|
(4,555
|
)
|
Cash at the beginning of the period
|
|
|
11,152
|
|
|
|
2,605
|
|
|
|
4,912
|
|
Cash at the end of the period
|
|
|
2,605
|
|
|
|
4,912
|
|
|
|
357
|
|
Net cash used in operating activities
Net cash used in operating activities was
US$4.3 million for the year ended December 31, 2018. We had a net loss of US$123.2 million. The principal items accounting
for the difference between our net loss and our net cash used in operating activities were an impairment loss of US$115.2
million, an increase in amounts due to related parties of US$8.8 million, and depreciation and amortization of US$1.5
million, partially offset by income tax benefits of US$2.1 million.
Net cash used in operating activities was US$9.9
million for the year ended December 31, 2017. We had a net loss of US$161.9 million. The principal items accounting for the difference
between our net loss and our net cash used in operating activities were impairment loss of US$147.0 million, depreciation and amortization
of US$8.6 million and a decrease of prepaid expenses and other current assets of US$6.2 million, partially offset by a decrease
of accrued expenses and other current liabilities of US$0.9 million, income tax benefits of US$6.9 million and an increase of amount
due from related parties of US$2.7 million.
Net cash used in operating activities was US$5.8
million for the year ended December 31, 2016. We had a net loss of US$25.3 million. The principal items accounting for the difference
between our net loss and our net cash used in operating activities were a decrease of prepaid expenses and other current assets
of US$15.8 million, depreciation and amortization of US$8.9 million and a decrease of accounts receivable of US$1.9 million, partially
offset by a decrease of accrued expenses and other current liabilities of US$8.6 million, income tax benefits of US$2.2 million
and a decrease of accounts and notes payable of US$1.4 million.
Net cash used in investing activities
Net cash used in investing activities was US$13.1
thousand for the year ended December 31, 2018, representing all the amount for the purchase of property and equipment.
Net cash used in investing activities was US$0.74
million for the year ended December 31, 2017, representing US0.74 million for purchase of property and equipment.
Net cash used in investing activities was US$2.6
million for the year ended December 31, 2016, including US$1.9 million for purchase of property and equipment and US$0.7 million
payment for investment.
Net cash provided by financing activities
Net cash provided by financing activities was
US$1.7 million for the year ended December 31, 2018, representing cash received from related parties.
Net cash provided by financing activities was
US$12.6 million for the year ended December 31, 2017 including cash received from loan borrowed from Ms. Xiaoxia Zhu of US$5.1
million and proceeds from short-term bank borrowings of US$7.6 million.
Financing activities did not provide us with
any cash for the year ended December 31, 2016.
Capital Expenditures
We made capital expenditures of US$13.1 thousand
for the year ended December 31, 2018, consisting of the purchase of property and equipment.
We made capital expenditures of US$0.74 million
for the year ended December 31, 2017, consisting of the purchase of property and equipment.
We made capital expenditures of US$1.9 million
for the year ended December 31, 2016, consisting of the purchase of property and equipment.
Going forward, as more third-party sellers utilize
our online markets and more customers and third-party sellers download and utilize our app, our server demand will increase and
we intend to purchase additional servers to service our expanded networking.
Inflation
Since our inception, inflation in China has
not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year
percent changes in the consumer price index for December 2016, 2017 and 2018 were increases of 2.1%,1.6% and 2.1%, respectively.
Although we have not been materially affected by inflation in the past, we have experienced and expect to continue to experience
upward pressure on our operating expenses.
Withholding Tax Obligation
Pursuant to PRC individual income tax laws,
when a corporation purchases equity interest from individuals, the individuals are obligated to pay individual income tax based
on 20% of the capital gain from the transaction with the corporation as the withholding agent. We have purchased equity interests
of certain entities from individual sellers. There is a possibility that if individual sellers fail to meet their income tax obligations,
the tax authority may require us, as the withholding agent, to pay the taxes for the sellers. Based on the information currently
available, we are unable to make a reasonable estimate of the related liability due to the uncertainty related to the outcome and
amount of payment and relating penalty and interest.
|
C.
|
Research and development, patents and licenses, etc.
|
Please refer to Item 4B “Information on
the Company—Business Overview—Technology” and “—Intellectual Property.”
Other than as described elsewhere in this annual
report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material
adverse effect on our revenue, income from continuing operations, profitability, liquidity or capital resources, or that would
cause our reported financial information not necessarily to be indicative of future operating results or financial condition.
|
E.
|
Off-balance sheet arrangements.
|
Save for the contingent withholding tax obligation
disclosed above and commitments disclosed below, we do not currently have any outstanding off-balance sheet arrangements or commitments.
We have no plans to enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial
partnerships established for the purpose of facilitating off-balance sheet arrangements or commitments.
|
F.
|
Tabular Disclosure of Contractual Obligations.
|
The following table sets forth our contractual
obligations as of December 31, 2018:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1–3 years
|
|
|
3–5 years
|
|
|
More than 5 years
|
|
|
|
(in US$ thousands)
|
|
Operating Lease Commitments
|
|
|
145
|
|
|
|
93
|
|
|
|
52
|
|
|
|
—
|
|
|
|
—
|
|
Investment Commitments*
|
|
|
2,182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,182
|
|
Total
|
|
|
2,237
|
|
|
|
93
|
|
|
|
52
|
|
|
|
—
|
|
|
|
2,182
|
|
|
*
|
In May 2016, Zhongmin entered into a share purchase agreement with Cold Chain Link (Shanghai)
Internet of Things Co., Ltd., formerly known as Cold Chain Link Global (Shanghai) Logistic Co., Ltd., and its original
shareholders for acquiring 10% equity interest. The contractual investment amount is RMB20.0 million (US$3.1 million). As of
December 31, 2018, Zhongmin has paid RMB5.0 million (US$0.7 million). The remaining payment obligation is due no later than
March 9, 2045.
|
ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and senior
management.
|
The following table sets forth certain information
relating to our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Xiaoxia Zhu
|
|
48
|
|
Chairperson of the Board of Directors, Chief Executive Officer
|
Huimin Wang
|
|
62
|
|
Director
|
Feng Pan
|
|
40
|
|
Director
|
Liyun Cao
|
|
48
|
|
Director
|
Hua Zhou
|
|
33
|
|
Director
|
Xiaoyu Li
|
|
30
|
|
Director
|
Tianruo (Robert) Pu
|
|
49
|
|
Independent Director
|
Tony C. Luh
|
|
54
|
|
Independent Director
|
Min Zhou
|
|
54
|
|
Independent Director
|
Frank Zhigang Zhao
|
|
59
|
|
Chief Financial Officer
|
Ms. Xiaoxia Zhu
has served as the chairperson
of our board of directors since June 2015 and our chairperson since May 2018. She was our co-chief executive officer from June
2015 to September 2015, and has served as our chief executive officer since then. Ms. Zhu has over 21 years of experiences on Chinese
hotels and restaurant management and the internet startups. In 2013, Ms. Zhu, Ms. Huimin Wang and over 40 leading catering and
hotel brands across China, jointly founded JMU. Ms. Zhu is also the vice chairwoman of China Hotel Association. From 1998 to current,
Ms. Zhu founded and served as chief executive officer and chairwoman of Zhejiang Sunward Fishery Restaurant Group Co., Ltd. where
she successfully expanded its business operations across multiple regions and brands to become what is now among China’s
top 100 catering enterprises.
Ms. Huimin Wang
has served as our director
since June 2015. Ms. Wang is a co-founder of JMU HK, and she is also the founder of “Xiao Nan Guo” or the “Shanghai
Min” brand. Besides her directorship in our Company, at present, Ms. Wang is also the chairperson of Xiao Nan Guo Holdings
Limited and chairperson of the board of directors of TANSH Global Food Group Co., Ltd., which formerly known as Xiao Nan Guo Restaurants
Holdings Limited, a company listed on the Stock Exchange of Hong Kong (code: 3666.HK). Ms. Huimin Wang is also the Vice Chairman
of China Cuisine Association, China Hotel Association and World Association of Chinese Cuisine.
Mr. Feng Pan
has served as our director
and chief strategic officer since June 2015. Mr. Pan has worked in the field of supply chain management, the internet, and strategy
consulting over the past 14 years. Mr. Pan joined JMU as executive vice president in 2013, and he participated in the design of
JMU’s business model and its strategic investment. From 2005 to 2013, he served as the president of Influence Education Training
Group and Influence Education Technology Company where he provided strategic planning for various leading corporations and several
public companies. Mr. Pan worked at Midea Group from 2003 to 2005 and Hisense Kelon Group from 2001 to 2003.
Ms. Liyun Cao
has served as our director
since June 2015. Ms. Cao has served as vice president of JMU HK and president of JMU HK’s Supply Unit since 2014, and was
responsible for the operation and management of its B2B business. From 2001 to 2014, Ms. Cao worked at Zhejiang Sunward Fishery
Restaurant Group Co., Ltd. in various roles including Operations Manager of the Jiangsu and Shanghai Districts. In 2012, she was
promoted and has served as a director and vice president of Zhejiang Sunward Fishery Restaurant Group Co., Ltd. for two years.
Ms. Hua Zhou
has served as
our director since May 2018. Ms. Zhou used to work at our company as a sales manager from 2011 to 2015. Ms. Zhou has over
10 years of experience in client and partner relationship management, M&A and marketing. Since 2017, Ms. Zhou has served
as the Vice President of Strategic Partnership at Beijing Galaxy Fintech Group, a fin-tech company providing finance-related
solutions to micro, small and medium enterprises. From 2015 to 2017, she worked as the Chief Executive Officer at iBeacon, a
data-based marketing platform providing market targeting services to retailers. From 2009 to 2011, Ms. Zhou worked as the
Director of Sales at WeLink Group. Prior to that, Ms. Zhou was Director of Clients at Focus Wireless Media, starting
from 2007. Ms. Zhou holds a college degree from the China University of Petroleum.
Ms. Xiaoyu Li
has served as our
director since May 2018. Ms. Li used to worked at our company’s investor relations department from 2012 to 2013. Ms.
Li has extensive experience in investor relations and investment. Since 2015, she has served as the Investor Manager at
Galaxy Internet, an online investment platform for entrepreneurs. Ms. Li holds a master's degree in finance from
University of Illinois at Urbana-Champaign, and a bachelor's degree in economics from University of Minnesota.
Mr. Tianruo (Robert) Pu
has served as
our independent director since April 2015. Mr. Pu has also served as the chief financial officer of Zhaopin Limited, an NYSE listed
company, since January 2016 and a director of Renren Inc., an NYSE listed company since December 2016. Previously, Mr. Pu served
as a director of UTStarcom Holdings Corporation, a Nasdaq listed company, from November 2011 to August 2014 and its Chief Financial
Officer from October 2012 to August 2014. Mr. Pu served as the Chief Financial Officer of China Nuokang Biopharmaceutical Inc.,
a Nasdaq listed company, from September 2008 to June 2012. Prior to Nuokang Biopharmaceutical Inc., Mr. Pu was Chief Financial
Officer of Global Data Solutions, a Chinese information technology services company, from June 2006 to August 2008. Prior to Global
Data Solutions, Mr. Pu had gained various accounting and finance experiences in both China and the United States. Mr. Pu received
an MBA degree from Northwestern University’s Kellogg School of Management, a Master of Science degree in accounting from
the University of Illinois and a Bachelor of Arts degree in English from China Foreign Affairs College.
Mr. Tony C. Luh
has served as our independent
director since April 2015. At present, Tony is a venture partner for DFJ DragonFund and Yifang Ventures. Mr. Luh was an independent
board director for Pansoft Inc. between 2008 and 2012. Mr. Luh served as a General Partner and Greater China President for the
Westly Group between 2011 and 2014. Before joining the Westly Group, Mr. Luh was a Founding Partner and Managing Director at DFJ
DragonFund from 2006 to 2011. Mr. Luh is also one of the Founder and Managing Director at DragonVenture, which he co-founded in
1999. Before DragonVenture, Mr. Luh was a senior executive at InfoWave Communications from 1997 to 1999. Mr. Luh has over 20 years
of experience in capital markets, sales, strategic alliances and business development and has accumulated public investment expertise
in sectors ranging from information technology to high volume manufacturing in Asia.
Mr. Min Zhou
has served as our independent
director since April 2015. At present, Mr. Zhou is the executive director and executive president of Beijing Enterprises Water
Group Limited serving since 2013. Between 2008 and 2012, Mr. Zhou served as an executive director and vice president of Beijing
Enterprises Water Group Limited. Mr. Zhou served as the director and chief financial officer of Beijing Zhongkecheng Environment
Protection Group Limited from 2004 to 2008. Previously, Mr. Zhou served as a director and chief financial officer of Sichuan Zhongkecheng
Environment Protection Stock Co., Ltd. from 2001 to 2004. Mr. Zhou served as the Chairman of Beijing Jingsheng Investment Co.,
Ltd. from 1989 to 2001. Prior to that, Mr. Zhou worked at Industrial and Commercial Bank of China—Zhejiang Yongkang Branch
from 1985 to 1989 and worked at the People’s Bank of China—Zhejiang Yongkang Branch from 1980 to 1985. Mr. Zhou received
an EMBA degree from Tsinghua University.
Mr. Frank Zhigang Zhao
has served as
our chief financial officer since June 2015. Mr. Zhao has over two decades of experience in financial and accounting management
with auditing firms and public companies. Prior to joining us, Mr. Zhao was the chief financial officer of Borqs International
Limited, from 2013 to 2015. Mr. Zhao worked as the chief financial officer of KingMed Medical Diagnostics from 2011 to 2013. Mr.
Zhao was the chief financial officer of Simcere Pharmaceutical Group, from 2006 to 2011. From 2005 to 2006, Mr. Zhao worked as
the chief financial officer of Sun New Media Inc. From 2003 to 2005, Mr. Zhao worked at FARO Technologies, Inc. as a financial
controller. Mr. Zhao received his bachelor’s degree in economics from Peking University and MBA degree from University of
Hartford.
Compensation of Directors and Executive Officers
In 2018, we paid an aggregate of approximately
RMB3.2 million (US$0.5 million) in cash as salaries and fees to our senior executives, officers and directors named in this annual
report. Other than salaries, fees and share incentives, we do not otherwise provide pension, retirement or similar benefits to
our officers and directors.
Share Incentive Plan
We adopted our share incentive plan in 2011
and amended it in 2015 to attract and retain the best available personnel, provide additional incentives to our employees, directors
and consultants, and promote the success of our business. The amended and restated 2011 share incentive plan provides for the grant
of options, restricted shares and other share-based awards, collectively referred to as “awards.” Our board of directors
has authorized the issuance of ordinary shares of up to 15% of the issued and outstanding share capital of our company from time
to time.
Plan Administration
. Our compensation
committee will administer the amended and restated 2011 share incentive plan. The committee determines the participants to receive
awards, the type and number of awards to be granted, and the terms and conditions of each award grant.
Award Agreements
. Awards granted under
our amended and restated 2011 share incentive plan are evidenced by an award agreement that sets forth the terms, conditions and
limitations for each grant, which may include the term of the award, the provisions applicable in the event that the grantee’s
employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the
award. Unless specifically approved by our board of directors, the purchase price per share of an option shall not be less than
100% of the fair market value of the shares on the date of grant.
Transfer Restrictions
. The right of a
grantee in an award granted under our amended and restated 2011 share incentive plan may not be transferred in any manner by the
grantee other than by will or the laws of descent and, with limited exceptions, may be exercised during the lifetime of the grantee
only by the grantee.
Option Exercise
. The term of options
granted under the amended and restated 2011 share incentive plan may not exceed ten years from the date of grant. The consideration
to be paid for our ordinary shares upon exercise of an option or purchase of ordinary shares underlying the option may include
cash, check or other cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any combination
of the foregoing methods of payment.
Acceleration upon a Change of Control
.
If a change of control of our company occurs, (i) the compensation committee may determine that any outstanding unexercisable,
unvested or lapsable awards shall automatically be deemed exercisable, vested and not subject to lapse immediately prior to the
event triggering the change of control and (ii) the compensation committee may cancel such awards for fair value, provide for the
issuance of substitute awards or provide that for a period of at least 15 days prior to the event triggering the change of control,
such options shall be exercisable and that upon the occurrence of the change of control, such options shall terminate and be of
no further force and effect.
Termination and Amendment
. Unless terminated
earlier, our share incentive plan will expire on February 1, 2021. Our board of directors has the authority to amend or terminate
our share incentive plan subject to shareholder approval to the extent necessary to comply with applicable laws. Shareholders’
approval is required for any amendment to the amended and restated 2011 share incentive plan that increases the number of ordinary
shares available under the amended and restated 2011 share incentive plan or changes the maximum number of shares for which awards
may be granted to any participant. Additionally, a participant’s consent is required to diminish any of the rights of the
participant under any award previously granted to such participant.
The following table summarizes, as of the date
of this annual report, the outstanding options granted to our executive officers, directors, and other individuals as a group
under our amended and restated 2011 share incentive plan.
Name
|
|
Common shares
underlying options
awarded/Restricted
Share Units
|
|
|
Exercise price
(US$/share)
|
|
|
Date of grant
|
|
Date of expiration
|
Feng Pan
|
|
|
*
|
|
|
|
0.2
|
|
|
2016/7/1
|
|
2026/7/1
|
|
|
|
*
|
(1)
|
|
|
—
|
|
|
2016/7/1
|
|
2026/7/1
|
Liyun Cao
|
|
|
*
|
|
|
|
0.2
|
|
|
2016/7/1
|
|
2026/7/1
|
|
|
|
*
|
(1)
|
|
|
—
|
|
|
2016/7/1
|
|
2026/7/1
|
Other Individuals as a Group
|
|
|
46,251,820
|
|
|
|
from 0 to 0.2
|
|
|
from 2011/2/1
to 2016/7/1
|
|
from 2018/9/1
to 2026/7/1
|
|
|
|
*
|
(1)
|
|
|
—
|
|
|
2016/7/1
|
|
2026/7/1
|
Total
|
|
|
61,498,520
|
|
|
|
|
|
|
|
|
|
|
*
|
Less than one percent of our total outstanding share capital.
|
|
(1)
|
restricted share units
|
Duties of Directors
Under Cayman Islands law, our directors owe
certain fiduciary duties to our company, including duties of loyalty, to act honestly, and to act in what they consider in good
faith to be in our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably
prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance
with our fourth amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by
our directors is breached.
The powers of our board of directors include,
among others:
|
·
|
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
|
|
·
|
issuing authorized but unissued shares;
|
|
·
|
declaring dividends and distributions;
|
|
·
|
exercising the borrowing powers of our company and mortgaging the property of our company;
|
|
·
|
approving the transfer of shares of our company, including the registering of such shares; and
|
|
·
|
exercising any other powers conferred by the shareholders’ meetings or under our fourth amended and restated memorandum
and articles of association.
|
Terms of Directors and Executive Officers
We have nine directors on our board of directors,
three of whom are independent directors. Any director on our board may be removed by way of an ordinary resolution of shareholders.
Any vacancies on our board of directors or additions to the existing board of directors can be filled by the affirmative vote of
a majority of the remaining directors. The shareholders may also by ordinary resolution elect any person to be a director either
to fill a casual vacancy or as an addition to the existing board of directors.
Any director appointed to fill a casual vacancy
shall hold office for the remaining term of the director in whose place he is appointed and shall be eligible for re-election at
the expiry of the said term.
Grounds for Vacating a Director
The office of a director shall be vacated if
the director:
|
·
|
resigns his office by notice in writing delivered to us or tendered at a meeting of the board of directors;
|
|
·
|
becomes of unsound mind or dies;
|
|
·
|
without special leave of absence from the board of directors, is absent from meetings of the board of directors for six consecutive
months and the board of directors resolves that his office be vacated;
|
|
·
|
becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;
|
|
·
|
is prohibited by law from being a director; or
|
|
·
|
ceases to be a director by virtue of any provisions of Cayman Islands law or is removed from office pursuant to the fourth
amended and restated articles of association.
|
All of our executive officers are
appointed by and serve at the discretion of our board of directors. Our executive officers are elected by and may be removed by
a majority vote of our board of directors.
Board Committees
Our board of directors has established an audit
committee and a compensation committee.
Audit Committee
Our audit committee consists of Tianruo (Robert)
Pu, Tony C. Luh and Min Zhou. We have determined that all the members of our audit committee satisfy the “independence”
requirements of Rule 10A-3 under the Exchange Act and Nasdaq Marketplace Rule 5605(c)(2)(A) and that Tianruo (Robert) Pu is an
audit committee financial expert as defined in the instructions to Item 16A of the Form 20-F. Tianruo (Robert) Pu serves as the
chairperson of the audit committee.
The audit committee oversees our accounting
and financial reporting processes and the audits of our consolidated financial statements. Our audit committee is responsible for,
among other things:
|
·
|
selecting the independent auditor;
|
|
·
|
pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;
|
|
·
|
annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control procedures,
any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and
all relationships between the independent auditor and our company;
|
|
·
|
setting clear hiring policies for employees and former employees of the independent auditors;
|
|
·
|
reviewing with the independent auditor any audit problems or difficulties and management’s response;
|
|
·
|
reviewing and approving all related party transactions on an ongoing basis;
|
|
·
|
reviewing and discussing the annual audited consolidated financial statements with management and the independent auditor;
|
|
·
|
reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial
statement presentations;
|
|
·
|
reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and
judgments;
|
|
·
|
discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts
and rating agencies;
|
|
·
|
reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance
sheet structures, on our consolidated financial statements;
|
|
·
|
discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent
auditor;
|
|
·
|
timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by
our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and
all other material written communications between the independent auditor and management;
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·
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establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting,
internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
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·
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annually reviewing and reassessing the adequacy of our audit committee charter;
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·
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such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
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·
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meeting separately, periodically, with management, internal auditors and the independent auditor; and
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·
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reporting regularly to the full board of directors.
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Compensation Committee
Our compensation committee consists of Min Zhou,
Tianruo (Robert) Pu and Tony C. Luh. We have determined that all the members of our compensation committee satisfy the “independence”
requirements of Rule 5605(a) of Nasdaq Stock Market Marketplace Rules. Min Zhou serves as the chairperson of the compensation committee.
Our compensation committee is responsible for,
among other things:
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·
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reviewing and approving our overall compensation policies;
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·
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reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating
our Chief Executive Officer’s performance in light of those goals and objectives, reporting the results of such evaluation
to the board of directors, and determining our Chief Executive Officer’s compensation level based on this evaluation;
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·
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determining the compensation level of our other executive officers;
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·
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making recommendations to the board of directors with respect to our incentive-compensation plan and equity-based compensation
plans;
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·
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administering our equity-based compensation plans in accordance with the terms thereof; and
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·
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such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
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Corporate Governance
Our board of directors has adopted a code of
business conduct and ethics, which is applicable to all of our directors, officers and employees. We have made our code of business
conduct and ethics publicly available on our website.
In addition, our board of directors has adopted
a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to our board’s structure,
procedures and committees. The guidelines are not intended to change or interpret any law, or our fourth amended and restated memorandum
and articles of association.
Remuneration and Borrowing
The directors may determine the remuneration
to be paid to the directors. The compensation committee will assist the directors in reviewing and approving the compensation structure
for the directors. The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking,
property and uncalled capital, and to issue debentures or other securities whether outright or as security for any debt obligations
of our company or of any third-party.
Qualification
There is no requirement for our directors to
own any shares in our company in order for them to qualify as a director.
Employment Agreements
We have entered into employment agreements with
each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without notice
or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, willful
misconduct to our detriment or a failure to perform agreed duties. We may also terminate an executive officer’s employment
under certain conditions, including, but not limited to, incapacity or disability of the officer, by a one-month prior written
notice. An executive officer may terminate his or her employment with us for cause, at any time for certain reasons, or by a one-month
prior written notice.
Our executive officers have also agreed not
to engage in any activities that compete with us, or to directly or indirectly solicit the services of our employees, during employment
or for a period of two years after termination of employment. Each executive officer has agreed to hold in strict confidence any
confidential information or trade secrets of our company. Each executive officer also agrees to comply with all material applicable
laws and regulations related to his or her responsibilities at our company as well as all material corporate and business policies
and procedures of our company.
As of December 31, 2018, we had a total of 75
employees, consisting of 30 in sales, 16 in marketing, 12 in research and development, and 17 staff members in administrative and
management departments. We had a total of 252 employees as of December 31, 2017 and 291 employees as of December 31, 2016.
The remuneration package for our employees includes
salary, sales commissions and employee share option programs. In accordance with applicable regulations in China, we participate
in a number of social insurance schemes, namely, a pension contribution plan, a medical insurance plan, an unemployment insurance
plan, a personal injury insurance plan, a maternity insurance and a housing reserve fund for the benefit of all of our employees.
We have not experienced any material labor disputes or disputes with the labor department of the PRC government since our inception.
The following table sets forth information with
respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares as of the
date of this annual report (unless otherwise indicated) by:
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·
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each of our directors and executive officers; and
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·
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each person known to us to own beneficially more than 5% of our ordinary shares.
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Beneficial ownership is determined in accordance
with the rules of the SEC and generally. includes voting power or investment power with respect to securities. The number of ordinary
shares beneficially owned including ordinary shares such person has the right to acquire within 60 days after the date of this
annual report. Such shares, however, are not deemed to be outstanding and beneficially owned for the purpose of computing the
percentage ownership of any other shareholder. The total number of ordinary shares outstanding as of the date of this annual report
is 2,108,869,528 (excluding 759,600 ordinary shares in the form of ADSs that are reserved for issuance upon the exercise of share
awards).
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Ordinary Shares Beneficially Owned
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|
|
|
Number
|
|
|
Percentage (%)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
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Xiaoxia Zhu
|
|
|
—
|
|
|
|
—
|
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Huimin Wang
(1)
|
|
|
291,015,012
|
|
|
|
13.80
|
|
Feng Pan
(2)
|
|
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111,213,418
|
|
|
|
5.27
|
|
Liyun Cao
|
|
|
—
|
|
|
|
—
|
|
Hua Zhou
(3)
|
|
|
—
|
|
|
|
—
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|
Xiaoyu Li
(4)
|
|
|
*
|
|
|
|
*
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|
Tianruo (Robert) Pu
(5)
|
|
|
—
|
|
|
|
—
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|
Tony C. Luh
(6)
|
|
|
—
|
|
|
|
—
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Min Zhou
(7)
|
|
|
—
|
|
|
|
—
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Frank Zhigang Zhao
(8)
|
|
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*
|
|
|
|
*
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Directors and executive officers as a group
|
|
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412,600,970
|
|
|
|
19.57
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|
Principal Shareholders:
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|
|
|
|
|
|
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Haohan Xu
(9)
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1,011,303,374
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|
|
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47.95
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Extensive Power Limited
(10)
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149,100,132
|
|
|
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7.07
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Moonlight Vista Limited
(11)
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|
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141,914,880
|
|
|
|
6.73
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Shanghai Zhongju Investment Management Center (limited Partnership)
(12)
|
|
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111,213,418
|
|
|
|
5.27
|
|
|
*
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Less than 1% of our total
outstanding shares.
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|
**
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The address of our directors (except Ms. Hua Zhou, Ms.Xiaoyu Li, Mr. Tianruo (Robert) Pu, Mr. Tony C. Luh, and Mr. Min
Zhou) and
executive officers
(except Mr. Frank Zhigang Zhao) is 2/F, No. 608, Macau Road,
Putuo District, Shanghai 200060, People’s Republic of
China.
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(1)
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representing (i) 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled by Huimin
Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson Street, Causeway Bay,
Hong Kong, and (ii) 141,914,880 ordinary shares owned by Moonlight Vista Limited, a British Virgin Islands company
controlled by
Huimin Wang, the principal business address of which is Suites
3201-5, Tower One, Times Square, 1 Matheson Street, Causeway
Bay, Hong Kong.
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(2)
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representing 111,213,418 ordinary shares owned by Shanghai Zhongju Investment Management Center (Limited Partnership), a PRC
limited liability partnership, whose general partner has irrevocably appointed Feng Pan to act on behalf of the general partner
for all matters relating to Shanghai Zhongju Investment Management Center(Limited Partnership) and has irrevocably waived the right
to replace Feng Pan. The principal business address of Shanghai Zhong Ju Investment Management Center is Room 304-22, 3/Fl, Building
2, No. 38 Debao Road, China (Shanghai) Pilot Free Trade Zone, People’s Republic of China.
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(3)
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the business address of Ms. Zhou is 128 Weihai Road, Room 4-3-601, Rizhao, Shandong Province, People’s Republic of
China.
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(4)
|
the business address of Ms. Li is 6-2-301 Xi Er Qi Zhi College, Beijing, People’s Republic of
China,
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(5)
|
the business address of Mr. Pu is 5th Floor Shoukai Plaza, 10 Fu Rong Street, Wang Jing, Beijing, People’s Republic of
China.
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(6)
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the business address of Mr. Luh is c/o Dragon Venture, Inc., 55 East 3rd Avenue, San Mateo, CA 94401.
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(7)
|
the business address of Mr. Zhou is c/o Beijing Enterprises Water Group Limited. Tower 3 Poly International Plaza, Zone 7 Wangjing
East Park, Chaoyang District, Beijing, People’s Republic of China.
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(8)
|
the business address of Mr. Zhao is 18-11 Bishui Garden, Beijing,
China.
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(9)
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representing 1,011,303,374 ordinary shares directly held by Mr. Haohan Xu. The business
address of Mr. Haohan Xu is 12 East 49 Street, 17
th
Floor, New York, NY, 10017, United States of America.
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|
(10)
|
representing 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled by Huimin Wang, the
principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.
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(11)
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representing 141,914,880 ordinary shares owned by Moonlight
Vista Limited, a British Virgin Islands company controlled by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times
Square, 1 Matheson Street, Causeway Bay, Hong Kong.
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(12)
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representing 111,213,418 ordinary shares owned by Shanghai Zhongju Investment Management Center
(Limited Partnership), a PRC limited liability partnership. The principal business address of Shanghai Zhongju Investment
Management Center is Room 304-22, 3/F, Building 2, No. 38 Debao Road, China (Shanghai) Pilot Free Trade Zone, People’s
Republic of China.
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As of the date of this annual report,
we had 2,108,869,528 ordinary shares outstanding (excluding 759,600 ordinary shares in the form of ADSs that are reserved
for issuance upon the exercise of share awards). To our knowledge, we had only one record shareholder in the United
States. Citibank, N.A., the depositary of our ADS program, which held 520,490,502 ordinary shares as of the date of this
annual report, representing 35.3% of our total outstanding ordinary shares. The number of beneficial owners of our ADSs in
the United States is likely to be much larger than the number of record holders of our ordinary shares in the United
States.
None of our existing shareholders has voting
rights that will differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company.
ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Please refer to “Item 6. Directors, Senior
Management and Employees—E. Directors, Senior Management and Employees—Share Ownership.”
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B.
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Related Party Transactions.
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Contractual Arrangements with Our VIEs
and Their Respective Shareholders
Due to certain restrictions under PRC
law on foreign ownership of businesses engaged in internet businesses, we conduct our operations in China principally
through contractual arrangements between our wholly-owned PRC subsidiaries, Shanghai Zhongming and Lianji Future on the one
hand and our consolidated affiliated entities in China, Zhongmin, Lianji and their respective subsidiaries
and shareholders on the other. For a description of these contractual arrangements, see “Item 4. Information on
the Company—C. Organizational Structure.”
Related Party Loans and Other Payments
Please see Note 18 to our consolidated financial
statements included elsewhere in this annual report for the details of related party transactions.
Employment Agreements
See “Item 6. Directors, Senior Management
and Employees—C. Board Practices—Employment Agreements.”
Share Options
See “Item 6. Directors, Senior Management
and Employees—B. Compensation—Compensation of Directors and Executive Officers—Share Incentive Plan.”
Registration Rights Agreement with former JMU HK shareholders
On June 8, 2015, in connection with our
acquisition of JMU, we entered into a registration rights agreement with (i) former shareholders of JMU HK, which are
beneficially owned by Ms. Xiaoxia Zhu, our chairperson and chief executive officer, and (ii) entities beneficially owned by
Mr. Maodong Xu, pursuant to which we agreed to provide these former shareholders
and Mr. Xu with certain registration rights in respect of our ordinary shares held by them.
Upon receipt of a written request from the holders of 10% of
the registrable securities then outstanding requesting us effect a registration under the Securities Act covering all of part of
the shares held by them, we shall, as soon as is practicable, but in no event not later than ninety days after receipt of such
written request, file with the SEC, and use our reasonable best efforts to cause to be declared effective, a registration statement,
or a shelf registration statement. However, that we shall not be obligated to effect any such registration if the aggregate price
(net of any underwriters’ discounts or commissions) of the sale of shares relating to such registration is less than $10,000,000.
If, at any time, we file a registration statement with the SEC,
holders of registration rights under this agreement will be entitled, subject to certain exceptions, to exercise “piggyback”
registration rights requiring us to include in any such registration that number of shares held by them, subject to certain prescribed
limitations provided in the registration rights agreement.
We may, on a limited number of occasions, and in certain prescribed
circumstances, delay the filing or effectiveness of any registration statement required to be filed pursuant to the registration
rights agreement.
Related Party Transaction with Mr. Haohan
Xu
Acquisition of Unicorn
On May 21, 2019, we entered into a share purchase
agreement with Unicorn and Mr. Haohan Xu, one of our shareholders, pursuant to which we acquired all the issued and outstanding
shares of Unicorn held by Mr. Haohan Xu, in consideration for the issuance of 632,660,858 new ordinary shares.
Registration Rights Agreement with former Unicorn shareholder
On May 21, 2019, in connection with our
acquisition of Unicorn in consideration for the issuance of 632,660,858 new ordinary shares to the former
shareholder of Unicorn, Mr. Haohan Xu, we entered into a registration rights agreement with Mr. Xu, pursuant to which we agreed to provide Mr. Xu with certain registration rights in respect of our
ordinary shares held by him.
Upon receipt of a written request from the
holders of 10% of the registrable securities then outstanding requesting us effect a registration under the Securities Act
covering all of part of the shares held by them, we shall, as soon as it is practicable, but in no event later than
ninety days after receipt of such written request, file with the SEC, and use our reasonable best efforts to cause to be
declared effective, a registration statement, or a shelf registration statement. However, we shall not be obligated to
effect any such registration if the aggregate price (net of any underwriters’ discounts or commissions) of the sale of
shares relating to such registration is less than $5,000,000.
If, at any time, we file a registration statement with the SEC,
holders of registration rights under this agreement will be entitled, subject to certain exceptions, to exercise “piggyback”
registration rights requiring us to include in any such registration that number of shares held by them, subject to certain prescribed
limitations provided in the registration rights agreement.
We may, on a limited number of occasions, and in certain prescribed
circumstances, delay the filing or effectiveness of any registration statement required to be filed pursuant to the registration
rights agreement.
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C.
|
Interests of experts and counsel.
|
Not applicable.
ITEM 8. FINANCIAL
INFORMATION
|
A.
|
Consolidated Statements and Other Financial Information.
|
Please refer to Item 18 “Financial Statements”
for our audited consolidated financial statements filed as part of this annual report.
Legal Proceedings
On January 11, 2019, Shanghai
MIN Hongshi Trading
Co., Ltd
, or Shanghai Hongshi, filed a claim with the
Shanghai Yangpu People’s Court, or the Shanghai Yangpu Court, against Zhongmin, alleging that Zhongmin had failed to
repay a loan of RMB10 million due to Shanghai Hongshi. On January 14, 2019, the Shanghai Yangpu Court issued a civil
ruling paper of property preservation, which ordered the freezing of RMB10 million deposit of Zhongmin or the
attachment of the equivalent property. A civil summon was also issued by the Shanghai Yang Pu Court on January 1, 2019,
requesting the summoned appear before the court on February 13, 2019. The two parties are currently negotiating on a settlement,
and Zhongmin had applied to the court for a postponement of the hearing. The specific time of the hearing is to be notified
by the court.
On February 1, 2019, WM Ming Hotel
Co.,
Ltd
., or WM Ming, filed a claim with the Shanghai Yangpu Court against Zhongmin, alleging that Zhongmin
had failed to repay a loan of RMB6 million due to WM Ming, which we believe is the amount of investment payable
by WM Ming, and Zhongmin is requesting WM Ming to verify.
The legal representative of
Shanghai Hongshi and WM Ming is Ms. Huimin Wang, who is also our director. Although we are attempting to
negotiate with the relevant parties, uncertainties exist as to whether we are obligated to pay the two loans mentioned in
the preceding two paragraphs.
Other than as set forth above, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management,
is likely to have a material adverse effect on our business, financial condition or results of operations.
Dividend Policy
Since our inception, we have not declared or
paid any dividends on our ordinary shares. We have no present plan to pay any dividends on our ordinary shares in the foreseeable
future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Any future determination to pay dividends will
be made at the discretion of our board of directors subject to certain restrictions under Cayman Islands law, namely that our company
may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if
this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition,
our shareholders may declare a dividend at a general meeting of our company. Our board of directors’ decision to declare
and pay dividends may be based on a number of factors, including our future operations and earnings, capital requirements and surplus,
the amount of distributions, if any, received by us from our PRC subsidiary, our general financial condition, contractual restrictions
and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same
extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
We are a holding company incorporated in the
Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed
by Our WFOEs. Certain payments from our PRC subsidiary to us are subject to PRC taxes, such as withholding income tax. In addition,
regulations in China currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits
as determined in accordance with its articles of association and the accounting standards and regulations in China. Our PRC subsidiary
is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common
reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory
reserves are not distributable as loans, advances or cash dividends. Our PRC subsidiary may set aside a certain amount of its after-tax
profits to other funds at its discretion. These reserve funds can only be used for specific purposes and are not transferable to
the company’s parent in the form of loans, advances or dividends. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—We rely principally
on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements
we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse
effect on our ability to conduct our business.”
Except as disclosed elsewhere in this annual
report, we have not experienced any significant changes since the date of our audited consolidated financial statements included
in this annual report.
ITEM 9. THE
OFFER AND LISTING.
|
A.
|
Offer and listing details.
|
See “C. Markets.”
Not applicable.
Our ADSs are listed on The Nasdaq Global Market
under the symbol “JMU.” Each ADS represents 180 ordinary shares.
Not applicable.
Not applicable.
|
F.
|
Expenses of the issue.
|
Not applicable.
ITEM 10. ADDITIONAL
INFORMATION.
Not applicable.
|
B.
|
Memorandum and articles of association.
|
We are a Cayman Islands exempted company with
limited liability and our affairs are governed by our memorandum and articles of association, and the Companies Law (2018 Revision),
as amended, of the Cayman Islands, which is referred to as the Companies Law below. The following are summaries of material provisions
of our fourth amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material
terms of our ordinary shares.
Registered Office and Objects
Our registered office in the Cayman Islands
is at Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. The objects for which
our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the
Companies Law, as amended from time to time, or any other law of the Cayman Islands.
Board of Directors
A director is not required to hold any shares
in our company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which
he is materially interested. A director may exercise all the powers of our company to borrow money, mortgage its undertaking, property
and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of
our company or of any third-party. The directors may receive such remuneration as our board may from time to time determine. There
is no age limit requirement with respect to the retirement or non-retirement of a director. See also “Item 6. Directors,
Senior Management and Employees — C. Board Practices.”
Ordinary Shares
General
All of our outstanding ordinary shares are fully
paid and non-assessable. Our ordinary shares are issued in registered form and are issued when registered in our register of members.
Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our fourth amended
and restated memorandum and articles of association do not permit us to issue bearer shares.
Dividends
The holders of our ordinary shares are entitled
to such dividends as may be declared by our shareholders or board of directors subject to the Companies Law and to the fourth amended
and restated articles of association. Under Cayman Islands law, dividends may be declared and paid only out of funds legally available
therefor, namely out of either profit or our share premium account, and provided further that a dividend may not be paid if this
would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
Voting Rights
Each ordinary share is entitled to one vote
on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless
a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder present in person or by proxy.
An ordinary resolution to be passed by the shareholders
requires the affirmative vote of a simple majority of votes attached to the ordinary shares cast in a general meeting, while a
special resolution requires the affirmative vote of at least two-thirds of votes cast attached to the ordinary shares in a meeting.
A special resolution will be required for important matters such as a change of name or making changes to our memorandum and articles
of association.
General Meetings of Shareholders
Shareholders’ meetings may be convened
by a majority of our board of directors or our chairman. Cayman Islands law provides shareholders with only limited rights to requisition
a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these
rights may be provided in a company’s articles of association. Our fourth amended and restated articles of association allow
our shareholders holding shares representing in aggregate not less than 30% of our voting share capital in issue, to requisition
an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the
resolutions so requisitioned to a vote at such meeting; however, our fourth amended and restated articles of association do not
provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not
called by such shareholders. Advance notice of at least ten clear days is required for the convening of our annual general shareholders’
meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least
two shareholders present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in
our company.
Transfer of Ordinary Shares
Subject to the restrictions contained in our
fourth amended and restated articles of association, as applicable, any of our shareholders may transfer all or any of his or her
ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute
discretion, decline to register any transfer of any ordinary share which is not fully paid up to a person of whom it does not approve,
or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists.
Our board of directors may also decline to register any transfer of any ordinary share unless (a) the instrument of transfer is
lodged with us or such other place at which the register of members is kept in accordance with Cayman Islands law, accompanied
by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably
require to show the right of the transferor to make the transfer; (b) the instrument of transfer is in respect of only one class
of shares; (c) the instrument of transfer is properly stamped, if required; (d) the ordinary shares transferred are fully paid
and free of any lien in favor of us; (e) a fee of such maximum sum as the Nasdaq Global Market may determine to be payable or such
lesser sum as the board may from time to time require is paid to us in respect thereof; and (f) the transfer is not to more than
four joint holders.
If our directors refuse to register a transfer
they are required, within three months after the date on which the instrument of transfer was lodged, to send to each of the transferor
and the transferee notice of such refusal.
The registration of transfers may, after compliance
with any notice requirement of the Nasdaq Global Market, be suspended and the register closed at such times and for such periods
as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended
nor the register closed for more than 30 days in any year as our directors may determine.
Liquidation
On a return of capital on winding up or otherwise
(other than on redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares
will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are
insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders
proportionately.
Calls on Ordinary Shares and Forfeiture of Ordinary
Shares
Our board of directors may from time to time
make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14
days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Share Repurchases
We are empowered under our fourth amended and
restated memorandum of association to purchase our shares subject to the Companies Law and our fourth amended and restated articles
of association. Our fourth amended and restated articles of association provide that this power is exercisable by our board of
directors in such manner, upon such terms and subject to such conditions as it in its absolute discretion thinks fit subject to
the Companies Law and, where applicable, the rules of the Nasdaq Global Market and the applicable regulatory authority.
Variations of Rights of Shares
If at any time our share capital is divided
into different classes of shares, all or any of the special rights attached to any class of shares may, subject to the provisions
of the Companies Law, be varied with the sanction of a special resolution passed at a separate general meeting of the holders of
the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of
two-thirds of the vote of all of the shares in that class. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class,
be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Inspection of Books and Records
Holders of our ordinary shares will have no
general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However,
our fourth amended and restated articles of association provide our shareholders with the right to inspect our list of shareholders
and to receive annual audited financial statements.
Changes in Capital
We may from time to time by ordinary resolution:
(a) increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
(b) consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; (c) sub-divide
our existing shares, or any of them into shares of a smaller amount; or (d) cancel any shares which, at the date of the passing
of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the
amount of the shares so cancelled. We may by special resolution reduce our share capital or any capital redemption reserve in any
manner permitted by law.
Register of Members
Under Cayman Islands law, we must keep a register
of members and there should be entered therein: (a) the names and addresses of the members, a statement of the shares held by each
member, and of the amount paid or agreed to be considered as paid, on the shares of each member; (b) the date on which the name
of any person was entered on the register as a member; and (c) the date on which any person ceased to be a member.
Under Cayman Islands law, the register of members
of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of
fact on the matters referred to above unless rebutted) and a member registered in the register of members should be deemed as a
matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Upon the closing
of this offering, the register of members should be immediately updated to record and give effect to the issue of shares by us
to the Depositary (or its nominee) as the depositary. Once our register of members has been updated, the shareholders recorded
in the register of members will be deemed to have legal title to the shares set against their name.
If the name of any person is incorrectly entered
in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact
of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our
company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either
refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Differences in Corporate Law
The Companies Law is derived, to a large extent,
from the older Companies Acts of England but does not follow recent statutory enactments in England. In addition, the Companies
Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant
differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the
United States.
Mergers and Similar Arrangements
The Companies Law permits mergers and consolidations
between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a)
“merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and
liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two
or more constituent companies into a combined company and the vesting of the undertaking, property and liabilities of such companies
to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must
approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders
of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s
articles of association.
The written plan of merger or consolidation
must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company,
a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or
consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation
will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares
(which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures,
subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with
these statutory procedures.
In addition, there are statutory provisions
that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number
of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths
in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by
proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must
be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the
view that the transaction ought not to be approved, the Grand Court of the Cayman Islands can be expected to approve the arrangement
if it determines that (a) the statutory provisions as to the required majority vote have been met; (b) the shareholders have been
fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority
to promote interests adverse to those of the class; (c) the arrangement is such that may be reasonably approved by an intelligent
and honest man of that class acting in respect of his interest; and (d) the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
If an arrangement and reconstruction is thus
approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined
value of the shares.
When a takeover offer is made and accepted by
holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration
of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection
can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so
approved unless there is evidence of fraud, bad faith or collusion.
Shareholders’ Suits
In principle, we will normally be the proper
plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities,
which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle,
including when (a) a company acts or proposes to act illegally or ultra vires; (b) the act complained of, although not ultra vires,
could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and (c) those who control
the company are perpetrating a “fraud on the minority.”
Indemnification of Directors and Executive Officers
and Limitation of Liability
Cayman Islands law does not limit the extent
to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our fourth amended and restated memorandum and articles of association
permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless
such losses or damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct
is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend
to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional
indemnification beyond that provided in our fourth amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions,
we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles
of Association
Some provisions of our fourth amended and restated
memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders
may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series
and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote
or action by our shareholders.
However, under Cayman Islands law, our directors
may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated
from time to time, for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties
As a matter of Cayman Islands law, a director
of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he
owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make
a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a
position where the interests of the company conflict with his or her personal interest or his or her duty to a third-party. A director
of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director
need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person
of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with
regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
In addition, directors of a Cayman Islands company
must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests.
However, this obligation may be varied by the company’s articles of association, which may permit a director to vote on a
matter in which he has a personal interest provided that he has disclosed that nature of his interest to the board. Our fourth
amended and restated memorandum and articles of association provides that a director with an interest (direct or indirect) in a
contract or arrangement or proposed contract or arrangement with the company must declare the nature of his interest at the meeting
of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his
interest then exists, or in any other case at the first meeting of the board of directors after he is or has become so interested.
A general notice may be given at a meeting of
the board of directors to the effect that (i) the director is a member/officer of a specified company or firm and is to be regarded
as interested in any contract or arrangement which may after the date of the notice in writing be made with that company or firm;
or (ii) he is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing to
the board of directors be made with a specified person who is connected with him, will be deemed sufficient declaration of interest.
Following the disclosure being made pursuant to our fourth amended and restated memorandum and articles of association and subject
to any separate requirement for Audit Committee approval under applicable law or the listing rules of Nasdaq, and unless disqualified
by the chairman of the relevant board meeting, a director may vote in respect of any contract or arrangement in which such director
is interested and may be counted in the quorum at such meeting. However, even if a director discloses his interest and is therefore
permitted to vote, he must still comply with his duty to act bona fide in the best interest of our company.
In comparison, under Delaware corporate law,
a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components:
the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to
shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that
a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use
his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that
the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been
made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation.
However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented
concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction
was of fair value to the corporation.
Shareholder Proposals
Under the Delaware General Corporation Law,
a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice
provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to put
any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford
shareholders an opportunity to make proposals and nominations provided that they comply with the notice provisions in the certificate
of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do so in
the governing documents, but shareholders may be precluded from calling special meetings.
There are no statutory requirements under Cayman
Islands law allowing our shareholders to requisition a shareholders’ meeting. However, under our fourth amended and restated
articles of association, on the requisition of shareholders representing not less than 30% of the voting rights entitled to vote
at general meetings, the board shall convene an extraordinary general meeting. As an exempted Cayman Islands company, we are not
obliged by law to call shareholders’ annual general meetings. However, our fourth amended and restated articles of association
require us to call such meetings every year.
Cumulative Voting
Under the Delaware General Corporation Law,
cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically
provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors
since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which
increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our
fourth amended and restated articles of association do not provide for cumulative voting. As a result, our shareholders are not
afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law,
a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding
shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our fourth amended and restated articles
of association, directors may be removed by an ordinary resolution of shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains
a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected
not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is approved by its shareholders,
it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following
the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or
which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or associate of
the corporation and owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has
the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would
not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes
an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in
the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the
terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute.
As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However,
although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide
that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and
not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law,
unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the
total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple
majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate
of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands
law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members
or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority
to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable
to do so.
Under the Companies Law of the Cayman Islands
and our fourth amended and restated articles of association, our company may be dissolved, liquidated or wound up by a special
resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law,
a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class,
unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our fourth amended and restated articles
of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class
only with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Amendment of Governing Documents
Under the Delaware General Corporation Law,
a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the board of directors
and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority
of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the
board of directors. Under Cayman Islands law, our fourth amended and restated memorandum and articles of association may only be
amended by a special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our fourth
amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise
voting rights on our shares. In addition, there are no provisions in our fourth amended and restated memorandum and articles of
association governing the ownership threshold above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares
Subject to applicable law, our board of directors
is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special
rights or restrictions.
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in Item 4 “Information on the Company,”
elsewhere in this annual report or below.
Regulations on Foreign Exchange
Foreign Exchange Regulation
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments
of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made
in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval
from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is
to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiary.
SAFE has promulgated the Circular on Further
Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, as amended in May 2015, which substantially
amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose
foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts,
the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a
foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital
accounts for the same entity could be opened in different provinces, which was not possible previously. In addition, SAFE promulgated
the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by
Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches
over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37,
which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the relevant local SAFE branch
before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen or
resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by that
PRC citizen or resident. In addition, the SAFE registrations are required to be updated with local SAFE branch with respect to
that offshore special purpose company in connection with the change of its basic information, such as its company name, business
term, shareholding by individual PRC citizens or residents, merger, or division and, with respect to the individual PRC citizens
or residents in case of any increases or decreases of capital in that offshore special purpose company, or share transfers or swaps
by the individual PRC citizens or residents.
Our PRC citizen or resident beneficial owners
are applying for registrations under SAFE Circular 37 with the relevant local counterpart of SAFE in Beijing. However, we might
not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our
beneficial owners to comply with SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders
or beneficial owners who are PRC citizens or residents have complied with and will in the future make or obtain any applicable
registrations or approvals required by SAFE Circular 37 or other related regulations. Failure to comply with the required SAFE
registration and updating requirements described above could subject us to fines or legal sanctions, restrict our overseas or cross-border
investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure,
which could adversely affect our business and prospects. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to Doing Business in China—A failure by our shareholders or beneficial owners who are PRC citizens or residents in China
to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas
and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and
financial condition.”
Employee Stock Option Plans
In February 2012, SAFE promulgated the Notices
on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas
Publicly-Listed Company, replacing earlier rules promulgated in March 2007, to regulate the foreign exchange administration of
PRC citizens and non-PRC citizens who reside in the PRC for a continuous period of not less than one year, with a few exceptions,
who participate in stock incentive plans of overseas publicly-listed companies. Pursuant to these rules, these individuals who
participate in any stock incentive plan of an overseas publicly-listed company, are required to register with SAFE through a domestic
qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. We and
our executive officers and other employees who are PRC citizens or non-PRC citizens who reside in the PRC for a continuous period
of not less than one year and have been granted options are subject to these regulations. Failure to complete such SAFE registrations
could subject us and these employees to fines and other legal sanctions. The State Administration of Taxation has issued certain
circulars concerning employee share options or restricted shares. Under these circulars, our employees working in the PRC who exercise
share options or are granted restricted shares would be subject to PRC individual income tax. Our PRC subsidiary has obligations
to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual
income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income
taxes according to relevant laws and regulations, we could face sanctions imposed by the tax authorities or other PRC government
authorities. In addition, under the SAFE Circular 37 effective from July 2014, the individual PRC citizens or residents who are
directors, supervisors, senior management or other employees of an enterprise in the PRC that is directly or indirectly controlled
by an overseas non-listed special purpose company and participate in any stock incentive plan of such non-listed special purpose
company, can submit relevant materials to the relevant local SAFE branch for the foreign exchange registration before the exercise
of the share option. However, as a newly implemented regulation, specific terms of SAFE Circular 37 remain subject to interpretation
and application by SAFE.
See “Item 3. Key Information—D.
Risk Factors—Risks Relating to Doing Business in China—A failure to comply with PRC regulations regarding the registration
of shares and share options held by our employees who are PRC citizens could subject such employees or us to fines and legal or
administrative sanctions.”
Foreign Exchange Administration Applicable to Direct Investment
In February 2015, SAFE further simplified and
improved the policies of Foreign Exchange Administration Applicable to Direct Investment, two administrative examination and approval
items, i.e. verification and approval of foreign exchange registration under domestic direct investment, and verification and approval
of foreign exchange registration under overseas direct investment, shall be abolished. Instead, banks shall, in accordance with
this Notice and the Operating Guidelines for Foreign Exchange Services under Direct Investment, directly examine and handle foreign
exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment. The
SAFE and its branches will then conduct indirect regulation of Foreign Exchange Registration of Direct Investment via banks. Pursuant
to these rules, foreign investors can directly invest into PRC entities without prior verification and approval of foreign exchange
registration from SAFE.
Settlement of the Foreign Exchange Capitals of Foreign-invested
Enterprises
In March 2015, SAFE reformed the administrative
approach regarding the settlement of the foreign exchange capitals of foreign-invested enterprises. Foreign-invested enterprises
will be allowed to settle their foreign exchange capitals on a discretionary basis. It means a foreign-invested enterprise may,
based on its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which
the relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which the bank has registered
the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle 100% of
their foreign exchange capitals on a discretionary basis. However, a foreign-invested enterprise shall not use its capital and
the RMB funds obtained from foreign exchange settlement for any of the following purposes: (1) directly or indirectly, using the
foregoing funds for expenditure beyond its business scope or expenditure prohibited by State laws and regulations; (2) directly
or indirectly, using the foregoing funds for investment in securities, unless otherwise prescribed by laws and regulations; (3)
directly or indirectly, using the foregoing funds for disbursing RMB entrusted loans(unless permitted under its business scope),
repaying inter-corporate borrowings (including third-party advances) and repaying RMB bank loans that have been sub-lent to third
parties; or (4) using the foregoing funds to pay for the expenses related to the purchase of real estate not for self-use, unless
it is a foreign-invested real estate enterprise.
Regulations on Dividend Distribution
Wholly foreign-owned companies in China, such
as Our WFOEs, may pay dividends only out of their accumulated profits after tax as determined in accordance with PRC accounting
standards. Remittance of dividends by a wholly foreign-owned enterprise out of China is subject to examination by the commercial
banks. Wholly foreign-owned companies are not permitted to pay dividends unless they set aside at least 10% of their respective
accumulated profits after-tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such
fund reaches 50% of the wholly foreign-owned company’s registered capital. In addition, these companies also may allocate
a portion of their after-tax profits based on PRC accounting standards to other funds at their discretion. These statutory reserve
funds and other funds are not distributable as cash dividends.
The following is a general summary of the
material Cayman Islands, People’s Republic of China and U.S. federal income tax consequences relevant to an investment in
our ADSs and ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular
prospective purchaser. The discussion is based on laws and relevant interpretations thereof as of the date of this annual report,
all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address
U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China
and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and
disposition of our ADSs and ordinary shares.
Cayman Islands Taxation
The Cayman Islands does not impose any withholding
taxes on dividends paid to shareholders by a Cayman Islands corporation, nor does the Cayman Islands impose any other taxes on
shareholders of a Cayman Islands corporation who are not themselves residents of the Cayman Islands. The Cayman Islands is not
a party to any tax treaties that are applicable to any payments made to or by our company.
People’s Republic of China Taxation
Under the Enterprise Income Tax Law and the
Regulations on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China, enterprises established
outside of China but whose “de facto management body” is located in China are considered “resident enterprises”
for PRC tax purposes. Under the applicable implementation regulations, “de facto management body” is defined as the
organizational body that effectively exercises overall management and control over production and business operations, personnel,
finance and accounting, and properties of the enterprise. Substantially all of our management is currently based in China, and
may remain in China in the future. If we are treated as a “resident enterprise” for PRC tax purposes, foreign enterprise
holders of our ADSs or ordinary shares may be subject to a 10% PRC income tax upon dividends payable by us and on gains realized
on their sales or other dispositions of our ADSs or ordinary shares. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Doing Business in China—Under the PRC enterprise income tax law, we could be classified as a ‘resident
enterprise’ of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
In addition, gains derived by our non-PRC individual shareholders from the sale of our shares and ADSs may be subject to a 20%
PRC withholding tax. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to
any PRC tax on dividends obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise.
If any PRC tax were to apply to dividends realized by non-PRC individuals, it would generally apply at a rate of 20% unless a reduced
rate is available under an applicable tax treaty. However, it is unclear either whether our non-PRC shareholders would be able
to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as
a PRC resident enterprise.
Material United States Federal Income Tax Considerations
The following summary describes the material
United States federal income tax consequences to United States Holders (as defined below) of the ownership of our ordinary shares
and ADSs as of the date hereof. Except where noted, this summary deals only with ordinary shares and ADSs held as capital assets.
As used herein, the term “United States Holder” means a beneficial owner of an ordinary share or ADS that is for United
States federal income tax purposes:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate the income of which is subject to United States federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons
have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United
States Treasury regulations to be treated as a United States person.
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This summary does not represent a detailed description
of all of the United States federal income tax consequences that may be applicable to you if you are subject to special treatment
under the United States federal income tax laws, including if you are:
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a dealer in securities or currencies;
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a financial institution of certain types;
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a regulated investment company;
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a real estate investment trust;
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a tax-exempt organization;
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a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale
or a straddle;
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a trader in securities that has elected the mark-to-market method of accounting for your securities;
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a person who owns or is deemed to own 10% or more of the voting power or value of our stock;
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a partnership or other pass-through entity for United States federal income tax purposes; or
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a person whose “functional currency” is not the United States dollar.
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In addition, this discussion does not address
any state, local, alternative minimum tax, or non-United States tax considerations, or the Medicare contribution tax on net investment
income. Each potential investor is urged to consult its tax advisor regarding the United States federal, state, local and non-United
States income and other tax considerations of an investment in our ADSs or ordinary shares.
The discussion below is based upon the provisions
of the Internal Revenue Code of 1986, as amended, or the Code, final and proposed regulations thereunder, rulings and judicial
decisions as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal
income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations
made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance
with their terms.
If a partnership holds our ordinary shares or
ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership.
If you are a partnership or a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.
This summary does not contain a detailed description of all the
United States federal income tax consequences that may be applicable to you in light of your particular circumstances and, except
as set forth below with respect to PRC tax considerations, does not address the effects of any state, local or non-United States
tax laws. If you are considering the purchase, ownership or disposition of our ordinary shares or ADSs, you should consult your
own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well
as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal
income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such
ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends and Other Distributions on the ADSs
Subject to the discussion under “—Passive
Foreign Investment Company” below, the gross amount of any distributions on the ADSs or ordinary shares (including any amounts
withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings
and profits, as determined under United States federal income tax principles. Such income (including withheld taxes) will be includable
in your gross income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares,
or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to
corporations under the Code.
Dividends paid to certain non-corporate United
States Holders may be taxable at preferential rates applicable to long-term capital gain if we are treated as a “qualified
foreign corporation.” A foreign corporation is treated as a qualified foreign corporation with respect to dividends received
from that corporation on ordinary shares (or ADSs backed by such shares) that are readily tradable on an established securities
market in the United States. Our ADSs are listed on the Nasdaq Global Market, and thus, pursuant to the United States Treasury
Department guidance, our ADSs are treated as readily tradable on an established securities market in the United States. Thus, we
believe that dividends we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that
our ordinary shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary
shares that do not back ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that
our ADSs will continue to be considered readily tradable on an established securities market in later years. A qualified foreign
corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United
States. In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we believe we would be eligible
for the benefits of the income tax treaty between the United States and the PRC (including any protocol thereunder), or the Treaty,
and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented
by ADSs or are readily tradable on an established securities market in the United States, would be eligible for the reduced rates
of taxation. For discussion regarding whether we may be classified as a PRC resident enterprise, see “Item 10. Additional
Information—E. Taxation—People’s Republic of China Taxation.” Even if dividends would be treated as paid
by a qualified foreign corporation, non-corporate United States Holders will not be eligible for reduced rates of taxation if they
do not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend
date or to the extent that such United States Holders elect to treat the dividend income as “investment income” under
the Code. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related
payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum
holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular
circumstances.
Non-corporate United States Holders will not
be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company, or
PFIC, for United States federal income tax purpose for the taxable year in which such dividends are paid or for the preceding taxable
year.
In the event that we are deemed to be a PRC
resident enterprise under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to
the ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—People’s Republic of China
Taxation.” In that case, PRC withholding taxes on dividends (limited, in the case of a U.S. holder who qualifies for the
benefits of the Treaty, to the extent not exceeding the applicable dividend withholding rate under the Treaty), generally will
be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating
the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and generally will
constitute passive category income. The rules governing the foreign tax credit are complex. You are
urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution
exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax
principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of
the ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on
a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange. However, we do not expect to calculate our earnings and profits in accordance with United
States federal income tax principles. Therefore, you should expect that a distribution generally will be treated as a dividend
(as discussed above).
Passive Foreign Investment Company
In general, we will be a PFIC for any taxable
year in which:
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at least 75% of our gross income is passive income, or
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at least 50% of the average value (determined on a quarterly basis) of our assets produce or are held for the production of
passive income.
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For this purpose, passive income generally includes
dividends, interest, royalties and rents. Furthermore, cash is categorized as a passive asset and our unbooked intangibles associated
with active business activities (including goodwill) may generally be taken into account and classified as active assets. In estimating
the value of our goodwill, we generally take into account our market capitalization. If we own at least 25% (by value) of the stock
of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s
assets and receiving our proportionate share of the other corporation’s income.
Based on our current income and assets and the
value of our ADSs and ordinary shares, we do not believe that we were a PFIC for our taxable year ended December 31, 2018. With
respect to our 2019 taxable year and foreseeable future taxable years, and subject to the uncertainty regarding the treatment of
our contractual arrangements with our consolidated affiliated entities (discussed below), we presently do not anticipate that we
will be a PFIC based upon the expected composition of our income and assets and the expected value of our assets, including goodwill
(determined, in part, based on the price of our ADSs and ordinary shares). The determination of whether we are a PFIC is made annually.
Accordingly, it is possible that we may be a PFIC for our 2019 taxable year or any future taxable year due to changes in our asset
or income composition or the value of our assets. Because the value of our assets may be determined by reference to our market
capitalization, and because the market price of our ADSs and ordinary shares may be volatile, a decrease in the price of our ADSs
may also result in our becoming a PFIC. Under circumstances where the cash is not deployed for active purposes, our risk of becoming
a PFIC may increase. In addition, although the law in this regard is not entirely clear, we treat Our VIEs as being owned by us
for United States federal income tax purposes because we control its management decisions and we are entitled to substantially
all of its economic benefits and, as a result, we consolidate its results of operations in our consolidated U.S. GAAP financial
statements. If it were determined, however, that we are not the owner of Our VIE for United States federal income tax purposes,
we could be treated as a PFIC for taxable years ending after the date of our initial public offering.
If we are a PFIC for any taxable year during
which you hold our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to you for all succeeding taxable
years during which you hold our ADSs or ordinary shares, and you will be subject to the special tax rules discussed below, except
if you have made a mark-to-market election as discussed below. However, if we are a PFIC for any taxable year and subsequently
cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election, or a Purging Election,
to recognize gain (but not loss) in the manner described below as if your ADSs or ordinary shares had been sold on the last day
of the last taxable year during which we were a PFIC. After the Purging Election, your ADSs or ordinary shares will not be treated
as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your own tax advisors about the availability
of this election, and whether making the election would be advisable in your particular circumstances.
If we are a PFIC for any taxable year during
which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any “excess distribution”
received and any gain realized from a sale or other disposition, including a Purging Election or pledge, of ADSs or ordinary shares.
Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter
of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions.
Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC
with respect to you, will be treated as ordinary income, and
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the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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If we are a PFIC for any taxable year during
which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, a United States Holder
would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application
of these rules. A disposition of shares in, or a distribution by, any of our subsidiaries that is a PFIC will trigger the excess
distributions rules described above. You are urged to consult your tax advisors about the application of the PFIC rules to any
of our subsidiaries.
In lieu of being subject to the excess distribution
rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market
method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election will
be available to holders of ADSs as long as the ADSs are listed on the Nasdaq Global Market, which constitutes a qualified exchange,
and are “regularly traded” for purposes of the mark-to-market election (for which no assurance can be given). It should
also be noted that only the ADSs and not the ordinary shares, are listed on the Nasdaq Global Market. Consequently, if you are
a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election
if we are or were to become a PFIC.
If you make an effective mark-to-market election,
you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADSs at the end
of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the
excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the
net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election,
any gain you recognize upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be
treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market
election.
Your adjusted tax basis in the ADSs will be
increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If
you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent
taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to
the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election,
and whether making the election would be advisable in your particular circumstances.
A U.S. investor in a PFIC generally can mitigate
the adverse consequences of the excess distribution rules described above by electing to treat the PFIC as a “qualified electing
fund” under the Code. However, this option is not available to you because we do not intend to comply with the requirements
necessary to permit you to make this election.
We expect to file annual reports on Form 20-F
with the U.S. Securities and Exchange Commission in which we will indicate whether or not we believe we were a PFIC for the relevant
taxable year. We do not intend to make any other annual determination or otherwise notify you regarding our status as a PFIC for
any taxable year. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding
ADSs or ordinary shares if we are considered a PFIC in any taxable year.
A United States Holder that owns (or is deemed
to own) ordinary shares in a PFIC during any taxable year of the United States Holder may have to file an IRS Form 8621 (whether
or not a mark-to-market election is or has been made) with such United States Holder’s U.S. federal income tax return and
provide such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and the mark-to-market
election are complex and are affected by various factors in addition to those described above. Accordingly, United States Holders
of our ordinary shares and ADSs should consult their own tax advisors concerning the application of the PFIC rules to our ordinary
shares and ADSs under their particular circumstances.
Taxation of Capital Gains
For United States federal income tax purposes,
you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference
between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion
under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss.
Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates
of taxation. The deductibility of capital losses is subject to limitations.
Any gain or loss recognized by you generally
will be treated as United States source gain or loss. However, if we are treated as a PRC resident enterprise for PRC tax purposes
and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain
as PRC source gain under the Treaty and, accordingly, you may be able to credit the PRC tax against your United States federal
income tax liability. If you are not eligible for the benefits of the Treaty or you fail to make the election to treat any gain
as PRC source, then you generally would not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition
of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income
treated as derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you
are a resident of the United States, and you meet other factual requirements specified in the Treaty. Because qualification for
the benefits of the Treaty is a fact-intensive inquiry which depends upon the particular circumstances of each investor, you are
specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are also urged to
consult your tax advisor regarding the tax consequences if PRC tax is imposed on the gain on a disposition of our ordinary shares
or ADSs, including the availability of the foreign tax credit and the election to treat any gain as PRC source under your particular
circumstances.
Foreign Asset Reporting
Certain United States Holders who are individuals
(and under proposed regulations, certain entities) may be required to report information relating to an interest in our ordinary
shares or ADSs, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial
institutions) on IRS Form 8938. United States Holders are urged to consult their tax advisors regarding their information reporting
obligations, if any, with respect to their ownership and disposition of our ordinary shares or ADSs.
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F.
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Dividends and paying agents.
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Not applicable.
Not applicable.
We are subject to periodic reporting and other
informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports,
including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the
rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders, and our executive officers,
directors and principal shareholders are not subject to the insider short-swing profit disclosure and recovery provisions of Section
16 of the Exchange Act.
All information that we have filed with the
SEC can be accessed through the SEC’s website at www.sec.gov. This information can also be inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms.
We intend to furnish the depositary with our
annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity
with U.S. GAAP, and all notices of shareholders’ meeting and other reports and communications that are made generally available
to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our
written request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting
received by the depositary from us.
In accordance with Nasdaq Stock Market Rule
5250(d), we will post this annual report on Form 20-F on our website at ir.ccjmu.com. In addition, we will provide hard copies
of our annual report free of charge to shareholders and ADS holders upon request.
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Subsidiary Information.
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Not applicable.
ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange Risk
Substantially all of our revenues and expenses
are denominated in RMB. We do not believe that we currently have any significant direct foreign exchange risk and have not used
any derivative financial instruments to hedge our exposure to such risk. Although in general, our exposure to foreign exchange
risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar
and the RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar
and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange
policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008
and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation
of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if
we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for
other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts
available to us.
Interest Rate Risk
Our exposure to interest rate risk primarily
relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We generated
interest income of US$26.1 thousand for the years ended December 31, 2016, and had interest expense of US$0.4 million and US$0.9
million for the years ended December 31, 2017 and 2018, respectively. We had cash and cash equivalents
of US$0.4 million as of December 31, 2018. Assuming such amount of cash and cash equivalents are held entirely in interest-bearing
bank deposits, a hypothetical one percentage point (100 basis-point) decrease in interest rates would decrease our interest income
from these interest-bearing bank deposits for one year by approximately US$3.6 thousand. Interest-earning instruments carry a
degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes
in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest
rates.
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
Not applicable.
Not applicable.
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American Depositary Shares.
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Fees and Charges Our ADS Holders May Have to Pay
Citibank, N.A. is our depositary. The depositary
collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary shares or surrendering ADSs for
the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors
by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary
may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by
charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting
services until its fees for those services are paid.
An ADS holder will be required to pay
the following fees under the terms of the deposit agreement:
Services:
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Fees:
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Issuance of ADSs upon deposit of shares (excluding issuances as a result of distributions of shares)
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Up to US$0.05 per ADS issued
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Cancellation of ADSs
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Up to US$0.05 per ADS cancelled
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Distribution of cash dividends or other cash distributions (i.e., sale of rights and other entitlements)
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Up to US$0.05 per ADS held
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Distribution of ADSs pursuant to (i) stock dividends or other fee stock distributions, or (ii) exercise of rights to purchase additional ADSs
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Up to US$0.05 per ADS held
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Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares)
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Up to US$0.05 per ADS held
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ADS Services
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Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary
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Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us for
expenses we incur that are related to the establishment and maintenance of the ADR program, including investor relations expenses.
There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available
to us is not linked to the amounts of fees the depositary collects from investors. We have received US$0.09 million from the depositary
until the date of this annual report.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
JMU Limited, formerly known
as “Wowo Limited”, (the “Company”), was incorporated in Cayman Islands on July 13, 2011. The Company and
its subsidiaries, variable interest entities (“VIEs”) and VIEs’ subsidiaries are primarily engaged in operating
a business-to-business ("B2B") online e-commerce platform that provides integrated services to suppliers and consumers
in the catering industry in the People’s Republic of China ("PRC").
On April 8, 2015, the Company
completed its IPO in National Association of Securities Dealers Automated Quotation (“NASDAQ”) by offering 4 million
American Depositary Shares (“ADSs”), representing 72 million ordinary shares, and received net proceeds of $35.2 million.
On April 27, 2015, the Company issued an additional 220,000 ADSs, representing 3.96 million of ordinary shares to the underwriter
for exercising the over-allotment option at price of $10 per ADS and received net proceeds of $2.1 million.
On June 5, 2015, the Company
and its wholly owned subsidiary, New Admiral Limited (“New Admiral”) entered into an agreement to acquire Join Me
Group (HK) Investment Company Limited and its subsidiaries, variable interest entity (“VIE”) and VIE’s subsidiaries
(Collectively, “JMU Group”) with a consideration of 741,422,780 ordinary shares of the Company and $30 million in
cash. On that date, JMU Group, which operates a business-to-business ("B2B") online e-commerce platform that provides
integrated services to suppliers and consumers in the catering industry, became a wholly owned subsidiary of the Company. JMU
Group engages primarily in the sale of rice, flavor, bean oil, seafood, wine and some other types of generic food and beverage
products through its website
www.ccjoin.com
.
On September 9, 2015, the Company
sold all of its equity interests in Wowo Group Limited, a subsidiary of the Company, together with all of its subsidiaries and
consolidated VIEs and their respective subsidiaries (collectively, the “Group Buying Entities”), which were engaged
in the Company’s group buying business and other non-food service-related businesses. The sale was pursuant to a definitive
agreement entered into between the Company and Century Winning Limited, an exempted company with limited liability incorporated
under the laws of the British Virgin Islands (the “Buyer”), in exchange for the Buyer’s payment of $1 and the
assumption of $47,390,420 of net liabilities of the Group Buying Entities.
On December 28, 2016, the Company
changed its name from Wowo Limited to JMU Limited.
The PRC laws and regulations
currently place certain restrictions on foreign ownership of companies that engage in internet content and other restricted businesses.
Specifically, foreign investors are not allowed to own more than 50% of the equity interests in any entity conducting internet
content and other restricted businesses. To comply with these PRC laws and regulations, the Company conducts substantially its
businesses through the VIE and VIE’s subsidiaries. To provide the Company’s control over the VIE and the rights to
the expected residual returns of the VIE and VIE’s subsidiaries, Shanghai Zhongming, a wholly foreign-invested enterprise
in China, or WFOE entered into a series of contractual arrangements as described below with VIE and its shareholder.
Prior to the acquisition of
JMU Group, JMU Group formed contractual arrangements through its wholly owned subsidiary Shanghai Zhongming with the VIE. As a
result of the Company's acquisition of JMU Group, the Company through JMU's wholly owned subsidiary, Shanghai Zhongming, has (1)
power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the right
to receive economic benefits of the VIE that could be significant to the VIE. Accordingly, the Company is considered the primary
beneficiary of the VIE and has consolidated the VIE’s financial results of operations, assets, and liabilities in the Company’s
consolidated financial statements. The Company also believes that this ability to exercise control ensures that the VIE will continue
to execute and renew the exclusive consulting and services agreements and pay service fees to the Company. The ability to charge
service fees in amounts determined at the Company’s sole discretion, and by ensuring that the exclusive services agreements
are executed and renewed indefinitely, the Company has the right to receive substantially all of the economic benefits from the
VIE.
Pursuant to the master exclusive
service agreement and business cooperation agreement, VIE, including its subsidiaries or any companies or entities under its control,
agrees to engage WFOE as its provider for technical and business support services. VIE shall pay to WFOE service fees determined
based on the audited consolidated net profit of VIE. WFOE shall exclusively own any intellectual property arising from the performance
of the services set forth in the agreement. WFOE shall provide financial support to VIE in the form of bank loans or others forms
as permitted under the PRC laws. The service agreements shall remain effective upon the written confirmation issued by WFOE to
VIE and/or its shareholder 30 days before the termination. VIE or its shareholder has no right to unilaterally terminate the agreement.
Subsequently, the Company entered
into financial support undertaking letter with VIE and pursuant to the financial support undertaking letter, the Company is obligated
and hereby undertakes to provide unlimited financial support to the VIE, to the extent permissible under the applicable PRC laws
and regulations, whether or not any such operational loss is actually incurred. The Company will not request repayment of the
loans or borrowings if the VIE or its shareholder does not have sufficient funds or are unable to repay.
The VIE’s shareholder
has entered into an exclusive option agreement with WFOE, pursuant to which WFOE has an exclusive option to purchase, or to designate
other persons to purchase, to the extent permitted by applicable PRC laws, rules and regulations, all of the equity interest in
VIE from the shareholder. The purchase price for the entire equity interest is to be the minimum price permitted by applicable
PRC laws and administrative regulations. If there is no minimum price under PRC laws or administrative regulations, the price
shall be determined by the WFOE or on a basis of the registration capital of VIE. The term of the exclusive option agreement shall
remain effective upon written confirmation issued by the WFOE to VIE and its shareholder 30 days before the termination. VIE and
its shareholder has no right to unilaterally terminate the agreement.
The VIE’s shareholder
has signed an irrevocable proxy and power of attorney agreement to appoint WFOE, or its designee, as the attorney-in-fact to act
on VIE’s shareholder's behalf on all rights that the shareholder has in respect of such shareholder's equity interest in
VIE conferred by relevant laws and regulations and the articles of association of VIE. The rights include but not limited to attending
shareholders meeting, exercising voting rights and transferring all or a part of the equity interests of VIE held by the shareholder.
The proxy and power of attorney shall remain effective upon written confirmation issued by WFOE to VIE and its shareholder 30
days before the termination. VIE and its Shareholder has no right to unilaterally terminate the agreement.
The VIE’s shareholder
has entered into an equity pledge agreement with the WFOE, under which the shareholder pledged all of the equity interests in
VIE to WFOE as collateral to secure performance of all obligations under the Master Exclusive Service Agreement, Business Cooperation
Agreement, Proxy and Power of Attorney Agreement and the Exclusive Option Agreement (collectively, the "Principal Agreement").
The dividends generated by the pledged equity interests shall be deposited into the account designated by the WFOE and shall be
used to pay the secured indebtedness prior and in preference to any other payment during the term of the pledge. If any event
of default incurred under the Principal Agreement, WFOE, as the pledgee, will be entitled to dispose of the pledged equity interests
and shall be paid in priority with the proceeds recovered from the disposal.
Assessing the legal validity
and compliance of these above noted arrangements are a precursor to the Company’s ability to consolidate the results of
operations and financial condition of the VIE and VIE’s subsidiaries. The Company, in consultation with its PRC legal counsel,
believes that:(1) the ownership structure of the Group, including its PRC subsidiary, VIE and VIE’s subsidiaries is in compliance
with all existing PRC laws and regulations; (2) each of the VIE agreements amongst the WFOE, the VIE and VIE’s shareholder
governed by PRC laws, are legal, valid and binding, enforceable against such parties, and will not result in any violations of
PRC laws or regulations currently in effects; and (3) the Group’s PRC subsidiary, VIE and VIE’s subsidiaries have
the necessary corporate power and authority to conduct its business as described in its business scope under its business licenses,
which is in full force and effect, and the Group’s business operations in the PRC are in compliance with existing PRC laws
and regulations. The shareholder of the VIE are also shareholders of the Company and therefore have no current interest in seeking
to act contrary to the contractual arrangements. However, uncertainties in the PRC legal system could limit the Company’s
ability to enforce these contractual arrangements and if the shareholders were to reduce their interest in the Company, their
interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary
to the contractual terms.
The Company’s ability
to control the VIE also depends on the power of attorney. The Company, through WFOE, has to vote on all matters requiring shareholder
approval in the VIE entities. As noted above, the Company believes this power of attorney is legally enforceable but may not be
as effective as direct equity ownership.
In addition, if the legal structure
and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC regulatory authorities
could:
The imposition of any of these
penalties could result in a material adverse effect on the Group’s ability to conduct the Group’s business. In addition,
if the imposition of any of these penalties causes the Group to lose the rights to direct the activities of the VIE, VIE’s
subsidiaries, or the right to receive their economic benefits, the Group would no longer be able to consolidate the VIE and VIE’s
subsidiaries. The Group does not believe that any penalties imposed or actions taken by the PRC government would result in the
liquidation or dissolution of the Company, WFOE, the VIE and their respective subsidiaries.
The following financial statement
balances and amounts of the VIE and VIE’s subsidiaries were included in the accompanying consolidated financial statements
as follows after the elimination of intercompany balances and transactions among VIE and VIE’s subsidiaries within the Group:
The VIE contributed an aggregate
of 90.6%, 90.9% and 79.5% of the consolidated revenues for the years ended December 31, 2016, 2017 and 2018, respectively. As of
December 31, 2017 and 2018, the VIE accounted for an aggregate of 11.9% and 127.3%, respectively, of the consolidated total assets,
and 87.2% and 87.4%, respectively, of the consolidated total liabilities. The assets not associated with the VIE primarily consist
of certain cash and cash equivalents, certain prepaid expenses and other current assets and certain property and equipment. The
recognized and unrecognized revenue-producing assets that are held by the VIE are primarily property and equipment and online platform.
There are no consolidated VIE’s
assets that are collateral for the VIE’s obligations and can only be used to settle the VIE’s obligations. There are
no creditors (or beneficial interest holders) of the VIE that have recourse to the general credit of the Company or any of its
consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable
interests that require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE ever need
financial support, the Company’ PRC subsidiary, WOFE, shall provide financial support to VIE in the form of bank loans or
other forms as permitted under PRC law. Relevant PRC laws and regulations restrict the VIE from transferring a portion of their
net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and
advances or cash dividends. Please refer to Note 21 for disclosure of restricted net assets.
The Group experienced a net
loss of approximately $25.3 million, $161.9 million and $123.2 million for the years ended December 31, 2016, 2017 and 2018, respectively,
and negative cash flows from operations of approximately $5.8 million, $9.9 million and $4.3 million for the years ended December
31, 2016, 2017 and 2018, respectively. As at 31 December 2018, the Group’s current liabilities exceeded its current asset
by $15.7 million and there was a capital deficiency of $22.2 million. These conditions raise substantial doubt about the Group’s
ability to continue as a going concern. However, management believes the Group has the ability to fulfill its financial obligations
and will continue as a going concern because Ms. Xiaoxia Zhu (“Ms. Zhu”) has agreed in writing to provide adequate
funds during the period when she remains as director and chief executive officer of the Group to enable the Group to meet in full
its financial obligations as they fall due through June 28, 2020.
The Group believes that it
can realize its assets and satisfy its liabilities in the normal course of business with the financial support from Ms. Zhu. As
a result, the consolidated financial statements have been prepared assuming the Group will continue as a going concern. The accompanying
consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets
and liabilities as that might be necessary if the Group is unable to continue as a going concern.
The consolidated
financial statements of the Group have been prepared in accordance with the U.S. generally accepted accounting principles (‘‘US
GAAP’’).
The consolidated
financial statements of the Group include the financial statements of the Company, its consolidated subsidiaries, VIE and VIE’s
subsidiaries for which the Company is the primary beneficiary. All significant inter-company transactions and balances have been
eliminated upon consolidation.
Business combinations
are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any noncontrolling
interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized
and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interests of the acquiree,
if any, at the acquisition date over the fair values of the identifiable net assets acquired.
Consideration
transferred in a business acquisition is measured at the fair value as at the date of acquisition.
The preparation of financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include,
but are not limited to, provision for other receivables, estimating useful lives and impairment for property and equipment and
acquired intangible assets, impairment of goodwill, valuation allowance for deferred tax assets and share-based compensation.
Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such,
differences may be material to the consolidated financial statements.
The functional and reporting
currency of the Company is the United States dollar (“U.S. dollars”, “US$” or“$”). The functional
currency of the Company's subsidiary, New Admiral, is U.S. dollars. The functional currency of the Company’s HK subsidiaries,
JMU Investment and JMU Supply Chain, is Hong Kong dollars (“HK dollars”). The financial records of the Group’s
subsidiaries, VIE and VIE’s subsidiaries located in the PRC are maintained in their local currencies, the Renminbi (“RMB”),
respectively, which are also the functional currencies of these entities.
Transactions denominated in
currencies other than the respective entities’ functional currencies are re-measured into the functional currencies, in
accordance with Accounting Standards Codification (“ASC”) 830 (“ASC 830”)
Foreign Currency Matters
,
at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are
re-measured into the functional currencies at the exchange rates prevailing at the balance sheet date. All foreign exchange gains
or losses are included in the consolidated statements of operations.
Assets and liabilities are
translated to the reporting currency at the exchange rates at the balance sheet date, equity accounts are translated at historical
exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments
are reported as cumulative translation adjustments and are shown as a separate component of consolidated statements of comprehensive
loss.
Cash and cash equivalents consists
of cash on hand and demand deposits placed with banks or other financial institutions which are unrestricted as to withdrawal
and use and have original maturities less than three months.
Accounts receivable represents those receivables derived in the ordinary course of business, carried at
net realizable value.
The Group maintains an allowance for doubtful accounts for estimated losses on uncollected accounts receivable.
Management considers the following factors when determining the collectability of specific accounts: creditworthiness of customers,
aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms,
specific facts and circumstances, and the overall economic climate in the industries the Group serves.
The
provision for doubtful accounts receivable for the years ended December 31, 2016, 2017 and 2018 was $nil, $nil and $293,814, respectively.
Inventory is stated at the
lower of cost or market. Cost of inventory is determined using the weighted average cost method. Adjustments are recorded to write
down the cost of inventory to the estimated market value for slow-moving merchandise and damaged goods. The amount of written-down
depends upon factors such as whether the goods are returnable to vendors, historical and forecasted consumer demand, market condition
and the promotional environment.
Written-down amounts are recorded
in cost of goods sold in the consolidated statements of operations. No inventory provision was recognized for each of the three
years ended December 31, 2018.
Property and equipment are
stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Repair and maintenance costs
are charged to expense when incurred, whereas the cost of betterments that extend the useful life of property and equipment are
capitalized as additions to the related assets. Retirement, sale and disposals of assets are recorded by removing the cost and
related accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations.
Acquired intangible assets
with finite lives are carried at cost less accumulated amortization and impairment. Amortization of finite lived intangible assets
is calculated on a straight-line basis over the shorter of the contractual terms or the expected useful lives of the acquired
assets. The amortization period by major intangible asset classes is as follows:
The Group evaluates the recoverability
of its long-lived assets, including intangible assets with finite lives, whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing
the carrying value of the assets to the estimated undiscounted future cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets,
the Group would recognize an impairment loss based on the excess of carrying amount over the fair value of the assets.
An impairment loss of $nil,
$19,765,615 and $8,637,214 were recognized for the years ended December 31, 2016, 2017 and 2018, respectively.
The Group annually, or more
frequently if the Group believes indicators of impairment exist, reviews the carrying value of goodwill to determine whether impairment
may exist.
Specifically, goodwill impairment
is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount,
including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired
and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares
the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair
value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed
fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss
is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value
is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.
The Group has determined to
perform the annual impairment tests on December 31 of each year. The goodwill as of December 31, 2016, 2017 and 2018 was attributable
solely to the JMU business on which an impairment loss of $nil, $127,252,810 and $105,818,351 were recognized for the years ended
December 31, 2016, 2017 and 2018, respectively.
Cost method accounting is also
applied to investment that are not considered as “in-substance” common stock investment, and do not have readily determinable
fair value.
No impairment
was recognized for each of the two years ended December 31, 2017. For the year ended December 31, 2018, we recognized an
impairment charge of $723,139.
The Group recognizes revenue
from the sales of rice, flavoring, oil, seafood, wine and other types of generic food and beverage products through its online
platform
www.ccjoin.com
. The website also serves as an online platform to connect third-party vendors and customers. The
Group recognizes revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv)
collectability is reasonably assured.
The Group recognizes revenue
when the customers confirm the acceptance of the goods once they receive the delivered goods. The sales returns are considered
and estimated when the related revenue was recognized.
Revenue is recorded net of
surcharges and value-added tax ("VAT") and related surcharges.
The Group primarily generates
revenue from online direct sales and online platform services.
The Group primarily sells rice,
flavoring, oil, seafood, wine and other products relating to catering and hotel industries through online direct sales. There
is a separate channel on the Group’s online platform designated for the Group’s online direct sales and the Group
records revenue from online direct sales on a gross basis as the Group acts as the principal in these arrangements: it is the
primary obligor in the sales arrangements, has latitude in establishing prices and has discretion in suppliers' selection. On
certain transactions, the Group also retains some of general inventory risk and physical inventory loss risk.
The Group also provides
the online platform services to connect third-party sellers and purchasers for their transactions via its online marketplace.
Online platform sales are made from the online stores under the third-party sellers’ names, and the Group records the
related revenue on a net basis as the Group acts as the agent in these arrangements: it is not the primary obligor, does not
bear inventory risk, and does not have the ability to establish the price or discretion in supplier selection. For the years
ended December 31, 2016, 2017 and 2018, revenues related to the online platform services were nominal, as the Group normally does
not charge any service fees to the third-party sellers and purchasers.
VAT is calculated at 0% on
the revenue from primary agricultural products, 11% or 10% on the revenue from other agricultural products and 17% or 16% on the
revenue from sales of other products. The Group reports revenue net of VAT. WFOE, VIE and VIE's subsidiaries are VAT general tax
payers, which are allowed to offset qualified VAT paid against their output VAT liabilities.
Cost of revenues primarily
consists of purchased cost of the products sold related to online direct sales and payroll of the operating personnel.
Advertising and promotional
expenses, including advertisements through various form of media and kinds of marketing and promotional activities, are included
in “Selling and marketing expense” in the consolidated statements of operations and are expensed when incurred. Advertising
and marketing expenses for the years ended December 31, 2016, 2017 and 2018 are $498,045, $101,232 and $137,464, respectively.
Leases where
substantially all the rewards and risks of the ownership of the assets remain with the leasing companies are accounted for as
operating leases. Payments made for the operating leases are charged to the consolidated statements of operations on a
straight-line basis over the lease term and have been included in the operating expenses in the consolidated statements of
operations. In 2016, the Group entered into a 15-year lease arrangement for its new headquarters in Shanghai, China, which
provided a seven month rent free period. In 2018, the Company changed its address of its principal executive office with no
rent free period and cancelled the former lease arrangement. As of December 31, 2016, 2017 and 2018, the Group recognized
non-current liabilities related to straight-lining of the seven month rent free period and the step increases in monthly rent
to be paid over the lease term of $1,086,342, $1,386,749 and $nil, respectively.
The Group follows the liability
method in accounting for income taxes in accordance to ASC topic 740 (“ASC 740”),
Income Taxes
. Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to
reverse. The Group records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it
is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized.
The Group applies the provision
of ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing
the recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements.
The Group has elected to classify
interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated
statements of operations.
In 2016, the Group launched
a customer loyalty program to certain qualified customers, who can earn customer credits from purchases if their annual spending
with the Group exceeds RMB10 million. In 2017, the Group announced its revised customer loyalty program to certain qualified customers
for granting customer credits only if their annual spending with the Group exceeds RMB100 million. The customers can redeem the
earned credits for gift merchandise. In 2018, the Company abrogated customer loyalty program.
During 2016, the Group negotiated
settlement of earned loyalty credits with 13 of its customers in ordinary shares of the Company. As part of the settlement, the
Group agreed to issue 4.42 million of its ordinary shares, and recognized $1,377,503 in paid-in capital and selling expenses based
on the grant date fair value of the ordinary shares. The Group is not legally obligated or expected to continue the redemption
of the credits for the ordinary shares in the future.
Share-based payment awards
with employees are measured based on the grant date fair value of the equity instrument issued, and recognized as compensation
costs using the straight-line method over the requisite service period, which is generally the vesting period of the options,
with a corresponding impact reflected in additional paid-in capital. For share-based payment awards with market conditions, such
market conditions are included in the determination of the estimated grant-date fair value. In the second quarter of 2017, the
Company elected to early adopt ASU No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvement to Employee Share
based Payment Accounting
, to account for forfeitures as they occur. The cumulative-effect adjustment to accumulated deficits
was $nil as a result of the adoption of ASU 2016-09.
A change in any of the terms
or conditions of share-based payment awards is accounted for as a modification of awards. The Group measures the incremental compensation
cost of a modification as the excess of the fair value of the modified awards over the fair value of the original awards immediately
before its terms are modified, based on the share price and other pertinent factors at the modification date. For vested awards,
the Group recognizes incremental compensation cost in the period the modification occurred. For unvested awards, the Group recognizes,
over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation
cost for the original award on the modification date.
Basic loss per ordinary share
is computed by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding
during the period.
Diluted loss per ordinary share
reflects the potential dilution that could occur if securities were exercised or converted into ordinary shares. The Group had
stock options and restricted share units, which could potentially dilute basic loss per share in the future. To calculate the
number of shares for diluted loss per ordinary share, the effect of the stock options and restricted share units is computed using
the treasury stock method. Potential ordinary shares in the diluted net loss per share computation are excluded in periods of
losses from operations, as their effect would be anti-dilutive.
Comprehensive loss is defined
as the decrease in equity of the Company during a period from transactions and other events and circumstances excluding transactions
resulting from investments by owners and distributions to owners. Comprehensive loss is reported in the consolidated statements
of comprehensive loss, including net loss and foreign currency translation adjustments, presented net of tax.
Fair value is the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
Authoritative literature provides
a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input
that is significant to the fair value measurement as follows:
Financial instruments include
cash and cash equivalents, short-term bank borrowings, amounts due from/to related parties, accounts receivable, accounts payable
and investment. The carrying values of cash, short-term bank borrowings, amounts due from/to related parties, accounts receivable
and accounts payable approximate their fair values reported in the consolidated balance sheets due to the short-term maturities.
The Group determined that it is not practicable to estimate the fair value of its cost method investment as of December 31, 2018
and measures the cost method investment at fair value on a nonrecurring basis only if an impairment charge were to be recognized.
Financial assets and liabilities
measured at fair value on a non-recurring basis include acquired assets and liabilities and goodwill based on Level 3 inputs in
connection with business acquisition.
As a company with less than
US$1 billion in gross revenue for the last fiscal year, we qualify as an “emerging growth company” (“EGC”)
pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take
advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These
provisions include a provision that an emerging growth company does not need to comply with any new or revised financial accounting
standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.
We will take advantage of the extended transition period.
In May 2014, the Financial
Accounting Standards Board (the “FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
which
supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition.
The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and
supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model
is to recognize revenue when control of the goods or services transfers to the customer. The new disclosure requirements will
provide information about the nature, amount, timing and uncertainty of revenue and cash flows from revenue contracts with customers.
The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period, for public business entities.
The new revenue standards may
be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect
recognized as of the date of initial application (the modified retrospective method). The Group as an EGC has elected to adopt
the new revenue standard as of the effective date applicable to nonissuers and will implement the new revenue standard on January
1, 2019 using the modified retrospective method. The Group has substantially completed its assessment and currently does not expect
the adoption of this guidance will have significant effects on the Group’s revenue recognition practices, financial positions,
results of operations or cash flows. The new standard will require the Group to provide more robust disclosures than required
by previous guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations,
and the judgments made in revenue recognition determinations.
In January 2016, the FASB issued
ASU No. 2016-01, to improve the recognition and measurement of financial instruments. The new guidance requires equity investments
(except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be
measured at fair value with changes in fair value recognized in net income and separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet
or the accompanying notes to the financial statements. The guidance also eliminates the requirement to disclose the fair value
of financial instruments measured at amortized cost for organizations that are not public business entities and the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet. The guidance is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years, for public business entities. The
Group as an EGC has elected to adopt this standard as of the effective date applicable to nonissuers and will implement the new
standard on January 1, 2019 using the modified retrospective method. This accounting standards update does not have a material
impact on the Group’s consolidated financial statements.
August 2018, the FASB issued
ASU No. 2018-13,
Fair Value Measurement (Topic 820)
: Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements.
The standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The
Group is in the process of evaluating the impact on its consolidated financial statements upon adoption.
In October 2018, the FASB issued
ASU No. 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
:
The amendments in this ASU are effective for public business entities with fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. The amendments are also effective for private entities with fiscal years beginning
after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.All entities are required to
apply the amendments in this ASU retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of
the earliest period presented. Early adoption is permitted. The Group is in the process of evaluating the impact on its consolidated
financial statements upon adoption.
Financial instruments that
potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents. The Group places
its cash and cash equivalents with financial institutions with high-credit ratings and quality.
Substantially all of the Group’s
businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take
place either through Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by
the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts.
From July 21, 2005, the RMB
is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For RMB against U.S.
dollar, there was depreciation of approximately 6.8% and 5.7% in the year ended December 31, 2016 and 2018, respectively and appreciation
5.8% in the year end December 31, 2017. It is difficult to predict how market forces or PRC or U.S. government policy may impact
the exchange rate between the RMB and the U.S. dollar in the future.
To the extent that the Company
needs to convert U.S. dollar into RMB for capital expenditures and working capital and other business purposes, appreciation of
RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely,
if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends on ordinary shares, strategic
acquisitions or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on
the U.S. dollar amount available to the Company. In addition, a significant depreciation of the RMB against the U.S. dollar may
significantly reduce the U.S. dollar equivalent of the Company’s earnings or losses.
As of December 31, 2017 and
2018, all accounts receivable are due from third-party customers for online direct sales.
The Group provided provision
of $nil, $584,956 and $166,535 for other receivables during the year ended December 31, 2016, 2017 and 2018, respectively.
On December 21, 2018, as discussed
in Note 19, the Company terminated its lease of its headquarters located in Shanghai. As a result of the termination of the lease,
the Company wrote off leasehold improvements of $614,282, net of accumulated depreciation of $459,222 and recorded a loss of $614,282
which has been included in general and administrative expenses in the accompanying Consolidated Statement of Operations for the
year ended December 31, 2018..
For the years ended December
31, 2016, 2017 and 2018, depreciation and amortization expense was $259,307, $267,458 and $337,643, respectively. No impairment
loss was recognized for the years ended December 31, 2016, 2017 and 2018.
The movement of acquired intangible
assets for the years ended December 31, 2017 and 2018 is as follows:
The amortization expense of
acquired intangible assets was $8,640,885, $8,359,386 and $1,171,219 for the years ended December 31, 2016, 2017 and 2018, respectively.
Impairment loss of $nil, $19,765,615 and $8,637,214 was provided by the Group for the years ended December 31, 2016, 2017 and
2018, respectively.
During the year ended December
31, 2018, the Group provided impairment loss of $5,566,496, $350,189 and $2,720,529 for Trade name/domain name, Online platform
and Customer relationship, respectively, to write down the carrying amount to their fair value respectively (Note 15).
In May 2016, the VIE entered into a share purchase agreement with Cold Chain Link (Shanghai) Internet
of Things Co., Ltd., formerly known as Cold Chain Link Global (Shanghai) Logistic Co., Ltd., (“CCLG”) and CCLG’s
original shareholders for acquiring
a 10% equity interest
for total consideration of RMB20 million ($3.0 million). The agreement provides that the Board of Directors of CCLG shall consist
of three directors, and that the VIE may appoint one director. On August 16, 2017, the VIE executed an Investment Redemption Agreement
with the two controlling shareholders of CCLG. This agreement provides the VIE a right of redemption from August 2020 to August
2022 to request redemption from CCLG’s two controlling shareholders of its RMB 5,000,000 investment in CCLG.
According to unaudited financial
statements of CCLG, CCLG had total shareholders’ equity of $773,327 at December 31, 2018 and had net losses of $381,022 and
$1,296,356 for the years ended December 31, 2018 and 2017, respectively. Accordingly, we have recognized an impairment loss of
$723,139 at December 31, 2018 and reduced the carrying value of our investment to $nil.
The changes in the goodwill
balance for the years ended December 31, 2017 and 2018 are as follows:
The Group has one reporting
unit and applies discounted cash flows for its impairment test as of December 31 of each year. The Group recorded an impairment
loss of $ nil, $127,252,810 and $105,818,351 for the years ended December 31, 2016, 2017 and 2018, respectively.
In July 2017, the VIE, entered
into a banking facility arrangement with Bank of Dalian Shanghai Branch, pursuant to which the VIE is entitled to borrow RMB denominated
loan of RMB50 million ($7.6 million, equivalently), for a one-year period from July 25, 2017 to July 24, 2018.
The facility agreement was guaranteed
by the Company’s shareholders, Ms. Zhu and Ms. Wang and Ms. Wang also provided her own property as collateral (Note 18).
On April 23, 2018, Ms. Zhu Xiaoxia signed a shareholder support letter with JMU Limited, stipulating that
she will unconditionally provide funds to JMU Limited to meet its operational needs within 12 months after the signing date of
the letter of commitment.
The Facility agreement
contains provisions that require, among other things, approval from the bank on (1) reduction of ownership, divestitures,
mergers, joint ventures, and reorganizations; (2) selling and renting Company assets; (3) providing of collateral to third
parties; and (4) other matters that impact the bank’s claim. The bank has the right to give oversight on the use of the
line. The bank has the right to perform due diligence on the line of credit. If the terms are not followed, the bank has the
right to reduce the credit amount or terminate the agreement. The Facility agreement also provides that a second loan must
not be taken out by the Company using collateral without the bank’s approval, that the Company periodically provide
financial statements and other support to the bank, and that the Company inform the bank on significant matters pertaining to
the Company such as changes in management and changes in ownership. To the date of the issuance of these financial
statements, the bank has not indicated its intention to currently terminate the line or make a demand for repayment of the
amount currently outstanding under the line.
On August 10, 2017 and August
16, 2017, the Group drew down RMB27 million ($4.1 million) and RMB23 million ($3.5 million), respectively, with fixed interest
rate of 5.66% per annum.
On August 6, 2018, the Group
extended the loan to August 5, 2019. As of December 31, 2018, the Group drew down RMB50 million ($7.3 million), with fixed interest
rate of 5.66% per annum.
Should Ms. Zhu or the new controlling shareholder of the Company be unwilling or unable to fund the repayment
of the RMB50,000,000 ($7,272,198) loan under the line on August 5, 2019 at maturity, the Bank of Dalian may choose to exercise
its rights under the guarantees from Ms. Zhu and Ms. Wang and the real estate collateral of Ms. Wang.
From April 2018 to June 2018,
Shanghai Zhongming used time deposits of RMB60 million (approximately $8.7 million), which were funded by Ms. Zhu as the collateral
to guarantee loans made by Dalian Bank to Shenzhen Bangrun Commercial Factoring Co., Ltd. (hereinafter referred to as “Shenzhen
Bangrun” - see Note 18 under “Amount due from related parties”), a wholly-owned subsidiary of Ms. Zhu Xiaoxia,
a major shareholder of the Company. At the same time, Shenzhen Bangrun issued a counter-guarantee letter to Dalian Bank, which
agreed that Shenzhen Bangrun irrevocably bears the counter- guarantee obligation for the above-mentioned guarantee of Shanghai
Zhongming. On December 20, 2018, the time deposits matured and the RMB60,000,000 plus related interest income of RMB1,404,930 or
an aggregate of RMB61,404,430 ($8,930,977) was transferred to Shenzhen Bangrun at Ms Zhu’s request with the permission of
the Bank of Dalian.
Under the current laws of the
Cayman Islands, the Company is not subject to tax on its income or capital gains.
Under the Hong Kong tax laws,
the Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax rate at 16.5%. No provision for Hong Kong profits
tax was made for each of the three years ended December 31, 2018 on the basis that the Group’s Hong Kong subsidiaries did
not have any assessable profits arising in or derived from Hong Kong for those years.
The enterprise income tax (‘‘EIT’’)
law applies a uniform 25% EIT rate to both foreign invested enterprises and domestic enterprises. The EIT rate for the Group’s
entities operating in the PRC is 25%.
No taxable income was generated
for both domestic and foreign entities of the Group during each of the three years ended December 31, 2018.
The significant components
of the Group’s deferred tax assets and liabilities were as follows:
The Group considers the following
factors, among other matters, when determining whether some portion or all of the deferred tax assets will more likely than not
be realized: the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory
carry forward years, the Group’s experience with tax attributes expiring unused and tax planning alternatives. The Group’s
ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carry forward years
provided for in the tax law.
The Group incurred net operating
losses carry forwards of $8,744,032, $10,196,547 and $10,802,048 from the Group’s PRC entities for the years ended December
31, 2016, 2017 and 2018, respectively, which would expire on various dates through 2021 to 2023. The Group operates its business
through its subsidiaries, its VIE and its subsidiaries. The Group does not file consolidated tax returns, therefore, losses from
individual subsidiary, the VIE or the VIE’s subsidiaries may not be used to offset other PRC entities’ earnings within
the Group. Valuation allowance is considered on each individual subsidiary, VIE and VIE’s subsidiary basis.
As of December 31, 2017 and
2018, valuation allowance was $10,595,656 and $12,382,942, respectively, which was provided against deferred tax assets as it is
considered more likely than not that the relevant deferred tax assets will not be realized in the foreseeable future.
Reconciliation between the
income taxes benefits computed by applying the PRC tax rate to loss before income taxes and the actual credit for income taxes
is as follows:
The EIT Law includes a provision
specifying that legal entities organized outside the PRC will be considered residents for Chinese income tax purposes if their
place of effective management or control is within the PRC. If legal entities organized outside the PRC were considered residents
for Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income. This would cause any income
legal entities organized outside the PRC earned to be subject to the PRC’s 25% EIT. The Implementation Rules to EIT Law
provide that non-resident legal entities will be considered as PRC residents if substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc. reside within the PRC.
Pursuant to the additional
guidance released by the Chinese government on April 22, 2009 and issued bulletin on August 3, 2011 which provide more guidance
on the implementation, management does not believe that the legal entities organized outside the PRC should be characterized as PRC tax residents for EIT Law purposes.
Under the EIT Law and its implementation
rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise
in the PRC to its foreign investors who are non-resident enterprises are subject to a 10% withholding tax, unless any such foreign
investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a different withholding arrangement.
The Cayman Islands, where the Company is incorporated, does not have a tax treaty with the PRC.
There were no aggregate undistributed
earnings of the Company’s subsidiary, VIE and VIE’s subsidiaries located in the PRC available for dividend distribution.
Therefore, no deferred tax liability has been accrued for the Chinese dividend withholding taxes that might be payable upon the
distribution of aggregate undistributed earnings as of December 31, 2017 and 2018.
The impact of an uncertain
tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit
by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of
being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.
As of December 31, 2017 and
2018, the Group recorded an unrecognized tax benefit of $563,455 and $843,073, respectively, of which $304,923 and $381,570, respectively,
are presented on a net basis against the deferred tax assets related to tax loss carry forward on the consolidated balance sheets
(Note 12). The unrecognized tax benefit is mainly related from under reported income. The amount of unrecognized tax benefits
will change in the next 12 months, pending clarification of current tax law or audit by tax authorities, however, an estimate
of the range of the possible change cannot be made at this time.
During the years ended December
31, 2016, 2017 and 2018, the Group recorded interest accrued in relation to the unrecognized tax benefit in income tax expense
of $nil, $26,785 and $27,517, respectively.
Since the incorporation, the
relevant tax authorities of the Group’s subsidiary, VIE and VIE’s subsidiaries located in the PRC have not conducted
a tax examination. In accordance with relevant PRC tax administration laws, tax years from 2015 to 2018 of the Group’s PRC
subsidiary, VIE and VIE’s subsidiaries, remain subject to tax audits as of December 31, 2018, at the tax authority’s
discretion.
On April 8, 2015, the Company
completed its IPO on NASDAQ by offering 4,000,000 ADSs, representing 72 million ordinary shares at price of $10 per ADS. On April
27, 2015, the Company issued an additional 220,000 ADSs, representing 3.96 million of ordinary shares to the underwriter for exercising
the overallotment option at price of $10 per ADS. The total proceeds from issuance of ordinary shares upon IPO are $37,294,600,
after deducting the IPO related cost of $3,000,000.
Upon the completion of the
IPO, all of the Company's then outstanding Series A-1, Series A-2 and Series B preferred shares were automatically converted into
12,202,988, 122,029,877 and 30,507,471 ordinary shares respectively, and immediately after the completion of the IPO, the indebtedness
owed to Mr. Maodong Xu ("Mr. Xu"), one of the Company's shareholder, amounting to $69.4 million was converted into 124,835,802
ordinary shares.
On June 8, 2015, the Company
issued 741,422,780 ordinary shares to JMU's original shareholders for the acquisition of JMU. In addition, the Company initially
agreed to issue 72,000,000 ordinary shares of the Company to Mr. Xu at a purchase price of $0.5556 per share, for a total purchase
price of $40,000,000. On September 7, 2015, the Company and Mr. Xu reduced the number of shares to be purchased through a supplemental
agreement resulting in a final subscription amount of $15,000,000 for 27,000,000 shares. On the same date, the Company issued
an additional 27,000,000 ordinary shares to Mr. Xu in relation to his additional subscription.
On September 27, 2015, the
Company issued and transferred 38,363,112 ordinary shares to its depositary bank representing 2,131,284 ADSs, to be issued to
employees and former-employees upon the exercise of their vested share options and the registration of their vested RSUs.
As of December 31, 2016, 2017
and 2018, 22,770,288, 37,462,294 and 37,670,266 ordinary shares, respectively, out of these 38,363,112 ordinary shares had been
issued to employees and former-employees upon the exercise of share options and the registration of vested RSUs. Therefore, as
of December 31, 2016, 2017 and 2018, 15,592,824, 900,818 and 692,846 common shares, respectively, remained for future issuance.
The Group had no financial
assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2017 and 2018.
The Group measures the acquired
assets and liabilities at fair value on a nonrecurring basis as result of the business acquisition. The fair value was determined
using models with significant unobservable inputs (Level 3 inputs), primarily the management projection of the future cash flow
and the discount rate.
The following table presents
the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a non-recurring basis as
of December 31, 2017 and 2018:
On February 1, 2011, the Board
of Directors approved the Company 2011 Share Incentive Plan (‘‘2011 Plan’’). The 2011 Plan provides for
the grant of options, restricted shares, and other share-based awards.
The Group recognized compensation
cost on the share options to employees under 2011 Plan on a straight-line basis over the requisite service period. The options
granted during 2012 and 2013 vest ratably over 48 months and the options granted during 2014 vest on the first anniversary of
the date of grant.
On July 27, 2015, the Board
of Directors approved to grant 28,841,700 Restricted Share Units ("RSUs") awards pursuant to the 2011 Plan. Each RSU
represents the contingent right of the participant to receive an ordinary share. Each RSU is an agreement to issue ordinary share
at the time the award vests with zero exercise price. The issued RSUs will vest 50%, and 50%, respectively, on each anniversary
of the grant date. The Group recognizes share-based compensation cost on the RSUs on a straight-line basis over the 2 years from
the grant date.
On September 1, 2015, the Board of Directors approved that all 3,312,618 unvested options and 28,639,900
RSUs granted under
the 2011 Plan became vested and exercisable
as of September 1, 2015. Meanwhile, the Board of Directors also approved that all vested and accelerated vested options and RSUs
shall be exercised within 2 years from the acceleration date, i.e. September 1, 2017, which was subsequently extended by another
1 year approved by the Company on June 20, 2017. On August 31, 2018, the Company approved to extend the expiration date of these
Accelerated Awards by another 1 year to September 1, 2019.
On July 1, 2016, under the
2011 Plan, the Board of Directors approved to grant 32,028,700 share options with exercise price of $0.20 per share to its employees
and management. 40%, 30% and 30% of the shares subject to the options shall vest on the second, third and fourth anniversary of
the vesting commencement date, respectively, provided that the optionee continues to be a service provider to the Group.
On July 1, 2016, the Board
of Directors also approved to grant 10,430,000 RSUs awards pursuant to the 2011 Plan. Each RSU represents the contingent right
of the participant to receive an ordinary share. Each RSU is an agreement to issue ordinary shares at the time the award vests
with zero exercise price. The issued RSUs will vest 100% when the following two conditions are both met: a) on and after the first
anniversary of the grant date and b) the market price of the Company’s ADS is not less than $7 per ADS. As the second condition
was not met, nil RSU was vested as of December 31, 2018. The Group recognizes share-based compensation cost on the RSUs over the
12 months from the grant date.
The following table summarizes
the Company’s restricted shares award issued under the 2011 Plan for the year ended December 31, 2018:
The following table summarizes
the Company’s employee share options under 2011 Plan for the year ended December 31, 2018:
Accordingly, during the year ended December 31, 2018, the credit to operating expenses of $56,705 is net
of forfeitures related to terminated employees of $494,542 which represents prior charges for benefits that will never be received
by the former employees. In addition, during the year ended December 31, 2018, the net credit of $56,705 includes a reduced charge
of $437,837 for the cost at benefits for remaining continuing employees (not terminated employees) still qualifying for benefits
under the 2011 Plan.
On September 1, 2015, the Board of Directors approved that all 3,312,618 unvested options and 28,639,900
RSUs granted under 2011 Plan became vested and exercisable (“Accelerated Awards”) as of September 1, 2015. This was
accounted for as a modification. The share-based compensation of $7,503,976 from this modification was
a
one-time charge to operating expenses of discontinued operations for the year ended December 31, 2015. As all batches of options
and RSUs outstanding as of September 1, 2015 were immediately vested on that date, the actual forfeiture rates were trued up, which
resulted a reversal of $327,376 share-based compensation in discontinued operations for the year ended December 31, 2015.
The aggregated intrinsic value
of stock options outstanding and exercisable as of December 31, 2017 and 2018 was calculated based on the closing price of the
Company’s ordinary shares, $1.02 per ADS (equivalent to $0.06 per ordinary share) and $0.7 per ADS ($0.004 per ordinary
share) at December 31, 2017 and 2018, respectively. The total intrinsic value of stock options exercised during the years ended
December 31, 2016, 2017 and 2018 was $618,971, $52,536 and $832, respectively.
As of December 31, 2018, the
unrecognized share-based compensation related to RSUs issued to employees was $nil; the unrecognized share-based compensation
related to share options were $786,251 and expected to be recognized following the straight-line method over the remaining weighted-average
period of 1.5 years as of December 31, 2018.
The fair value of the options
granted/modified was estimated on the date of grant/modification with the assistance of an independent third-party appraiser,
and was determined using binomial model with the following assumptions:
The volatility of the underlying
ordinary shares during the life of the options was estimated based on average historical volatility of comparable companies for
the period before the valuation date with lengths equal to the life of the options.
Risk free rate is estimated
based on yield to maturity of PRC international government bonds with maturity term close to the life of the options.
The dividend yield was estimated
by the Group based on its expected dividend policy over the life of the options.
The exercise price of the options was determined
by the Group’s Board of Directors.
The estimated fair value of
the ordinary shares underlying the options as of the respective valuation dates was determined based on a contemporaneous valuation.
When estimating the fair value of the ordinary shares on the valuation dates, management has considered a number of factors, including
the result of a third-party appraisal and equity transactions of the Group, while taking into account standard valuation methods
and the achievement of certain events. The fair value of the ordinary shares in connection with the option grants on the valuation
dates was determined with the assistance of an independent third-party appraiser.
After the Company listed on
NASDAQ in April 2015, the closing market price of the ordinary shares of the Company as of the grant/modification date was used
as the fair value of the ordinary shares on that date.
For the years ended December
31, 2016, 2017 and 2018, 35,190,467, 22,195,156 and 24,145,294 ordinary shares resulting from the assumed exercise of share options
were excluded as their effect was anti-dilutive for the continuing operations of the Group, respectively.
The Group’s capital commitments
primarily relate to commitments in connection with the investment in CCLG. Total capital commitments contracted but not yet reflected
in the financial statements amounted to $2.3 million and $2.2 million as of December 31, 2017 and 2018, respectively.
The Group leases certain
office premises under non-cancellable leases. The lease for the Company’s former headquarters located in Shanghai was
terminated by the Company on December 21, 2018. The lease which commenced in July 2015 and was due to expire in July 2030,
provided for increases in the basic monthly rent ranging from RMB1.90 per square meter per day in 2015 to RMB3.10 per square
meter per day in 2025. As of the December 21, 2018 lease termination date, there was approximately RMB31,000,000
(approximately $4,500,000) of remaining lease payments due under the lease. If the Company terminates the lease without the
permission of the lessor, the original lease as amended provides for the Company’s payment of the breach of contract
liability for the purpose of mitigating the lessor’s loss on early termination by the Company. While the Company
counsel believes that the Company is in default of the breach of contract provision under the lease, it is Counsel’s
opinion that the Company’s responsibility is limited to the extent of the Company’s security deposit of
RMB795,763 ($115,739) and courts would provide relief from any amounts in excess of that. To the date of issuance of these
financial statements, the Company as lessee has not had contact with the lessor and has determined that the space terminated
by it has been re-leased to a new tenant by the lessor. Accordingly, the Company wrote off this deposit as of December 21,
2018 and recognised an expense of the same amount during the year ended December 31, 2018.
The two leases for the Company’s
new headquarters located in Shanghai commenced on November 1, 2018 and expire on April 30, 2019 and December 31, 2020. The lease
expiring April 2019 provided for monthly rent of RMB70,000 (approximately $10,300) and the lease expiring December 2020 provides
for monthly rent of RMB30,000 (approximately $4,400).
Rental expense/(credit) under
operating leases for the years ended December 31, 2016, 2017 and 2018 were $2,243,907, $1,223,390 and ($769,824), respectively.
The rent expense credit for the year ended December 31, 2018 reflects a credit of $1,312,284 representing the writeoff of the rent
liability balance as of December 31, 2018 representing the straight-lining of the seven month rent free period and the step increases
in monthly rent regarding the lease of the Company’s former headquarters which was terminated on December 21, 2018. In addition,
rent expense for the year ended December 31, 2018 included rent incurred for the period January 1, 2018 to December 21, 2018 for
the lease of the former headquarters of $568,111.
The future aggregate minimum lease payments under
non-cancelable operating lease agreements (represented by the two leases for the new Shanghai headquarters) were as follows:
Rent expense for the year ended
December 31, 2018 includes $24,936 related to the two leases for the new Shanghai headquarters.
Full time PRC employees of
the Group are eligible to participate in a government-mandated multi- employer defined contribution plan under which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to these employees.
The PRC labor regulations require the Group to accrue for these benefits based on a percentage of each employee’s income.
Total provisions for employee benefits were $1,297,485, $1,656,561 and $1,053,575 for the years ended December 31, 2016, 2017
and 2018, respectively, reported as a component of operating expenses when incurred.
In accordance with the Regulations
on Enterprises with Foreign Investment of China and their articles of association, the Group’s subsidiaries, VIE and VIE’s
subsidiaries located in the PRC, being foreign invested enterprises established in the PRC, are required to provide for certain
statutory reserves. These statutory reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise
expansion fund or discretionary reserve fund, and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits,
the general reserve fund requires a minimum annual appropriation of 10% of after-tax profit (as determined under accounting principles
generally accepted in China at each year-end); the other fund appropriations are at the subsidiaries’ or the affiliated
PRC entities’ discretion. These statutory reserve funds can only be used for specific purposes of enterprise expansion,
staff bonus and welfare, and are not distributable as cash dividends except in the event of liquidation of our subsidiaries, our
affiliated PRC entities and their respective subsidiaries. The Group’s subsidiary, VIE and VIE’s subsidiaries are
required to allocate at least 10% of their after-tax profits to the general reserve until such reserve has reached 50% of their
respective registered capital. As of December 31, 2017 and 2018, none of the Group’s PRC subsidiary, VIE and VIE’s
subsidiaries has a general reserve that reached 50% of their registered capital threshold and therefore they will continue to
allocate at least 10% of their after tax profits to the general reserve fund.
Appropriations to the enterprise
expansion reserve and the staff welfare and bonus reserve are to be made at the discretion of the Board of Directors of each of
the Group’s subsidiaries.
The appropriation to these
reserves by the Group’s PRC subsidiary, VIE and VIE’s subsidiaries were all $nil for the years ended December 31,
2016, 2017 and 2018.
As a result of these PRC laws
and regulations and the requirement that distributions by the PRC entities can only be paid out of distributable profits computed
in accordance with the PRC GAAP, the PRC entities are restricted from transferring a portion of their net assets to the Group.
Amounts restricted include paid-in capital and the statutory reserves of the Group’s PRC subsidiary, VIE and VIE’s
subsidiaries.
The aggregate amounts of capital
and statutory reserves restricted which represented the amount of net assets of the relevant subsidiary, VIE and VIE’s subsidiaries
in the Group not available for distribution were $28,213,892 and $28,213,892 as of December 31, 2017 and 2018, respectively, including
$1,614,140 and $1,614,140 of net restricted assets recorded under VIE and VIE’s subsidiaries in the Group.
On January 11, 2019, Shanghai
MIN Hongshi Trading Co., Ltd., or Shanghai Hongshi, filed a claim with the Shanghai Yangpu People’s Court, or the
Shanghai Yangpu Court, against Zhongmin, alleging that Zhongmin had failed to repay a loan of RMB10 million ($1,454,440 at
December 31, 2018) due to Shanghai Hongshi. On January 14, 2019, the Shanghai Yangpu Court issued a civil ruling paper of
property preservation, which ordered the freezing of RMB 10 million deposit of Zhongmin or the attachment of the equivalent
property. In January 2019, the Bank of Shanghai froze a total of RMB476,376 ($69,286) of Company cash in two accounts at the
bank (at December 31, 2018, cash in the Company’s balance sheet included RMB361,070 ($52,515) related to these two
frozen accounts). A civil summons was also issued by the Shanghai Yang Pu Court on January 14, 2019 requesting the
summoned appear before the court on February 13, 2019. The two parties are currently negotiating on a settlement, and
Zhongmin has applied to the court for a postponement of the hearing. The specific time of the hearing is to be notified by
the court. At December 31, 2018, current liabilities include an amount due to Shanghai Hongshi representing loans from that
entity of $1,514,246 within “Amount Due to Related Parties” (see Note 18).
On February 1, 2019, WM Ming Hotel
Co., Ltd., or WM Ming, filed a claim with the Shanghai Yangpu Court against Zhongmin, alleging that Zhongmin failed to repay a
loan of RMB 6 million ($872,664 at December 31, 2018) due to WM Ming. At December 31, 2018, current liabilities include an amount
due to WM Ming representing loans from that entity of $945,082 within “Amount Due to Related Parties” (see Note 18).
The legal representative of Shanghai
Hongshi and WM Ming is Ms. Huimin Wang, who is also our director. Although we are attempting to negotiate with the relevant parties,
uncertainties exist as to whether we are obligated to pay the two loans mentioned in the preceding two paragraphs.
Should the Company lose in litigation
and be required to repay the amounts owed to the Ms. Wang controlled entities aggregating RMB16,000,000 ($2,327,104) and should
Ms. Zhu or the new controlling shareholder of the Company be unwilling or unable to fund this liability, it is highly unlikely
that the Company will be able to collect the $676,476 that is owed the Company from revenue from the sale of products to Shanghai
Xiao Nan Guo Hai Zhi Yuan Restraurant Management Co., Ltd., another entity controlled by Ms. Wang, included in Amounts Due From
Related Parties at December 31, 2018. Accordingly, as of December 31, 2018 and for the year ended December 31, 2018, the Company
has provided an allowance for doubtful account of $676,415 to reserve for this loss.
On May 21, 2019, JMU acquired Unicorn
Investment Limited (“Unicorn”) in exchange for 632,660,858 newly issued ordinary shares of JMU.
Unicorn is a developer of
asset transaction platform products based on blockchain technologies. The former shareholder of Unicorn and the seller in the
acquisition, Mr. Haohan Xu, is a principal shareholder of the Company. Mr. Xu held 25.7% of all the issued and outstanding
shares of the Company immediately prior to the closing of the acquisition, and holds approximately 48.0% of all the issued
and outstanding shares of the Company immediately after the closing of the acquisition. According to unaudited financial
statements of Unicorn provided the Company pursuant to the Share Purchase Agreement dated May 21, 2019, the unaudited assets
of Unicorn, which are subject to change based upon a completion of an audit, were approximately $1,309,000 at March 31, 2019,
consisting principally of crypto-currency coins, and the unaudited stockholders’ equity was approximately $1,056,000.
In addition, prior to the date of the acquisition, Unicorn had unaudited revenues of approximately $960,000 for the year
ended December 31, 2018 and approximately $90,000 for the three months ended March 31, 2019 and had unaudited net income
(loss) of approximately $641,000 for the year ended December 31, 2018 and approximately ($103,000) for the three months ended
March 31, 2019.
The Share Purchase Agreement provides for a right of rescission for a period of up to one year by either party under certain conditions.
In connection with our acquisition of Unicorn, we entered into a registration rights agreement with Mr. Xu.
Upon receipt of
a written request from the holders of 10% of the registrable securities then outstanding requesting us effect a registration under
the Securities Act covering all or part of the shares held by them, we shall, as soon as it is practicable, but in no event later
than ninety days after receipt of such written request, file with the SEC, and use our reasonable best effort to cause to be declared
effective, a registration statement, or a shelf registration statement. However, we shall not be obligated to effect any such registration
if the aggregate price (net of any underwriters’ discounts or commissions) of the sale of shares relating to such registration
is less than $5,000,000.
If, at any time, we file a registration statement with the SEC, holders of registration rights under this agreement will be entitled,
subject to certain exceptions, to exercise “piggyback” registration rights requiring us to include in any such registration
that number of shares held by them, subject to certain prescribed limitation provided in the registration rights agreement.
We may, on a limited number of occasions, and in certain prescribed circumstances, delay the filing or effectiveness of any registration
statement required to be filed pursuant to the registration rights agreement.
From January 1, 2019 to April 30, 2019, the Company
received loans from its chief executive officer Ms. Zhu and entities controlled by Ms. Zhu totaling RMB7,290,000 (approximately
$1,060,000).