Date of event requiring this shell company
report . . . . . . . . . . . . . . . . . . .
For the transition period from
to
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 New York Stock Exchange of American depositary shares.
Securities registered or to be registered
pursuant to Section 12(g) of the Act.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. As
of December 31, 2015, there were 146,634,596 ordinary shares outstanding, par value $0.00025 per share, being the sum of 87,829,756
Class A ordinary shares and 58,804,840 Class B ordinary shares.
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.
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
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
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.
Unless otherwise indicated and except where
the context otherwise requires, references in this annual report on Form 20-F to:
This annual report contains forward-looking
statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking
statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking
statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,”
“continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations
and projections about future events that we believe may affect our financial condition, results of operations, business strategy
and financial needs. These forward-looking statements include statements relating to:
You should read thoroughly this annual report
and the documents that we refer to in this annual report with the understanding that our actual future results may be materially
different from and worse than what we expect. Other sections of this annual report include additional factors which could adversely
impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties
emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess
the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by
these cautionary statements.
The forward-looking statements made in this
annual report relate only to events or information as of the date on which the statements are made in this annual report. Except
as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result
of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of
unanticipated events. You should read this annual report and the documents that we refer to in this annual report and have filed
as exhibits to this annual report completely and with the understanding that our actual future results may be materially different
from what we expect.
PART
I
|
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not applicable.
|
Item 2.
|
Offer Statistics and Expected Timetable
|
Not applicable.
|
A.
|
Selected Financial Data
|
The following summary consolidated statements
of income data for the years ended December 31, 2013, 2014 and 2015, summary consolidated balance sheets data as of December 31,
2014 and 2015 and summary consolidated cash flow data for the years ended December 31, 2013, 2014 and 2015 have been derived
from our audited consolidated financial statements included elsewhere in this annual report. The summary consolidated statements
of income/(loss) data for the years ended December 31, 2011 and 2012, summary consolidated balance sheets data as of December 31,
2011, 2012 and 2013 and summary consolidated cash flow data for the years ended December 31, 2011 and 2012 have been derived from
our audited consolidated financial statements which are not included in this annual report. 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.
You should read the summary consolidated
financial information in conjunction with our consolidated financial statements and related notes and “Item 5. Operating
and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily
indicative of our results expected for future periods.
|
|
For
the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for share, per share
and per ADS data)
|
|
Summary Consolidated Statements of Income/(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
21,361
|
|
|
|
1,319,681
|
|
|
|
2,556,139
|
|
|
|
3,355,914
|
|
|
|
7,113,278
|
|
|
|
1,098,101
|
|
Marketplace services
|
|
|
119,369
|
|
|
|
152,539
|
|
|
|
434,977
|
|
|
|
531,617
|
|
|
|
229,681
|
|
|
|
35,457
|
|
Total net revenues
|
|
|
140,730
|
|
|
|
1,472,220
|
|
|
|
2,991,116
|
|
|
|
3,887,531
|
|
|
|
7,342,959
|
|
|
|
1,133,558
|
|
Cost of revenues
|
|
|
(18,009
|
)
|
|
|
(937,660
|
)
|
|
|
(1,754,539
|
)
|
|
|
(2,350,702
|
)
|
|
|
(5,225,669
|
)
|
|
|
(806,704
|
)
|
Gross profit
|
|
|
122,721
|
|
|
|
534,560
|
|
|
|
1,236,577
|
|
|
|
1,536,829
|
|
|
|
2,117,290
|
|
|
|
326,854
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(76,487
|
)
|
|
|
(182,328
|
)
|
|
|
(366,795
|
)
|
|
|
(434,691
|
)
|
|
|
(948,954
|
)
|
|
|
(146,493
|
)
|
Marketing expenses
|
|
|
(60,378
|
)
|
|
|
(230,303
|
)
|
|
|
(322,965
|
)
|
|
|
(499,115
|
)
|
|
|
(655,314
|
)
|
|
|
(101,163
|
)
|
Technology and content expenses
|
|
|
(4,770
|
)
|
|
|
(27,875
|
)
|
|
|
(62,068
|
)
|
|
|
(135,698
|
)
|
|
|
(169,694
|
)
|
|
|
(26,196
|
)
|
General and administrative
expenses
|
|
|
(9,242
|
)
|
|
|
(30,060
|
)
|
|
|
(246,052
|
)
|
|
|
(102,527
|
)
|
|
|
(191,918
|
)
|
|
|
(29,627
|
)
|
Total operating expenses
(1)
:
|
|
|
(150,877
|
)
|
|
|
(470,566
|
)
|
|
|
(997,880
|
)
|
|
|
(1,172,031
|
)
|
|
|
(1,965,880
|
)
|
|
|
(303,479
|
)
|
Income/(loss) from operations
|
|
|
(28,156
|
)
|
|
|
63,994
|
|
|
|
238,697
|
|
|
|
364,798
|
|
|
|
151,410
|
|
|
|
23,375
|
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
35
|
|
|
|
1,255
|
|
|
|
5,675
|
|
|
|
82,251
|
|
|
|
114,123
|
|
|
|
17,618
|
|
Others, net
|
|
|
(967
|
)
|
|
|
(586
|
)
|
|
|
771
|
|
|
|
56,397
|
|
|
|
(59,289
|
)
|
|
|
(9,153
|
)
|
Income/(loss) before tax
|
|
|
(29,088
|
)
|
|
|
64,663
|
|
|
|
245,143
|
|
|
|
503,446
|
|
|
|
206,244
|
|
|
|
31,840
|
|
Income tax benefit/(expense)
|
|
|
3,066
|
|
|
|
(13,507
|
)
|
|
|
(88,576
|
)
|
|
|
(98,083
|
)
|
|
|
(71,403
|
)
|
|
|
(11,023
|
)
|
Net income/(loss)
|
|
|
(26,022
|
)
|
|
|
51,156
|
|
|
|
156,567
|
|
|
|
405,363
|
|
|
|
134,841
|
|
|
|
20,817
|
|
Net income attributable
to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(222
|
)
|
|
|
(11,925
|
)
|
|
|
(1,841
|
)
|
Net income/(loss) attributable to Jumei International Holding Limited
|
|
|
(26,022
|
)
|
|
|
51,156
|
|
|
|
156,567
|
|
|
|
405,141
|
|
|
|
122,916
|
|
|
|
18,976
|
|
Accretion to preferred share redemption value
|
|
|
(4,625
|
)
|
|
|
(10,616
|
)
|
|
|
(11,123
|
)
|
|
|
(4,629
|
)
|
|
|
-
|
|
|
|
-
|
|
Income allocation to participating
Redeemable Preferred Shares
|
|
|
-
|
|
|
|
(8,203
|
)
|
|
|
(46,473
|
)
|
|
|
(55,984
|
)
|
|
|
-
|
|
|
|
-
|
|
Net income/(loss) attributable to Jumei’s
ordinary shareholders
|
|
|
(30,647
|
)
|
|
|
32,337
|
|
|
|
98,
971
|
|
|
|
344,528
|
|
|
|
122,916
|
|
|
|
18,976
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for share, per share and per
ADS data)
|
|
Weighted average number of ordinary shares used in per share calculations
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
40,644,779
|
|
|
|
50,070,659
|
|
|
|
59,475,739
|
|
|
|
115,090,686
|
|
|
|
145,901,672
|
|
|
|
145,901,672
|
|
- Diluted
|
|
|
40,644,779
|
|
|
|
83,672,986
|
|
|
|
83,196,788
|
|
|
|
125,217,054
|
|
|
|
149,758,825
|
|
|
|
149,758,825
|
|
Net income/(loss) per share attributable to Jumei’s ordinary
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.75
|
)
|
|
|
0.65
|
|
|
|
1.66
|
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.13
|
|
- Diluted
|
|
|
(0.75
|
)
|
|
|
0.39
|
|
|
|
1.19
|
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.13
|
|
Net income/(loss) per ADS attributable to Jumei’s ordinary
shareholders
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.75
|
)
|
|
|
0.65
|
|
|
|
1.66
|
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.13
|
|
- Diluted
|
|
|
(0.75
|
)
|
|
|
0.39
|
|
|
|
1.19
|
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.13
|
|
|
(1)
|
Share-based compensation expenses are allocated in operating expenses items as follows:
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Fulfillment expenses
|
|
|
1
|
|
|
|
2
|
|
|
|
2,347
|
|
|
|
5,865
|
|
|
|
6,860
|
|
|
|
1,059
|
|
Marketing expenses
|
|
|
2
|
|
|
|
2
|
|
|
|
2,963
|
|
|
|
10,017
|
|
|
|
8,621
|
|
|
|
1,331
|
|
Technology and content expenses
|
|
|
256
|
|
|
|
187
|
|
|
|
4,846
|
|
|
|
8,347
|
|
|
|
8,335
|
|
|
|
1,287
|
|
General and administrative expenses
|
|
|
1,081
|
|
|
|
1,473
|
|
|
|
191,092
|
|
|
|
14,888
|
|
|
|
22,545
|
|
|
|
3,480
|
|
|
(2)
|
On April 8, 2011, we effected a 4,000-for-1 share split whereby all of our 50,000 then issued and outstanding ordinary
shares of a par value of $1.00 each were converted into 200,000,000 ordinary shares of a par value of $0.00025 each. Concurrent
with the share split, we repurchased an aggregate of 130,924,549 ordinary shares from the then existing shareholders. As a result
of the share split, the number of our total authorized shares was increased from 50,000 to 200,000,000. Immediately prior to the
completion of our initial public offering in May 2014, all of the ordinary shares then held by Super ROI Global Holding Limited
and Pinnacle High-Tech Limited were re-designated as Class B ordinary shares on a one-for-one basis and all of the then remaining
ordinary shares and preferred shares that were issued and outstanding were automatically converted and re-designated into Class A
ordinary shares on a one-for-one basis.
|
|
(3)
|
Each ADS represents one Class A ordinary share.
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Summary Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
57,447
|
|
|
|
188,337
|
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
395,858
|
|
Accounts receivable, net
|
|
|
21,016
|
|
|
|
9,142
|
|
|
|
17,116
|
|
|
|
26,942
|
|
|
|
76,937
|
|
|
|
11,877
|
|
Inventories
|
|
|
174
|
|
|
|
92,699
|
|
|
|
199,084
|
|
|
|
621,772
|
|
|
|
965,510
|
|
|
|
149,049
|
|
Total assets
|
|
|
119,774
|
|
|
|
448,157
|
|
|
|
1,191,962
|
|
|
|
4,549,430
|
|
|
|
4,991,673
|
|
|
|
770,582
|
|
Accounts payable
|
|
|
6,112
|
|
|
|
242,569
|
|
|
|
541,225
|
|
|
|
889,960
|
|
|
|
1,030,200
|
|
|
|
159,036
|
|
Total liabilities
|
|
|
62,951
|
|
|
|
338,307
|
|
|
|
729,818
|
|
|
|
1,179,697
|
|
|
|
1,347,661
|
|
|
|
208,044
|
|
Total mezzanine equity
|
|
|
86,216
|
|
|
|
96,832
|
|
|
|
107,955
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total shareholders’ equity/(deficit)
|
|
|
(29,393
|
)
|
|
|
13,018
|
|
|
|
354,189
|
|
|
|
3,369,733
|
|
|
|
3,644,012
|
|
|
|
562,538
|
|
Ordinary shares
|
|
|
135
|
|
|
|
135
|
|
|
|
135
|
|
|
|
237
|
|
|
|
239
|
|
|
|
37
|
|
Number of outstanding ordinary shares
|
|
|
79,124,394
|
|
|
|
79,124,394
|
|
|
|
79,124,394
|
|
|
|
145,205,128
|
|
|
|
146,634,596
|
|
|
|
146,634,596
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Summary Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
(13,165
|
)
|
|
|
172,575
|
|
|
|
524,750
|
|
|
|
422,444
|
|
|
|
151,497
|
|
|
|
23,386
|
|
Net cash provided by (used in) investing activities
|
|
|
(13,042
|
)
|
|
|
(41,665
|
)
|
|
|
(28,753
|
)
|
|
|
(2,575,715
|
)
|
|
|
1,383,691
|
|
|
|
213,605
|
|
Net cash provided by/(used in) financing activities
|
|
|
65,220
|
|
|
|
-
|
|
|
|
(5,236
|
)
|
|
|
2,486,702
|
|
|
|
4,417
|
|
|
|
684
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,190
|
)
|
|
|
(20
|
)
|
|
|
110
|
|
|
|
(512
|
)
|
|
|
12,555
|
|
|
|
1,938
|
|
Net increase in cash and cash equivalents
|
|
|
37,824
|
|
|
|
130,890
|
|
|
|
490,871
|
|
|
|
332,919
|
|
|
|
1,552,160
|
|
|
|
239,613
|
|
Cash and cash equivalents at beginning of year
|
|
|
19,623
|
|
|
|
57,447
|
|
|
|
188,337
|
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
156,245
|
|
Cash and cash equivalents at end of year
|
|
|
57,447
|
|
|
|
188,337
|
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
395,858
|
|
Change in Reporting Currency and Exchange Rate Information
Our business is primarily conducted in China
and almost all of our revenues are denominated in RMB. Effective July 1, 2015, we changed our reporting currency from U.S. dollar
to Renminbi. The change in reporting currency is to improve investors’ ability to evaluate our financial results against
other comparable publicly traded companies in the industry as most of them use RMB as their reporting currency. Prior to July 1,
2015, we reported our annual and quarterly consolidated balance sheets and consolidated statements of income and comprehensive
income and shareholder’s equity and cash flows in U.S. dollar. In this annual report, the financial results for the year
ended December 31, 2015 are stated in RMB. The related financial statements prior to the current period have been recast to reflect
RMB as the reporting currency for comparison to the financial results for the year ended December 31, 2015.
Current period amounts in this annual report
are translated into U.S. dollars for the convenience of the readers. The conversion of RMB into U.S. dollars in this
annual report is based on the noon buying rate in New York City for cable transfers in RMB as certified for customs purposes by
the Federal Reserve Board. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to
RMB in this annual report were made at a rate of RMB6.4778 to US$1.00, the noon buying rate in effect as of December 31, 2015.
Our net GMV amounts for the historical periods are denominated in RMB and were translated into U.S. dollar amounts using the applicable
average exchange rate for each relevant period. We make no representation that any RMB or U.S. dollar amounts could have
been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government
imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange
and through restrictions on foreign trade. On April 22, 2016, the noon buying rate was RMB6.5004 to US$1.00.
The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
|
|
Noon Buying Rate
|
|
Period
|
|
Period-End
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per U.S. Dollar)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
6.2939
|
|
|
|
6.4475
|
|
|
|
6.6364
|
|
|
|
6.2939
|
|
2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.3879
|
|
|
|
6.2221
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1704
|
|
|
|
6.2591
|
|
|
|
6.0402
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2869
|
|
|
|
6.5932
|
|
|
|
6.1870
|
|
October
|
|
|
6.3180
|
|
|
|
6.3505
|
|
|
|
6.3591
|
|
|
|
6.3180
|
|
November
|
|
|
6.3883
|
|
|
|
6.3640
|
|
|
|
6.3945
|
|
|
|
6.3180
|
|
December
|
|
|
6.4778
|
|
|
|
6.4491
|
|
|
|
6.4896
|
|
|
|
6.3883
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.5752
|
|
|
|
6.5726
|
|
|
|
6.5932
|
|
|
|
6.5219
|
|
February
|
|
|
6.5525
|
|
|
|
6.5501
|
|
|
|
6.5795
|
|
|
|
6.5154
|
|
March
|
|
|
6.4480
|
|
|
|
6.5027
|
|
|
|
6.5500
|
|
|
|
6.4480
|
|
April (through April 22, 2016)
|
|
|
6.5004
|
|
|
|
6.4726
|
|
|
|
6.4571
|
|
|
|
6.5004
|
|
Source: Federal Reserve Statistical
Release
|
(1)
|
Annual averages are calculated using the average of month-end rates of the relevant year. Monthly averages are calculated using
the average of the daily rates during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Risks Related to Our Business
Any harm to our Jumei (
聚美
) brand
or our reputation may materially and adversely affect our business and results of operations.
We believe that the recognition and reputation
of our Jumei (
聚美
) brand among our customers, suppliers
and third-party merchants have contributed significantly to the growth and success of our business. Maintaining and enhancing the
recognition and reputation of our brand are critical to our business and market position. Many factors, some of which are beyond
our control, are important to maintaining and enhancing our brand. These factors include our ability to:
|
·
|
maintain the popularity, quality and authenticity of the products we offer;
|
|
·
|
provide a superior online shopping experience to customers;
|
|
·
|
increase brand awareness through various means of marketing and promotional activities;
|
|
·
|
maintain the efficiency, reliability and quality of our fulfillment and delivery services;
|
|
·
|
maintain and improve customers’ satisfaction with our after-sales services;
|
|
·
|
preserve and enhance our reputation and goodwill generally and in the event of any negative publicity on product quality or
authenticity, customer service, internet security, or other issues affecting us or other online retailers in China; and
|
|
·
|
maintain our cooperative relationships with quality suppliers, third-party merchants and other service providers.
|
A public perception that non-authentic,
counterfeit or defective goods are sold on our internet platform or that we 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 among our customers and have a negative impact on our ability to attract new customers
or retain our existing customers. In June 2014, the State Administration of Industry and Commerce launched
Operation Red-shield
,
which was aimed at reducing the number of counterfeit products sold on e-commerce platforms in China. In July 2014, news media
reported that certain luxury products sold by a third party merchant on a number of major e-commerce platforms in China, including
the marketplace on our internet platform, were counterfeit. Following these reports, we received negative publicity. We immediately
launched an investigation into the third-party merchant in question and closed its online store at our marketplace. We further
decided to stop offering the products at issue on our marketplace. We also offered full refund for such products. Despite our remedial
efforts, such negative publicity about us may have adversely damaged our brand, public image and reputation, which may harm our
ability to attract customers and result in an adverse impact on our results of operations and prospects. If our reputation suffers,
our business prospects may be materially and adversely affected.
We face intense competition, and
if we fail to compete effectively, we may lose market share and customers.
China’s retail market for beauty products
is fragmented and highly competitive. We face competition from traditional beauty products retailers, such as Watsons and Sephora,
and online beauty products retailers, as well as e-commerce platform companies, such as Alibaba Group, which operates Taobao.com
and Tmall.com, Amazon China, which operates Amazon.cn, JD.com, Inc., which operates JD.com, E-Commerce China Dangdang Inc., which
operates Dangdang.com, and Vipshop Holdings Limited, which operates VIP.com and Lefeng. See “Item 4. Information on the Company
– B. Business Overview – Competition.” Our current or future competitors may have longer operating histories,
greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities or
greater financial, technical or marketing resources than we do. Competitors may leverage their brand recognition, experience and
resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions
for the expansion of their products and services. 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 and system development than us. In addition, new and enhanced technologies may increase
the competition in the online retail market. Increased competition may reduce our profitability, market share, customer base and
brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors,
and such competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.
Our limited operating history
makes it difficult to evaluate our business and prospects.
We commenced our beauty products retail
business in March 2010 and have a limited operating history. Since our inception, we have experienced rapid expansion in our business,
which results in strong revenue growth as well as increasing costs. Our total net revenues increased by 30.0% from RMB3.0 billion
in 2013 to RMB3.9 billion in 2014 and further increased by 87.2% to RMB7.3 billion (US$1.1 billion) in 2015. Our net income increased
by 158.9% from RMB156.6 million in 2013 to RMB405.4 million in 2014, but decreased by 66.7% to RMB134.8 million (US$20.8 million)
in 2015. Our historical performance may not be indicative of our future financial results. We cannot assure you that we will be
able to achieve similar positive results or grow at the same rate as we did in the past, or avoid similar negative results or decline
in the future. Growth may slow and net revenues or net income may decline for a number of possible reasons, some of which are beyond
our control, including decreasing consumer spending, increasing competition, slowing growth of our overall market, fulfillment
bottlenecks, emergence of alternative business models, changes in government policies or general economic conditions. It is difficult
to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in rapidly
evolving markets may be exposed. You should consider our prospects in light of the risks and uncertainties that fast-growing companies
with a limited operating history may encounter.
Our growth prospects could be
negatively impacted by our decision to terminate our marketplace beauty products and luxury products sales to shift our marketplace
beauty products sales to merchandise sales.
In the third quarter of 2014, we began to
shift our marketplace beauty product sales to our merchandise sales. By the end of 2014, we had replaced most of our historical
marketplace beauty product offerings using procurements through direct brand cooperation, department stores and our
Jumei Global
.
While our decision to undertake such transitions were driven by our determination to ensure the authenticity and quality of the
products sold through our internet platform, such transitions have resulted in a decrease in the number of SKUs available through
our internet platform and exerted increased pressure on our merchandizing team to source the relevant beauty products directly.
Furthermore, the termination of marketplace beauty product sales and the shift to merchandising sales had a negative impact on
our financial performance since 2014. Although we are taking measures to improve operating efficiency of
Jumei Global
, we
cannot assure you that the shift would not continue to have negative impact on our results of operations or financial results in
the future. Our decision to terminate our marketplace beauty products and luxury products sales to shift our marketplace beauty
products sales to merchandise sales may negatively impact our future growth prospects and financial performance.
If we are unable to manage our
growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
We have been growing rapidly since our inception.
Expansion has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we
anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls,
including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train,
manage and motivate our workforce and manage our relationships with customers, suppliers, brand owners, third-party merchants and
other service providers. As we selectively increase our product offerings, we will need to work with different groups of new suppliers
and third-party merchants efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers,
brand owners and third-party merchants. All of these endeavors involve risks, and will require substantial management effort and
significant additional expenditures. We cannot assure you that we will be able to manage our growth or execute our strategies effectively,
and any failure to do so may have a material adverse effect on our business and prospects.
Our expansion into new product
categories and of our Jumei Global sales channel may expose us to new challenges and more risks and may lower our profit margins.
Since our inception, we have focused on
selling beauty products online. We have expanded the product offerings on our internet platform to include selected categories
of baby, children and maternity products, health supplements, as well as apparel and other lifestyle products. Expansion into new
product categories involve new risks and challenges. Our lack of familiarity with these products and lack of relevant customer
data relating to these products may make it more difficult for us to keep pace with the evolving customer demands and preferences.
We launched our
Jumei Global
sales
channel in September 2014, which allows Chinese consumers to directly purchase products from overseas on our internet platform.
We currently offer beauty products, baby, children and maternity products, light luxury products as well as health supplements
through our
Jumei Global
sales channel, which expose us to new challenges and more risks associated with, for example, managing
a global logistical network, operating directly in foreign jurisdictions and handling more complex supply and product return issues.
Furthermore, our expansion of our
Jumei Global
sales channel has required us to make significant investment in building
a global supply and logistics infrastructure and incurred considerable costs. The PRC regulatory framework, as well as the implementation
policies of local authorities, in respect of overseas direct purchase and sale of merchandise are still evolving. New applicable
laws and regulations and new interpretation of the existing laws and regulations may be adopted from time to time to address new
issues that arise, and additional licenses and permits may be required. As a result, substantial uncertainties exist regarding
the evolution of the regulatory system and the interpretation and implementation of current and future PRC laws and regulations
applicable to our
Jumei Global
business.
We have limited experience and operating
history in our new product categories and our
Jumei Global
sales channel, which makes predicting our future results of operations
more difficult than it otherwise would be. Therefore, our past results of operations should not be taken as indicative of our future
performance. If we cannot successfully address new challenges and compete effectively, we may not be able to recover costs of our
investments, and our future results of operations and growth prospects may be materially and adversely affected.
We may incur liability for products
sold on our internet platform that are without or have yet to receive proper authorization, or for products sold or content posted
on our internet platform that infringe on third-party intellectual property rights, or for products sold on our internet platform
that fail to comply with cosmetics-related permits or filing requirements.
In 2015, we worked with approximately 2,091
suppliers and third-party merchants on our internet platform. Although we have adopted measures to verify the authorization of
products sold through us and avoid potential infringement of third-party intellectual property rights in the course of sourcing
and selling products, we may not be successful in ensuring all products sold on our platform have proper authorization.
We have sold certain branded products that
were procured by our suppliers or third-party merchants from overseas and domestic markets that are without or have yet to receive
proper authorization and as a result, our relationships with brand owners, particularly the international brand owners that offer
beauty products in the China market, may be adversely affected. We have in the past received and may continue to receive claims
alleging that some products sold on our internet platform are without authorization from the relevant brand owners and suppliers,
or otherwise infringe upon third-party intellectual property rights. Although our suppliers and third-party merchants are responsible
for sourcing products to be sold on our internet platform and allegations and claims have not had material adverse impact on our
business in the past, we might be required to allocate significant resources and incur material expenses regarding such claims
in the future. Irrespective of the validity of such claims, we could incur significant costs and efforts in either defending or
settling such claims, which could divert our management’s attention from day-to-day operations. If there is a successful
claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products. Regardless
of whether we successfully defend against such claims, we could suffer negative publicity and our reputation could be severely
damaged. Any of these events could have a material and adverse effect on our business, results of operations or financial condition.
Furthermore, although as an online distributor
we are not required to obtain customs clearance or other specific cosmetics-related permits, we are required under the relevant
PRC laws to check whether importers have obtained the requisite import related permits or filings and whether the products have
passed the quality inspection before they are sold and distributed in the China market. In the past, for products imported from
outside of the PRC, we had requested our suppliers and third-party merchants to provide the relevant import permits or filings.
To reduce any legal risks that we may be exposed to, we have adopted internal policy and procedures to periodically check import
permits or filings as well as import tariff payments of our suppliers and third-party merchants. If any of our suppliers or third-party
merchants has evaded import tariffs or fails to obtain clearance from the customs or inspection and quarantine bureaus and sold
such imported products to us or on our internet platform, we may be subject to fines, suspension of business, as well as confiscation
of products illegally sold and the proceeds from such sales, depending on the nature and gravity of such liabilities. See “Item
4. Information on the Company – B. Business Overview – Regulation – Regulation Relating to Distribution of Cosmetics.”
Under our standard form agreements, we require
suppliers or third-party merchants to indemnify us for any losses we suffer or any costs that we incur due to any products we source
from these suppliers or any products sold by these third-party merchants. However, not all of our agreements with suppliers and
third-party merchants have such terms, and for those agreements that have such terms, we may not be able to successfully enforce
our contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights. Enforcing
our contractual rights under those agreements will incur significant costs and efforts and will divert our management’s attention
from day-to-day operations. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
If counterfeit products are sold
on our internet platform, our reputation and financial results could be materially and adversely affected.
Suppliers and third-party merchants on our
internet platform are separately responsible for sourcing the products that are sold on our internet platform. Although we have
adopted measures to verify the authenticity of products sold on our internet platform and to immediately remove any counterfeit
products found on our internet platform, these measures may not always be successful. In July 2014, a major media outlet reported
that certain luxury products sold by a third party merchant on a number of major e-commerce platforms in China, including the marketplace
on our internet platform, were counterfeits. We immediately took actions to address this issue. Potential sanctions under PRC law
if we were to negligently participate or assist in infringement activities associated with counterfeit goods include injunctions
to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on
the gravity of such misconduct. Furthermore, counterfeit products may be defective or inferior in quality as compared to authentic
products and may pose safety risks to our customers. If our customers are injured by counterfeit products sold on our internet
platform, we may be subject to lawsuits, severe administrative penalties and criminal liability. See “—We may be subject
to product liability claims if our customers are harmed by the products sold on our internet platform.” We believe our brand
and reputation are extremely important to our success and our competitive position. The discovery of counterfeit products sold
on our internet platform may severally damage our reputation and cause customers to refrain from making future purchases from us,
which would materially and adversely affect our business operations and financial results.
If we are unable to provide high
quality customer experience, our business and reputation may be materially and adversely affected.
The success of our business largely depends
on our ability to provide high quality customer experience, which in turn depends on a variety of factors. These factors include
our ability to continue to offer authentic products at competitive prices, source products to respond to customer demands and preferences,
maintain the quality of our products and services, provide reliable and user-friendly website interface and mobile applications
for our customers to browse and purchase products, and provide timely and reliable delivery and superior after-sales service. If
our customers are not satisfied with our products or services, or the prices at which we offer the products, or our internet platform
is severely interrupted or otherwise fail to meet our customers’ requests, our reputation and customer loyalty could be adversely
affected.
We rely on contracted third-party delivery
service providers to deliver our products. Interruptions to or failures in the delivery services could prevent the timely or successful
delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control
of our third-party delivery service providers, such as inclement weather, natural disasters or labor unrest. If our products are
not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence
in our services. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and
interact with our customers personally. Any failure to provide high-quality delivery services to our customers may negatively impact
the shopping experience of our customers, damage our reputation and cause us to lose customers.
In addition, we depend on our customer service
center and online customer service representatives to provide live assistance to our customers 24 hours a day, 7 days a week. If
our customer service representatives fail to provide satisfactory service, or if waiting times are too long due to the high 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.
As a result, if we are unable to continue
to maintain our customer experience and provide high quality customer service, we may not be able to retain existing customers
or attract new customers, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to offer products
at attractive prices to meet customer needs and preferences, our business, financial condition and results of operations may be
materially and adversely affected.
Our future growth depends on our ability
to continue attracting new customers and increasing the spending level of our existing customers. Constantly changing consumer
preferences have affected and will continue to affect the online retail industry. We must stay abreast of emerging lifestyle and
consumer preferences and anticipate product trends that will appeal to existing and potential customers. Our customers choose to
purchase authentic and quality products on our internet platform 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 online retailers or by physical stores. If our customers
cannot find their desired products within our product portfolio at attractive prices, they may lose interest in us and visit our
internet platform less frequently or even stop visiting our internet platform altogether, which in turn may materially and adversely
affect our business, financial condition and results of operations.
We rely on the online retail sale
of beauty products for a substantial portion of our net revenues.
Since our inception, we have focused on
selling beauty products online. We expect that sales of beauty products will continue to be our focus and represent a substantial
portion of our total net revenues in the near future. We have increased our offerings to include other product categories, mainly
baby, children and maternity products, as well as apparel products. However, our sales of these new products may not increase to
a level that would substantially reduce our dependence on online sales of beauty products. We face intense competition from other
online retailers of beauty products and from established companies with physical stores that are moving into the online space.
Any event that results in a reduction in our sales of beauty products could materially and adversely affect our ability to maintain
or increase our current level of net revenue and business prospects.
If we fail to manage and expand
our relationships with suppliers and third-party merchants, or otherwise fail to procure products at favorable terms, our business
and growth prospects may suffer.
We worked with approximately 1,700, 2,400
and 2,091 suppliers and third-party merchants in 2013, 2014 and 2015, respectively. Our suppliers and third-party merchants include
brand owners, brand distributors, resellers and suppliers of our exclusive products. Maintaining strong relationships with these
suppliers and third-party merchants is important to the growth of our business.
In particular, we depend significantly on
our ability to procure products from suppliers on favorable pricing terms and attract third-party merchants to offer their products
on commercially attractive terms. However, our agreements do not ensure the long-term availability of products or the continuation
of particular pricing practices or payment terms beyond the end of the contractual term. Other than for exclusive products, our
agreements with suppliers and third-party merchants typically do not restrict them from selling products to other buyers. We cannot
assure you that our current suppliers and third-party merchants will continue to sell products to us or offer products on our internet
platform on commercially attractive terms, or at all, after the term of the current agreement expires. Even if we maintain good
relationships with our suppliers and third-party merchants, they may be unable to remain in business due to economic conditions,
labor actions, regulatory or legal decisions, natural disasters or other causes. In the event that we are not able to source products
at favorable prices, our net revenues and gross profit as a percentage of net revenues may be materially and adversely affected.
In the event that any supplier or third-party
merchant does not have authorization from the relevant brands to sell certain products to us, the suppliers may be prevented from
selling products to us or the third-party merchants may be prevented from selling products at our internet platform at any time,
which may adversely affect our business and net revenues. In addition, 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 and third-party merchant relationships to ensure that we have access to a steady supply of products
on favorable commercial terms. If we are unable to develop and maintain good relationships with suppliers and third-party merchants
that would allow us to obtain a sufficient amount and variety of authentic and quality products on acceptable commercial terms,
it may limit our ability to offer sufficient products sought by our customers, or to offer these products at prices acceptable
to them. Any negative developments in our relationships with suppliers and third-party merchants could materially and adversely
affect our business and growth prospects. If we fail to attract new suppliers and third-party merchants to sell their products
to us or offer their products on our internet platform due to any reason, our business and growth prospects may be materially and
adversely affected.
We have been named as a defendant
in putative shareholder class action lawsuit that could have a material adverse impact on our business, financial condition, results
of operation, cash flows and reputation.
We will have to defend against the putative
shareholder class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial
Information—Legal Proceedings,” including any appeals of such lawsuits should our initial defense be unsuccessful.
We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these
lawsuits. In the event that our initial defense of these lawsuits is unsuccessful, there can be no assurance that we will prevail
in any appeal. Any adverse outcome of these cases, including any plaintiff’s appeal of a judgment in these lawsuits, could
have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition,
there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may
arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s
attention from the day-to-day operations of our company, all of which could harm our business. We also may be subject to claims
for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business
or financial results.
If we are not able to manage our
complex fulfillment network successfully, our growth potential, business and results of operations may be materially and adversely
affected.
We believe our fulfillment network, currently
consisting of strategically located logistics centers in Tianjin, Zhengzhou, Kunshan, Chengdu, Guangzhou, Shenyang, Hangzhou, Ningbo,
Suzhou and Hong Kong, is essential to our business. We plan to add more logistics center capability to increase our warehouse capacity,
accommodate more customer orders and provide better coverage of our target markets. Our fulfillment network is complex and challenging
to operate. We cannot assure you that we will be able to lease facilities suitable to our needs on commercially acceptable terms
or at all. We may not be able to recruit a sufficient number of qualified employees with regards to the expansion of our fulfillment
network. In addition, the expansion of our fulfillment infrastructure may strain our managerial, financial, operational and other
resources. If we fail to manage such expansion successfully, our growth potential, business and results of operations may be materially
and adversely affected.
We depend on numerous third-party
delivery service providers to deliver our products, and if they fail to provide reliable delivery services, our business and reputation
may be materially and adversely affected.
We used a network of 402 third-party inter-city
transportation companies and local third-party delivery service providers companies to deliver parcels to our customers as of December
31, 2015. For customers in remote areas not covered by our delivery network, we use the state-owned China postal services to deliver
our products. Interacting with and coordinating the activities of many delivery companies are complicated and any major interruptions
to or failures in these third parties’ shipping services could prevent the timely or successful delivery of our products.
These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party delivery companies,
such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. If our products are not
delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in
our services. Thus, we may lose customers, and our financial condition and reputation could suffer. In addition, as local delivery
service providers tend to be small companies with limited capital resources, they may be more likely to go bankrupt, go out of
business or encounter financial difficulties, in which case we may not be able to retrieve our products in their possession, arrange
for delivery of those products by an alternative carrier, receive the payments the delivery service providers collect for us, or
hold them accountable for the losses they cause us. Although we generally only pay the delivery service providers after they have
performed their services, such payment arrangements may not be sufficient to cover the risks to which we are exposed. In addition,
if the delivery service providers cease to provide cash deposits to us or significantly reduce the amount of such deposits, our
working capital requirements may increase and our operating cash flow may be materially and adversely affected. 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. The occurrence of any of
these problems, alone or together, could damage our reputation and materially and adversely affect our business and results of
operations.
Any interruption in the operation
of our logistics centers for an extended period may have an adverse impact on our business.
The beauty products we sell are stored in
our logistics centers. We have logistics centers in each of Tianjin, Zhengzhou, Kunshan, Chengdu, Guangzhou, Shenyang, Hangzhou,
Ningbo, Suzhou and Hong Kong. All of our logistics centers are leased from third parties. If any of the landlords terminate the
lease agreements with us, or materially alter any existing arrangements with us, we may be forced to leave the premises and may
not be adequately compensated for our investments or at all, and our business, results of operations and financial condition may
be materially and adversely affected as a result.
Our ability to process and fulfill orders
accurately and provide high quality customer service depends on the smooth operation of our logistics centers. Our fulfillment
infrastructure may be vulnerable to damage caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake,
human error and other events. If any of our logistics centers were rendered incapable of operations, then we may be unable to fulfill
any orders in any of the geographic areas that rely on that center. We do not carry business interruption insurance, and the occurrence
of any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition and results
of operations.
We may not be able to recoup the
capital expenditures or investments we make to expand and upgrade our fulfillment and technology capabilities.
We have invested and will continue to invest
in expanding our logistics center capability and upgrading our technology platform. Furthermore, we plan to lease additional logistics
centers in Suzhou and purchase additional warehousing equipment. We expect to continue to invest in our fulfillment and technology
capabilities as our business further develops. We also intend to continue to add personnel and other resources to our logistics
centers and technology platform. We are likely to incur costs associated with these investments earlier than some of the anticipated
benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. We may not be able to recover
our capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take
longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could
adversely affect our profitability.
If we fail to adopt new technologies
or adapt our website, mobile application 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 internet platform. Our competitors are constantly
developing innovations and introducing new products to increase their customer base and enhance user experience. As a result, in
order to attract and retain customers and compete against our competitors, we must continue to invest significant resources in
research and development to enhance our information technology and improve our existing products and services for our customers.
The internet and the online retail 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 in a cost-effective and timely way. The development of website, mobile application
and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able
to use new technologies effectively or adapt our website, mobile application, 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.
We may be subject to product liability
claims if our customers are harmed by the products sold on our internet platform.
We sell products manufactured by third parties,
some of which may be defectively designed or manufactured, of inferior quality or counterfeit. For example, beauty products in
general, regardless of their authenticity or quality, may cause allergic reactions or other illness that may be severe for certain
customers. Sales and distributions of products on our internet platform could expose us to product liability claims relating to
personal injury and may require product recalls or other actions. Third parties that suffered such injury may bring claims or legal
proceedings against us as the retailer of the products or as the marketplace service provider. See “Item 4. Information on
the Company – B. Business Overview – Regulation – Regulation Relating to Product Quality and Consumer Protection.”
Although we would have legal recourse against the manufacturers, suppliers or third-party merchants of such products under PRC
law, attempting to enforce our rights against the manufacturers, suppliers or third-party merchants may be expensive, time-consuming
and ultimately futile. Defective, inferior or counterfeit products or negative publicity as to personal injury caused by products
sold on our platform may adversely affect consumer perceptions of our company or the products we sell, which could harm our reputation
and brand image. In addition, we do not currently maintain any product liability insurance in relation to products we sell. Our
third-party liability insurance coverage does not include products offered through third-party merchants, and the coverage on merchandise
sales products might be insufficient. 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.
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 expenses on a variety of
different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our
marketing and promotional activities may not be well received by customers and may not result in the levels of product sales that
we anticipate. We incurred RMB323.0 million, RMB499.1 million and RMB655.3 million (US$101.2 million) in marketing expenses in
2013, 2014 and 2015, respectively. Marketing approaches and tools in the consumer products market in China are evolving. This
further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments
and customer preferences, which may not be as cost-effective as our marketing activities in the past and may lead to significantly
higher marketing expenses in the future. While our innovative marketing campaigns, including our “I endorse myself”
micro-films starring our senior executive officers, have proven to be highly successful, we cannot assure you that we can continue
to produce, or benefit from, such unique and effective marketing campaigns in the future. Failure to refine our existing marketing
approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our
net revenues to decline and negatively impact our profitability.
Our online marketplace is subject
to risks associated with third-party merchants.
We are a service provider to third party
merchants who sell apparel and other lifestyle products on our internet platform and charge service fees for such sales. We historically
offered certain beauty products through third-party merchants and generated marketplace service revenues from such third-party
merchants. In the third quarter of 2014, we began the process of terminating our marketplace beauty product sales and shifting
our marketplace beauty product sales to our merchandise sales. We have substantially completed the termination of our marketplace
beauty product sales. We historically provided fulfillment services to third-party merchants who sold beauty products through our
internet platform and charged such third-party merchants for such services. For 2015, our net revenues generated from our marketplace
services accounted for approximately 3.1% of our total net revenues. Our third-party merchants use their own delivery systems or
service providers to deliver products to our customers, which makes it difficult for us to ensure that our customers get the same
service for other products sold by us on our internet platform. If any third-party merchant does not control the quality of the
products that it sells, or if it does not deliver the products or delivers products that are materially different from its description
of them, or if it sells counterfeit or defective products or products without proper authorization on our internet platform and
we fail to discover or take necessary measures to prevent such behavior, the reputation of our internet platform and our Jumei
(
聚美
) brand may be materially and adversely affected,
and we could face claims that we should be held liable for any losses and damages arising from such misbehavior or infringement.
See “Item 4. Information on the Company – B. Business Overview – Regulation – Regulation Relating to Product
Quality and Consumer Protection.” In addition, the supplier relationships, customer acquisition analytics and working capital
requirements for our marketplace business 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 marketplace business to be successful, we may continue to identify and attract
new third-party merchants, and we may not be successful in this regard.
If we fail to manage our inventory
effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.
Our business requires us to manage a large
volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions
and to manage our inventory of SKUs. Demand for products, however, can change significantly between the time inventory or components
are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles
and pricing, product defects, changes in consumer spending patterns, changes in consumer tastes with respect to our products and
other factors, and our customers may not order products in the quantities that we expect. It may be difficult to accurately forecast
demand, and determine appropriate product or component. We generally have the right to return unsold items for most of our products
to our suppliers. In order to secure more favorable commercial terms, we may need to continue to enter into supply arrangements
without unconditional return clauses or with more restrictive return policies.
If we fail to manage our inventory effectively
or negotiate favorable credit terms with third party suppliers, we may be subject to a heightened risk of inventory obsolescence,
a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale
prices in order to reduce inventory level or to pay higher prices to our suppliers in order to secure the right to return products
to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results
of operations and financial condition.
Uncertainties relating to the
growth and profitability of the online retail industry in China in general, and the development of the online curated and flash
sales business models in particular, could adversely affect our net revenues and business prospects.
We generate substantially all of our net
revenues from online retailing. While online retailing has existed in China since the 1990s, only recently have certain online
retailers become profitable. The curated and flash sales business models were not introduced to China until recently. The long-term
viability and prospects of various online retail business models in China, particularly the online curated and flash sales business
models, remain relatively untested. Our future results of operations will depend on numerous factors affecting the development
of the online curated and flash sales business and, more broadly, the online retail industry in China, many of which are beyond
our control. These factors include:
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the growth of internet, broadband, personal computer and mobile penetration and usage as well as online retailing in China,
and the rate of such growth;
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the trust and confidence level of online shopping consumers in China, as well as changes in customer demographics and consumer
tastes and preferences;
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the selection, price and popularity of products that we and our competitors offer online;
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the emergence and development of alternative retail channels or business models that better address the needs of consumers;
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the development of fulfillment, payment and other ancillary services associated with online purchases.
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A decline in the popularity of online shopping
or more specifically, of online curated and flash sales, or any failure by us to adapt our internet platform and improve the online
shopping experience of our customers in response to trends and consumer requirements, may adversely affect our net revenues and
business prospects.
Furthermore, the online retail industry
is very sensitive to macroeconomic changes, and retail purchases tend to decline during recessionary periods. Many factors outside
of our control, including inflation and deflation, volatility of stock and property markets, interest rates, tax rates and other
government policies and unemployment rates can adversely affect consumer confidence and spending, which could in turn materially
and adversely affect our growth prospects and profitability.
The proper functioning of our
technology platform is essential to our business. Any failure to maintain the satisfactory performance of our internet platform
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. Substantially all of our sales of products are made online through our internet platform. Our mobile
customer experience relies on the effective use of mobile devices, operating systems, networks and standards that we do not control.
Our net revenues depend on the number of visitors who shop on our internet platform and the volume of orders we fulfill. Any system
interruptions caused by telecommunications failures, errors encountered during system upgrades or system expansions, computer viruses,
hacking or other attempts to harm our systems that result in the unavailability or slowdown of our internet platform, leakage of
confidential customer information, degraded order fulfillment performance, or additional shipping and handling costs, which may,
individually or collectively, materially and adversely affect our business, reputation, financial condition and results of operations.
In addition, any system failure or interruption could cause material damage to our reputation and brand image if our systems are
perceived to be insecure or unreliable. For example, during a sales campaign in March 2013, our system was overwhelmed by unexpected
spikes of large user traffic. As a result, our website was down for a couple of hours and we encountered backlogs and delays in
our logistics and delivery systems. We subsequently resolved the problems, upgraded our technology system and significantly expanded
its peak traffic handling capacities. We have not had any similar system failure since then. 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. Because of our brand
recognition in the online retail industry in China, we believe we are a particularly attractive target for such attacks. 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 significant decrease in our net revenues.
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.
Any deficiencies in China’s
telecommunication infrastructure could impair our ability to sell products over our internet platform, which could cause us to
lose customers and materially and adversely affect our results of operations.
Substantially all of our sales of products
are made online through our internet platform. Our business depends on the performance and reliability of the telecommunication
infrastructure in China. The availability of our internet platform depends on telecommunications carriers and other third-party
providers for communications and storage capacity, including bandwidth and server storage, among other things. Almost all access
to the internet and mobile internet is maintained through state-owned telecommunication carriers under administrative control,
and we obtain access to end-user networks operated by such telecommunications carriers and service providers to present our internet
platform to consumers. We have experienced service interruptions in the past, which were typically caused by service interruptions
at the underlying external telecommunications service providers, such as the internet data centers and broadband carriers from
which we lease services. Service interruptions prevent consumers from viewing our internet platform and placing orders, and frequent
interruptions could frustrate customers and discourage them from attempting to place orders, which could cause us to lose customers
and adversely affect our 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 online retail
industry is the secure transmission of confidential information over public networks. Substantially all of the orders and some
of the payments for products we offer are made through our internet platform. In addition, some online payments for our products
are settled through third-party online payment services. We also share certain personal information about our customers with contracted
third-party delivery service providers, such as their names, addresses, phone numbers and transaction records. In such cases, maintaining
complete security for the 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 on our website. 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 at our website. The contracted third-party
delivery service providers we use may also violate their confidentiality obligations and disclose or use information about our
customers illegally. Although we do not believe that we will be held responsible for any such illegal activities, any negative
publicity on our website’s safety or privacy protection mechanism and policy could have a material and adverse effect on
our public image and reputation. We cannot assure you that similar events will not occur in the future. Any compromise of our information
security or contracted third-party delivery service providers’ information security measures 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 online retailing 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 and third-party merchants. We generally comply with industry standards and are subject to the terms of our
own privacy policies.
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 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. 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 online retailing and other online services generally, which may reduce
the number of orders we receive.
Payment methods used on our internet
platform subject us to third-party payment processing-related risks.
We accept payments using a variety of methods,
including payment on delivery, online payments with credit cards and debit cards issued by major banks in China, and payment through
third-party online payment platforms such as Alipay. For certain payment methods, including credit and debit cards, we pay interchange
and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject
to fraud and other illegal activities in connection with the various payment methods we offer, including online payment and cash
on delivery options. We also rely on third parties to provide payment processing services. For example, we use contracted third-party
delivery service providers for our cash on delivery payment options. The delivery personnel of our contracted third-party delivery
service providers collect the payment on our behalf, and we require the contracted third-party delivery service providers to remit
the payment collected to us on the following day. If these companies fail to remit the payment collected to us in a timely fashion
or at all, if they become unwilling or unable to provide these services to us, or if their services quality deteriorates, our business
could be disrupted. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic
funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply
with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit
and debit card payments from our customers, process electronic funds transfers or facilitate other types of online payments, and
our business, financial condition and results of operations could be materially and adversely affected.
Our delivery and return policies
may adversely affect our results of operations.
We have adopted shipping policies that do
not necessarily pass the full cost of shipping on to our customers. We also have adopted customer-friendly return policies that
make it convenient and easy for customers to change their minds after completing purchases. These policies improve customers’
shopping experience and promote customer loyalty, which in turn help us acquire and retain customers. However, these policies also
subject us to additional costs and expenses, which we may not be able to recoup through increased net revenues. Our ability to
handle a large volume of returns is unproven. If our return rates are higher than we expected, or such return policy is misused
by a significant number of customers, our costs may increase significantly and our results of operations may be materially and
adversely affected. In addition, as we cannot resell returned products that are not in their original packaging or return the products
to our suppliers pursuant to our contracts with them. If return rates for such products increase significantly, we may experience
an increase in our inventory balance, which may adversely affect our working capital. If we revise these policies to reduce our
costs and expenses, our customers may be dissatisfied, which may result in losing existing customers or failing to acquire new
customers at a desirable pace, which may materially and adversely affect our results of operations.
We may be the subject of anti-competitive,
harassing, or other detrimental conduct by third parties including complaints to regulatory agencies, negative blog postings, and
the public dissemination of malicious characterization of our business that could harm our reputation and cause us to lose market
share, customers and net revenues and adversely affect the price of our ADSs.
We have been subject to negative postings
and other media exposure on our business in the past. We may become the target of anti-competitive, harassing, or other detrimental
conduct by third parties. Such conduct includes complaints, anonymous or otherwise, to regulatory agencies. We may be subject to
government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and
incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute
each of the allegations within a reasonable period of time, or at all. Additionally, allegations, directly or indirectly against
us, may be posted in internet chat-rooms or on blogs or any website or social media platform by anyone, whether or not related
to us, on an anonymous basis. Consumers value readily available information concerning retailers and the goods and services offered
by them and often act on such information without further investigation or authentication and without regard to its accuracy. Information
on social media platforms and devices is easily accessible, and any negative publicity on us or our founders and management can
be quickly and widely disseminated. Social media platforms and devices immediately publish the content their subscribers and participants
post, often without filters or checks on accuracy of the content posted. Information posted may be inaccurate and adverse to us,
and it may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress
or correction. Our reputation may be negatively affected as a result of the public dissemination of anonymous allegations or malicious
statements about our business, which in turn may cause us to lose market share, customers and net revenues and adversely affect
the price of our ADSs.
Our business depends on the continued
efforts of our management. If we lose their services or they are unable to work together effectively or efficiently, our business
may be severely disrupted.
Our business operations depend on the continued
services of our senior management, particularly the executive officers named in this annual report. Our management team has only
been working together since the inception of our company. If they cannot work together effectively or efficiently, our business
may be severely disrupted. One or more of our executive officers may be unable or unwilling to continue their service to us, and
we might not be able to replace them easily or at all. On April 1, 2016, our co-chief financial officers at the time, Ms. Mona
Meng Gao and Mr. Yunsheng Zheng, tendered their resignations from their co-chief financial officer positions, in each case for
personal reasons. The resignation of Ms. Gao was effective on April 1, 2016, and the resignation of Mr. Zheng will be effective
in June 2016. As of the date of this annual report, Mr. Zheng serves as our chief financial officer. There can be no assurance
that we will not have other departures from our management team in the future. Our business, financial condition and results of
operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain personnel.
If any of our executive officers joins a competitor or forms a competing business, we may lose customers, suppliers, know-how and
key professionals and staff members. Our executive officers have 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.
If we are unable to recruit, train
and retain qualified personnel or sufficient workforce while controlling our labor costs, our business may be materially and adversely
affected.
We intend to hire additional qualified employees
to support our business operations and planned expansion. Our future success depends, to a significant extent, on our ability to
recruit, train and retain qualified personnel, particularly technical, fulfillment, marketing and other operational personnel with
experience in the online retail industry. Our experienced mid-level managers are instrumental in implementing our business strategies,
executing our business plans and supporting our business operations and growth. The effective operation of our managerial and operating
systems, logistics centers, customer service center and other back office functions also depends on the hard work and quality performance
of our management and employees. Since our industry is characterized by high demand and intense competition for talent and labor,
we can provide no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we
will need to achieve our strategic objectives. Our logistics centers also require a significant number of blue-collar workers,
and these positions tend to have higher than average turnover. Labor costs in China have increased with China’s economic
development, particularly in the large cities where we operate our logistics centers. Inflation in China is also putting pressure
on wages. In addition, as we are still a young company, our ability to train and integrate new employees into our operations may
also be limited and may not meet the demand for our business growth on a timely fashion, or at all. If we are unable to attract,
train and retain qualified personnel, our business may be materially and adversely affected.
Increases in labor costs or restrictions
in the supply of labor in China may materially and adversely affect our business, financial condition and results of operations.
We currently use workers dispatched by third-party
labor service agents to provide customer service, logistics and delivery services. Under such labor arrangement, we may also incur
liabilities if we cause any damages to such dispatched workers. According to the Interim Provisions on Labor Dispatch issued in
January 2014, which became effective on March 1, 2014, the number of dispatched contract workers hired by an employer shall not
exceed 10% of the total number of its work force. We were required to formulate a plan to reduce the number of our dispatched contract
workers to below the statutory limits prior to March 1, 2016. By April 1, 2016, we had reduced the number of our dispatched contract
workers to below 4% of our total number of work force. Although we are allowed to continue to engage the dispatched workers pursuant
to our existing agreements with labor service agents entered into before December 28, 2012, we will need to replace them with
full-time employees after the expiration of these contracts. We expect this may result in an increase in our labor cost. If we
are found to be in violation of the new rules regulating contract workers, we may be ordered by the labor authority to rectify
the noncompliance by entering into written employment contracts with our contract workers. We may also be subject to a penalty
ranging from RMB5,000 to RMB10,000 per dispatched worker if it is determined that we had failed to rectify within the time period
specified by the labor authority. See “Item 4. Information on the Company – B. Business Overview – Regulation
– Regulation on Employment.”
With the rapid development of the Chinese
economy, the cost of labor has increased and may continue to increase. Our results of operations will be materially and adversely
affected if the labor costs of our suppliers in China increase. In addition, even if labor costs do not increase, we and our suppliers
may not be able to find a sufficient number of workers to produce or provide us with the products we offer.
Furthermore, pursuant to the new PRC labor
contract law that became effective in 2008, as amended in 2012, employers in China are subject to stricter requirements when signing
labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts.
The labor contract law and related regulations impose greater liabilities on employers and may significantly increase the costs
of workforce reductions. If we decide to significantly change or reduce our workforces, the labor contract law could adversely
affect our ability to make such changes in a timely, favorable and effective manner. Any of these events may adversely affect our
business, financial condition and results of operations.
Future strategic alliances, investments
or acquisitions may have a material and adverse effect on our business, reputation and results of operations.
We may in the future enter into strategic
alliances with various third parties to further our business purposes from time to time. Strategic alliances with third parties
could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the
counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely
affect our business. We may have little ability to control or monitor their actions. To the extent the third parties suffer negative
publicity or harm to their reputations from events relating to their business, we may also suffer negative publicity or harm to
our reputation by virtue of our association with such third parties. For instance, following our investment in BabyTree in 2015,
we have entered into framework agreements outlining business cooperation with BabyTree, whereby we sell certain cosmetics and baby
care products through BabyTree’s mobile apps and online platform. Due to our association with BabyTree, any negative publicity
or harm to BabyTree’s reputation could harm our reputation and reduce consumer trust in the products we sell, whether or
not they are actually sold through BabyTree.
In addition, we have made investments in
complementary business in the past and if we are presented with appropriate opportunities, we may continue to acquire additional
assets, technologies or businesses that are complementary to our existing business. Past and future acquisitions and the subsequent
integration of new assets and businesses into our own would require significant attention from our management and could result
in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations.
The costs of identifying and consummating acquisitions may be significant. We may also incur significant expenses in obtaining
approvals from shareholders and relevant government authorities in China and elsewhere in the world. Acquired assets or businesses
may not generate the financial results we expect. In addition, acquisitions could result in the use of substantial amounts of cash,
potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses
for other intangible assets and exposure to potential unknown liabilities of the acquired business. The cost and duration of integrating
newly acquired businesses could also materially exceed our expectations. Any such negative developments could have a material adverse
effect on our business, financial condition and results of operations.
Any lack of requisite approvals,
licenses or permits applicable to our business or failure to comply with PRC laws and regulations may have a material and adverse
impact on our business, financial condition and results of operations.
Our business is subject to governmental
supervision and regulation by the relevant PRC governmental authorities, including the Ministry of Commerce, the Ministry of Industry
and Information Technology, or MIIT. Together, these government authorities promulgate and enforce regulations that cover many
aspects of the operation of online retailing and distribution of food and nutritional supplements, including entry into these industries,
the scope of permissible business activities, licenses and permits for various business activities, and foreign investment. We
are required to hold a number of licenses and permits in connection with our business operation, including the ICP license, food
distribution permit or food business operation permit (as applicable), hygiene permit for nutritional supplements, as well as approvals
for the establishment of foreign-invested enterprises engaging in the sale of goods over the internet. We have in the past held
and currently hold all licenses and permits described above. See “Item 4. Information on the Company – B. Business
Overview – Regulation – Regulations Relating to Foreign Investment” and “Item 4. Information on the Company
– B. Business Overview – Regulation – Licenses and Permits.”
As of the date of this annual report, we
have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental
authorities regarding our conducting our business without the above mentioned approvals and permits. However, we cannot assure
you that we will not be subject to any penalties in the future. As online retailing is still evolving in China, new laws and regulations
may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new
issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation
of current and any future PRC laws and regulations applicable to online retail businesses. For example, we are providing mobile
applications to mobile device users. It is uncertain if our variable interest entities, or VIEs, will be required to obtain a separate
operating license in addition to the valued-added telecommunications business operating licenses for Internet content provision
service. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates
new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any
part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material and adverse effect on our results of operations.
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 may be subject to late payment fees, fines and/or other penalties. If the relevant
PRC authorities determine that we shall 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 may be adversely affected.
Our use of some leased properties
could be challenged by third parties or government authorities, which may cause interruptions to our business operations.
As of December 31, 2015, we had 62 leased
properties for our offices, logistics centers, dormitories, customer service center and physical stores. The lessors of 6 leased
properties have not been able to provide proper ownership certificates for the properties we lease or prove their rights to sublease
the properties to us or do not hold legal certificates to legally lease properties to us. If our lessors are not the owners of
the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities,
our leases could be invalidated. We may have to renegotiate the leases with the owners or the parties who have the right to lease
the properties, and the terms of the new leases may be less favorable to us. In addition, our leasehold interests in leased properties
have not been registered with relevant PRC government authorities as required by PRC law, which may expose us to potential fines
ranging from RMB1,000 (US$154) to RMB10,000 (US$1,544) per unit leasehold.
As of the date of this annual report, we
are not aware of any claims or actions being contemplated or initiated by government authorities, property owners or any other
third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use
of such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be
subject to fines and forced to relocate the affected operations. In addition, we may become involved in disputes with the property
owners or third parties who otherwise have rights to or interests in our leased properties. We can provide no assurance that we
will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be
subject to material liability resulting from third parties’ challenges on our use of such properties. As a result, our business,
financial condition and results of operations may be materially and adversely affected.
Failure to renew our current leases
or locate desirable alternatives for our facilities could materially and adversely affect our business.
As of December 31, 2015, we leased an aggregate
of approximately 199 thousand square meters of properties for our offices, logistics centers, dormitories, customer service center
and physical stores. We may not be able to successfully extend or renew such leases upon expiration of the current term on commercially
reasonable terms or at all, and may therefore be forced to relocate our affected operations. This could disrupt our operations
and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations.
In addition, we compete with other businesses for premises at certain locations or of desirable sizes. As a result, even though
we could extend or renew our leases, rental payments may significantly increase as a result of the high demand for the leased properties.
In addition, we may not be able to locate desirable alternative sites for our facilities as our business continues to grow and
such failure in relocating our affected operations could affect our business and operations.
We have granted, and may continue
to grant, options, restricted shares and other types of awards under our share incentive plan, which may result in increased share-based
compensation expenses.
We adopted a share incentive plan in 2011,
or the 2011 plan, and a share incentive plan in 2014, or the 2014 plan, for the purpose of granting share-based compensation awards
to employees, directors and consultants to incentivize their performance and align their interests with ours. Under the 2011 plan,
we are authorized to grant options or share purchase rights to purchase up to 10,401,229 ordinary shares. As of February 28, 2016,
options to purchase 5,546,983 ordinary shares are issued and outstanding under the 2011 plan. We account for compensation costs
for all share options using a fair-value based method and recognize expenses in our consolidated statement of income in accordance
with U.S. GAAP. Under the 2014 plan, we are authorized to grant options, restricted shares and restricted share units. The maximum
aggregate number of shares which may be issued initially pursuant to all awards under the 2014 plan is 6,300,000 Class A ordinary
shares. The number of shares reserved for future issuances under the 2014 plan will be increased by a number equal to 1.5% of the
total number of outstanding shares on the last day of the immediately preceding calendar year, or such lesser number of Class A
ordinary shares as determined by our board of directors, on the first day of each calendar year during the term of the 2014 plan
beginning in 2015. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 plan is 8,499,519
Class A ordinary shares as of February 28, 2016. As of February 28, 2016, 290,448 restricted share units have been granted under
the 2014 plan. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain
key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our
expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
We may not be able to prevent
others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, copyrights, domain
names, know-how, proprietary technologies, and similar intellectual property as critical to our success, and we rely on a combination
of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements
with our employees and others to protect our proprietary rights. As of December 31, 2015, we owned 246 registered trademarks, copyrights
to 32 software programs developed by us relating to various aspects of our operations, and 48 registered domain names, including
jumei.com
and
jumeiglobal.com
. See “Item 4. Information on the Company – B. Business Overview –
Regulation on Intellectual Property Rights.” Although we are not aware of any copycat websites that attempt to cause confusion
or diversion of traffic from us at the moment, we may become an attractive target to such attacks in the future because of our
brand recognition in the online retail industry in China. Despite these measures, any of our intellectual property rights could
be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us
with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business
rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and
technologies from these third parties on reasonable terms, or at all.
It is often difficult to register, maintain
and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement
and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment
and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such
breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights
in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate
to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual
property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We
can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become
available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual
property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure
in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition
and results of operations.
We may be subject to intellectual
property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations
or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how
or other intellectual property rights held by third parties. We have been in the past, and may be from time to time in the future,
subject to legal proceedings and claims relating to the intellectual property rights of others. Some of our trademarks applications
have been challenged by third parties and we may not be able to successfully register such trademarks. In addition, there may be
other third-party intellectual property that is infringed by our products, services or other aspects of our business. There could
also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently infringe.
We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of our technology
platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against us in China,
the United States or any other jurisdictions. In addition, we strive to closely monitor the products offered on our internet
platform, and also require suppliers and third-party merchants to indemnify us for any losses we suffer or any costs that we incur
in relation to the products we source from such suppliers or the products offered by such third-party merchants on our internet
platform. However, we cannot be certain that these measures would be effective in completely preventing the infringement of trademarks,
patents, copyrights, know-how or other intellectual property rights held by third parties. Further, the application and interpretation
of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights,
know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC
courts or regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights
of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property,
and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses,
and may be forced to divert management’s time and other resources from our business and operations to defend against these
third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result
in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use
of the intellectual property in question.
Finally, we use open source software in
connection with parts of our technology platform. Companies that incorporate open source software into their own products and services
have, from time to time, faced claims challenging the ownership of open source software and compliance with open source license
terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or
noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software
as part of their software to publicly disclose all or part of the source code to such software and make available any derivative
works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our source code or pay damages for
breach of contract could be harmful to our business results of operations and financial condition.
If we fail to implement and maintain
an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent
fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
We are subject to the reporting obligations
under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require public companies to include
a report of management on their internal control over financial reporting in their annual reports. This report must contain an
assessment by management of the effectiveness of a public company’s internal control over financial reporting. In addition,
an independent registered public accounting firm for a public company must attest to and report on management’s assessment
of the effectiveness of the company’s internal control over financial reporting. We sometimes hire a professional consultant
to assist us in such efforts. Our efforts to implement standardized internal control procedures and develop the internal tests
necessary to verify the proper application of the internal control procedures and their effectiveness are a key area of focus for
our board of directors, our audit committee and senior management.
As a result of management’s evaluation
of our internal control over financial reporting, the following material weaknesses in our internal control over financial reporting
were identified as of December 31, 2015.
(i) We did not have sufficient resources
with an appropriate level of knowledge and experience to prepare financial statements with proper disclosures in accordance with
U.S. GAAP. As a result, the financial statements were not prepared properly and adequately.
(ii) We did not have resources with an appropriate
level of knowledge and experience in U.S. GAAP and controls over financial reporting to properly account for significant complex
transactions under U.S. GAAP and properly address impact of these transactions on controls over financial reporting. As a
result, several significant complex transactions were not accounted for properly and the impact of one transaction on controls
over financial reporting was not addressed properly.
The material weaknesses described above
may result in misstatement of our consolidated financial statements that would result in a material misstatement to our quarterly
or annual consolidated financial statements that would not be prevented or detected. As a result of the material weaknesses, management
has concluded that our internal control over financial reporting was ineffective as of December 31, 2015.
Our management has been engaged in, and
continues to be engaged in making necessary changes and improvements to the overall design of its control environment to address
the material weaknesses in internal control over financial reporting and the ineffectiveness of our disclosure controls and procedures
described above.
To remediate the material weaknesses described
above with respect to controls over the period-end financial statement reporting and controls over significant complex transactions,
we plan to continue to: (i) retain additional accounting personnel with appropriate knowledge and experience; (ii) provide more
comprehensive training on knowledge of U.S. GAAP and controls over financial reporting to our accounting team and other relevant
personnel; (iii) enhance our accounting manual to provide our accounting team with more comprehensive guidelines on the accounting
policies under U.S. GAAP and SEC rules and requirements; (iv) continue to engage an external consultant to review the accounting
and disclosures of our significant complex transactions and related impact on controls over financial reporting; and (v) continue
to review and improve key controls over financial reporting. We plan to continue to assess our standardized processes to further
enhance the effectiveness of our financial review, including the analysis and monitoring of financial information in a consistent
and thorough manner.
We expect that we will incur more costs
in the implementation of such measures. However, the implementation of these measures may not fully address the material weaknesses
and deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our
failure to correct the material weaknesses and control deficiencies or our failure to discover and address any other material weakness
or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with
applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial
condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected.
Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.
We may need additional capital,
and financing may not be available on terms acceptable to us, or at all.
We believe our current cash and cash equivalents,
short-term investments and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the
next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments,
including any marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our
cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional
equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain
whether financing will be available in amounts or on terms acceptable to us, if at all.
A severe or prolonged downturn
in the global or Chinese economy could materially and adversely affect our business and our financial condition.
The global macroeconomic environment is
facing challenges, including the escalation of the European sovereign debt crisis since 2011, the end of quantitative easing by
the U.S. Federal Reserve and the economic slowdown in the Eurozone in 2014. The growth rate of the Chinese economy has slowed down
since 2012 and such slowdown may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary
and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including
the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa,
which have resulted in volatility in oil and other markets, and over the conflicts involving Ukraine and Syria. There have also
been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in
relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well as changes
in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any sever or prolonged
slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial
condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets
to meet liquidity needs.
We have limited insurance coverage
which could expose us to significant costs and business disruption.
We maintain certain insurance policies to
safeguard against risks and unexpected events. We have purchased all risk property insurance covering our inventory in all of our
logistics centers and certain fixed assets such as equipment, furniture and office facilities. We do not maintain cargo transportation
insurance, although we may request courier companies to purchase insurance covering our products in our agreements with them. We
purchased third-party liability insurance covering our merchandise sales products against claims from consumers in relation to
alleged defects in product quality. For certain of our logistics staff, we purchased personal injury insurance. However, as the
insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business-related
insurance products. We do not maintain business interruption insurance or product liability insurance, nor do we maintain key-man
life insurance on our directors or officers. We cannot assure you that our insurance coverage is sufficient to prevent us from
any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all.
If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual
loss, our business, financial condition and results of operations could be materially and adversely affected.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be adversely affected
by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, the influenza A (H1N1), H7N9,
the Ebola virus or another epidemic. Any of such occurrences could cause severe disruption to our daily operations, and may even
require a temporary closure of our facilities. Such closures may disrupt our business operations and adversely affect our results
of operations. Our operation could also be disrupted if our suppliers, customers or business partners were affected by such natural
disasters or health epidemics.
Risks Related to Our Corporate Structure
If the PRC government deems that
the contractual arrangements in relation to our VIEs do not comply with PRC regulatory restrictions on foreign investment in the
relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject
to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of internet-based businesses,
including online retail businesses and distribution of online information, is subject to restrictions under current PRC laws and
regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added
telecommunication service provider (except for the e-commerce business) and 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 2007, as amended in 2015, or the Catalog and other applicable laws and regulations. As provided
for under the amendment to the Guidance Catalog of Industries for Foreign Investment in 2015, which became effective on April 10,
2015, “e-commerce business” is an exception to the above restriction on foreign investment. However, the above amended
Catalog does not define the “e-commerce business,” and its interpretation and enforcement involve significant uncertainties,
therefore, we cannot assure you that whether our online retail business and distribution of online information falls into the “e-commerce
business” and thus, whether we are permitted to conduct our value-added telecommunication services in the PRC through our
subsidiaries in which foreign investors own more than 50% of equity interests.
We are a Cayman Islands company and our
PRC subsidiaries are considered foreign-invested enterprises. Accordingly, as of the date of this annual report, none of our PRC
subsidiaries is eligible to provide value-added telecommunication services in China. To comply with PRC laws and regulations, we
conduct such business activities through Reemake Media Co., Ltd., or Reemake Media, a PRC VIE of ours. Reemake Media holds our
ICP license as an internet information provider. Reemake Media is 82.30% owned by Mr. Leo Ou Chen, our founder, chairman and
chief executive officer, 8.85% owned by Mr. Yusen Dai, our founder, director and executive officer, and 8.85% owned by Mr. Hui
Liu, a former employee of our company. All of the shareholders of Reemake Media are PRC citizens. We entered into a series of contractual
arrangements with each of our VIEs and their respective shareholders, which enable us to:
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exercise effective control over our VIEs;
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receive substantially all of the economic benefits of our VIEs; and
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have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when and to the extent permitted
by PRC law.
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Because of these contractual arrangements,
we are the primary beneficiary of our VIEs and hence consolidate their financial results as our VIEs under U.S. GAAP. For a detailed
discussion of these contractual arrangements, see “Item 4. Information on the Company – C. Organizational Structure.”
In the opinion of Fangda Partners, our PRC
legal counsel, (i) the ownership structure of our wholly-owned subsidiaries and VIEs in China does not result in any violation
of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our subsidiaries and VIEs and
their respective shareholders governed by PRC law will not result in any violation of PRC laws or regulations currently in effect.
However, we have been advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and
application of current and future PRC laws, regulations and rules; accordingly, the PRC regulatory authorities may take a view
that is contrary to or otherwise different from the opinion of our PRC legal counsel. For example, the Ministry of Commerce published
a discussion draft of the proposed Foreign Investment Law in January 2015, pursuant to which, VIEs that are controlled via contractual
arrangements would also be deemed as foreign invested enterprises, or FIEs, if they are ultimately “controlled” by
foreign investors. Therefore, for any companies with a VIE structure in an industry category that is in the “restriction
category” on the “negative list” which is to be separately issued by the State Council in the future, the VIE
structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state-owned
enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then
the VIEs will be treated as FIEs and any operation in the industry category on the “negative list” without market entry
clearance may be considered as illegal. Through our dual-class share structure, Mr. Leo Ou Chen and Mr. Yusen Dai, our
founders and principal beneficial owners of our company, who are PRC citizens, possess and control 87.0% of the voting power of
our company as of March 31, 2016. However, if the enacted version of the Foreign Investment Law and the final “negative list”
mandate further actions, such as market entry clearance granted by the Ministry of Commerce, to be completed by companies with
existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all. See “—Risks
Related to Doing Business in China—Substantial uncertainties exist with respect to the enactment timetable, the final version,
interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate
structure, corporate governance and business operations.” If our ownership structure, contractual arrangements and businesses
of our PRC subsidiaries or our VIEs are found to be in violation of any existing or future PRC laws or regulations, or we fail
to obtain the foresaid market entry clearance, or our PRC subsidiaries or our VIEs fail to obtain or maintain any of the required
permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations
or failures, including:
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revoking the business licenses and/or operating licenses of such entities;
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shutting down our servers or blocking our website, or discontinuing or placing restrictions or onerous conditions on our operation
through any transactions between our PRC subsidiaries and VIEs;
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imposing fines, confiscating the income from our PRC subsidiaries or our VIEs, or imposing other requirements with which we
or our VIEs may not be able to comply;
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requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with
our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic
interests from, or exert effective control over our VIEs; or
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restricting or prohibiting our use of the proceeds of our offshore offerings to finance our business and operations in China.
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Any of these actions could cause significant
disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our
business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities
of our VIEs that most significantly impact its economic performance, and/or our failure to receive the economic benefits from our
VIEs, we may not be able to consolidate such entities in our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements
with our VIEs and their respective shareholders for a portion of our business operations, which may not be as effective as direct
o ownership in providing operational control.
We have relied and expect to continue to
rely on contractual arrangements with our VIEs and their respective shareholders to hold our ICP license as an internet information
provider. For a description of these contractual arrangements, see “Item 4. Information on the Company – C. Organizational
Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over
our VIEs. For example, our VIEs and their respective shareholders could breach their contractual arrangements with us by, among
other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks,
in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of our VIEs,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn
could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under
the current contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their obligations
under the contracts to exercise control over our VIEs. The shareholders of our consolidated VIEs may not act in the best interests
of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend
to operate our business through the contractual arrangements with our VIEs. If any dispute relating to these contracts remains
unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation
and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure
by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material
and adverse effect on our business.” Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring
our control over the relevant portion of our business operations as direct ownership would be.
Any failure by our VIEs or their
shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect
on our business.
If our VIEs or their shareholders fail to
perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional
resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC law. For example, if the respective
shareholders of our VIEs were to refuse to transfer their equity interest in the VIEs to us or our designee if we exercise the
purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may
have to take legal actions to compel them to perform their contractual obligations.
All the agreements under our contractual
arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these
contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents
and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted
or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal
action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results
in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties
may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional
expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or
other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over
our VIEs, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business
in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections
available to you and us.”
The shareholders of our VIEs may
have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
Mr. Leo Ou Chen, Mr. Yusen Dai
and Mr. Hui Liu are the shareholders of Reemake Media, owning 82.30%, 8.85% and 8.85% equity interest, respectively, in Reemake
Media. Mr. Leo Ou Chen is our founder, chairman of board of directors and chief executive officer, Mr. Yusen Dai is our
founder, director and executive officer, and Mr. Hui Liu is a former employee of our company. See “Item 6. Directors,
Senior Management and Employees – E. Share Ownership.” The shareholders of our VIEs may have potential conflicts of
interest with us. These shareholders may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements
we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and
receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed
in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely
basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests
of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements
to address potential conflicts of interest between the respective shareholders of our VIEs and our company. Each of Mr. Leo
Ou Chen and Mr. Yusen Dai is also a director and executive officer of our company. We rely on Mr. Chen and Mr. Dai
to abide by the laws of the Cayman Islands and China, which provide that directors owe a fiduciary duty to the company that requires
them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal
gains. There is currently no specific and clear guidance under PRC laws that address any conflict between PRC laws and laws of
Cayman Islands in respect of any conflict relating to corporate governance. If we cannot resolve any conflict of interest or dispute
between us and the shareholders of our VIEs, we would have to rely on legal proceedings, which could result in disruption of our
business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation
to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIEs owe additional
taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations,
arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten
years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC
tax authorities determine that the contractual arrangements between our wholly-owned subsidiaries in China, our VIEs in China,
and their respective shareholders were not entered into on an arm’s length basis in such a way as to result in an impermissible
reduction in taxes under applicable PRC laws, rules and regulations, and adjust our VIEs income in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our
VIEs for PRC tax purposes, which could in turn increase their tax liabilities without reducing our subsidiaries’ tax expenses.
In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes
according to the applicable regulations. Our financial position could be materially and adversely affected if our VIEs’ tax
liabilities increase or if they are required to pay late payment fees and other penalties.
We may lose the ability to use
and enjoy assets held by our VIEs that are material to the operation of our business if the entities go bankrupt or become subject
to dissolution or liquidation proceedings.
As part of our contractual arrangements
with our VIEs, they hold certain assets that are material to the operation of our business, including the ICP license, and the
domain names and trademarks. If our VIEs go bankrupt and all or part of their assets become subject to liens or rights of third-party
creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our
business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell,
transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our
VIEs undergo a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some
or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our
business, financial condition and results of operations.
Risks Related to Doing Business in China
Changes in China’s economic,
political or social conditions or government policies could have a material and adverse effect on our business and operations.
Substantially all of our operations are
located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant
degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. Although the Chinese 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 Chinese government continues to play a significant role in regulating industry development by
imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through
allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While the Chinese economy has experienced
significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy.
The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some
of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition
and results of operations may be adversely affected by government control over capital investments or changes in tax regulations.
In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control
the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy
has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and adversely
affect our business and operating results.
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
The PRC legal system is based on written
statutes and prior court decisions have limited value as precedents. 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 uniform and
enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort
to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have
significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems.
Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in
a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation 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, could materially and adversely affect our business and impede
our ability to continue our operations.
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.
The PRC government extensively regulates
the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the
internet industry. These internet related laws and regulations are relatively new and evolving, and their interpretation and enforcement
involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions
may be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government
regulation of the internet industry include, but are not limited to, the following:
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We only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment
in businesses providing value-added telecommunication services (except for e-commerce) in China, including internet information
provision services. This may 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 online commerce industry in China is still in an early stage of development and the PRC laws applicable to the industry
are still evolving. Due to the lack of clarity under the existing PRC regulatory regime, we may be required to comply with additional
legal and licensing requirements. For example, we are providing mobile applications to mobile device users. It is uncertain if
our VIEs will be required to obtain a separate operating license in addition to the valued-added telecommunications business operating
licenses for Internet content provision service. Although we believe that we are not explicitly required to obtain such separate
license which is in line with the current market practice, there can be no assurance that we will not be required to apply for
an operating license for our mobile applications in the future.
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The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For
example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office
(with the involvement of the State Council Information Office, the MIIT, and the Ministry of Public Security). The primary role
of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the
relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation
to the internet industry.
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New laws and regulations may be promulgated that will regulate internet activities, including online retail. If these new laws
and regulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these
new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations,
we could be subject to penalties.
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The Circular on Strengthening the Administration
of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MIIT in July 2006, prohibits domestic
telecommunication service providers from leasing, transferring or selling telecommunications business operating licenses to any
foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation
of a telecommunications business in China. According to this circular, either the holder of a value-added telecommunication services
operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in their provision
of value-added telecommunication services. The circular also requires each license holder to have the necessary facilities, including
servers, for its approved business operations and to maintain such facilities in the regions covered by its license. 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 such license holder, including
revoking its ICP license. Currently, Reemake Media, a PRC VIE of ours, holds an ICP license, and it operates our website. Reemake
Media owns the relevant domain names and trademarks in connection with our value-added telecommunications business and has the
necessary personnel to operate such website.
The interpretation and application of existing
PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities
of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses
required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones.
Substantial uncertainties exist
with respect to the enactment timetable, the final version, interpretation and implementation of draft PRC Foreign Investment Law
and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The Ministry of Commerce published a discussion
draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, 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 Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. The Ministry of Commerce has solicited comments on this draft and substantial uncertainties
exist with respect to its enactment timetable, the final version, interpretation and implementation. The draft Foreign Investment
Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business
operations in many aspects.
Among other things, the draft Foreign Investment
Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether
a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities
established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign
jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce or its local counterparts, treated as
a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. In this connection,
“control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more
of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the
power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to
exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having
the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial
matters or other key aspects of business operations. Once an entity is determined to be an FIE, it will be subject to the foreign
investment restrictions or prohibitions, if the FIE is engaged in the industry listed in the “negative list” which
will be separately issued by the State Council later. Unless the underlying business of the FIE falls within the negative
list, which calls for market entry clearance by the Ministry of Commerce or its local counterparts, prior approval from the government
authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.
The “variable interest entity”
structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits
in the industries that are currently subject to foreign investment restrictions in China. See “—Risks Related to Our
Corporate Structure—If the PRC government deems that the contractual arrangements in relation to our VIEs do not comply with
PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in
those operations” and “Item 4. Information on the Company – C. Organizational Structure.” Under the draft
Foreign Investment Law, VIEs that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately
“controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is
in the “restriction category” on the “negative list,” the VIE structure may be deemed legitimate only if
the ultimate controlling person(s) is/are of PRC nationality (either PRC State-owned enterprises or agencies or PRC citizens).
Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs and any
operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
Through our dual-class share structure,
Mr. Leo Ou Chen and Mr. Yusen Dai, our founders and principal beneficial owners of our company, who are PRC citizens,
possess and control 87.0% of the voting power of our company as of March 31, 2016. However, in the draft Foreign Investment Law,
the Ministry of Commerce has not taken a position on what actions shall be taken with respect to the existing companies with a
VIE structure, whether or not these companies are controlled by Chinese parties. Moreover, it is uncertain whether the value-added
telecommunication service industry, in which our VIEs operate, will be subject to the foreign investment restrictions or prohibitions
set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative
list” mandate further actions, such as market entry clearance granted by the Ministry of Commerce, to be completed by companies
with existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.
The draft Foreign Investment Law, if enacted
as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the
draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and
the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment
and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are
required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may
potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject
to criminal liabilities.
Regulation and censorship of information
disseminated over the internet in China may adversely affect our business, and we may be liable for content that is displayed on
our website.
China has enacted laws and regulations governing
internet access and the distribution of products, services, news, information, audio-video programs 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 information were 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 materially and adversely
affect our business, financial condition and results of operations. We may also be subject to potential liability for any unlawful
actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficult
to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from
operating our website in China.
We may rely on dividends and other
distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation
on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct
our business.
We are a holding company, and we may rely
on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including
the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our
PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to
pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our subsidiaries to adjust their
taxable income under the contractual arrangements they currently has in place with our VIEs in a manner that would materially and
adversely affect their ability to pay dividends and other distributions to us. See “—Risks Related to Our Corporate
Structure—Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they
may determine that we or our PRC VIEs owe additional taxes, which could negatively affect our financial condition and the value
of your investment.”
Under PRC laws and regulations, our PRC
subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax
profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise
is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve
funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned
enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds.
These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any limitation on the ability of our PRC
subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
See also “—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could
result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
PRC regulation of loans to and
direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent
us from using the proceeds of our offshore offerings to make loans to or make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Under PRC laws and regulations, we are permitted
to utilize the proceeds from our offshore offerings to fund our PRC subsidiaries by making loans to or additional capital contributions
to our PRC subsidiaries, subject to applicable government registration and approval requirements.
Any loans to our PRC subsidiaries, which
are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations.
For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered
with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of
foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry
of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. For example, the current
amounts of approved total investment and registered capital of Beijing Jumei are RMB41.6 million and RMB41.6 million, respectively,
and the current amounts of approved total investment and registered capital of Tianjin Jumeiyoupin Technology Co., Ltd., or Tianjin
Jumei, are RMB122.5 million and RMB122.5 million, respectively, which means each of Beijing Jumei and Tianjin Jumei cannot obtain
any loans from our entities outside of China currently.
We may also decide to finance our PRC subsidiaries
by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce or its local counterpart
according to the PRC laws and regulations currently in effect. In addition, SAFE issued a circular in September 2008, 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 unless otherwise provided by law, may not be used for equity investments within the PRC. In addition, SAFE strengthened
its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company.
The use of such RMB capital may not be altered 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. Violations of SAFE Circular No. 142 could result in severe
monetary or other penalties. To satisfy and facilitate the business and capital operations of foreign invested enterprises in the
PRC, on July 15, 2014, SAFE issued a SAFE Circular 36 which launched the pilot reform of administration regarding conversion of
foreign currency registered capitals of foreign-invested enterprises in 16 pilot areas. According to the SAFE Circular 36, an ordinary
foreign-invested enterprise with a business scope containing “investment” in the pilot areas is permitted to use Renminbi
converted from its foreign-currency registered capital to make equity investments in the PRC, subject to certain registration and
settlement procedure as set forth in the SAFE Circular 36. On April 8, 2015, SAFE released the Notice on the Reform of the Management
Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which has come into
force and supersede SAFE Circular No. 142 and SAFE Circular 36 from June 1, 2015. SAFE Circular 19 has made certain adjustments
to some regulatory requirements on the settlement of foreign currency capital of foreign-invested enterprises, and some foreign
exchange restrictions under SAFE Circular No. 142 has been lifted. For example, the RMB capital converted from foreign currency
registered capital of a foreign-invested enterprise can be used for equity investments in the PRC but cannot be used to provide
entrusted loans or repay loans between non-financial enterprises. Nevertheless, Circular 19 also reiterates the principle that
Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used
for purposes beyond its business scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will
be interpreted and implemented in practice.
In light of the above requirements imposed
by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 19,
we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our
PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received
or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
PRC regulation of loans by offshore
holding companies to PRC entities and governmental control of currency conversion may limit our ability to fund the operations
of our consolidated VIEs.
Due to the restrictions imposed on loans
in foreign currencies extended to any PRC domestic companies, we are not likely to have our Cayman Islands holding company or other
offshore entities to use the proceeds from our offshore offerings to extend loans to our VIEs, the PRC domestic companies. Meanwhile,
we are not likely to finance the activities of our VIEs by means of capital contributions due to regulatory restrictions relating
to foreign investment in PRC domestic enterprises engaged in value-added telecommunications services. In addition, due to the restrictions
on a foreign-invested enterprise’s use of Renminbi converted from foreign-currency registered capital under PRC regulations,
including SAFE Circular 19, as described under the foregoing risk factor, our PRC subsidiaries may be unable to use the Renminbi
converted from their registered capital to provide entrusted loans through financial institutions to our VIEs. Additionally, our
PRC subsidiaries are not prohibited under PRC laws and regulations from using their capital generated from their operating activities
to provide entrusted loans through financial institutions to our VIEs. We will assess the working capital requirements of our VIEs
on an ongoing basis and, if needed, may have our PRC subsidiaries to use their capital from operating activities to provide financial
support to our VIEs.
Fluctuations in exchange rates
could have a material and adverse effect on our results of operations and the value of your investment.
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.
Significant revaluation of the RMB may have
a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars into RMB for
capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have
an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our 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 amount available to us. In addition, appreciation
or depreciation in the value of the RMB relative to U.S. dollars would affect our financial results reported in U.S. dollar terms
regardless of any underlying change in our business or results of operations.
Very limited hedging options are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure
or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability
to convert RMB into foreign currency.
Governmental control of currency
conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government imposes controls on the
convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially
all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands may rely on dividend payments
from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing 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. Therefore, our
PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition
that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation,
such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But 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 loans denominated in foreign currencies. The PRC government may also
at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be
able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
The M&A Rules and certain
other PRC 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.
The Regulations on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended
in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements
in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign
investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the Ministry of Commerce shall
be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review
rules issued by the Ministry of Commerce that became effective in September 2011 specify that mergers and acquisitions by foreign
investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors
may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict
review by the Ministry of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by
structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete
such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry
of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability
to expand our business or maintain our market share.
PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC
subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
On July 4, 2014, the SAFE promulgated the
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Overseas Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, which replaced the former Circular on Issues
Relating to the Administration of Foreign Exchange in Fund-Raising and Round Trip Investment Activities of Domestic Residents Conducted
via Offshore Special Purpose Vehicles (generally known as SAFE Circular No. 75) promulgated by the SAFE on October 21, 2005.
SAFE Circular No. 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity,
for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in
domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.”
SAFE Circular No. 37 further requires amendment to the registration in the event of any significant changes with respect to the
special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger,
division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to complete
the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with
the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls. On February 28, 2015, SAFE released the Notice on Further Simplifying and Improving Policies for the Foreign Exchange
Administration of Direct Investment, or SAFE Circular 13, which came into effect on June 1, 2015. According to this notice, local
banks will examine and handle foreign exchange registrations for overseas direct investment, including the initial foreign exchange
registrations and amendment registrations, under SAFE Circular No.37. See “Item 4. Information on the Company – B.
Business Overview – Regulation – SAFE Regulations on Offshore Special Purpose Companies Held by PRC Residents”
for more information about SAFE Circular No. 37.
We have requested PRC residents who we know
hold direct or indirect interest in our company to make the necessary applications, filings and amendments as required under SAFE
Circular No. 37 and other related rules. To our knowledge, all of our shareholders who are PRC citizens and hold interest
in us, have registered with the local SAFE branch as required under SAFE Circular No. 37. However, we may not be informed of the
identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that
these PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements
under SAFE Circular No. 37 or other related rules. The failure or inability of our PRC resident shareholders to comply with
the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border
investment activities, limit our PRC subsidiaries’ ability to distribute dividends and the proceeds from any reduction in
capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into our PRC subsidiaries.
Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability
under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability
to distribute profits to you could be materially and adversely affected.
Any failure to comply with PRC
regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or
us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices
on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas
Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens
who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas
publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which
could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas
entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase
or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC
for a continuous period of not less than one year and who have been granted options are subject to these regulations. Failure to
complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory
uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees
under PRC law. See “Item 4. Information on the Company – B. Business Overview – Regulation – SAFE Regulations
on Employee Stock Incentive Plan.” We have made SAFE registrations for employee stock incentive plans.
Discontinuation of any of the
preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely affect
our financial condition and results of operations.
The PRC Enterprise Income Tax Law and its
implementation rules have adopted a uniform statutory enterprise income tax rate of 25% to all enterprises in China. The PRC Enterprise
Income Tax Law and its implementation rules also permit qualified “high and new technology enterprises,” or HNTEs,
to enjoy a preferential enterprise income tax rate of 15% upon filing with relevant tax authorities. The qualification as a HNTE
generally has a valid term of three years and the renewal of such qualification is subject to review by the relevant authorities
in China. Reemake Media, our consolidated VIE, obtained its HNTE certificate in September 2015 with a valid period of three years.
Tianjin Cyril Information Technology Co., Ltd., or Tianjin Cyril, one of our PRC subsidiaries, obtained its HNTE certificate in
October 2014 with a valid period of three years. Therefore, Tianjin Cyril is eligible to enjoy a preferential tax rate of 15% from
2014 through 2016, as long as it maintains the HNTE qualification and obtains approval from the relevant tax authority. The discontinuation
of the preferential income tax treatments currently available to Reemake Media and Tianjin Cyril could have a material and adverse
effect on our result of operations and financial condition. We cannot assure you that we will be able to maintain or lower our
current effective tax rate in the future.
According to the Notice on the Enterprise
Income Tax regarding Deepening Implementation of Grand Development of the Western Region issued by the State Administration of
Taxation, enterprises located in the western region of the PRC with principal net revenues of over 70% generated from encouraged
category of western region are entitled to a preferential income tax rate of 15% for ten years from January 1, 2011 to December 31,
2020. Chengdu Jumeiyoupin Science and Technology Co., Ltd., or Chengdu Jumei, a subsidiary of our company located within the western
region of the PRC and meets the criteria as set forth in the notice, is entitled to the preferential income tax rate of 15% starting
from 2013 upon approval by the relevant tax authority. If Chengdu Jumei fails to continue to meet the criteria set forth in the
notice, its applicable enterprise income tax rate may increase to 25%, which could have an adverse effect on our financial condition
and results of operations.
In addition, our PRC subsidiaries have received
various financial subsidies from PRC local government authorities. The financial subsidies are discretionary incentives and policies
adopted by PRC local government authorities. Local governments may decide to change or discontinue such financial subsidies at
any time. The discontinuation of such financial subsidies or imposition of any additional taxes could adversely affect our financial
condition and results of operations.
The Change of PRC regulation of
import tax on consumer goods imported through cross-border e-commerce platforms could adversely affect our financial condition
and results of operations.
Pursuant to the Notice on Pilot Bonded
Area Import Pattern of Cross-Border Trade E-Commerce Services, which was issued by the PRC General Administration of Customs
on March 4, 2014, consumer goods imported through cross-border e-commerce platforms shall be classified as “personal
baggage or postal articles”. A personal baggage or postal articles tax was levied before the online retailors could
deliver goods to buyers, and the personal baggage or postal articles tax shall be exempted if the payable amount is lower
than RMB 50. The rate of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for different
categories of products imported. Specifically, a 50% rate was applied to cosmetics and a 10% rate was applied to maternity
and baby care products. Pursuant to the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation issued by PRC
Ministry of Finance, General Administration of Customs and State Administration of Taxation on March 24, 2016, which came
into effect on April 8, 2016, the pilot bonded area import pattern of cross-border e-commerce was abolished. Under the new
pattern, the goods imported through cross-border e-commerce platforms will no longer be treated as “personal baggage or
postal articles” but normal goods, so the value-added tax and the consumption tax on those goods will be levied as on
normal imported goods but on a 70% basis, and the tariff on those goods will be exempted. Normally, a 17% value-added tax
will be levied on most products sold on our platform and a 30% consumption tax will be levied on cosmetics and perfumes
without tax preference under the new pattern, while no consumption tax will be levied on skin care products, maternity and
baby care products.
Furthermore, the new pattern only applies
to goods listed within the scope of the Cross-Border E-Commerce Retail Importation Goods Inventory, or the Inventory, and thus
goods beyond the scope of this Inventory will not have a tax code and may be prohibited from selling on the cross-border e-commerce
platforms. Ministry of Finance, National Development and Reform Commission, Ministry of Industry and Information Technology, State
Administration of Taxation, General Administration of Customs and other relevant authorities have jointed issued the Cross-Border
E-Commerce Retail Importation Goods Inventory and the Cross-Border E-Commerce Retail Importation Goods Inventory (Second Batch)
separately on April 6, 2016 and April 15, 2016. The Inventory may be updated from time to time. Specifically, cosmetics imported
for the first time, nutrition supplements and other special food products required to be registered with the State Food and Drug
Administration are excluded from the scope of the Inventory. We are prohibited from selling the cosmetics imported for the first
time on our platform and we are also prohibited from selling nutrition supplements and other special food products before required
registration certificates for these products have been legitimately obtained. However, pursuant to a transition policy issued by
the General Administration of Customs, the goods which have been imported to or in transit to the bonded areas and special regulated
areas of customs before April 8, 2016, can still be sold on the cross-border e-commerce platforms, even if these goods are not
listed on the Inventory. See “Item 4. Information on the Company – B. Business Overview – Regulation –Regulations
on Tax-Import Tax” for more information about the pattern change. The regulation pattern change regarding the import tax
on consumer goods imported through cross-border e-commerce platforms may substantially increase import tax imposed on buyers and
thus raise the price of goods sold on our online platform, which may impair our competitive advantage and could adversely affect
our financial condition and results of operations.
If we are classified as a PRC
resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our
non-PRC shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law
and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the
PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%.
The implementation rules define the term “de facto management body” as the body that exercises full and substantial
control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In April 2009,
the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.
Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled
by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s
general position on how the “de facto management body” text should be applied in determining the tax resident status
of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a
PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China
and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the
primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s
financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the
enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located
or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe Jumei International Holding Limited
is not a PRC resident enterprise for PRC tax purposes. See “Item 10. Additional Information – E. Taxation – People’s
Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax
authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If
the PRC tax authorities determine that Jumei International Holding Limited is a PRC resident enterprise for enterprise income tax
purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident
enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may
be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated
as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be
subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to
be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20%
unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of
Jumei International Holding Limited would be able to claim the benefits of any tax treaties between their country of tax residence
and the PRC in the event that Jumei International Holding Limited is treated as a PRC resident enterprise.
We may not be able to obtain certain
benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through Jumei Hongkong Limited.
We are a holding company incorporated under
the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy
part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies
to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement
between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion
on Income, or the Double Tax Avoidance Arrangement, and a Circular 81 issued by the State Administration of Taxation, such withholding
tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise throughout the 12 months prior
to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements
under the Double Tax Avoidance Arrangement and other applicable PRC laws. 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.
See “Item 4. Information on the Company – B. Business Overview – Regulation – Regulations on Tax.”
The relevant PRC tax authority will conduct a comprehensive analysis and determine whether to grant approval on a case-by-case
basis. We cannot assure you that we will be able to obtain the approval from the relevant PRC tax authority and enjoy the preferential
withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to
Jumei Hongkong Limited.
We may face uncertainties with
respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment
of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies
On February 3, 2015, the State Administration
of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises,
or Bulletin 7, which replaced previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share
Transfer by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009.
Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise,
by non-PRC resident enterprises may be treated as a direct transfer of PRC taxable assets, if such arrangement does not have a
reasonable commercial purpose and is established for the purpose of avoiding payment of PRC enterprise income tax. As a result,
gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable
assets” include assets attributed to an establishment in China, immoveable properties located in China, and equity investments
in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise,
would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose”
of the transaction arrangement, features to be taken into consideration include the followings: whether the main value of the equity
interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise
mainly consist of direct or indirect investment in China or if their income mainly derive from China; whether the offshore enterprise
and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their
actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability
of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax
treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain
is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would
consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable
properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment
or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential
tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments
has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such
tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor
to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where
such shares are acquired from a transaction through a public stock exchange.
As Bulletin 7 is lately promulgated, it
is not clear how it will be implemented. 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 the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions will
be increased, which may have an adverse effect on our financial condition and results of operations.
Registered public accounting
firms in China, including our independent registered public accounting firm, are not inspected by the U.S. Public Company Accounting
Oversight Board, which deprives us and our investors of the benefits of such inspection.
Auditors of companies whose shares are registered
with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, including our independent
registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and
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 applicable to auditors. Our independent registered public accounting firm is located
in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB, notwithstanding the requirements of U.S.
law, is currently unable to conduct inspections without the approval of the Chinese authorities. In May 2013, PCAOB announced that
it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or
the CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and
exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United
States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit
joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
This lack of PCAOB inspections in China
prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting
firm. As a result, we and investors in our common stock are deprived of the benefits of such PCAOB inspections. The inability of
the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent
registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China
that are subject to PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our
audit procedures and reported financial information and the quality of our financial statements.
If additional remedial measures
are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative
proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we could be unable to
timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act.
In December 2012, the SEC instituted administrative
proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging
that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide
to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United
States. On January 22, 2014, the administrative law judge presiding over the matter rendered an initial decision that each of
the firms had violated the SEC’s rules of practice by failing to produce audit workpapers to the SEC. The initial decision
censured each of the firms and barred them from practicing before the SEC for a period of six months. The Big Four PRC-based accounting
firms appealed the administrative law judge’s initial decision to the SEC. The administrative law judge’s decision
does not take effect unless and until it is endorsed by the SEC. On February 6, 2015, the four China-based accounting firms each
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 and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide
the SEC with access to Chinese firms’ audit documents via the CSRC in response to future document requests by the SEC made
through the CSRC. If the Big Four PRC-based accounting firms, including our independent registered public accounting firm, fail
to comply with the documentation production procedures that are in the settlement agreement or if there is a failure of the process
between the SEC and CSRC, the SEC retains authority to impose a variety of additional remedial measures on the firms, such as
imposing penalties on the firms and restarting the proceedings against the firms, depending on the nature of the failure. If the
accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with
SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC
requirements could ultimately lead to the delisting of our ADSs from the NYSE or the termination of the registration of our ordinary
shares under the Exchange Act, which would substantially reduce or effectively terminate the trading of our ADSs in the United
States.
Risks Related to Our American Depositary Shares
There can be no assurance that the proposed going-private
transaction will continue to be pursued, approved or successfully consummated. Potential uncertainty involving
the proposed going-private transaction may adversely affect our business and the market price of our ADSs.
On February 17, 2016, our board of
directors received a non-binding proposal letter from Mr. Leo Ou Chen, Mr. Yusen Dai, and Sequoia funds (together, the
“buyer group”), proposing a “going-private” transaction to acquire all of our outstanding ordinary
shares not already owned by the buyer group for US$7.00 in cash per ADS. Our board of directors has formed a special
committee consisting of two independent and disinterested directors, Mr. Sean Shao (as chairman) and recently-appointed
director Mr. Adam J. Zhao, to consider the “going-private” proposal. There can be no assurance that the
going-private transaction will continue to be pursued, approved or consummated.
The going-private transaction, whether or
not pursued or consummated, presents a risk of diverting management focus, employee attention and resources from other strategic
opportunities and from operational matters. In addition, if we sign any definitive agreement with the buyer group, we may be subject
to various restrictions under those agreements on the conduct of our business prior to the completion of the transaction, which
may delay or prevent us from undertaking business opportunities that may arise pending completion of the transaction. Also, any
development of the transaction, such as entering into or termination of any definitive agreement, may increase volatility of the
trading price of our ADSs.
The market price for our ADSs
has fluctuated significantly and may continue to be volatile.
The trading prices of our ADSs have fluctuated
significantly since we first listed our ADSs. Since our ADSs became listed on the NYSE on May 16, 2014, the trading price of our
ADSs has ranged from US$4.9 to US$39.5 per ADS, and the last reported trading price on April 28, 2016 was US$6.34 per
ADS. The trading prices of our ADSs may continue to fluctuate widely and be volatile due to factors beyond our control. This may
happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance
or deteriorating financial results of other listed internet or other companies based in China that have listed their securities
in the United States in recent years. The securities of some of these companies have experienced significant volatility since
their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities.
The trading performances of other Chinese companies’ securities after their offerings, including internet and e-commerce
companies, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently
may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news
or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other
Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless
of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant
price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the
United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material
and adverse effect on the market price of our ADSs.
In addition to the above factors, the price
and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:
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regulatory developments affecting us, our customers, suppliers or our industry;
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announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;
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changes in the economic performance or market valuations of other online retailers;
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actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
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changes in financial estimates by securities research analysts;
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conditions in the online retail industry;
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announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures
or capital commitments;
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additions to or departures of our senior management;
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detrimental negative publicity about us, our management or our industry;
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fluctuations of exchange rates between the RMB and the U.S. dollar;
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release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
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sales or perceived potential sales of additional ordinary shares or ADSs.
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If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading
volume could decline.
The trading market for our ADSs will depend
in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts
do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ADSs or publish
inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these
analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets,
which, in turn, could cause the market price or trading volume for our ADSs to decline.
As we do not expect to pay dividends
in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.
We currently intend to retain most, if not
all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not
expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source
for any future dividend income.
Our board of directors has discretion as
to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides to declare and pay dividends,
the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and
cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our
financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return
on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee
that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return
on your investment in our ADSs and you may even lose your entire investment in our ADSs.
Substantial future sales or perceived
potential sales of our ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs in the public market,
or the perception that these sales could occur, could cause the market price of our ADSs to decline and could materially impair
our ability to raise capital through equity offerings in the future. Certain holders of our ordinary shares may cause us to register
under the Securities Act of 1933, as amended, or the Securities Act, the sale of their shares. Registration of these shares under
the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration. We cannot predict what effect, if any, market sales of securities held
by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the
market price of our ADSs.
Our dual-class voting structure
with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any
change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our ordinary shares are divided into Class A
ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A
ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per
share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof,
while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer
of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B
ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares. As of March
31, 2016, Mr. Leo Ou Chen and Mr. Yusen Dai held 58,804,840 Class B ordinary shares, representing approximately
87.0% of the aggregate voting power of our company.
As a result of the dual class share structure
and the concentration of ownership, holders of our Class B ordinary shares have considerable influence over matters such as decisions
regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant
corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration
of ownership may discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving
our other shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce
the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others
from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares
and ADSs may view as beneficial.
Certain existing shareholders
have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.
As of March 31, 2016, Mr. Leo Ou
Chen and Mr. Yusen Dai collectively own an aggregate of 40.1% of our outstanding ordinary shares on an as-converted basis,
representing 87.0% of the total voting power of our outstanding ordinary shares. As a result, they have substantial influence over
our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our
assets and election of directors.
They may take actions that are not in the
best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control
of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders.
In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’
perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated
entities, see “Item 6. Directors, Senior Management and Employees – E. Share Ownership.”
In addition, we are a “controlled
company” as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen beneficially owns a majority of the aggregate
voting power of our company. For so long as we remain a controlled company, we are permitted to elect to rely on certain exemptions
from corporate governance rules:
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an exemption from the rule that a majority of our board of directors must be independent directors;
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the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing
the committee’s purpose and responsibilities;
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the requirement that the nominating committee be composed entirely of independent directors and have a written charter addressing
the committee’s purpose and responsibilities; and
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the requirement of an annual performance evaluation of the nominating and corporate governance and compensation committees.
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As a result, our independent directors may
not have as much influence over our corporate governance as they would if we were not a controlled company.
You, as holders of ADSs, may have
fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights
of our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance
with the provisions of the deposit agreement. Under our second amended and restated memorandum and articles of association, the
minimum notice period required to convene a general meeting is ten days. When a general meeting is convened, you may 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. In addition, the depositary and its agents may 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 your ADSs. Furthermore, the depositary and its agents 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 may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested.
In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
Your right to participate in any
future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights
to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United
States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption
from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to
you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities
Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect
to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not
be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate
in our rights offerings and may experience dilution in your holdings.
You may not receive cash dividends
if the depositary decides it is impractical to make them available to you.
The depositary of our ADSs has agreed to
pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of
Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable
or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not
practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost
of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations
on transfer of your ADSs.
Your ADSs are transferable on the books
of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient
in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers
of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable
to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement,
or for any other reason.
Certain judgments obtained against
us by our shareholders may not be enforceable.
We are an exempted company incorporated
under the laws of the Cayman Islands. We conduct our operations in China and substantially all of our assets are located in China.
In addition, our directors and executive officers reside within China, and most of the assets of these persons are located within
China. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the
United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
You may face difficulties in protecting
your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under
Cayman Islands law.
We are an exempted company limited by shares
incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our second amended and restated memorandum
and articles of association, the Companies Law (2013 Revision) of the Cayman Islands and the common law of the Cayman Islands.
The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our
directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law
of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the
common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established
as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands
has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed
and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted
companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of
shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether
or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them
available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts
necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, public
shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the
board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Our memorandum and articles of
association contain anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights
of holders of our Class A ordinary shares and ADSs.
Our second amended and restated memorandum
and articles of association contain certain provisions that could limit the ability of others to acquire control of our company,
including a dual-class voting structure that gives disproportionate voting power to the Class B ordinary shares beneficially
owned by our founders, and a provision that grants authority to our board of directors to establish from time to time one or more
series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares,
the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to
sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of
our company in a tender offer or similar transactions.
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. However, the information we are required to file with or furnish
to the SEC are 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 company incorporated in the
Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ
significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders
than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a Cayman Islands company listed on the
NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit a foreign private issuer like
us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands,
which is our home country, may differ significantly from the NYSE corporate governance listing standards. Currently, we do not
rely on home country practice with respect to our corporate governance. However, if we choose to follow home country practice in
the future, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing
standards applicable to U.S. domestic issuers.
We may be classified as a passive
foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income
tax consequences to United States investors in the ADSs or Class A ordinary shares.
We will be a “passive foreign investment
company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such
year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets
(as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the
“asset test”). Depending upon the value of our assets, which may be determined based, in part, on the market price
of our ADSs, and the nature of our assets and income over time, we could be classified as a passive foreign investment company,
or PFIC, for United States federal income tax purposes. Although the law in this regard is not entirely clear, we treat our VIEs
and each of their subsidiaries as being owned by us for United States federal income tax purposes, because we control their management
decisions and we are entitled to substantially all of the economic benefits associated with such entities, and, as a result, we
consolidate the results of their operations in our consolidated U.S. GAAP financial statements. If it is determined, however, that
we do not own the stock of our VIEs or any of their subsidiaries for United States federal income tax purposes, we may be treated
as a PFIC for the current taxable year and any subsequent taxable years. Assuming we are the owner of our VIEs and each of their
subsidiaries for United States federal income tax purposes, and based upon our income and assets, including goodwill, and the value
of our ADSs and Class A ordinary shares, we do not believe that we were a PFIC for the taxable year ended December 31, 2015 and
do not anticipate becoming a PFIC in the foreseeable future. While we do not anticipate becoming a PFIC, fluctuations in the market
price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years.
Because of the uncertainties in the application
of the relevant rules and because PFIC status is a factual determination made annually after the close of each taxable year on
the basis of the composition of our income and the value of our active versus passive assets for that year, there can be no assurance
that we will not be a PFIC for the current taxable year or any future taxable year. The overall level of our passive assets will
be affected by how, and how quickly, we spend our liquid assets. Under circumstances where gross income from activities that produce
passive income significantly increase relative to our gross income from activities that produce non-passive income or where we
determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially
increase.
If we were to be or become classified as
a PFIC, a U.S. Holder (as defined in “Item 10. Additional Information – E. Taxation – United States Federal Income
Tax Considerations—General”) may incur significantly increased United States federal income tax on gain recognized
on the sale or other disposition of the ADSs or Class A ordinary shares and on the receipt of distributions on the ADSs or
Class A ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the
United States federal income tax rules. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our
ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which
such U.S. Holder holds our ADSs or Class A ordinary shares. You are urged to consult your tax advisor concerning the United
States federal income tax consequences of holding and disposing of ADSs or Class A ordinary shares if we are or become classified
as a PFIC. For more information see “Item 10. Additional Information—E. Taxation— United States Federal Income
Tax Considerations—Passive Foreign Investment Company Considerations” and “—Passive Foreign Investment
Company Rules.”
We incurred increased costs as
a result of being a public company, and we cannot predict or estimate the amount of additional future costs we may incur or the
timing of such costs.
We are a public company and have incurred
significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as
well as rules subsequently implemented by the SEC and NYSE, impose various requirements on the corporate governance practices of
public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate
activities more time-consuming and costly. As we generated more than US$1.0 billion in net revenues for our latest fiscal year
ended December 31, 2015, we are no longer an “emerging growth company” and will incur significant expenses and devote
substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 and the other rules and regulations of the SEC. We cannot predict or estimate with any degree of certainty the amount of additional
costs we may incur or the timing of such costs.
We are named as a defendant in a putative
shareholder class action lawsuit in the United States, and we may be involved in more class action lawsuits in the future. Such
lawsuits current and could further divert a significant amount of our management’s attention and other resources from our
business and operations, which could harm our results of operations and require us to incur significant expenses to defend the
lawsuits. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital
in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could
have a material adverse effect on our financial condition and results of operations.
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Item 4.
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Information on the Company
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A.
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History and Development of the Company
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Our founder, chairman and chief executive
officer Mr. Leo Ou Chen and two co-founders formed Reemake Media Co., Ltd., or Reemake Media, in Beijing, China in August
2009 and commenced our online beauty products retail business under our Jumei (
聚美
)
brand through Reemake Media in March 2010. In January 2011, Reemake Media acquired 100% of the equity interests in Beijing Shengjinteng
Network Science and Technology Co., Ltd., or Beijing Shengjinteng.
In August 2010, we incorporated Jumei International
Holding Limited, an exempted company with limited liability, under the laws of the Cayman Islands as our offshore holding company
in order to facilitate international financing. In September 2010, we established a wholly-owned Hong Kong subsidiary, Jumei Hongkong
Limited to be our intermediate holding company. In March 2011, Jumei Hongkong Limited established a wholly-owned PRC subsidiary,
Jumei Youpin (Beijing) Science and Technology Services Co., Ltd., which was subsequently renamed as Beijing Silvia Technology Service
Co., Ltd, or Beijing Jumei. In March 2014, we established a new wholly-owned Hong Kong subsidiary named Jumei Hongkong Holding
Limited, which operates our
Jumei Global
business.
Due to PRC legal restrictions on foreign
ownership and investment in value-added telecommunication service businesses, we conduct such activities through contractual arrangements
with Reemake Media, a consolidated VIE of ours in China. Through Beijing Jumei, we obtained control over Reemake Media in April
2011 by entering into a series of contractual arrangements with Reemake Media and the shareholders of Reemake Media. The contractual
arrangements, except for the exclusive consulting and services agreement, were subsequently amended and restated in January 2014.
Reemake Media holds an ICP license for our operation as an internet information provider and operates our website.
In addition to our significant subsidiaries
and significant consolidated VIE, Reemake Media and its subsidiaries, we have certain other consolidated VIEs. Through Tianjin
Jumei we obtained control over Tianjin Yingxun Technology Co., Ltd., or Tianjin Yingxun, in August 2014. We intended to have Tianjin
Yingxun provide certain technology support services to other entities within our corporate group and Tianjin Yingxun began its
application for an ICP license. However, our business plan has since changed with respect to Tianjin Yingxun, and it did not carry
out any material business operation or held any operating license that was material to our company as of the date of this annual
report.
We have entered into a series of contractual
arrangements with our VIEs and their respective shareholders. These contractual arrangements allow us to:
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exercise effective control over our VIEs;
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receive substantially all of the economic benefits of our VIEs; and
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have an exclusive option to purchase all or part of the equity interests and assets in our VIEs at the lowest price when and
to the extent permitted by PRC law.
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As a result of these contractual arrangements,
we are the primary beneficiary of each of our consolidated VIEs. We have consolidated the financial results of our VIEs and their
subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
Jumei Hongkong Limited established Shanghai
Paddy Commerce and Trade Co., Ltd. in June 2012, Chengdu Jumeiyoupin Science and Technology Co., Ltd., or Chengdu Jumei, in July
2012, and Tianjin Cyril Information Technology Co., Ltd., or Tianjin Cyril, and Tianjin Darren Trading Co., Ltd. in March 2013.
Tianjin Darren Trading Co., Ltd. was subsequently renamed as Tianjin Qianmei International Trading Co., Ltd., or Tianjin Qianmei,
in March 2014. Shanghai Paddy Commerce and Trade Co., Ltd. was subsequently renamed Shanghai Jumeiyoupin Technology Co., Ltd.,
or Shanghai Jumei, in June 2014. In December 2013, Jumei Hongkong Limited established Tianjin Venus Technology Co., Ltd., a wholly-owned
subsidiary, which was subsequently renamed as Tianjin Jumeiyoupin Technology Co., Ltd.. Tianjin Jumei established Zhengzhou Venus
Information Technology Co., Ltd., or Zhengzhou Venus in August 2014, Ningbo Jumeiyoupin Network Technology Co., Ltd. in May, 2015,
Hangzhou Youpin Technology Co., Ltd. in August, 2015, Zhuhai Jumeiyoupin Technology Co., Ltd. in June, 2015, and Shenzhen Hepo
Technology Co., Ltd. in August, 2015, all of which are wholly-owned subsidiaries of Tianjin Jumei. Jumei Hongkong Limited established
Suzhou Jumeiyoupin Technology Co., Ltd., or Suzhou Jumei, in October 2014. Chengdu Jumei established Shanghai Youpin E-commerce
Co., Ltd., a wholly-owned subsidiary of Chengdu Jumei, in June, 2015.
In December 2015, we started a restructuring
of our wholly-owned subsidiaries in China, during which Chengdu Jumei acquired 100% of the equity interests in Tianjin Jumei, Tianjin
Cyril, Tianjin Qianmei, Shanghai Jumei and Suzhou Jumei from Jumei Hongkong Limited. The competent authorities have approved these
equity transfers, and we are in the process of registering with the relevant corporate registration authorities regarding those
transfers. Meanwhile, Chengdu Jumei also acquired 100% equity interest in Jumei Hongkong Holding Limited from Jumei Hongkong Limited.
In January and February 2015, we established
two wholly-owned subsidiaries in Suzhou, PRC, and South Korea. None of these subsidiaries carried out any material business operation
or held any operating license that was material to our company as of the date of this annual report.
Currently, the business scope of each of
our wholly-owned subsidiaries in the PRC contains the business of development of computer software and technology, which falls
in the encouraged category under the Catalog. The business scope of Shanghai Jumei and Tianjin Qianmei each contains the business
of online sales, which falls in the permitted category under the Catalog and which can be conducted by wholly foreign-owned enterprises
subject to approvals from the competent government authorities. Shanghai Jumei and Tianjin Qianmei have received approvals from
the competent commerce authorities for operation of their online sales business. The other businesses listed in the business scope
of each of these wholly owned subsidiaries are not listed in the Catalog and thus fall in the permitted category for foreign investment
under PRC law. See “– B. Business Overview – Regulation – Regulation Relating to Foreign Investment.”
We believe that, other than online business
conducted through our website that requires an ICP license and thus is subject to foreign ownership restriction, our business operations
can be conducted by our wholly owned subsidiaries in China. Since 2011, we have started to conduct our business operations that
are not subject to PRC legal restrictions on foreign ownership through our wholly owned subsidiaries.
On May 16, 2014, our ADSs commenced trading
on the New York Stock Exchange, or NYSE, under the symbol “JMEI.” We sold a total of 12,723,854 ADSs, representing
12,723,854 Class A ordinary shares, at the price of US$22.00 per ADS, in our initial public offering. Concurrently with our initial
public offering, we also issued 6,818,182 Class A ordinary shares at a price of US$22.00 per share to General Atlantic Singapore
Fund Pte. Ltd. through a private placement.
On July 22, 2015, we made an investment
in BabyTree Inc. and its subsidiaries and variable interest entities in PRC, or, collectively, BabyTree in the form of a convertible
loan of RMB558 million (US$86.1 million), or the Convertible Loan. On or prior to July 22, 2016, or the Maturity Date, and subject
to certain conditions, all outstanding balance of the Convertible Loan is convertible into 11.6% equity interests in BabyTree’s
Chinese operation entity if BabyTree completes its proposed restructuring. In case the proposed restructuring is not completed
before the Maturity Date, we have the option to convert all or a portion of the outstanding balance of the Convertible Loan to
shares in BabyTree Inc. In addition, we have the right to make an additional RMB186.0 million (US$28.7 million) loan under the
same terms to BabyTree at the end of 2015, and, if certain sales targets are not met by BabyTree before the end of 2015, we have
the right to demand early repayment of RMB186.0 million (US$28.7 million) of loan balance. On March 16, 2016, we and the relevant
BabyTree parties entered into a supplemental agreement to the loan agreement to exercise the early repayment option and received
RMB186.0 million (US$28.7 million) of repayment from BabyTree. In addition to the loan arrangements, we have also entered into
framework agreements outlining business cooperation with BabyTree, whereby we sell certain cosmetics and baby care products through
BabyTree’s mobile apps and online platform.
On February 17, 2016, our board
of directors received a non-binding proposal letter from Mr. Leo Ou Chen, Mr. Yusen Dai, Sequoia funds (together,
the “buyer group”), proposing a “going-private” transaction to acquire all of our outstanding
ordinary shares not already owned by the buyer group for US$7.00 in cash per ADS. Our board of directors has formed a
special committee consisting of two independent and disinterested directors, Mr. Sean Shao (as chairman) and
recently-appointed director Mr. Adam J. Zhao, to consider the “going-private” proposal. There can be no assurance
that the going-private transaction will continue to be pursued, approved or consummated.
See
“Item 3. Key Information on the Company—Risks Related to Our American Depositary Shares—There can be
no assurance that the proposed going-private transaction will continue to be pursued, approved
or successfully consummated. Potential uncertainty involving the proposed going-private transaction may adversely affect
our business and the market price of our ADSs.”
Our principal executive offices are located
at 20th Floor, Tower B, Zhonghui Plaza, 11 Dongzhimen South Road, Dongcheng District, Beijing 100007, the People’s Republic
of China. Our telephone number at this address is +86 10-5676-6999. Our registered office in the Cayman Islands is located at the
offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for
service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New
York, New York 10017.
OVERVIEW
We are China’s leading online retailer
of beauty products
.
We have grown rapidly and substantially since we launched our
jumei.com
website in March
2010. Such growth has resulted in both strong revenue growth as well as increasing costs. We achieved RMB7.3 billion (US$1.1 billion)
in net revenues, an increase of 88.9% from the previous year, and our net income in 2015 was RMB134.8 million (US$20.8 million),
a decline of 66.7% from the previous year. We had approximately 16.0 million active customers during 2015.
We believe that our internet platform is
a trusted destination for consumers to discover and purchase branded beauty products, baby, children and maternity products, as
well as fashionable apparel and other lifestyle products. Leveraging our deep understanding of customer needs and preferences,
as well as our strong merchandizing capabilities, we have adopted multiple effective sales formats to encourage product purchases
on our platform. Our current sales formats consist of curated sales, online shopping mall and flash sales. Our
Jumei Global
sales channel is part of our curated sales format.
For curated sales, we recommend a carefully
selected collection of branded products, including beauty products, baby, children and maternity products, light luxury products
as well as health supplements, for a limited period of time at attractive prices. Our curated sales format captures online shoppers’
attention through product recommendations and insightful product descriptions, which has helped us build a strong customer base.
As part of our curated sales format, we launched our
Jumei Global
sales channel in September 2014, which offers Chinese
consumers convenient access to products sourced at attractive prices directly from overseas, without the need to travel abroad,
and allows our consumers to make payments in Renminbi. We also sell a wider selection of branded beauty products through our online
shopping mall on a long-term basis to enhance customer stickiness. To further enhance and complement our customer experience with
more choices, we provide a limited-time offering of fashionable apparel and other lifestyle products at deep discounts through
flash sales.
We have built a large base of highly engaged
and loyal customers, as well as a wide variety of well-selected products. Our active customers totaled approximately 10.5 million,
13.3 million and 16.0 million in 2013, 2014 and 2015, respectively. Our suppliers and third-party merchants include brand owners,
brand distributors, resellers and certain exclusive product suppliers. We worked with approximately 2,091 suppliers and third-party
merchants in 2015.
We have invested substantial resources to
build a mobile platform that is dedicated to providing a superior mobile shopping experience. As a result, sales through our mobile
platform have grown significantly since its launch in May 2012. In the fourth quarter of 2015, approximately 79.5% of our GMV was
generated through our mobile platform.
Under our visionary management’s leadership,
we have attracted a large and loyal user base through our creative and cost-efficient marketing campaigns as well as word-of-mouth
referrals resulting from our well-selected products and superior customer experience. We further enhance the attractiveness of
our product offerings by entering into arrangements with beauty product suppliers for exclusive sales and distribution of selected
products in China.
Our net revenues were RMB3.0 billion in
2013, RMB3.9 billion in 2014 and RMB7.3 billion (US$1.1 billion) in 2015. Our net income was RMB156.6 million in 2013, RMB405.4
million in 2014 and RMB134.8 million (US$20.8 million) in 2015. Our net cash provided by operating activities were RMB524.8 million
in 2013, RMB422.4 million in 2014 and RMB151.5 million (US$23.4 million) in 2015.
OUR SALES FORMATS
We currently utilize three sales formats:
curated sales, online shopping mall and flash sales. The following table summarizes the key features of our three sales formats:
|
Curated
Sales
|
|
Online
Shopping Mall
|
|
Flash
Sales
|
Products
|
Branded beauty products, baby, children and maternity products, light luxury products and health supplements
|
|
Branded beauty products
|
|
Branded apparel and other lifestyle products
|
|
|
|
|
|
|
Duration
|
Usually one to three days
|
|
Long-term offerings
|
|
Usually five days
|
|
|
|
|
|
|
Breadth of Offering
|
Selected, focusing on SKUs
|
|
Wide
|
|
Selected, focusing on brands
|
|
|
|
|
|
|
Pricing
|
Attractive price
|
|
Attractive price
|
|
Deep discount
|
|
|
|
|
|
|
Our Role
|
• Select,
curate and recommend a carefully selected collection of SKUs each day
• Act as principal
|
|
• Merchandize a wider
selection of products
• Act as principal
|
|
• Select brands
• Act as service
provider for third-party merchants
|
Jumei Global
and Curated Sales
We believe the curated sales format embraces
value, quality and convenience for our customers and enhances our trendsetting image. We curate and recommend a carefully selected
collection of branded products for a limited period of time at attractive prices. Launched in September 2014, our
Jumei Global
offers Chinese consumers convenient access to products sourced at attractive prices directly from overseas and allows our consumers
to make payments in Renminbi. Our
Jumei Global
currently offers branded beauty products, baby, children and maternity products,
light luxury products and health supplements from South Korea, Japan, Taiwan, the United States and a number of European countries.
We centralize the customs clearance and domestic fulfillment processes for all products sold through
Jumei Global
in order
to ensure fast product delivery to our customers. Customers may also return unwanted products directly to us within the product
return period.
Online Shopping Mall
In addition to curated sales, we offer a
wider selection of branded beauty products through our online shopping mall on a long-term basis and at attractive prices to enhance
customer stickiness. Our shopping mall allows customers to browse products based on category, functionality, brand, price and whether
they are sold exclusively by us. We collaborate with an extensive range of international and domestic suppliers, who offer diversified
and branded beauty products.
Flash Sales
We offer apparel and other lifestyle products
sold by third-party merchants to meet our customers’ growing needs and enhance their shopping experience with more choices.
Launched in December 2012, our flash sales format features virtual stores of selected third-party merchants, offering apparel and
accessories, footwear, handbags and luggage, as well as home goods and other lifestyle products at deep discounts. Products offered
through our flash sales format are directly sold and fulfilled by third-party merchants.
PRODUCT OFFERINGS
Product Categories
The following table illustrates the categories
of products we sell on
Jumei Global
through curated sales format.
Product category
|
|
Product
description
|
Cosmetics
|
|
Foundation, powder, concealer, makeup remover, eye liner, eye shadow, brow powder, brow pencil, mascara, lip gloss, lipstick and nail polish
|
Skin care
|
|
Facial cleanser, whitening products, sun block, moisturizer, facial mask, eye mask, eye gel, exfoliating scrub, lotion, cream pore cleanser, lip care and toner
|
Cosmetic applicators
|
|
Brush, puff, curler, hair iron and shaver
|
Fragrance
|
|
Perfume and cologne for women and men
|
Body care
|
Shampoo, conditioner and body wash
|
For
men
|
Facial wash, firming lotion, astringent and moisturizer
|
For
baby and children
|
Lip balm, lotion, shampoo, soap, essence oil, formula milk and diapers
|
Light luxury products
|
Bags, shoes, watches
|
Health supplements
|
Weight control products and nutritional supplements
|
The following table illustrates the categories
of beauty products we sell through our online shopping mall format:
Product category
|
|
Product
description
|
Cosmetics
|
|
Foundation, powder, concealer, makeup remover, eye liner, eye shadow, brow powder, brow pencil, mascara, lip gloss, lipstick and nail polish
|
Skin care
|
|
Facial cleanser, whitening products, sun block, moisturizer, facial mask, eye mask, eye gel, exfoliating scrub, lotion, cream pore cleanser, lip care and toner
|
Cosmetic applicators
|
|
Brush, puff, curler, hair iron and shaver
|
Fragrance
|
|
Perfume and cologne for women and men
|
Body care
|
|
Shampoo, conditioner and body wash
|
For
men
|
|
Facial wash, firming lotion, astringent and moisturizer
|
For
baby and children
|
|
Lip balm, lotion, shampoo, soap, essence oil, formula milk and diapers
|
We supplement our product offerings with
apparel and other lifestyle products through flash sales format as illustrated by the following table:
Product category
|
|
Product
description
|
Womenswear
|
|
Women’s apparel, featuring a variety of apparel for different age groups, including casual wear, jeans, dresses, outerwear and swimsuits
|
Footwear
|
|
Shoes for women and men designed in a variety of styles, for both casual and formal occasions
|
Lingerie
|
|
Underwear, stockings and pajamas
|
Handbags and luggage
|
|
Purses, satchels, backpacks, duffel bags and luggage
|
Menswear
|
|
Men’s apparel in various styles for different age groups, including casual and smart-casual T-shirts, polo shirts, jackets, pants and underwear
|
Sportswear and sporting goods
|
|
Sports apparel, and sports gear and footwear for tennis, badminton, soccer and swimming
|
Accessories
|
|
Fashion accessories in a variety of styles and materials, including belts, jewelry, watches and glasses complementing apparel for all seasons and types of customers
|
Home goods and other lifestyle products
|
|
Home goods with an extensive selection of home furnishings, including bedding and bath products, home decor, dining and tabletop items, and small household appliances
|
Miscellaneous
|
|
Snacks and health supplements
|
Exclusive Products
To enhance the attractiveness of our product
offerings, we enter into exclusive arrangements from time to time with manufacturers and other suppliers to offer exclusive products,
including products under our private label brands, on our internet platform. Our exclusive products primarily consist of beauty
products. In addition, through exclusive arrangements with suppliers, we are able to offer selected SKUs and sets of beauty products
under popular brands exclusively on our internet platform. We do not substantially depend on any of our exclusive products suppliers.
We also have exclusive distribution rights for the sale of beauty products under global brands seeking to enter into the Chinese
market.
Our exclusive products have proven to be
highly popular among our customers. For example, our
Hippo Family
brand of face masks has constantly ranked as one of the
most popular curated sales products on our internet platform since its debut.
CUSTOMERS
The majority of our active customers are
females. The loyalty of our customer base is demonstrated by the repeat purchase rates and growing willingness of our customers
to try new products on our internet platform. The numbers of our active customers were approximately 10.5 million in 2013, 13.3
million in 2014 and 16.0 million in 2015. The number of new customers was approximately 8.2 million in 2013, 8.9 million in 2014
and 10.9 million in 2015. Orders placed by our repeat customers accounted for approximately 88.9%, 87.6% and 92.0% of our total
orders in 2013, 2014 and 2015, respectively.
MARKETING
We believe that the most efficient form
of marketing for our business is to continuously roll out creative and cost-efficient marketing campaigns to establish our brand
image as the trendsetter for beauty and stylish living. These marketing campaigns promote word-of-mouth referrals and enhance repeat
customer visits to our internet platform. We have launched a number of television and internet video-based advertising campaigns
aimed at promoting our brand image.
As part of our viral marketing strategy,
we offer various incentives to our existing customers in order to increase their spending and loyalty. Our customers can earn cash
coupons for eligible purchases and gain elite membership status, which offers enhanced benefits such as larger cash coupon rewards,
exclusive products and free samples. We offer gifts and lucky draw promotions on our internet platform. Our customers can also
earn cash coupons for successful referrals of new members and customers. In addition, we encourage our customers to share their
shopping experiences with us through social media and networking websites in China.
We conduct online advertising via search
engines, portals, advertising networks, video sharing websites, and social networking and microblogging sites. Our collaboration
with search engines is mainly through paid search, whereby we purchase key words and brand-link products. With the help of online
advertising networks, we can run our advertisements through a variety of online media. We also upload our promotional videos to
popular video sharing websites in China and conduct offline advertising by placing television commercials. We plan to continue
to enhance such online and offline advertising efforts as we continue to grow our business.
OUR INTERNET PLATFORM
Our websites
We focus on creating a superior online shopping
experience for our customers whereby they are aided by detailed product descriptions, thoughtful peer reviews and multi-angle picture
illustrations in making purchase decisions. Our website interface is fully integrated with our warehouse management system, enabling
us to track order and delivery status on a real-time basis.
Our website design offers several user-friendly
features that enhance customer experience and convenience:
|
·
|
Browsing.
Our
jumei.com
home page arranges our product offerings into segments, namely separate webpages for
curated sales of beauty products, baby and maternity products and light luxury products, store fronts of beauty products by brands
in our online shopping mall, flash sales of apparel and other lifestyle products and a link to our
jumeiglobal.com
page.
Our websites provide customers with detailed product information, including product specifications, user guides, photographs, peer
reviews and ratings.
|
|
·
|
Sales Functionalities
. Our
jumei.com
website allows users to view the popularity of each product and see other
users who are viewing the products, and by featuring countdown clocks next to products on our curated sales webpages. Our customers
can conveniently share their shopping experiences with us on various social media and networking websites through links prominently
set out on our website interface.
|
|
·
|
Product Reviews
. To help customers make informed purchasing decisions, we devote a large part of our websites to display
recent purchase records for each beauty product to highlight the item’s popularity and encourage previous purchasers to share
their feedback. The product descriptions and reviews on our
jumei.com
website feature detailed statistical analysis and
visual aids, including, for example, customer purchase distribution by age group, skin type and zodiac sign. We also provide tools
that allow customers to identify suitable products based on their skin type and age group on our
jumei.com
website. We only
allow customers who have made purchases to post reviews on the relevant products, and we incentivize customers by offering them
rewards for posting reviews. Our websites allow users to follow other customers who have posted reviews and to receive feeds on
the purchase history of such customers.
|
|
·
|
Personalized Services.
We offer personalized services to our customers via our account management system by allowing
them to customize their payment and delivery preferences. Customers can link their
Jumei
accounts with other popular social
networks and payment platforms in China. To facilitate the ease of the checkout process for our repeat customers, our database
keeps track of their preferred delivery address, shipping method and payment option based on information they previously provided.
We allow users to subscribe to future curated sales notices via text messages, emails and mobile push notifications. We believe
all these features improve the shopping experience of our customers and deepen their loyalty.
|
Our Mobile Platform
Sales through our mobile platform have grown
significantly since its launch in May 2012. Approximately 79.5% of our GMV was generated from our mobile platform in the fourth
quarter of 2015.
Our Android- and iOS-based mobile applications
allow customers to quickly and efficiently view, discover, select and purchase our products offered at our sales events. Customers
can browse our recommended product selections, in particular our curated sales which are immediately accessible as soon as our
mobile applications are activated on their mobile devices, and make quick purchases at any time and regardless of their locations.
In addition, customers can conveniently browse and search for products based on brand, category, product functionality, and can
sort product listings by popularity, price and discount level. Users may also subscribe to future curated sales notifications sent
by our mobile applications.
The unique product offerings and functions
on our mobile platform further enhance mobile user experience and engagement. We have also launched some of our sales events a
few hours earlier on mobile applications to further boost traffic and purchases on our mobile platform. Some selected products
and sales events are offered exclusively on our mobile applications to increase their popularity. In addition, we are in collaboration
with telecommunication service providers by offering free data usage to customers shopping on our mobile applications. We offer
selected products exclusively on our mobile applications to increase their popularity. We also seek to provide customers with a
customized shopping experience through analyzing and understanding their transaction histories and browsing patterns on our mobile
application and develop targeted sales events to increase customer stickiness and enhance cross-selling opportunities. A direct
dial feature on our mobile platform allows users to call our customer service with a single click. We periodically send product
promotional information to our mobile application users through text messages and mobile push notifications. We also continuously
work on developing additional features to better utilize mobile device functionalities to enhance user experience.
Our Physical Stores
To complement our internet platform, we
opened our first physical store in Beijing in December 2013, which showcases our high quality products, professional knowledge
in beauty and skincare as well as superior customer services. We have opened another physical store in Beijing since then. After
our customers have sampled our products, they are encouraged and guided to make purchases on our website through the tablets in
our stores or on our mobile applications through their mobile devices with the assistance of free wi-fi provided in our stores.
Our customers can also directly purchase beauty products sold at our physical stores. However, we do not offer any discount on
products sold directly offline, so as to encourage our customers to make purchases on our website.
OUR SUPPLIERS AND THIRD-PARTY MERCHANTS
Our suppliers and third-party merchants
include brand owners, brand distributors, resellers and exclusive product suppliers. In 2013, 2014 and 2015, we worked with approximately
1,700, 2,400 and 2,091 suppliers and third-party merchants, respectively.
Supplier and third-party merchant selection
.
We have implemented a strict and systematic selection process for suppliers and third-party merchants. Our merchandizing team is
responsible for identifying potential suppliers and third-party merchants globally based on our selection guidelines. Our key supplier
and third-party merchant selection criteria include size, reputation, sales records in offline and online channels and product
offerings. We generally choose to work with reputable suppliers and third-party merchants with good track records and high quality
product offerings. Once a potential supplier or third-party merchant is identified, we conduct due diligence reviews on its qualifications
based on our selection criteria. For our exclusive products, we typically identify suppliers from trade shows and on-site visits
based on our selection criteria, including the relevant qualifications and governmental permits. We also conduct detailed factory
auditing on the supplier’s manufacturing capability and production process to control product quality.
Supply arrangements
. We generally
enter into framework supply agreements with suppliers and third-party merchants annually based on our standard form. We constantly
communicate with our suppliers and third-party merchants to keep them informed of any changes to the inventory levels of their
products in order for them to timely respond to our sales demands. Before hosting a major sales event, we provide advance notice
to our suppliers and third-party merchants so that they can prepare ample stock to meet potential surge in demand and increased
purchases.
Product selection
. Our merchandizing
team members possess insightful knowledge and understanding of existing and potential customers’ needs and preferences. Before
selecting each product, we consider and analyze historical sales data, fashion trends, seasonality and customer feedbacks to project
how many items of a particular product we should offer for curated sales, in our online shopping mall or for flash sales. To maximize
the outcome of our curated sales, we carefully plan our product mix to achieve a balanced and complementary product offering across
different beauty product categories.
Quality control.
In addition to our
product selection process, we believe we have one of the most stringent quality assurance and control procedures in the e-commerce
industry for products delivered through our logistics network. In July 2013, the Authentic Beauty Products Alliance, or the Alliance,
an online organization that aims to call on the whole beauty product industry to commit to authentication and provide only authentic
products to consumers, was launched. We were one of the founding organizers of the Alliance, whose organizers also include China
Quality Long March (
质量万里行
),
one of the most influential nationwide not-for-profit organizations focusing on product quality in China. The Alliance invites
our beauty product suppliers to become members, whereby they agree to place stickers containing unique authentication pin numbers
on their products sold through us. Customers may then peel the sticker to reveal authentication pin numbers and validate the product
authenticity through the Alliance website or websites of the participating brands. The Alliance had 168 members as of December
31, 2015. A significant portion of our beauty products are sold with verifiable authentication pin numbers.
In addition to the Alliance, we conduct
daily laboratory tests using our in-house facilities on randomly selected samples of beauty products provided by our suppliers.
The tests are designed to analyze the chemical composition of sample beauty products to ensure their authenticity. Any non-compliant
products identified will subject the supplier to fines of up to five times the value of the merchandise as well as permanent termination
of business relationship with such supplier.
Furthermore, we diligently examine the product
sourcing channel and qualification of our suppliers, carefully inspect all beauty products delivered to our logistics centers,
and reject or return products that do not meet our quality standards or the purchase order specifications. We also reject any products
with broken or otherwise compromised packaging. In addition, we inspect all products before shipment from our logistics centers
to our customers and conduct random periodic quality checks on our inventory. For non-compliant products, we immediately take them
off from our internet platform. For apparel and other lifestyle products that are not processed by our logistics centers, we carefully
scrutinize the product sourcing channels of third-party merchants and impose penalties, typically in amounts equal to several times
the value of the relevant products, for any quality non-compliance that we discover through customer feedback.
Products offered through our
Jumei Global
are examined by the relevant government authorities at customs. We use our best efforts to cooperate with the authorities and facilitate
these examinations, including the provision of required documentations and samples.
Inventory management
. For curated
sales (other than
Jumei Global
) or for our online shopping mall, we either pay in advance for the products that we purchase
from our suppliers, or settle payment upon receipt of such products. Most of our suppliers of beauty products grant us a credit
term of 30 days. For beauty products sold through
Jumei Global
, we have gradually moved from advanced payments to settlement
upon receipt in 2015. For selected suppliers, we only have to settle payment after such products are sold to our customers.
PAYMENT AND FULFILLMENT
Payment
We provide our customers with a number of
payment options including cash on delivery (for selected cities), bank transfers, online payments with credit cards and debit cards
issued by major banks in China, and payment through major third-party online payment platforms, such as
alipay.com
and
tenpay.com
.
As part of our marketing efforts, we distribute
cash coupons that can be used to deduct from the purchase price of our beauty products. Furthermore, our customers can use the
account balances on
Jumei
accumulated from prior product refunds to make future purchases.
Fulfillment
We have established a logistics and delivery
network with nationwide coverage. We have adopted a flexible logistics model supported by our robust and advanced warehouse management
system. We use a mix of third-party nationwide and regional delivery companies to ensure reliable and timely delivery.
Logistics Network and Warehouse Management
System
. Our logistics network consists of regional logistics centers strategically located in Tianjin and Shenyang in Northern
China, Chengdu in Western China, Guangzhou in Southern China, Kunshan, Hangzhou, Ningbo and Suzhou in Eastern China and Zhengzhou
in Central China. Globally, we also have logistics centers located in Hong Kong.
Our warehouse management system enables
us to closely monitor each step of the fulfillment process from the time a purchase order is confirmed and the product stocked
in our logistics centers, up to when the product is packaged and picked up by delivery service providers for delivery to a customer.
Shipments from suppliers first arrive at one of our regional logistics centers, depending on demand from each logistics center.
At each logistics center, inventory is bar-coded and tracked through our management information system, allowing real-time monitoring
of inventory levels across our logistics network and item tracking at each logistics center. We repackage all products to our standardized
boxes for optimized storage and sourcing in our logistics centers. Our warehouse management system is specifically designed to
support the frequent curated sales events on our internet platform and a large volume of inventory turnover. We closely monitor
the speed and service quality of the third-party merchants through customer surveys and feedbacks from our customers to ensure
customer satisfaction.
Delivery Services
We deliver orders placed on our internet
platform to all areas in China through reputable third-party delivery companies with nationwide coverage, and regional delivery
companies. For delivery to remote regions of China, we use China Post.
We leverage our large-scale operations and
reputation to obtain favorable contractual terms from third-party delivery companies. To reduce the risk of reliance on any single
delivery company, we typically contract with two or more regional delivery companies in each major city. We regularly monitor and
review the delivery companies’ performance and their compliance with our contractual terms. For our cash on delivery payment
option, we typically require the delivery companies to pay deposits or provide payment guarantees before providing services to
us. We typically negotiate and enter into logistics agreements every two years.
CUSTOMER SERVICE
Customers can access our sales and after-sales
service hotlines and online representatives 24 hours a day, 7 days a week. Our customer service centers, located in Beijing and
Chengdu, had 654 customer service representatives as of December 31, 2015. We train our customer service representatives to
answer customer inquiries and proactively educate potential customers about our products and promptly resolve customer complaints.
Each representative is required to complete mandatory training, conducted by experienced managers on product knowledge, complaint
handling and communication skills.
For beauty products, we generally offer
a 30-day product return policy for curated sales and online shopping mall, and a seven-day product return policy for
Jumei Global
,
in both cases generally even if the products have been used or are no longer in their original packaging or original condition.
For our apparel and other lifestyle products, our third-party merchants offer a seven-day product return policy, as long as the
products are unwashed, undamaged, in their original condition and can be resold. For our merchandised baby and maternity products,
we generally grant product return only in cases of quality issues. For other baby and maternity products, the suppliers usually
have a 7-day return policy for any unopened products or ad hoc product return in case of quality issues. For light luxury products
other than underwear, watches and jewels, we generally have a 7-day return policy for unopened products. Customers in cities where
the payment option of cash on delivery is available can open the packaging and inspect the products ordered upon delivery and refuse
acceptance should they be dissatisfied.
Once a customer submits a return application
request online, our customer service representatives will review and process the request or contact the customer by e-mail or by
phone if there are any questions relating to the request. Upon receipt of the returned product, we credit the customer’s
Jumei
member or payment account with the purchase price. We provide a shipping allowance of up to RMB15 for our merchandized
products and up to RMB10 for other products sold through our internet platform.
TECHNOLOGY
Our technology systems are designed to enhance
efficiency and scalability, and play an important role in the success of our business. We rely on a combination of internally developed
proprietary technologies and commercially available licensed technologies to improve our website and management systems in order
to optimize every aspect of our operations for the benefit of our customers, suppliers and third-party merchants.
We have adopted a service-oriented architecture
supported by data processing technologies which consists of front-end, mid-end and back-end modules. Our network infrastructure
is built upon self-owned servers located in data centers operated by third-party internet data center providers. We are implementing
enhanced cloud architecture and infrastructure for our core data processing system to augment our existing virtual private network
as we continue to expand our operations, enabling us to achieve significant internal efficiency through a virtual and centralized
network platform.
Our front-end modules facilitate the online
shopping processes of our customers. Our front-end modules are supported by our content distribution network, dynamic and distributed
cluster and a core database, providing our customers with quicker access to the product display they are interested in, and facilitating
faster processing of their purchases. We have designed our systems to cope with our maximum peak concurrent visitors at all times.
As a result of such foresight, we are able to provide our customers constantly smooth online shopping experience. Our mid-end modules
support our daily administrative and business operations and our back-end modules support our supply chain and greatly enhance
the efficiency of our operations.
Our business intelligence systems enable
us to effectively gather, analyze and make use of internally-generated customer behavior and transaction data. We regularly use
this information in planning our marketing initiatives for upcoming curated sales and merchandizing for our online shopping mall.
Our business intelligence system is built with the proprietary cloud computing infrastructure, providing decision-making intelligence
such as dashboard operation, operational analysis, market analysis, sales forecasts and products such as anti-fraud filters, precision
marketing, and other application-oriented intelligent products that facilitate data-driven decision-making and increase our product
sales.
We have developed most of the key business
modules in-house. We also license software from reputable third-party providers, and work closely with these third-party providers
to customize the software for our operations. We have implemented a number of measures to prevent data failure and loss. We have
developed a disaster tolerant system for our key business modules which includes real-time data mirroring, real-time data back-up
and redundancy and load balancing.
In addition, we have also adopted rigorous
security policies and measures to protect our proprietary data and customer information.
SEASONALITY
Overall, the historical seasonality of our
business has been relatively mild due to our rapid growth. However, sales in the traditional retail industry are significantly
higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies in China, including
us, hold special promotional campaigns on festivals or days popular among young people, such as November 11 each year, which falls
in the fourth quarter. We also hold a special promotional campaign in March each year to celebrate our anniversary. These special
promotional campaigns typically increase the net revenues in the relevant quarters. Due to our limited operating history, the seasonal
trends that we have experienced in the past may not apply to, or be indicative of, our future operating results. Our future operating
results will be affected by the timing of promotional or marketing campaigns that we may launch from time to time.
INTELLECTUAL PROPERTY
We regard our trademarks, software copyrights,
service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success,
and we rely on trademark, copyright and trade secret protection laws in the PRC, as well as confidentiality procedures and contractual
provisions with our employees, service providers, suppliers, third-party merchants and others to protect our proprietary rights.
As of December 31, 2015, we owned 246 registered trademarks, copyrights to 32 software programs developed by us relating to various
aspects of our operations, and 48 registered domain names, including
jumei.com
and
jumeiglobal.com
.
COMPETITION
The retail market of beauty products in
China is fragmented and highly competitive. We face competition from traditional beauty products retailers, such as Watsons and
Sephora, and online beauty products retailers, as well as e-commerce platform companies, such as Alibaba Group, which operates
Taobao.com
and
Tmall.com
, AmazonChina, which operates
Amazon.cn
, JD.com, Inc., which operates
JD.com
,
and E-Commerce China Dangdang Inc., which operates
Dangdang.com
, and Vipshop Holdings Limited, which operates
VIP.com
and
Lefeng
.
We believe we compete primarily on the basis
of our ability to identify beauty products in demand among consumers and source these products on favorable terms from suppliers
and third-party merchants; our ability to ensure the authenticity and quality of our products; our ability to acquire new customers
at relative low cost and provide superior customer service; our internet platform features; our customer service and fulfillment
capabilities; and our reputation among consumers, suppliers and third-party merchants.
INSURANCE
We maintain certain insurance policies to
safeguard against risks and unexpected events. We have purchased property insurance covering our inventory in our logistics centers
and certain fixed assets such as equipment, furniture and office facilities. We do not maintain cargo transportation insurance,
although we may request courier companies to purchase insurance covering our products in our agreements with them. We purchased
third-party liability insurance covering our merchandise sales products against claims from consumers in relation to alleged defects
in product quality. For certain of our logistics staff, we purchased personal injury insurance.
REGULATION
This section sets forth a summary of the
most significant rules and regulations that affect our business activities in China or our shareholders’ rights to receive
dividends and other distributions from us.
Regulations Relating to Foreign Investment
Industry Catalog Relating to Foreign
Investment
. Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries
for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and
the National Development and Reform Commission. The Catalog divides industries into three categories: encouraged, restricted and
prohibited. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted by other
PRC regulations.
Establishment of wholly foreign-owned enterprises
is generally permitted in encouraged 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. For example, pursuant to the latest Catalog that was amended in 2015 and became effective in April 10,
2015, the online sale of commodities is in the permitted category and the establishment of foreign-invested enterprises (including
wholly foreign-owned enterprises) is subject to certain governmental approvals; and the provision of value-added telecommunications
services falls in the restricted category and the percentage of foreign ownership generally cannot exceed 50% (except for the e-commerce
business). Under the Catalog, “e-commerce business” is an exception to the above 50% restriction on foreign investment
on the value-added telecommunication services. However, the Catalog does not define the “e-commerce business”, and
its interpretation and enforcement involve significant uncertainties. Although according to the Notice on Lifting the Restriction
to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated
by the MIIT on June 19, 2015, foreign investors are allowed to hold up to 100% of all equity interests in the online data processing
and transaction processing business (operation e-commerce) in China, other requirements provided by the Foreign Investment Telecommunications
Rules (such as the track record and experience requirement for a major foreign investor) shall still apply. It is unclear how this
notice will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities.
Therefore, we cannot assure you that whether our online retail business and distribution of online information falls into the “e-commerce
business” and thus, whether we are permitted to conduct our value-added telecommunication services in the PRC through our
subsidiaries in which foreign investors own more than 50% of equity interests.
Currently, the business scope of each of
our wholly-owned subsidiaries in the PRC contains the business of development of computer software and technology, which falls
in the encouraged category under the Catalog. The business scope of each of Shanghai Jumei and Tianjin Qianmei contains the business
of online sales, which falls in the permitted category and which can be conducted by wholly foreign-owned enterprises subject to
approvals from the competent government authorities. Shanghai Jumei and Tianjin Qianmei have received approvals from the competent
commerce authorities for operation of their online sales business. The other businesses listed in the business scope of each of
our wholly-owned enterprises are not listed in the Catalog and thus fall in the permitted category for foreign investment under
PRC law.
In addition, the Ministry of Commerce published
a discussion draft of the proposed Foreign Investment Law in January 2015, which 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. The Ministry of Commerce has solicited comments on this
draft and substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and implementation.
The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure,
corporate governance and business operations in many aspects. For more details, see “Item 3. Key Information – D. Risk
Factors—Risks Related to Doing Business in China—Substantial uncertainties exist with respect to the enactment timetable,
the final version, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of
our current corporate structure, corporate governance and business operations.”
Foreign Investment in the Commercial
Sector
. According to the Administrative Measures on Foreign Investment in the Commercial Sector issued by the Ministry
of Commerce in April 2004, or the Commercial Sector Measures, a foreign investor is permitted to engage in the commercial sector,
which is defined in the measures to include wholesale, retail, commission agency and franchising, by setting up commercial enterprises
in accordance with the procedures and guidelines provided in the Commercial Sector Measures. To further simplify the approval procedure
for foreign investment in the commercial sector, on several occasions in 2005, 2008 and 2010, the Ministry of Commerce delegated
its approval authority to its provincial counterparts and authorized them to examine and approve certain applications. Currently,
the provincial counterparts of the Ministry of Commerce have the authority to approve applications for setting up foreign-invested
enterprises solely engaging in sale of goods through the internet, among others. Currently, each of our PRC subsidiaries engaging
in online distribution of cosmetics and other general merchandise has obtained approval from the relevant authorities for this
business.
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 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.
In July 2006, the Ministry of Information
Industry, the predecessor of 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 above 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.
To comply with the PRC regulations discussed
above, we operate our
jumei.com
website and value-added telecommunications services through Reemake Media, a PRC consolidated
VIE of ours, which holds an ICP license. Reemake Media, the operator of our
jumei.com
website, also owns the relevant domain
names and trademarks used in our value-added telecommunications businesses.
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:
ICP License
. The Telecommunications
Regulations promulgated by the State Council and its related implementation rules, including the Catalog 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 September 2000, the State Council also issued
the Administrative Measures on Internet Information Services, which was amended in January 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 March 2009, the MIIT
promulgated the Administrative Measures on Telecommunications Business Operating Licenses, which 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. Reemake Media, as our ICP operator, holds
an ICP license issued by the Beijing Telecommunications Administration. See “Item 3. Key Information – D. Risk Factors—Risks
Related to Our Business—Any lack of requisite approvals, licenses or permits applicable to our business or failure to comply
with PRC laws and regulations may have a material and adverse impact on our business, financial condition and results of operations.”
Food Distribution Permit / Food Business
Operation Permit
. China has adopted a licensing system for food supply operations under the Food Safety Law and its implementation
rules. Entities or individuals that intend to engage in food production, food distribution or food service businesses must obtain
licenses or permits for such businesses. Pursuant to the Administrative Measures on Food Distribution Permits issued by the State
Administration of Industry and Commerce, in July 2009, an enterprise needs to obtain a Food Distribution Permit from a local branch
of the State Administration of Industry and Commerce to engage in the food distribution business. Pursuant to the newly revised
Food Safety Law, State Food and Drug Administration issued the Administrative Measures for the Licensing of Food Business Operations
in August 2015, which superseded Administrative Measures on Food Distribution Permits and came into effect on October 1, 2015.
Under Administrative Measures for the Licensing of Food Business Operations, Food Business Operation Permits replaces Food Distribution
Permit as license for food distribution or food service businesses. The Food Distribution Permits obtained before October 1, 2015
remain effective until expiration of the effective terms. Furthermore, if enterprises engage in the distribution of nutritional
supplements, a Hygiene Permit for Nutritional Supplements is required pursuant to Nutritional Supplements Regulations promulgated
by Ministry of Health of the PRC, whose authority to supervise cosmetic products was taken over by the State Food and Drug Administration
in 2008. We sell food and nutritional supplements through our website. Reemake Media, our consolidated VIE, has obtained a Food
Distribution Permit and a Hygiene Permit for Nutritional Supplements.
Regulation Relating to Distribution of Cosmetics
China has established a regulatory system
concerning the production and sale of cosmetics according to the Hygiene Supervision over Cosmetics and its implementation rules
and other applicable rules. Cosmetic producers in the PRC need to obtain various licenses and permits or make filings for their
production of cosmetics, including: (i) a Cosmetics Hygiene Permit issued by the State Food and Drug Administration or its
local counterparts, (ii) a Production License issued by the General Administration of Quality Supervision, Inspection and
Quarantine or its local counterparts, (iii) a Special Cosmetics Approval Certificate issued by the State Food and Drug Administration
or its local counterparts for production of cosmetics for special uses such as hair nourishment, hair-dye, hair perm, hair removal,
breast massage, deodorant, freckle fading and anti-sunburn, and (iv) a Non-special Cosmetics Filing made with the local counterparts
of the State Food and Drug Administration for production of cosmetics for non-special uses. For imported cosmetics, pursuant to
the Hygiene Supervision over Cosmetics and its implementation rules, producers of overseas cosmetics shall directly or through
its designate entity apply for the License or Filing for the First Import of Cosmetics before such cosmetics are imported into
the PRC. According to the Measures for the Inspection, Quarantine, Supervision and Administration of Imported and Exported Cosmetics
and the Laws of Customs, the import of cosmetics is also subject to the inspection and quarantine procedure required by the Entry
& Exit Inspection and Quarantine Bureau or its local counterparts and customs clearance procedure by the General Administration
of Customs or its local counterparts, and the importer shall pay import tariffs, value-added tax and excise duty for the import
of cosmetics according to the relevant tariffs and tax rules.
As an online distributor of cosmetics, we
source the cosmetics from the producers or suppliers, and we are not required to obtain specific cosmetics-related permits, certificates
or make filings for our sale of cosmetics via the internet. However, under the relevant PRC laws, we are obliged to check whether
the cosmetics we sold on our internet platform have been issued the requisite permits, certificates or filings in relation to the
production or import of such products and whether such products have passed the quality inspection before they are sold. If we
sell any cosmetics products without such required permits, certificates or filings, we may be subject to fines, suspension of business,
as well as confiscation of products illegally sold and the proceeds from such sales under PRC law. In addition, if any cosmetics
sold on our internet platform fail to meet the statutory sanitary standards, we may be subject to fines, confiscation of products
illegally sold and the proceeds from such sales, and even criminal liabilities in severe circumstances.
Regulations Relating to E-Commerce, Internet Content and
Information Security and Privacy
China’s e-commerce industry is at
an 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 effective 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. The above measures were replaced by the Measures for the Administration of Online
Commodities Trading issued by the State Administration of Industry and Commerce on January 26, 2014 which became effective on March
15, 2014. These newly issued measures further impose more stringent requirements and obligations on the online trading or service
operators. For example, customers are entitled to return goods (except for certain fresh and perishable goods) which are purchased
online within seven days upon receipt without reasons. Where the online distributors also act as marketplace platforms that provide
service to third-party merchants, the online distributors are obligated to examine the legal status of the third-party merchants
and make the information stated in the business licenses of such third-party merchants available to the public or provide a link
to their business licenses on the website, as well as make clear distinction between their online direct sales and sales of third-party
merchant products on the marketplace platform. We are subject to such rules as a result of our online direct sales and online marketplace
business. The Administrative Measures on Internet Information Services specify that internet information services regarding news,
publication, education, medical and health care, pharmacy and medical appliances, among others, 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, the Administrative Measures
on Internet Information Services 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.
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 user’s personal information
confidential, and in case of any leakage or likely leakage of the user personal information, the ICP service operator must take
immediate remedial measures and, in severe circumstances, 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 providing 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. 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.
In relation to cross-border e-commerce trade,
such as
Jumei Global
, the General Administration of Customs has promulgated the Announcement on the Regulatory Issues concerning
the Inbound and Outbound Cargos and Items under Cross-border E-commerce Trade, or Customs Circular No. 56, which took effect on
August 1, 2014. Under the Customs Circular No. 56, e-commerce enterprises shall make record filing with the local customs bureau
and the e-commerce transactions shall be conducted on the platforms that are approved by the customs and are connected to customs
networks. For each item that is sold to the PRC customers under cross-border e-commerce, e-commerce enterprises shall submit separate
information about orders, payment and logistics to the customs bureau before making customs declaration and shall report the cargo
list and import and export goods declaration form to the customs bureau on a monthly basis. Currently, we set up our cross-border
e-commerce center in Zhengzhou Free Trade Zone and our e-commerce platform is connected to Zhengzhou customs bureau.
Regulation Relating to Product Quality and Consumer Protection
The PRC 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 PRC Consumer Protection Law, as amended
on October 25, 2013, sets out the obligations of business operators and the rights and interests of the consumers. 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. Furthermore, The Consumer Protection Law was further amended in October 2013 and became effective
on March 15, 2014. The amended Consumer Protection Law further strengthens the protection of consumers and imposes more stringent
requirements and obligations on business operators, especially on the business operators through the internet. For example, the
consumers are entitled to return the goods (except for certain specific goods) within seven days upon receipt without any reasons
when they purchase the goods from business operators via the internet. The consumers whose interests are harmed due to their purchase
of goods or acceptance of services on online marketplace platforms may claim damages from sellers or service providers. As to legal
liabilities of the online marketplace platform provider, the Consumer Protection Law and the Regulations of Several Issues on the
Application of Laws in the Trial of Food and Drugs Cases issued by the Supreme People’s Court of the PRC on December 9,
2013 set forth that, where a consumer purchases products (including cosmetics and food) or accepts services via an online trading
platform and his or her interests are prejudiced, if the online trading platform provider fails to provide the name, address and
valid contact information of the seller, the manufacturer or the service provider, the consumer is entitled to demand compensation
from the online trading platform provider. If the online trading platform provider gives an undertaking that is more favorable
to consumers, it shall perform such undertaking. Once the online trading platform provider has paid compensation, it shall have
a right of recourse against the seller, the manufacturer or the service provider. If an online trading platform provider is aware
or ought to have been aware that a seller, manufacturer or service provider is using the online platform to infringe upon the lawful
rights and interests of consumers and it fails to take necessary measures, it shall bear joint and several liabilities with the
seller, the manufacturer or service provider for such infringement.
The Tort Liability Law of the PRC, which
was enacted by the Standing Committee of the National People’s Congress on December 26, 2009, also provides that if
an online service provider is aware that an online user is committing infringing activities, such as selling counterfeit products,
through its internet services and fails to take necessary measures, it shall be jointly liable with the said online user for such
infringement. If the online service provider receives any notice from the infringed party on any infringing activities, the online
service provider shall take necessary measures, including deleting, blocking and unlinking the infringing content, in a timely
manner. Otherwise, it will be jointly liable with the relevant online user for the extended damages.
We are subject to the above laws and regulations
as an online distributor of commodities and a marketplace service provider and believe that we are currently in compliance with
these regulations in all material aspects.
Regulation on Intellectual Property Rights
The PRC has adopted comprehensive legislation
governing intellectual property rights, including trademarks, domain names and copyrights.
Trademark
. The PRC 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, 2015, we owned 246 registered
trademarks in different applicable trademark categories and were in the process of applying to register 42 trademarks in China.
In addition, pursuant to the PRC Trademark
Law, counterfeit or unauthorized production of the label of another person’s registered trademark, or sale of any label that
is counterfeited or produced without authorization will be deemed as an infringement to the exclusive right to use a registered
trademark. The infringing party will be ordered to stop the infringement immediately, a fine may be imposed and the counterfeit
goods will be confiscated. The infringing party may also be held liable for the right holder’s damages, which will be equal
to the gains obtained by the infringing party or the losses suffered by the right holder as a result of the infringement, including
reasonable expenses incurred by the right holder for stopping the infringement. If the gains or losses are difficult to determine,
the court may render a judgment awarding damages of no more than RMB 0.5 million.
Domain Name
. Domain names
are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT. The MIIT is the major regulatory
body responsible for the administration of the PRC internet domain names, under supervision of which the China Internet Network
Information Center, or CNNIC, is responsible for the daily administration of .cn domain names and Chinese domain names. CNNIC adopts
the “first to file” principle with respect to the registration of domain names. We have registered a number of domain
names including
jumei.com
and
jumeiglobal.com
.
Copyright
.
Pursuant
to the PRC 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 network. Pursuant to the relevant PRC regulations, rules
and interpretations, internet service providers will be jointly liable with the infringer if they (i) participate in, assist
in or abet infringing activities committed by any other person through the internet, (ii) are or should be aware of the infringing
activities committed by their website users through the internet, or (iii) 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.
Software Copyrights
. The Administrative
Measures on Software Products, issued by the MIIT in October 2000 and subsequently amended, provide a registration and filing system
with respect to software products made in or imported into China. These software products may be registered with the relevant local
authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status
granted by relevant software industry regulations. Software products can be registered for five years, and the registration is
renewable upon expiration.
In order to further implement the Computer
Software Protection Regulations promulgated by the State Council in December 2001, the State Copyright Bureau issued the Computer
Software Copyright Registration Procedures in February 2002, which apply to software copyright registration, license contract registration
and transfer contract registration. We have registered 32 computer software copyrights in China as of December 31, 2015.
Regulation on Employment
The PRC 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. 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.
On December 28, 2012, the PRC Labor Contract
Law was amended to impose more stringent requirements on labor dispatch which became effective on July 1, 2013. Pursuant to amended
PRC Labor Contract Law, the dispatched contract workers shall be entitled to equal pay for equal work as a fulltime employee of
an employer, and they shall only be engaged to perform temporary, ancillary or substitute works, and an employer shall strictly
control the number of dispatched contract workers so that they do not exceed certain percentage of total number of employees. “Temporary
work” means a position with a term of less than six (6) months; “auxiliary work” means a non-core business position
that provides services for the core business of the employer; and “substitute worker” means a position that can be
temporarily replaced with a dispatched contract worker for the period that a regular employee is away from work for vacation, study
or for other reasons. According to the Interim Provisions on Labor Dispatch, or the Labor Dispatch Provisions, promulgated by the
Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, (i) the number of
dispatched contract workers hired by an employer should not exceed 10% of the total number of its total employees (including both
directly hired employees and dispatched contract workers); (ii) in the case that the number of dispatched contract workers exceeds
10% of the total number of its employees at the time when the Labor Dispatch Provisions became effective (i.e., March 1, 2014),
the employer shall formulate a plan to reduce the number of its dispatched contract workers to below the statutory cap prior to
March 1, 2016, and (iii) such plan shall be filed with the local bureau of human resources and social security. Nevertheless, the
Labor Dispatch Provisions do not invalidate the labor contracts and dispatch agreements entered into prior to December 28, 2012.
In addition, the employer shall not hire any new dispatched contract worker before the number of its dispatched contract workers
is reduced to below 10% of the total number of its employees.
Regulations on Tax
Enterprise Income Tax
.
The PRC Enterprise Income Tax Law imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including
foreign-invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the
PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise
sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such
organization or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such
organization or establishment in the PRC.
The PRC Enterprise Income Tax Law and its
implementation rules permit certain “high and new technology enterprise strongly supported by the state” that hold
independent ownership of core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate.
In April 2008, the State Administration of Taxation, the Ministry of Science and Technology and the Ministry of Finance jointly
issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures
for the certification of HNTEs. In January 2016, the amended Administrative Rules for the Certification of High and New Technology
Enterprises were jointly issued by State Administration of Taxation, the Ministry of Science and Technology and the Ministry of
Finance and replaced the 2008 version, but the material criteria of HNTEs remain unchanged. Reemake Media, our consolidated VIE,
obtained its HNTE certificate in September 2015 with a valid period of three years. Tianjin Cyril Information Technology Co., Ltd.,
or Tianjin Cyril, one of our PRC Subsidiaries, obtained its HNTE certificate in October 2014 with a valid period of three years.
Therefore, Tianjin Cyril is eligible to enjoy a preferential tax rate of 15% from 2014 through 2016, as long as it maintains the
HNTE qualification and obtains approval from the relevant tax authority.
According to the Notice on the Enterprise
Income Tax regarding Deepening Implementation of Grand Development of the Western Region issued by the State Administration of
Taxation, enterprises located in the western region of the PRC with principal revenue of over 70% generated from encouraged category
of western region are entitled to a preferential income tax rate of 15% for ten years from January 1, 2011 to December 31,
2020. Chengdu Jumei, which is located within the western region of the PRC and meets the criteria as set forth in the notice, is
entitled to the preferential income tax rate of 15% starting from 2013 upon approval by the relevant tax authority.
Value-Added Tax and Business Tax
.
Pursuant to the PRC Provisional Regulations on Value-Added Tax and its implementation regulations, unless otherwise specified
by relevant laws and regulations, any entity or individual engage in the sales of goods, provision of processing, repairs and replacement
services and importation of goods into China is generally required to pay a value-added tax, or VAT, at the rate of 17% for revenues
generated from sales of products, less any deductible VAT already paid or borne by such entity.
Prior to January 1, 2012, pursuant
to the PRC Provisional Regulations on Business Tax and its implementing rules, taxpayers providing taxable services falling under
the category of service industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues with
certain exceptions. Our PRC subsidiaries and consolidated VIEs were subject to business tax at the rate of 5% for the marketplace
services. Since January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation have been implementing
the VAT pilot program, which imposes VAT in lieu of business tax for certain industries in Shanghai, and since September 1,
2012, such pilot program has been expanded to eight other provinces or municipalities in the PRC. Since August 2013, this tax pilot
program has been expanded to other areas on the nationwide basis in the PRC. VAT is or will be applicable at a rate of 6% in lieu
of business tax for the services rendered by our PRC subsidiaries and consolidated VIEs after the pilot program is being implemented
in their respective region.
Dividend Withholding Tax
.
Pursuant to the PRC 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 the
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. Accordingly, Jumei Hongkong Limited may be
able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries, if it satisfies the conditions
prescribed under Circular 81 and other relevant tax rules and regulations, and obtain the approvals as required. 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.
Import Tax.
Consumer goods imported through cross-border e-commerce platforms shall be classified as “personal baggage or
postal articles” pursuant to Notice on Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services,
which was issued by PRC General Administration of Customs on March 4, 2014. A personal baggage or postal articles tax was
levied before the online retailors could deliver goods to buyers. The personal baggage or postal articles tax shall be
exempted if the payable amount is lower than RMB 50. The rate of personal baggage or postal articles tax was respectively
10%, 20%, 30% and 50% for different categories of products imported. Specifically, a 50% rate was applied to cosmetics and a
10% rate was applied to maternity and baby care products. Under this pattern, a quota of RMB 1,000 for each purchase order is
imposed on online buyers, otherwise the imported goods shall be classified as normal goods and buyers shall pay the
value-added tax, the consumption tax and the tariff instead of a personal baggage or postal articles tax for the imported
goods.
Pursuant to the Notice on Tax Policies of
Cross-Border E-Commerce Retail Importation issued by PRC Ministry of Finance, General Administration of Customs and State Administration
of Taxation on March 24, 2016, which came into effect on April 8, 2016, the pilot bonded area import pattern of cross-border e-commerce
will be abolished. The goods imported through cross-border e-commerce platforms will no longer be treated as “personal baggage
or postal articles” but normal goods, so the value-added tax and consumption tax will be levied as on normal imported goods
but on a 70% basis, and the tariff on those goods will be exempted. Under this new pattern, the quota of RMB 1,000 for each purchase
order is raised to RMB 2,000 and a new quota of RMB 20,000 per year for each buyer will be imposed on buyers. For the imported
goods within the quota, buyers could enjoy a tax reduction of 30% on the value-added tax and the consumption tax and a reduction
of 100% on the tariff.
Pursuant to the Notice on Tax Policies of
Cross-Border E-Commerce Retail Importation issued by PRC Ministry of Finance, General Administration of Customs and State Administration
of Taxation on March 24, 2016, which came into effect on April 8, 2016, the pilot bonded area import pattern of cross-border e-commerce
will be abolished. The goods imported through cross-border e-commerce platforms will no longer be treated as “personal baggage
or postal articles” but normal goods, so the value-added tax and consumption tax will be levied as on normal imported goods
but on a 70% basis, and the tariff on those goods will be exempted. Normally, a 17% value-added tax will be levied on most products
sold on our platform and a 30% consumption tax will be levied on cosmetics and perfumes without tax preference under the new pattern,
while no consumption tax will be levied on skin care products, maternity and baby care products. Under this new pattern, the quota
of RMB 1,000 for each purchase order is raised to RMB 2,000 and a new quota of RMB 20,000 per year for each buyer will be imposed
on buyers. For the imported goods within the quota, buyers could enjoy a tax reduction of 30% on the value-added tax and the consumption
tax and a reduction of 100% on the tariff. Furthermore, the new pattern only applies to goods listed within the scope of the Cross-Border
E-Commerce Retail Importation Goods Inventory, or the Inventory, and thus goods beyond the scope of this Inventory will not have
a tax code and may be prohibited from selling on the cross-border e-commerce platforms. Ministry of Finance, National Development
and Reform Commission, Ministry of Industry and Information Technology, State Administration of Taxation, General Administration
of Customs and other relevant authorities have jointed issued the Cross-Border E-Commerce Retail Importation Goods Inventory and
the Cross-Border E-Commerce Retail Importation Goods Inventory (Second Batch) separately on April 6, 2016 and April 15, 2016. The
Inventory may be updated from time to time. Specifically, cosmetics imported for the first time, nutrition supplements and other
special food products required to be registered with the State Food and Drug Administration are excluded from the scope of the
Inventory. We are prohibited from selling the cosmetics imported for the first time on our platform and we are also prohibited
from selling nutrition supplements and other special food products before required registration certificates for these products
have been legitimately obtained. However, pursuant to a transition policy issued by the General Administration of Customs, the
goods which have been imported to or in transit to the bonded areas and special regulated areas of customs before April 8, 2016,
can still be sold on the cross-border e-commerce platforms, even if these goods are not listed on the Inventory.
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. In addition, SAFE 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. To satisfy
and facilitate the business and capital operations of foreign invested enterprises in the PRC, on July 15, 2014, SAFE issued a
SAFE Circular 36 which launched the pilot reform of administration regarding conversion of foreign currency registered capitals
of foreign-invested enterprises in 16 pilot areas. According to the SAFE Circular 36, an ordinary foreign-invested enterprise with
a business scope containing “investment” in the pilot areas is permitted to use Renminbi converted from its foreign-currency
registered capital to make equity investments in the PRC, subject to certain registration and settlement procedure as set forth
in the SAFE Circular 36. On April 8, 2015, SAFE released the Notice on the Reform of the Management Method for the Settlement of
Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular
No. 142 and SAFE Circular 36 from June 1, 2015. SAFE Circular 19 has made certain adjustments to some regulatory requirements on
the settlement of foreign currency capital of foreign-invested enterprises, and some foreign exchange restrictions under SAFE Circular
No. 142 has been lifted. For example, the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise can be used for equity investments in the PRC but cannot be used to provide entrusted loans or repay loans between non-financial
enterprises. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated
capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Since Circular
19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented in practice.
In November 2012, SAFE promulgated the Circular
of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment 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 account, foreign exchange capital account, guarantee account, 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 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. On February 28, 2015,
SAFE released SAFE Circular 13, which came into effect on June 1, 2015. According to this notice, local banks will examine and
handle foreign exchange registrations for direct investment by foreign investors in the PRC.
Regulations Relating to Dividend Distribution
Wholly foreign-owned companies in the PRC
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 company out of China is subject to examination by the banks designated by SAFE. Wholly foreign-owned
companies may not 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 employee welfare and bonus funds at their discretion. These reserve funds and employee welfare and
bonus funds are not distributable as cash dividends. Our PRC subsidiaries are wholly foreign-owned enterprises subject to the described
regulations.
SAFE Regulations on Offshore Special Purpose Companies
Held by PRC Residents
On July 4, 2014, the SAFE promulgated the
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Overseas Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, which replaced the former Circular on Issues
Relating to the Administration of Foreign Exchange in Fund-Raising and Round Trip Investment Activities of Domestic Residents Conducted
via Offshore Special Purpose Vehicles (generally known as SAFE Circular No. 75) promulgated by the SAFE on October 21, 2005. SAFE
Circular No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or
indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as
a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment to the registration in the event of any
significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals,
share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in
a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiaries of that special purpose vehicle
may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign
exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its
PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in
liability under PRC law for evasion of foreign exchange controls. We have requested PRC residents who we know hold direct or indirect
interest in our company to make the necessary applications, filings and amendments as required under SAFE Circular No. 37
and other related rules. To our knowledge, all of our shareholders who are PRC citizens and hold interest in us, have registered
with the local SAFE branch as required under SAFE Circular No. 37. However, we may not be informed of the identities of all the
PRC residents holding direct or indirect interests in our company, and we cannot provide any assurance that these PRC residents
will comply with our request to make or obtain any applicable registrations or comply with other requirements under SAFE Circular
No. 37 or other related rules. Any failure or inability of our PRC resident beneficial owners to make any required registrations
or comply with other requirements under SAFE Circular No. 37 and other related rules may subject such PRC residents or our
PRC subsidiaries to fines and legal sanctions and may also limit our ability to raise additional financing and contribute additional
capital into or provide loans to our PRC subsidiaries, limit our PRC subsidiaries’ ability to pay dividends or otherwise
distribute profits to us, or otherwise adversely affect us.
SAFE Regulations on Employee Stock Incentive Plan
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 subsidiaries 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 re subject to these regulations. Failure of our PRC option holders
or restricted shareholders to complete their SAFE registrations may 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 will be subject to PRC individual income tax. Our PRC subsidiaries
have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to
withhold individual income taxes of those employees who exercise their share options. We have made SAFE registrations for employee
stock incentive plans. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations,
we may face sanctions imposed by the tax authorities or other PRC government authorities.
M&A Rules
In August 2006, six PRC regulatory agencies,
including the CSRC, adopted the M&A Rules, which were amended in June 2009. The M&A Rules establish procedures and requirements
that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements
in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign
investor takes control of a Chinese domestic enterprise. In addition, the Security Review Rules issued by the Ministry of Commerce
that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense
and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic
enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and prohibit
any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual
control arrangement. See “Item 3. Key Information – D. Risk Factors—Risks Related to Doing Business in China—The
M&A Rules and certain other PRC 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.”
|
C.
|
Organizational Structure
|
The following diagram illustrates our corporate
structure, including our significant subsidiaries and consolidated VIEs and their subsidiaries, as of the date of this annual report:
|
(1)
|
Leo Ou Chen, Yusen Dai and Hui Liu hold 82.30%, 8.85% and 8.85% equity interests in Reemake Media, respectively.
|
We are a “controlled company”
as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen beneficially owns a majority of the aggregate voting power
of our company.
The following is a summary of the currently
effective contractual arrangements by and among our wholly-owned subsidiary, Beijing Jumei, our VIE, Reemake Media, and the shareholders
of Reemake Media.
Shareholders’ Voting Rights
Agreement
. On January 24, 2014, the shareholders of Reemake Media entered into an amended and restated shareholders’
voting rights agreement with Beijing Jumei in replacement of the previous shareholders’ voting rights agreement dated April 8,
2011. Pursuant to the amended and restated shareholders’ voting rights agreement, each of the shareholders of Reemake Media
appointed Beijing Jumei’s designated person as their attorney-in-fact to exercise all shareholder rights, including, but
not limited to, attending the shareholders’ meeting, voting all matters of Reemake Media requiring shareholder approval,
appointing or removing directors and executive officers, and disposing of all or part of the shareholder’s equity interests
in Reemake Media. The shareholders’ voting rights agreement will remain in force for an unlimited term, unless all the parties
to the agreement mutually agree to terminate the agreement in writing.
Equity Pledge Agreements
.
On January 24, 2014, Beijing Jumei, Reemake Media and the shareholders of Reemake Media entered into amended and restated equity
pledge agreements in replacement of the previous equity pledge agreements dated April 8, 2011, as amended on August 6, 2011.
Pursuant to the amended and restated equity pledge agreements, each of the shareholders of Reemake Media pledges all of their equity
interests in Reemake Media to guarantee their and Reemake Media’s performance of their obligations under the contractual
arrangements including, but not limited to, the exclusive consulting and services agreement, exclusive purchase option agreement
and shareholders’ voting rights agreement. If Reemake Media or its shareholders breach their contractual obligations under
these agreements, Beijing Jumei, as pledgee, will have the right to dispose of the pledged equity interests. The shareholders of
Reemake Media agree that, during the term of the amended and restated equity pledge agreements, they will not dispose of the pledged
equity interests or create or allow any encumbrance on the pledged equity interests, and they also agree that Beijing Jumei’s
rights relating to the equity pledges shall not be prejudiced by the legal actions of the shareholders of Reemake Media, their
successors or their designatees. During the term of the amended and restated equity pledge agreements, Beijing Jumei has the right
to receive all of the dividends and profits distributed on the pledged equity interests. The equity pledges will become effective
on the date when the pledge of equity interests contemplated in these agreements are registered with the relevant administration
for industry and commerce in accordance with the PRC Property Rights Law and will remain effective until Reemake Media and its
shareholders discharge all their obligations under the contractual arrangements. We have completed the registration of the equity
pledges with the relevant office of the administration for industry and commerce in accordance with the PRC Property Rights Law.
Exclusive Purchase Option Agreement.
On January 24, 2014, Beijing Jumei, Reemake Media and the shareholders of Reemake Media entered into an amended and restated
exclusive purchase option agreement in replacement of the previous exclusive purchase option agreement dated April 8, 2011.
Pursuant to the amended and restated exclusive purchase option agreement, each of the shareholders of Reemake Media irrevocably
grants Beijing Jumei an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the extent
permitted under PRC law, all or part of the shareholders’ equity interests in Reemake Media, and the purchase price shall
equal the amount that the shareholders contributed to Reemake Media as registered capital for the equity interests to be purchased,
or be the lowest price permitted by applicable PRC law. In addition, Reemake Media grants Beijing Jumei an exclusive option to
purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of Reemake
Media’s assets at the lowest price permitted by applicable PRC law. Without the prior written consent of Beijing Jumei, Reemake
Media may not increase or decrease the registered capital, dispose of its assets, terminate any material contract or enter into
any contract that is in conflict with its material contracts, appoint or remove any management members, distribute dividends to
the shareholders, guarantee its continuance, amend its articles of association and provide any loans to any third parties. The
shareholders of Reemake Media agree that, without the prior written consent of Beijing Jumei, they will not transfer or otherwise
dispose of their equity interests in Reemake Media or create or allow any encumbrance on the equity interests. The amended and
restated exclusive purchase option agreement will remain effective until all equity interests in Reemake Media held by its shareholders
and all assets of Reemake Media are transferred or assigned to Beijing Jumei or its designated representatives.
Exclusive Consulting and Services
Agreement
. Under the exclusive consulting and services agreement between Beijing Jumei and Reemake Media, dated April 8,
2011, Beijing Jumei has the exclusive right to provide to Reemake Media consulting and services related to all technologies needed
for Reemake Media’s business. Beijing Jumei owns the exclusive intellectual property rights created as a result of the performance
of this agreement. Reemake Media agrees to pay Beijing Jumei an annual service fee, at an amount that is agreed by Beijing Jumei
and Reemake Media otherwise. In addition, Beijing Jumei may provide other technology services specified by Reemake Media from time
to time, and charge Reemake Media for the services at a rate mutually agreed by the parties. This agreement will remain effective
for an unlimited term, unless Beijing Jumei and Reemake Media mutually agree to terminate the agreement in writing, or the agreement
is required to be terminated by applicable PRC law. Reemake Media is not permitted to terminate the agreement in any event unless
required by applicable law.
Shareholders’ voting rights agreements,
exclusive consulting and service agreements, exclusive purchase option agreements and equity pledge agreements, substantially the
same as those described above, were also entered into with respect to our other consolidated VIEs.
In the opinion of Fangda Partners, our PRC
legal counsel:
|
·
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the ownership structures of our VIEs and wholly foreign-invested subsidiaries will not result in any violation of PRC laws
or regulations currently in effect; and
|
|
·
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the contractual arrangements among our subsidiaries, VIEs and their respective shareholders governed by PRC law are valid,
binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.
|
However, there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory
authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel.
If the PRC government finds that the agreements that establish the structure for operating our online retail business do not comply
with PRC government restrictions on foreign investment in e-commerce and related businesses, including but not limited to online
retail businesses, 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 deems that
the contractual arrangements in relation to our VIEs do not comply with PRC regulatory restrictions on foreign investment in the
relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject
to severe penalties or be forced to relinquish our interests in those operations.” and “Item 3. Key Information –
D. Risk Factors—Risks Related to Doing Business in China—Substantial uncertainties exist with respect to the enactment
timetable, the final version, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability
of our current corporate structure, corporate governance and business operations.”
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D.
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Property, Plant and Equipment
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We are headquartered in Beijing and have
leased an aggregate of approximately 16 thousand square meters of office, physical stores and customer service center space in
Beijing. As of December 31, 2015, we also have leased an aggregate of approximately 183 thousand square meters in office, logistics
center and/or customer service space in Tianjin, Zhengzhou, Kunshan, Chengdu, Guangzhou, Shenyang, Hangzhou, Ningbo, Suzhou, Shenzhen
and Hong Kong. We lease most of our premises under operating lease agreements from independent third parties. A summary of our
leased properties as of December 31, 2015 is shown below:
Location
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|
Space
(in thousands of square
meters)
|
|
Use
|
|
Lease Term (years)
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Beijing
|
|
16
|
|
Office space, physical stores and customer service center
|
|
One to five
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Tianjin
|
|
27
|
|
Logistics center and office
|
|
One to two
|
Zhengzhou
|
|
35
|
|
Logistics center
|
|
Two
|
Kunshan
|
|
19
|
|
Logistics center
|
|
Three
|
Chengdu
|
|
17
|
|
Office, logistics center and customer service center
|
|
Three to five
|
Guangzhou
|
|
12
|
|
Logistics center
|
|
One to three
|
Shenyang
|
|
11
|
|
Logistics center
|
|
Two
|
Hangzhou
|
|
10
|
|
Logistics center
|
|
One
|
Ningbo
|
|
13
|
|
Logistics center
|
|
One to two
|
Suzhou
|
|
24
|
|
Logistics center
|
|
One to two
|
Shenzhen
|
|
13
|
|
Logistics center
|
|
One
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Hong Kong
|
|
2
|
|
Logistics center
|
|
Two
|
We typically enter into leasing agreements
that are renewable every one to three years. We believe our existing facilities are sufficient for our near term needs.
On January 29, 2016, we acquired land use
rights with RMB81.6 million (US$12.6 million) for 169,456 square meters of warehouse land in Suzhou.
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Item 4A.
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Unresolved Staff Comments
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None.
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Item 5.
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Operating and Financial Review and Prospects
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The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
the related notes included elsewhere in this annual report on Form 20-F. This discussion and analysis may contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item
3.D. Key Information—Risk Factors” or in other parts of this annual report on Form 20-F.
Overview
We generate net revenues from merchandise
sales and marketplace services. We generate net revenues from merchandise sales when we act as principal for the direct sale of
beauty products to customers. We generate net revenues from marketplace services when we act as service provider for third-party
merchants and charge them fees for the sale of their products through our internet platform.
The following table summarizes the key features
of our two revenue streams:
|
Revenue Stream
|
|
Merchandise Sales
|
|
Marketplace Services
|
Products
|
Beauty products, baby, children and maternity products, light luxury products and health supplements
|
|
Apparel and other lifestyle products
|
Sales formats
|
Curated sales and online shopping mall
|
|
Flash sales
|
Our Role
|
Act as principal
|
|
Act as service provider for third-party merchants
|
Our net revenues were RMB3.0 billion in
2013, RMB3.9 billion in 2014 and RMB7.3 billion (US$1.1 billion) in 2015. We achieved net income of RMB156.6 million in 2013, RMB405.4
million in 2014 and RMB134.8 million (US$20.8 million) in 2015. Our net cash provided by operating activities were RMB524.8 million
in 2013, RMB422.4 million in 2014 and RMB151.5 million (US$23.4 million) in 2015.
Our business and results of operations are
affected by general factors affecting the online retail market in China, including China’s overall economic growth, the increase
in per capita disposable income, the growth in consumer spending and the retail industry and the expansion of internet penetration.
Our operating results are more directly affected by certain company specific factors, including:
|
·
|
our ability to attract and retain customers at reasonable cost;
|
|
·
|
our ability to establish and maintain relationships with suppliers, third-party merchants and other service providers;
|
|
·
|
our ability to invest in growth while improving operating efficiency;
|
|
·
|
our ability to control marketing expenses, while promoting our brand and internet platform cost-effectively;
|
|
·
|
our ability to source products to meet customer demands; and
|
|
·
|
our ability to compete effectively and to execute our strategies successfully.
|
Net revenues
We generate net revenues from merchandise
sales and marketplace services. Merchandise sales revenues are generated when we act as principal for the direct sale of beauty
products to customers through our internet platform. Merchandise sales revenues are recorded on a gross basis, net of surcharges
and taxes. Marketplace service revenues are generated when we act as a service provider to third-party merchants and charge them
fees for the sale of apparel and other lifestyle products through our internet platform. We historically offered certain beauty
products through third-party merchants and generated marketplace service revenues from such third-party merchants. In the third
quarter of 2014, we began the process of terminating our marketplace beauty product sales and shifting our marketplace beauty product
sales to our merchandise sales. We have substantially completed the termination of our marketplace beauty product sales. We historically
provided fulfillment services to third-party merchants who sold beauty products through our internet platform and charged such
third-party merchants for such services.
The following table sets forth the principal
components of our net revenues by amounts and percentages of our total net revenues for the periods presented:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
2,556,139
|
|
|
|
85.5
|
%
|
|
|
3,355,914
|
|
|
|
86.3
|
%
|
|
|
7,113,278
|
|
|
|
1,098,101
|
|
|
|
96.9
|
%
|
Marketplace services
|
|
|
434,977
|
|
|
|
14.5
|
%
|
|
|
531,617
|
|
|
|
13.7
|
%
|
|
|
229,681
|
|
|
|
35,457
|
|
|
|
3.1
|
%
|
Total net revenues
|
|
|
2,991,116
|
|
|
|
100.0
|
%
|
|
|
3,887,531
|
|
|
|
100.0
|
%
|
|
|
7,342,959
|
|
|
|
1,133,558
|
|
|
|
100.0
|
%
|
We monitor and strive to improve the following
key business metrics to generate higher net revenues:
|
·
|
Total number of active customers
. We define active customers for a given period as customers who have purchased products
offered by us or by our third-party merchants at least once during that period. The numbers of our active customers were approximately
10.5 million in 2013, 13.3 million in 2014 and 16.0 million in 2015.
|
|
·
|
Total number of orders.
The total numbers of orders were approximately 36.0 million in 2013, 42.6 million in 2014 and 73.2 million
in 2015.
|
|
·
|
Net GMV.
We define net GMV as the sum of (i) net revenues generated from merchandise sales, and (ii) net revenues generated
from marketplace services and adding back corresponding payables to our third-party merchants. Our net GMV was RMB506.6 million
in 2013, RMB6.6 billion in 2014 and RMB8.9 billion (US$1.4 billion) in 2015.
|
Sales in the traditional retail industry
are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies
in China, including us, hold special promotional campaigns on festivals or days popular among young people, such as November 11
each year, which falls in the fourth quarter. We also hold a special promotional campaign in March each year to celebrate our anniversary.
These special promotional campaigns typically increase our net revenues in the relevant quarters. Overall, the historical seasonality
of our business has been relatively mild due to our rapid growth but seasonality may increase in the future. Due to our limited
operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating
results.
Cost of Revenues
Our cost of revenues primarily consists
of cost of goods sold and inventory write-downs. The cost of goods sold does not include shipping and handling expenses, payroll,
bonus and benefits of fulfillment staff or rental expenses for logistics centers. Therefore, our cost of revenues may not be comparable
to other companies which include such expenses in their cost of revenues. We procure inventory from our suppliers and our inventory
is recorded at the lower of cost or estimated marketable value. As net revenues generated from our marketplace services are recorded
on a net basis, our cost of revenues is all attributable to our net revenues from merchandise sales.
Operating Expenses
Our operating expenses consist of fulfillment
expenses, marketing expenses, technology and content expenses and general and administrative expenses. Share-based compensation
expenses are included in our operating expenses when incurred.
Fulfillment expenses
. Fulfillment
expenses consist primarily of expenses incurred in shipment, operations and staffing of our logistics and customer service centers.
Such expenses include costs attributable to receiving, inspecting and warehousing inventories; picking, packaging and preparing
customer orders for shipment; collecting payments from customers; and customer services. Fulfillment expenses also include amounts
payable to third parties that assist us in fulfillment and customer service operations. We will continue to invest in our fulfillment
and delivery network to support our long-term growth and expect that our fulfillment expenses will continue to increase in absolute
amount as a result of our continued business growth.
Marketing expenses
. Marketing expenses
consist primarily of advertising expenses, promotion expenses, and payroll and related expenses for personnel engaged in marketing.
Advertising expenses, which are primarily spent on online and offline advertising, are expensed when the relevant services are
received. Advertising expenses totaled RMB310.7 million, RMB463.1 million and RMB599.7 million (US$92.6 million) in 2013, 2014
and 2015, respectively. As we enhance our brand awareness and expand our market share by engaging in additional brand promotional
activities, we expect our marketing expenses to increase in the foreseeable future.
Technology and content expenses
.
Technology and content development expenses consist primarily of payroll and related costs for employees involved in application
development, category expansion, editorial content production on our internet platform and system support expenses, as well as
server charges and costs associated with telecommunications. As we continue to expand our technological capabilities to support
our anticipated growth and enhance customer experience, we expect our technology and content expenses to continue to increase in
absolute amount in the foreseeable future.
General and administrative expenses
.
General and administrative expenses consist primarily of payroll and related costs for employees involved in general corporate
functions, including accounting, finance, tax, legal, procurement, business development and human resources, professional fees
and other general corporate costs, as well as costs associated with the use of facilities and equipment for these general corporate
functions, such as depreciation and rental expenses. As our business further grows and as a public company, we expect our general
and administrative expenses to continue to increase in absolute amount in the foreseeable future.
Taxation
Cayman Islands
We are an exempted company incorporated
in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax in the Cayman
Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the Cayman Islands.
Hong Kong
Our subsidiaries incorporated in Hong Kong
are subject to the uniform tax rate of 16.5%. Under the Hong Kong tax laws, they are exempt from Hong Kong income tax on their
foreign-derived income and there are no withholding taxes in Hong Kong on the payment of dividends.
PRC
Our PRC subsidiaries and our consolidated
VIEs are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in
accordance with the relevant PRC income tax laws. Under the PRC Enterprise Income Tax Law and its implementation rules, both of
which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested
enterprises and domestic enterprises, unless they qualify for certain exceptions. Most of our PRC subsidiaries and our consolidated
VIEs are all subject to the tax rate of 25% for the periods presented in the consolidated financial statements included elsewhere
in this annual report.
In April 2008, the State Administration
of Taxation, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Rules for the
Certification of High and New Technology Enterprises specifying the criteria and procedures for the Certification of High and New
Technology Enterprises, or HNTEs. Reemake Media, our consolidated VIE, obtained its HNTE certificate in September 2015 with a valid
period of three years. Reemake Media is in the process of renewing its HNTE certificate. Tianjin Cyril Information Technology Co.,
Ltd., or Tianjin Cyril, one of our PRC Subsidiaries, obtained its HNTE certificate in October 2014 with a valid period of three
years. Therefore, Tianjin Cyril is eligible to enjoy a preferential tax rate of 15% from 2014 through 2016, as long as it maintains
the HNTE qualification and obtains approval from the relevant tax authority.
According to the Notice on the Enterprise
Income Tax regarding Deepening Implementation of Grand Development of the Western Region issued by the State Administration of
Taxation, enterprises located in the western region of the PRC with principal revenues of over 70% generated from encouraged category
of the western region are entitled to a preferential income tax rate of 15% for ten years from January 1, 2011 to December 31,
2020. Chengdu Jumei, which is located within the western region of the PRC and meets the criteria as set forth in the notice, is
entitled to the preferential income tax rate of 15% starting from 2013 upon approval by the relevant tax authority.
Under the PRC Enterprise Income Tax Law
and its implementation rules, dividends from our PRC subsidiaries paid out of profits generated after January 1, 2008, are
subject to a withholding tax of 10%, unless there is a tax treaty with China that provides for a different withholding arrangement.
Distributions of profits generated before January 1, 2008 by our PRC subsidiaries are exempt from PRC withholding tax.
Under the PRC Enterprise Income Tax Law,
an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident
enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define
the term “de facto management 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 State Administration
of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific
criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise
is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled
by PRC individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s
general position on how the “de facto management body” test should be applied in determining the tax resident status
of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe
that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities
could reach a different conclusion. See “Item 3. Key Information – D. Risk Factors—Risks Related to Doing Business
in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result
in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.” However, even if one or more of our legal
entities organized outside of the PRC were characterized as PRC resident enterprises, we do not expect any material change in our
net current tax payable balance and the net deferred tax balance as none of these entities had any profit during the periods presented
in the consolidated financial statements included elsewhere in this annual report.
Change in PRC regulation of import tax on
consumer goods imported through cross-border e-commerce platforms could also have a significant impact on our operating results.
For instance, under the new pattern of cross-border e-commerce which came into effect on April 8, 2016, our sale tax would increase,
which would decrease our gross margin. In addition, under the new pattern, we are prohibited from selling the cosmetics imported
for the first time on our platform and we are also prohibited from selling nutrition supplements and other special food products
before required registration certificates for these products have been legitimately obtained. Before we obtain the required registration
certificates for these products, our sales of these products could be negatively impacted during the interim periods. See “Item
3. Key Information – D. Risk Factors—Risks Related to Doing Business in China— The Change of PRC regulation of
import tax on consumer goods imported through cross-border e-commerce platforms could adversely affect our financial condition
and results of operations.”
Internal Control Over Financial Reporting
We are subject to the reporting obligations
under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require public companies
to include a report of management on their internal control over financial reporting in their annual reports. This report must
contain an assessment by management of the effectiveness of a public company’s internal control over financial reporting.
In addition, an independent registered public accounting firm for a public company must attest to and report on management’s
assessment of the effectiveness of the company’s internal control over financial reporting.
As a result of management’s evaluation
of our internal control over financial reporting, the following material weaknesses in our internal control over financial reporting
were identified as of December 31, 2015.
(i) We did not have sufficient resources
with an appropriate level of knowledge and experience to prepare financial statements with proper disclosures in accordance with
U.S. GAAP. As a result, the financial statements were not prepared properly and adequately.
(ii) We did not have resources with an appropriate
level of knowledge and experience in U.S. GAAP and controls over financial reporting to properly account for significant complex
transactions under U.S. GAAP and properly address impact of these transactions on controls over financial reporting. As a
result, several significant complex transactions were not accounted for properly and the impact of one transaction on controls
over financial reporting was not addressed properly.
The material weaknesses described above
may result in misstatement of our consolidated financial statements that would result in a material misstatement to our quarterly
or annual consolidated financial statements that would not be prevented or detected. As a result of the material weaknesses, management
has concluded that our internal control over financial reporting was ineffective as of December 31, 2015.
Our management has been engaged in, and
continues to be engaged in making necessary changes and improvements to the overall design of its control environment to address
the material weaknesses in internal control over financial reporting and the ineffectiveness of our disclosure controls and procedures
described above.
To remediate the material weaknesses described
above with respect to controls over the period-end financial statement reporting and controls over significant complex transactions,
we plan to continue to: (1) retain additional accounting personnel with appropriate knowledge and experience; (2) provide more
comprehensive training on knowledge of U.S. GAAP and controls over financial reporting to our accounting team and other relevant
personnel; (3) enhance our accounting manual to provide our accounting team with more comprehensive guidelines on the accounting
policies under U.S. GAAP and SEC rules and requirements; (4) continue to engage an external consultant to review the accounting
and disclosures of our significant complex transactions and related impact on controls over financial reporting; and (5) continue
to review and improve key controls over financial reporting. We plan to continue to assess our standardized processes to further
enhance the effectiveness of our financial review, including the analysis and monitoring of financial information in a consistent
and thorough manner.
We expect that we will incur more costs
in the implementation of such measures. However, the implementation of these measures may not fully address the deficiencies in
our internal control over financial reporting. See “Item 3. Key Information – D. Risk Factors—Risks Related to
Our Business—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately
or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially
and adversely affected.”
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements
in conformity with the U.S. GAAP, which requires us to make estimates and assumptions that affect our reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results
could differ materially from those estimates and changes in facts and circumstances may result in revised estimates. The following
descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial
statements and other disclosures included in this annual report.
Revenue Recognition
Revenue comes primarily from merchandise
sales and marketplace services. We generate revenues from merchandise sales when we act as principal for the direct sales of beauty
products to customers. We generate revenues from marketplace services when we act as the service provider for other vendors and
charges third-party merchant fees for the sales of their products, which include beauty products, apparel and other life style
products. We collect cash from customers before or upon deliveries of products mainly through banks, third party online payment
platforms or delivery companies. Cash collected from customers before product delivery is recognized as advances from customers
first and then recognized as revenue upon deliveries and acceptances by customers.
Revenues from merchandise sales and marketplace
services are recognized when the following four 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 merchandise sales revenues
upon acceptance of delivery of products by customers. Marketplace service revenues primarily consist of fees charged to third-party
merchants for selling their products through our internet platform and fees for providing fulfillment services. We recognize marketplace
service revenues upon acceptances of deliveries by customers for sales that we provide fulfillment services or upon shipping by
third party merchants for sales for which we do not provide fulfillment services. For customer orders and cash collected from customers
before delivery, we account for it in advance from customers.
We consider several factors in determining
whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as service fees.
Generally, when we are the primary obligor in a transaction, is subject to substantial inventory risk, and has latitude in establishing
prices, revenues are recorded at the gross sales price. If we do not have substantial inventory risk or latitude in establishing
prices and amounts earned are determined using a predetermined service rate, we record the net amounts as marketplace service fees
earned.
Sales allowances, which reduce revenues,
are estimated using management’s best estimate based on historical experience. Revenues are recorded net of value-added taxes,
business taxes and surcharges.
Loans receivable
The Company's loans receivable consist of
entrusted loans and Convertible Loan. Entrusted loans is carried at amortized cost. An allowance for doubtful accounts is recorded
in the period in which a loss is determined to be probable.
Convertible Loan that is not within the
scope of ASC 320 “Investments - debt and equity securities” is accounted for under ASC 310 “Receivables”.
The initial investment amount was first allocated, based on their fair value, to any free standing instrument purchased together
with the Convertible Loan, and any embedded features requiring separate recognition under ASC 815 “Derivatives and hedging”.
Embedded features are required to be separately recognized as derivatives when they meet all the three criteria under ASC 815-15-25-1.
The remaining investment amount was recognized as the Convertible Loan, and was subsequently carried at amortized cost.
Inventories
Inventories consisting of products available
for sell, are stated at the lower of cost or market. Cost of inventory is determined using the weighted average cost method. Inventory
reserve is recorded to write down the cost of inventory to the estimated market value due to slow-moving merchandise and damaged
goods, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment. We take
ownership, risks and rewards of the products purchased. Write downs are recorded in cost of revenues in the consolidated statements
of comprehensive income.
Investment security
We invest in marketable equity security
to meet business objectives. In accordance with ASC No. 320, “Investment Debt and Equity Securities” this marketable
security is stated at fair value, classified and accounted for as available-for-sale securities in investment security. The treatment
of a decline in the fair value of an individual security is based on whether the decline is other-than-temporary. We assess its
available-for-sale securities for other-than-temporary impairment by considering factors including, but not limited to, its ability
and intent to hold the individual security, severity of the impairment, expected duration of the impairment and forecasted recovery
of fair value. Investments classified as available-for-sale securities are reported at fair value with unrealized gains or losses,
if any, recorded in accumulated other comprehensive income in shareholders’ equity. If we determine a decline in fair value
is other-than-temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount
of the write-down is accounted for as a realized loss charged in the consolidated statement of comprehensive income. We reviewed
the stock price of the investment security and noted recovery of stock price in the subsequent period of 2016. Therefore, we concluded
that the decline in value of the investment security at December 31, 2015 was temporary.
Impairment of long-lived assets
Long-lived assets are evaluated for impairment
whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future
use of the assets) indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter
than we had originally estimated. When these events occur, we evaluate the impairment for the long-lived assets by comparing the
carrying value of the assets to an estimate of future undiscounted cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying value of the asset, we
recognize an impairment loss based on the excess of the carrying value of the assets over its fair value. No impairment charge
was recognized for the years ended December 31, 2013, 2014, and 2015.
Share-Based Compensation
All share-based awards granted to our founders,
employees and directors are measured at the grant date based on the fair value of the award and are recognized as expenses using
straight line method, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. Forfeitures
are estimated at the time of grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
We adopted the 2011 plan in March 2011.
The maximum number of ordinary shares in respect of which share awards may be granted under the 2011 plan is 10,401,229. The 2011
plan will terminate automatically 10 years after its adoption, unless terminated earlier by our board’s approval. As of February
28, 2016, options to purchase 5,546,983 ordinary shares have been granted and outstanding under the 2011 plan, excluding awards
that were forfeited or cancelled after the relevant grant dates.
We adopted the 2014 plan in April 2014.
The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 plan is 6,300,000 Class A ordinary
shares initially. The number of shares reserved for future issuances under the 2014 plan will be increased by a number equal to
1.5% of the total number of outstanding shares on the last day of the immediately preceding calendar year, or such lesser number
of Class A ordinary shares as determined by our board of directors, on the first day of each calendar year during the term of the
2014 plan beginning in 2015. Unless terminated earlier, the 2014 plan will terminate automatically in 2024. The maximum aggregate
number of shares which may be issued pursuant to all awards under the 2014 plan is 8,499,519 Class A ordinary shares as of February
28, 2016. As of February 28, 2016, 339,247 restricted share units have been granted under the 2014 plan.
A summary of our share option activities
through February 28, 2016 is presented below (share and per share information is presented to give retroactive effect to the share
splits that we have conducted so far).
|
|
Number of
Options
Granted
|
|
|
Exercise
Price
|
|
|
Fair Value
of
the Options
as of the
Grant Date
|
|
|
Fair Value
of the
Underlying
Ordinary
Shares as
of the
Grant Date
|
|
|
Intrinsic
Value as of
the Grant
Date
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
May 9, 2011
|
|
|
3,640,000
|
|
|
|
0.00
|
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.09
|
|
May 9, 2011
|
|
|
832,000
|
|
|
|
0.25
|
|
|
|
0.03
|
|
|
|
0.09
|
|
|
|
—
|
|
February 23, 2012
|
|
|
250,000
|
|
|
|
1.08
|
|
|
|
0.36
|
|
|
|
0.80
|
|
|
|
—
|
|
September 23, 2012
|
|
|
950,000
|
|
|
|
1.08
|
|
|
|
1.98
|
|
|
|
2.83
|
|
|
|
1.75
|
|
April 8, 2013
|
|
|
500,000
|
|
|
|
1.08
|
|
|
|
5.67
|
|
|
|
6.66
|
|
|
|
5.58
|
|
April 18, 2013
|
|
|
517,500
|
|
|
|
1.08
|
|
|
|
5.65
|
|
|
|
6.66
|
|
|
|
5.58
|
|
May 1, 2013
|
|
|
500,000
|
|
|
|
1.08
|
|
|
|
5.66
|
|
|
|
6.66
|
|
|
|
5.58
|
|
July 1, 2013
|
|
|
50,000
|
|
|
|
1.08
|
|
|
|
6.91
|
|
|
|
7.91
|
|
|
|
6.83
|
|
August 1, 2013
|
|
|
870,000
|
|
|
|
1.08
|
|
|
|
6.92
|
|
|
|
7.91
|
|
|
|
6.83
|
|
December 31, 2013
|
|
|
250,000
|
|
|
|
1.20
|
|
|
|
12.41
|
|
|
|
13.52
|
|
|
|
12.32
|
|
December 31, 2013
|
|
|
150,000
|
|
|
|
1.08
|
|
|
|
12.75
|
|
|
|
13.52
|
|
|
|
12.44
|
|
April 1, 2014
|
|
|
500,000
|
|
|
|
15.00
|
|
|
|
10.68
|
|
|
|
20.02
|
|
|
|
5.02
|
|
March 31, 2015
|
|
|
145,000
|
|
|
|
15.00
|
|
|
|
7.70
|
|
|
|
15.82
|
|
|
|
0.82
|
|
March 31, 2015
|
|
|
600,000
|
|
|
|
15.00
|
|
|
|
8.14
|
|
|
|
15.82
|
|
|
|
0.82
|
|
We estimated the fair value of share options
using the binomial option-pricing model with the assistance of an independent valuation firm. The fair value of each option grant
up to March 31, 2015 is estimated on the date of grant or date of repurchase with the following assumptions.
|
|
May
9,
2011
|
|
|
May
9,
2011
|
|
|
February
23,
2012
|
|
|
September
23,
2012
|
|
|
April
8,
2013
|
|
|
April
18,
2013
|
|
|
May
1,
2013
|
|
|
July
1,
2013
|
|
|
August
1,
2013
|
|
|
December
31,
2013
|
|
|
April
1,
2014
|
|
|
March
31,
2015
|
|
Risk-free
interest rates (%)
(1)
|
|
|
3.42
|
%
|
|
|
3.42
|
%
|
|
|
3.21
|
%
|
|
|
2.55
|
%
|
|
|
2.33
|
%
|
|
|
2.24
|
%
|
|
|
2.20
|
%
|
|
|
3.13
|
%
|
|
|
2.92
|
%
|
|
|
3.07
|
%
|
|
|
3.35
|
%
|
|
|
2.52
|
%
|
Exercise multiples
(2)
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2.2
|
|
|
|
2.2
|
|
Expected dividend yield
(3)
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
(%)
(4)
|
|
|
54
|
%
|
|
|
54
|
%
|
|
|
47
|
%
|
|
|
45
|
%
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
46
|
%
|
Fair market value of ordinary shares (US$)
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.80
|
|
|
|
2.83
|
|
|
|
6.66
|
|
|
|
6.66
|
|
|
|
6.66
|
|
|
|
7.91
|
|
|
|
7.91
|
|
|
|
13.52
|
|
|
|
20.02
|
|
|
|
15.82
|
|
Notes:
|
(1)
|
We estimated risk-free interest rate based on the yield to maturity of U.S. dollar denominated Chinese Government bonds with
a maturity similar to the expected expiry of the term.
|
|
(2)
|
The exercise multiple is estimated as the ratio of fair value of underlying shares over the exercise price as at the time the
option is exercised, based on a consideration of research study regarding exercise pattern based on historical statistical data.
|
|
(3)
|
We have never declared or paid any cash dividends on our capital stock, and we do not anticipate any dividend payments on our
ordinary shares in the foreseeable future.
|
|
(4)
|
We estimated expected volatility based on the annualized standard deviation of the daily return
embedded in historical share prices of comparable companies with a time horizon close to the expected expiry of the term.
|
Determining the fair value of our ordinary
shares historically required us to make complex and subjective judgments, assumptions and estimates, which involved inherent uncertainty.
Had our management used different assumptions and estimates, the resulting fair value of our ordinary shares and the resulting
share-based compensation expenses could have been different.
Share-based awards to non-employees are
recognized as compensation expenses ratably over the requisite service periods. We measure the cost of non-employee services received
in exchange for share-based awards based on the fair value of the awards issued. We measure the fair value of the awards in these
transactions using the fair value of underlying ordinary shares and other measurement assumptions on the measurement date, which
is determined as the earlier of the date at which a commitment for performance by the counterparty to earn the awards is reached,
or the date at which the counterparty’s performance is complete.
We measure the awards at their then-current
fair values at each of the financial reporting dates, and attribute the changes in those fair values over the future services period.
We recognize the estimated compensation
cost of service-based restricted share units based on the fair value of our ordinary shares on the date of the grant. We recognize
the compensation cost, net of estimated forfeitures, over a vesting term of generally four years.
On March 31, 2015, we granted 248,575 restricted
shares units of our company, as well as 745,000 share options (at exercise price of US$15.00 per share) to our employees, subject
to four-year service vesting schedule.
Fair Value of Our Ordinary Shares
Prior to our initial public offering, we
were a private company with no quoted market prices for our ordinary shares. We had therefore needed to make estimates of the fair
value of our ordinary shares at various dates for the purposes of (a) determining the fair value of our ordinary shares at
the date of issuance of convertible instruments as one of the inputs into determining the intrinsic value of the beneficial conversion
feature, if any; (b) determining the fair value of our ordinary shares at the date of the grant of a share-based compensation
award to our employees as one of the inputs into determining the grant date fair value of the award; (c) determining the fair
value of preferred shares and ordinary shares at the respective issuance dates; (d) the grant of options in conjunction with
a business acquisition; and (e) transfer of ordinary shares between existing shareholders.
The following table sets forth the fair
value of our ordinary shares estimated at different times with the assistance from an independent valuation firm.
Date
|
|
Fair Value
Per Share
(US$)
|
|
|
DLOM
|
|
|
Discount Rate
|
|
|
Type of Valuation
|
|
Purpose of
the
Valuations
|
January 16, 2011
|
|
|
0.09
|
|
|
|
30
|
%
|
|
|
32.00
|
%
|
|
Retroactive
|
|
(d)
|
April 08, 2011
|
|
|
0.09
|
|
|
|
30
|
%
|
|
|
30.00
|
%
|
|
Retroactive
|
|
(a), (b),(c)
|
November 18, 2011
|
|
|
0.66
|
|
|
|
25
|
%
|
|
|
30.00
|
%
|
|
Retroactive
|
|
(a), (b),(c)
|
February 23, 2012
|
|
|
0.80
|
|
|
|
25
|
%
|
|
|
28.00
|
%
|
|
Retroactive
|
|
(a), (b)
|
September 23, 2012
|
|
|
2.83
|
|
|
|
20
|
%
|
|
|
25.00
|
%
|
|
Retroactive
|
|
(a), (b)
|
April 18, 2013
|
|
|
6.66
|
|
|
|
15
|
%
|
|
|
20.00
|
%
|
|
Contemporaneous
|
|
(a), (b)
|
August 01, 2013
|
|
|
7.91
|
|
|
|
10
|
%
|
|
|
19.00
|
%
|
|
Contemporaneous
|
|
(a), (b)
|
October 28, 2013
|
|
|
12.20
|
|
|
|
10
|
%
|
|
|
19.00
|
%
|
|
Contemporaneous
|
|
(e)
|
November 20, 2013
|
|
|
12.83
|
|
|
|
10
|
%
|
|
|
18.50
|
%
|
|
Contemporaneous
|
|
(e)
|
December 31, 2013
|
|
|
13.52
|
|
|
|
10
|
%
|
|
|
18.00
|
%
|
|
Contemporaneous
|
|
(a), (b)
|
April 1, 2014
|
|
|
20.02
|
|
|
|
5
|
%
|
|
|
17.00
|
%
|
|
Contemporaneous
|
|
(a), (b)
|
March 31, 2015
|
|
|
15.82
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
N/A
|
|
(a), (b)
|
In determining the fair value of our ordinary
shares, we applied the income approach/ discounted cash flow, or DCF, analysis based on our projected cash flow using management’s
best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective
judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares
and our operating history and prospects at the time of valuation.
The major assumptions used in calculating
the fair value of ordinary shares include:
|
·
|
Weighted average cost of capital, or WACC: WACCs of 32%, 30%, 30%, 28%, 25%, 20%, 19%, 19%, 18.5%, 18% and 17% were used for
dates as of January 16, 2011, April 8, 2011, November 18, 2011, February 23, 2012, September 23, 2012, April
18, 2013, August 1, 2013, October 28, 2013, November 20, 2013, December 31, 2013 and April 1, 2014, respectively. The WACCs
were determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk membership,
company size and non-systematic risk factors
|
|
·
|
Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, two publicly traded
companies in China’s e-commerce industry and three publicly traded companies in the U.S. e-commerce industry were selected
for reference as our guideline companies.
|
|
·
|
Discount for lack of marketability, or DLOM: DLOM was quantified by the Black-Scholes option pricing model. Under this option-pricing
method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered
as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as it can take
into consideration factors like timing of a liquidity event, such as an initial public offering, and estimated volatility of our
shares. The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higher
the implied DLOM. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. DLOM
remained in the range of 5% to 30% in the period from 2011 to 2014.
|
|
·
|
The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts.
Our revenues and net income growth rates, as well as major milestones that we have achieved, contributed significantly to the increase
in the fair value of our ordinary shares from March 2011 to April 2014. However, these fair values are inherently uncertain and
highly subjective. The assumptions used in deriving the fair values are consistent with our business plan. These assumptions include:
no material changes in the existing political, legal and economic conditions 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.
These assumptions are inherently uncertain. The risk associated with achieving our forecasts were assessed in selecting the appropriate
discount rates, which ranged from 17% to 32%.
|
|
·
|
The option-pricing method was used to allocate enterprise value to preferred and ordinary shares, taking into account the guidance
prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued
as Compensation,” or the Practice Aid. The method treats common stock and preferred stock as call options on the enterprise’s
value, with exercise prices based on the liquidation preference of the preferred stock.
|
|
·
|
The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale
of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing
is based on the plans of our board of directors and management. Estimating the volatility of the share price of a privately held
company is complex because there is no readily available market for the shares. We estimated the volatility of our shares to range
from 27% to 49% based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business.
Had we used different estimates of volatility, the allocations between preference and ordinary shares would have been different.
|
Since our initial public offering, the determination
of the fair value of the ordinary shares is based on the market price of our ADSs, each representing one Class A ordinary share,
traded on the NYSE.
Income taxes
Current income taxes are provided on the
basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible
for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are provided
using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset
or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statement
of comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets
if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
Uncertain tax positions
ASC 740,
Tax provision
prescribes
a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Guidance was also provided on de-recognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax
positions and determining its provision for income taxes. We recognize interests and penalties, if any, under accrued expenses
and other current liabilities on our balance sheet and under other expenses in our consolidated statement of comprehensive income.
As of December 31, 2014 and 2015, we did not have any material unrecognized uncertain tax positions.
In order to assess uncertain tax positions,
we apply a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition.
Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon settlement.
Consolidation of Variable Interest
Entities
In order to comply with the PRC laws and
regulations which prohibit foreign control of companies involved in the value-added telecommunication service businesses, we operate
our website in the PRC through Reemake Media, a consolidated VIE of ours. The equity interests of Reemake Media are legally held
by certain shareholders of our company, who are PRC individuals. We obtained control over Reemake Media through Beijing Jumei in
April 2011 by entering into a series of contractual arrangements with Reemake Media and the PRC individual shareholders of Reemake
Media. These Contractual Agreements include Shareholders’ Voting Rights Agreement, Exclusive Consulting and Services Agreement,
Exclusive Purchase Option Agreement and Equity Pledge Agreements (“Contractual Agreements”). We obtained control over
our other consolidated VIEs through contractual arrangements, substantially the same as those described above.
As a result of these contractual arrangements,
we maintain the ability to exercise effective control over our consolidated VIEs and VIE’s subsidiaries, receive substantially
all of the economic benefits and have an exclusive option to purchase all or part of the equity interests and assets in our consolidated
VIEs and VIE’s subsidiaries when and to the extent permitted by PRC law at a minimum price. We conclude that we are the primary
beneficiary of each of our consolidated VIEs and VIE’s subsidiaries. As such, we consolidated the financial results of the
VIEs in our consolidated financial statements as required by SEC Regulation SX-3A-02 and ASC subtopic 810-10, Consolidation: Overall.
We will reconsider the initial determination of whether a legal entity is a consolidated VIEs upon occurrence of certain events
listed in ASC 810-10-35-4. We will also continuously reconsider whether we are the primary beneficiary of our VIEs as facts and
circumstances change. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition
(Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In
August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December
15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. We are currently evaluating the
impact of the adoption on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02,
“Consolidation (Topic 810) - Amendments to the Consolidation Analysis,” which provides guidance for reporting entities
that are required to evaluate whether they should consolidate certain legal entities. In accordance with ASU 2015-02, all legal
entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for public business entities
for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted.
We do not expect the adoption to have a material impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-03
“Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, which
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt
issuance costs are not affected by the amendments in this ASU.
For public business entities, the amendments
are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those
fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. We do
not expect the adoption to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330),” which modifies the accounting for inventory. Under this ASU, the measurement principle for
inventory will change from lower of cost or market value to lower of cost and net realizable value. The ASU defines net realizable
value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The ASU is effective for reporting periods after December 15, 2016, with early adoption permitted. We do not
expect the adoption to have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income
taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts
in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities
and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for fiscal
years beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively
to all periods presented. Early adoption is permitted. We are currently evaluating the impact this new guidance will have on its
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use
asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard
also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term,
on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods
within those years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact
this new guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting. For employee share-based payment, ASU 2016-09 amendments related to the
timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value
should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the
beginning of the period in which the guidance is adopted.
Amendments related to the presentation of
employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding
requirement should be applied retrospectively.
Amendments requiring recognition of excess
tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied
prospectively.
An entity may elect to apply the amendments
related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method
or a retrospective transition method.
For public business entities, the amendments
in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
Early adoption is permitted. We are currently evaluating the impact this new guidance will have on its consolidated financial statements.
Results of Operations
The following table sets forth a summary
of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of our total net
revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere
in this annual report. The results of operations in any period are not necessarily indicative of the results that may be expected
for any future period.
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for share, per share and per ADS data)
|
|
Summary Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
2,556,139
|
|
|
|
85.5
|
|
|
|
3,355,914
|
|
|
|
86.3
|
|
|
|
7,113,278
|
|
|
|
1,098,101
|
|
|
|
96.9
|
|
Marketplace services
|
|
|
434,977
|
|
|
|
14.5
|
|
|
|
531,617
|
|
|
|
13.7
|
|
|
|
229,681
|
|
|
|
35,457
|
|
|
|
3.1
|
|
Total net revenues
|
|
|
2,991,116
|
|
|
|
100.0
|
|
|
|
3,887,531
|
|
|
|
100.0
|
|
|
|
7,342,959
|
|
|
|
1,133,558
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
(1,754,539
|
)
|
|
|
(58.7
|
)
|
|
|
(2,350,702
|
)
|
|
|
(60.5
|
)
|
|
|
(5,225,669
|
)
|
|
|
(806,704
|
)
|
|
|
(71.2
|
)
|
Gross profit
|
|
|
1,236,577
|
|
|
|
41.3
|
|
|
|
1,536,829
|
|
|
|
39.5
|
|
|
|
2,117,290
|
|
|
|
326,854
|
|
|
|
28.8
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(366,795
|
)
|
|
|
(12.3
|
)
|
|
|
(434,691
|
)
|
|
|
(11.2
|
)
|
|
|
(948,954
|
)
|
|
|
(146,493
|
)
|
|
|
(12.9
|
)
|
Marketing expenses
|
|
|
(322,965
|
)
|
|
|
(10.8
|
)
|
|
|
(499,115
|
)
|
|
|
(12.8
|
)
|
|
|
(655,314
|
)
|
|
|
(101,163
|
)
|
|
|
(8.9
|
)
|
Technology and content expenses
|
|
|
(62,068
|
)
|
|
|
(2.1
|
)
|
|
|
(135,698
|
)
|
|
|
(3.5
|
)
|
|
|
(169,694
|
)
|
|
|
(26,196
|
)
|
|
|
(2.3
|
)
|
General and administrative expenses
|
|
|
(246,052
|
)
|
|
|
(8.2
|
)
|
|
|
(102,527
|
)
|
|
|
(2.6
|
)
|
|
|
(191,918
|
)
|
|
|
(29,627
|
)
|
|
|
(2.6
|
)
|
Total operating expenses
|
|
|
(997,880
|
)
|
|
|
(33.4
|
)
|
|
|
(1,172,031
|
)
|
|
|
(30.1
|
)
|
|
|
(1,965,880
|
)
|
|
|
(303,479
|
)
|
|
|
(26.7
|
)
|
Income from operations
|
|
|
238,697
|
|
|
|
7.9
|
|
|
|
364,798
|
|
|
|
9.4
|
|
|
|
151,410
|
|
|
|
23,375
|
|
|
|
2.1
|
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,675
|
|
|
|
0.2
|
|
|
|
82,251
|
|
|
|
2.1
|
|
|
|
114,123
|
|
|
|
17,618
|
|
|
|
1.6
|
|
Others, net
|
|
|
771
|
|
|
|
0.0
|
|
|
|
56,397
|
|
|
|
1.5
|
|
|
|
(59,289
|
)
|
|
|
(9,153
|
)
|
|
|
(0.8
|
)
|
Income before tax
|
|
|
245,143
|
|
|
|
8.1
|
|
|
|
503,446
|
|
|
|
13.0
|
|
|
|
206,244
|
|
|
|
31,840
|
|
|
|
2.9
|
|
Income tax expenses
|
|
|
(88,576
|
)
|
|
|
(3.0
|
)
|
|
|
(98,083
|
)
|
|
|
(2.5
|
)
|
|
|
(71,403
|
)
|
|
|
(11,023
|
)
|
|
|
(1.0
|
)
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for share, per share and per ADS data)
|
|
Summary Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
156,567
|
|
|
|
5.1
|
|
|
|
405,363
|
|
|
|
10.4
|
|
|
|
134,841
|
|
|
|
20,817
|
|
|
|
1.9
|
|
Net income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(222
|
)
|
|
|
(0.0
|
)
|
|
|
(11,925
|
)
|
|
|
(1,841
|
)
|
|
|
(0.2
|
)
|
Net income attributable to Jumei International Holding Limited
|
|
|
156,567
|
|
|
|
5.1
|
|
|
|
405,141
|
|
|
|
10.4
|
|
|
|
122,916
|
|
|
|
18,976
|
|
|
|
1.7
|
|
Accretion to preferred share redemption value
|
|
|
(11,123
|
)
|
|
|
(0.4
|
)
|
|
|
(4,629
|
)
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income allocation to participating Redeemable Preferred Shares
|
|
|
(46,473
|
)
|
|
|
(1.6
|
)
|
|
|
(55,984
|
)
|
|
|
(1.4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to Jumei’s ordinary shareholders
|
|
|
98,971
|
|
|
|
3.1
|
|
|
|
344,528
|
|
|
|
8.9
|
|
|
|
122,916
|
|
|
|
18,976
|
|
|
|
1.7
|
|
Year Ended December 31, 2015 Compared
to Year Ended December 31, 2014
Net revenues
. Our net revenues increased
by 88.9% from RMB3.9 billion in 2014 to RMB7.3 billion (US$1.1 billion) in 2015, which included RMB7.1 billion (US$1.1 billion)
generated from merchandise sales and RMB229.7 million (US$35.5 million) generated from marketplace services. The increase
of RMB3.8 billion in merchandise sales was partially offset by the decrease of RMB301.9 million in marketplace services. The decrease
was primarily due to our shift in strategy from marketplace sales to merchandise sales for beauty product that started in September
2014 and the launch of
Jumei Global
. The increase of net revenues was primarily attributable to the increase in active customers
and total orders. The number of our active customers increased from approximately 13.3 million in 2014 to approximately 16.0 million
in 2015. The number of our total orders increased significantly from approximately 42.6 million in 2014 to approximately 73.2 million
in 2015.
Cost of revenues
. Our cost of revenues
increased from RMB2.4 billion in 2014 to RMB5.2 billion (US$806.7 million) in 2015, significantly outgrowing the growth in net
revenues.
Gross profit
. Our gross profit increased
by 37.8% from RMB1.5 billion in 2014 to RMB2.1 billion (US$326.9 million) in 2015 but our gross profit as a percentage of net revenues
decreased from 39.5% to 28.8% during the same period. Our gross profit as a percentage of our net GMV increased from 23.4% in 2014
to 23.7% in 2015. The lower gross profit margin in 2015 is mainly attributed to shift in strategy from beauty product marketplace
sales to merchandise sales that started in September 2014.
Operating expenses
. Our operating
expenses increased from RMB1.2 billion in 2014 to RMB2.0 billion (US$303.5 million) in 2015 primarily due to our significant business
expansion. Our operating expenses as a percentage of our net GMV increased from 17.8% in 2014 to 22.0% in 2015.
|
·
|
Fulfillment expenses
. Our fulfillment expenses increased from RMB434.7 million in 2014 to RMB949.0 million (US$146.5 million)
in 2015. The increase was primarily attributable to the significant increase in the number of orders fulfilled. The number of orders
that we fulfilled increased from approximately 32.5 million in 2014 to 64.2 million in 2015. Our fulfillment expenses as a percentage
of our net GMV increased from 6.6% in 2014 to 10.6% in 2015, primarily because an increase in fulfilled orders generated by
Jumei
Global
and the shift from marketplace sales to merchandise sales of beauty products. Fulfillment expense for
Jumei Global
order is generally higher. Most of the marketplace sales orders are not fulfilled.
|
|
·
|
Marketing expenses
. Our marketing expenses increased from RMB499.1 million in 2014 to RMB655.3 million (US$101.2 million)
in 2015, which was primarily attributable to the increase of RMB136.6 million in advertisement fee on online marketing and brand
promotion activities. Our marketing expenses as a percentage of our net GMV was relatively flat from 7.6% in 2014 to 7.3% in 2015.
|
|
·
|
Technology and content expenses
. Our technology and content expenses increased from RMB135.7 million in 2014 to
RMB169.7 million (US$26.2 million) in 2015. The increase in our technology and content expenses was primarily attributable to the
increase of RMB21.6 million in server rental and bandwidth fees. Our technology and content expenses as a percentage of our net
GMV was relatively flat from 2.1% in 2014 to 1.9% in 2015.
|
|
·
|
General and administrative expenses
. Our general and administrative expenses increased from RMB102.5 million in
2014 to RMB191.9 million (US$29.6 million) in 2015, primarily due to the increase of RMB18.6 million in bad debt expenses and RMB19.7
million in advance to a supplier write off as well as the increase of RMB29.9 million in share-based compensation expenses and
staff costs on general and administrative personnel. Our general and administrative personnel increased from 308 as of December
31, 2014 to 403 as of December 31, 2015. Our general and administrative expenses as a percentage of our net GMV increased from
1.6% in 2014 to 2.2% in 2015.
|
Interest income
. Our interest income
increased from RMB82.3 million in 2014 to RMB114.1 million (US$17.6 million) in 2015 primarily due to higher bank deposits.
Income tax expense
. Our income tax
expense decreased from RMB98.1 million in 2014 to RMB71.4 million (US$11.0 million) in 2015 primarily due to a decrease in our
taxable income. Our effective tax rate increased from 20% in 2014 to 34.5% in 2015 due to the recognition of valuation allowance
on deferred tax asset, as it’s more likely than not that such assets will not be realized in the future.
Net income
. As a result of the foregoing,
our net income decreased from RMB405.4 million in 2014 to RMB134.8 million (US$20.8 million) in 2015.
Year Ended December 31, 2014 Compared
to Year Ended December 31, 2013
Net revenues
. Our net revenues increased
by 30.0% from RMB3.0 billion in 2013 to RMB3.9 billion in 2014, which included RMB3.4 billion generated from merchandise
sales and RMB531.6 million generated from marketplace services. This increase was primarily attributable to the increase in
active customers and total orders. The number of our active customers increased significantly from approximately 10.5 million in
2013 to approximately 13.3 million in 2014. The number of our total orders increased from approximately 36.0 million in 2013
to approximately 42.6 million in 2014.
Cost of revenues
. Our cost of revenues
increased from RMB1.8 billion in 2013 to RMB2.4 billion in 2014, which was in line with the increase in merchandise sales for the
same period.
Gross profit
. Our gross profit increased
by 24.3% from RMB1.2 billion in 2013 to RMB1.5 billion in 2014 and our gross profit as a percentage of net revenues decreased from
41.3% to 39.5% during the same period. Our gross profit as a percentage of our net GMV decreased from 24.5% in 2013 to 23.4% in
2014. The lower gross profit margin in 2014 is mainly attributed to our shift in strategy from beauty product marketplace sales
to merchandise sales that started in September 2014.
Operating expenses
. Our operating
expenses increased from RMB997.9 million in 2013 to RMB1.2 billion in 2014 primarily due to our significant business expansion.
Our operating expenses as a percentage of our net GMV decreased from 19.8% in 2013 to 17.8% in 2014, primarily due to the increase
in economies of scale and the significant decrease in share-based compensation expense.
|
·
|
Fulfillment expenses
. Our fulfillment expenses increased from RMB366.8 million in 2013 to RMB434.7 million in 2014.
The increase was primarily attributable to the significant increase in the number of orders fulfilled and higher staff compensation
and benefits due to headcount increase, and increase in rental expenses in connection with our expanded logistics center facilities.
The number of orders that we fulfilled increased from approximately 30.3 million in 2013 to 32.5 million in 2014. Our fulfillment
personnel increased from 1,778 as of December 31, 2013 to 2,032 as of December 31, 2014. Our fulfillment expenses as a percentage
of our net GMV decreased from 7.3% in 2013 to 6.6% in 2014, primarily because a percentage decrease of fulfilled orders over total
orders.
|
|
·
|
Marketing expenses
. Our marketing expenses increased from RMB323.0 million in 2013 to RMB499.1 million in 2014,
which was primarily attributable to our increased online marketing and brand promotion activities. Our marketing expenses as a
percentage of our net GMV increased from 6.4% in 2013 to 7.6% in 2014, primarily due to the higher number of marketing campaigns
and brand promotion activities that we launched in 2014.
|
|
·
|
Technology and content expenses
. Our technology and content expenses increased from RMB62.1 million in 2013 to
RMB135.7 million in 2014. The increase in our technology and content expenses was primarily attributable to higher compensation
and benefits for the technology and content staff due to headcount increase, and higher expenses incurred in maintaining our internet
platform. Our technology and content personnel increased from 362 as of December 31, 2013 to 773 as of December 31, 2014.
Our technology and content expenses as a percentage of our net GMV increased from 1.2% in 2013 to 2.1% in 2014, primarily due to
our increased investments in our information technology platform.
|
|
·
|
General and administrative expenses
. Our general and administrative expenses decreased from RMB246.1 million in
2013 to RMB102.5 million in 2014, primarily due to the significant decrease in share-based compensation expense, partially offset
by higher share-based compensation and higher administrative staff compensation and benefits due to headcount increase. Our share-based
compensation expense related to general and administrative expenses decreased from RMB191.1 million in 2013 to RMB14.9 million
in 2014. Our general and administrative personnel increased from 283 as of December 31, 2013 to 308 as of December 31, 2014. Our
general and administrative expenses as a percentage of our net GMV decreased from 4.9% in 2013 to 1.6% in 2014, primarily due to
the decrease in share-based compensation expense.
|
Interest income
. Our interest income
increased from RMB5.7 million in 2013 to RMB82.3 million in 2014 primarily due to higher bank deposits resulting from our initial
public offering in May 2014.
Income tax expense
. Our income tax
expense increased from RMB88.6 million in 2013 to RMB98.1 million in 2014 primarily due to an increase in our taxable income. Our
effective tax rate decreased from 36% in 2013 to 20% in 2014 due to the decrease in share-based compensation expenses, which were
not tax deductible.
Net income
. As a result of the foregoing,
our net income increased from RMB156.6 million in 2013 to RMB405.4 million in 2014.
|
B.
|
Liquidity and Capital Resources
|
To date, we have financed our operations
primarily through cash generated by operating activities and the issuance of Class A ordinary shares in our initial public offering
and our concurrent private placement in May 2014, as well as of preferred shares in private placements. As of December 31,
2015, our principal sources of liquidity was RMB2.9 billion (US$451.9 million) of cash, cash equivalents and short-term investments.
Our cash and cash equivalents represent cash on hand, time deposits and highly liquid investments placed with banks or other financial
institutions, which have original maturities of three months or less and are readily convertible to known amounts of cash. Short-term
investments comprise of the term deposits as well as highly liquid investments placed with banks with original maturities longer
than three months but less than one year. We believe that our current cash and cash equivalents, short-term investments and our
anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures
for the 12 months. We may, however, need additional capital in the future to fund our continued operations.
Although we consolidate the results of our
consolidated VIEs, we only have access to the assets or earnings of our consolidated VIEs through our contractual arrangements
with them. See “Item 4. Information on the Company – C. Organizational Structure.” For restrictions and limitations
on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”
As of December 31, 2015, our subsidiaries
in China held cash and cash equivalents and short-term investments in the amount of RMB2.7 billion (US$409.7 million), and our
consolidated VIEs and their subsidiaries held cash and cash equivalents and short-term investments in the amount of RMB45.5 million
(US$7.0 million), which includes cash reserved to settle payables to our subsidiary in China. We would need to accrue and pay withholding
taxes if we were to distribute funds from our subsidiaries in China to our offshore subsidiaries. We do not intend to repatriate
such funds in the foreseeable future, as we plan to use existing cash balance in China for general corporate purpose.
The following table sets forth a summary
of our cash flows for the periods indicated:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
|
|
524,750
|
|
|
|
422,444
|
|
|
|
151,497
|
|
|
|
23,386
|
|
Net cash used in investing activities
|
|
|
(28,753
|
)
|
|
|
(2,575,715
|
)
|
|
|
1,383,691
|
|
|
|
213,605
|
|
Net cash provided by/(used in) financing activities
|
|
|
(5,236
|
)
|
|
|
2,486,702
|
|
|
|
4,417
|
|
|
|
684
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
110
|
|
|
|
(512
|
)
|
|
|
12,555
|
|
|
|
1,938
|
|
Net increase in cash and cash equivalents
|
|
|
490,871
|
|
|
|
332,919
|
|
|
|
1,552,160
|
|
|
|
239,613
|
|
Cash and cash equivalents at beginning of year
|
|
|
188,337
|
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
156,245
|
|
Cash and cash equivalents at end of year
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
395,858
|
|
Operating Activities
Net cash provided by operating activities
amounted to RMB151.5 million (US$23.4 million) in 2015, which was primarily attributable to a net income of RMB134.8 million (US$20.8
million), adjusted for non-cash items of RMB245.6 million (US$37.9 million) and a net decrease of RMB228.9 million (US$35.3 million)
in change in working capital. The net decrease in change in working capital was primarily attributable to an increase in inventories
of RMB340.0 million, partially offset by an increase in accounts payable of RMB131.6 million.
Net cash provided by operating activities
amounted to RMB422.4 million in 2014, which was primarily attributable to a net income of RMB405.4 million, adjusted for non-cash
items of RMB74.4 million and a net decrease of RMB57.3 million in change in working capital. The net decrease in change in
working capital was primarily attributable to an increase in inventories of RMB429.5 million and an increase in prepayments and
other assets of RMB150.7 million, partially offset by an increase in accounts payable of RMB348.8 million. The increases in inventories
and accounts payable were primarily due to the rapid expansion of our business operations. The increase in prepayments and other
assets was primarily due to the increase in supplier rebate and interest receivable.
Net cash provided by operating activities
amounted to RMB524.8 million in 2013, which was primarily attributable to a net income of RMB156.6 million, adjusted for non-cash
items of RMB208.8 million and a net increase of RMB159.4 in change in working capital. The net increase in change in working
capital was primarily attributable to an increase in accounts payable of RMB298.7 million and an increase in tax payable of RMB73.0
million, which was partially offset by an increase in advance to suppliers of RMB115.6 million, an increase in inventories of RMB109.6
million and a decrease in advance from customers of RMB8.0 million. The increases in accounts payable and inventories were primarily
due to the significant increase in the total orders that we fulfilled which was in turn attributable to the rapid expansion of
our business operations.
Investing Activities
Net cash provided by investing activities
amounted to RMB1.4 billion (US$213.6 million) in 2015, which was primarily attributable to the maturity of RMB5.0 billion of our
short term investments, partially offset by our purchase of RMB2.8 billion of short term investments, and the investment of RMB558.0
million in BabyTree and RMB172.6 million in investment security.
Net cash used in investing activities amounted
to RMB2.6 billion in 2014, which was primarily attributable to our purchase of short term investments.
Net cash used in investing activities amounted
to RMB28.8 million in 2013, which was primarily attributable to our renovation and purchase of equipment for new logistics centers
and our newly leased office in Beijing.
Financing Activities
Net cash provided by financing activities
amounted to RMB4.4 million (US$0.7 million) in 2015, which was attributable to RMB9.8 million of proceeds from exercises of share
options and RMB11.1 million of proceeds from bank loans, partially offset by RMB15.4 million in payback of short-term borrowings.
Net cash provided by financing activities
amounted to RMB2.5 billion in 2014, which was attributable to the net proceeds from our initial public offering and our concurrent
private placement in May 2014.
Net cash used in financing activities amounted
to RMB5.2 million in 2013, which was attributable to the repurchase of vested options.
Capital Expenditures
Our capital expenditures amounted to RMB28.8
million, RMB40.1 million and RMB36.5 million (US$5.6 million) in 2013, 2014 and 2015, respectively. In the past, our capital expenditures
were principally used for renovation and purchase of equipment for new logistics centers and our leased office in Beijing, as well
as purchases of equipment related to our research and development efforts.
Holding Company Structure
Jumei International Holding Limited is a
holding company with no material operations of its own. We conduct our operations primarily through our wholly owned subsidiaries
and our consolidated VIEs in China. As a result, our ability to pay dividends depends upon dividends paid by our wholly owned subsidiaries.
If our wholly owned subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments
governing their debt may restrict their ability to pay dividends to us. In addition, our wholly owned subsidiaries are permitted
to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations. Under PRC law, each of our wholly owned PRC subsidiaries and our consolidated affiliated entity is required to set
aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its
registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate
future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends
except in the event of liquidation. As a result of these PRC laws and regulations, as of December 31, 2015, we had RMB17.6 million
(US$2.7 million) in statutory reserves that are not distributable as cash dividends. We currently plan to reinvest all earnings
from our PRC subsidiaries to their business developments and do not plan to request dividend distributions from them.
The exclusive consulting and services agreement
entered into among Beijing Jumei, Reemake Media and the shareholders of Reemake Media requires Reemake Media to pay service fees
in Renminbi to Beijing Jumei in the manner and amount set forth in such agreement. After paying the applicable withholding taxes
and making appropriations for the statutory reserve, the remaining net profits of our PRC subsidiaries would be available for distribution
to our offshore companies. As an offshore holding company of our PRC subsidiaries and consolidated VIEs, we may make loans to our
PRC subsidiaries and consolidated VIEs. Any loans to our PRC subsidiaries are subject to foreign exchange loan registrations with
relevant governmental authorities in China, and loans by us to our VIEs, which are domestic PRC entities, must be registered with
the National Development and Reform Commission and must also be registered with SAFE or its local branches. We may also finance
our subsidiaries by means of capital contributions. See “Item 3. Key Information – D. Risk Factors—Risks Related
to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies
and governmental control of currency conversion may delay or prevent us from using the proceeds of our offshore offerings to make
loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.”
Furthermore, cash transfers from our PRC
subsidiaries to our offshore companies are subject to PRC government control of currency conversion. For example, remittance of
dividends by our PRC subsidiaries out of China is subject to examination by the banks designated by SAFE. Restrictions on
the availability of foreign currency may affect the ability of our PRC subsidiaries and our consolidated VIEs to remit sufficient
foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations.
See “Item 3. Key Information – D. Risk Factors—Risks Related to Doing Business in China—Governmental control
of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.”
Inflation
Since our inception, inflation in China
has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year
percent changes in the consumer price index for December 2013, 2014 and 2015 were increases of 2.5%, 1.5% and 1.6%, respectively.
Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we
will not be affected in the future by higher rates of inflation in China.
|
C.
|
Research and Development, Patents and Licenses, etc.
|
Research and Development
Our technology systems are designed to enhance
efficiency and scalability, and play an important role in the success of our business. We rely on a combination of internally developed
proprietary technologies and commercially available licensed technologies to improve our website and management systems in order
to optimize every aspect of our operations for the benefit of our customers, suppliers and third-party merchants.
We have adopted a service-oriented architecture
supported by data processing technologies which consists of front-end, mid-end and back-end modules. Our network infrastructure
is built upon self-owned servers located in data centers operated by third-party internet data center providers. We are implementing
enhanced cloud architecture and infrastructure for our core data processing system to augment our existing virtual private network
as we continue to expand our operations, enabling us to achieve significant internal efficiency through a virtual and centralized
network platform.
Technology and content development expenses
consist primarily of payroll and related costs for employees involved in application development, category expansion, editorial
content production on our internet platform and system support expenses, as well as server charges and costs associated with telecommunications.
As we continue to expand our technological capabilities to support our anticipated growth and enhance customer experience, we expect
our technology and content expenses to continue to increase in absolute amount in the foreseeable future. We incurred RMB62.1 million,
RMB135.7 million and RMB169.7 million (US$26.2 million) in technology and content development expenses in 2013, 2014 and 2015,
respectively.
Intellectual Property
We regard our trademarks, software copyrights,
service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success,
and we rely on trademark, copyright and trade secret protection laws in the PRC, as well as confidentiality procedures and contractual
provisions with our employees, service providers, suppliers, third-party merchants and others to protect our proprietary rights.
As of December 31, 2015, we owned 246 registered trademarks, copyrights to 32 software programs developed by us relating to various
aspects of our operations, and 48 registered domain names, including
jumei.com
and
jumeiglobal.com
.
Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1,
2015 to December 31, 2015 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating
results or financial conditions.
|
E.
|
Off-Balance Sheet Arrangements
|
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services
with us.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
We lease our facilities and offices under
non-cancellable operating lease agreements. The rental expenses were RMB37.6 million, RMB70.2 million and RMB70.8 million (US$10.9
million) during the years ended December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2015, future minimum
commitment under non-cancelable agreements were as follows:
RMB (in thousand)
|
|
Total
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020 and thereafter
|
|
Operating lease
|
|
|
94,961
|
|
|
|
67,569
|
|
|
|
18,565
|
|
|
|
5,298
|
|
|
|
3,334
|
|
|
|
195
|
|
Other than those shown above, we did not
have any significant unrecognized uncertain tax positions, capital and other commitments, long-term obligations, or guarantees
as of December 31, 2015.
We have not entered into non-cancellable
capital expenditure agreement as of December 31, 2015.
This annual report on Form 20-F contains
forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and
our future financial performance and condition, all of which are largely based on our current expectations and projections. The
forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,”
“Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These
statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,”
“anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,”
“is/are likely to” or other and similar expressions. Forward-looking statements involve inherent risks and uncertainties.
You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this
annual report on Form 20-F relate only to events or information as of the date on which the statements are made in this annual
report on Form 20-F. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made
or to reflect the occurrence of unanticipated events. You should read this annual report on Form 20-F completely and with
the understanding that our actual future results may be materially different from what we expect.
|
Item 6.
|
Directors, Senior Management and Employees
|
|
A.
|
Directors and Senior Management
|
The following table sets forth information
regarding our directors and executive officers as of the date of this annual report. On April 1, 2016, our co-chief financial
officers at the time, Ms. Mona Meng Gao and Mr. Yunsheng Zheng, tendered their resignations from their Co-CFO positions, in each
case for personal reasons. The resignation of Ms. Gao was effective on April 1, 2016, and the resignation of Mr. Zheng will
be effective in June, 2016. As of the date of this annual report, Mr. Zheng serves as our Chief Financial Officer.
Directors and Executive
Officers
|
|
Age
|
|
Position/Title
|
Leo Ou Chen
|
|
33
|
|
Founder, Chairman of the Board of Directors and Chief Executive Officer
|
Yusen Dai
|
|
29
|
|
Co-Founder, Director and Vice President of Products
|
Sean Shao
|
|
59
|
|
Independent director
|
Zhenquan Ren
|
|
43
|
|
Independent director
|
Mang Su
|
|
44
|
|
Independent director
|
Adam J. Zhao
|
|
48
|
|
Independent director
|
Huipu Liu
|
|
37
|
|
Senior Vice President
|
Yunsheng Zheng
|
|
43
|
|
Chief Financial Officer
|
Tony Tao Zhou
|
|
45
|
|
Vice President of Logistics
|
Mr. Leo Ou Chen
is our founder
and has served as our chairman and chief executive officer since our inception. Mr. Chen received an MBA degree from Stanford
University in 2009, and a bachelor’s degree in computer science from Nanyang Technological University in Singapore in 2005.
Mr. Yusen Dai
is our co-founder
and has served as our director and vice president of products since our inception. He studied management science and engineering
in Stanford University from 2008 to 2009, and received his bachelor’s degree in industrial engineering from Tsinghua University
in Beijing, China in 2008.
Mr. Sean Shao
currently serves as
(i) independent director and chairman of the audit committee of: 21Vianet Group, Inc., a leading carrier-neutral internet data
center services provider listed on NASD since August 2015; Trina Solar Limited, an integrated solar-power products manufacturer
and solar system developer listed on the NYSE since January 2015; Jumei International Holding Ltd., an e-commerce company listed
on NYSE since May 2014; LightInTheBox Holdings Co. Ltd., an e-commerce company listed on NYSE since June 2013 and UTStarcom Holdings
Corp., a provider of broadband equipment and solutions listed on NASDAQ since October 2012, (ii) independent director and chairman
of the audit and compensation committees of China Biologic Products, Inc., a biopharmaceutical company listed on NASDAQ since July
2008, and (iii) independent director and chairman of the nominating committee of Agria Corporation, an agricultural company listed
on NYSE since November 2008. He served as the chief financial officer of Trina Solar Limited from 2006 to 2008. In addition, Mr.
Shao served from 2004 to 2006 as the chief financial officer of ChinaEdu Corporation, an educational service provider, and of Watchdata
Technologies Ltd., a Chinese security software company. Prior to that, Mr. Shao worked at Deloitte Touche Tohmatsu CPA Ltd. for
approximately a decade. Mr. Shao received his master’s degree in health care administration from the University of California
at Los Angeles in 1988 and his bachelor’s degree in art from East China Normal University in 1982. Mr. Shao is a member of
the American Institute of Certified Public Accountants.
Mr. Zhenquan Ren
has served as our
independent director since April 2015. Mr. Ren is a founder of Star VC, a venture capital firm established in 2014. In 2013, Mr.
Ren founded Beijing Hot and Spicy Investment Limited Company and established “Hot and Spicy No.1” hotpot brand. In
2011, Mr. Ren established Ren Quan Studio, which has gone on to produce many well-known TV shows and films in China. Prior to that,
Mr. Ren was an actor for Hua Yi Brothers. Mr. Ren graduated from the Shanghai Theatre Academy in 1997 and completed his EMBA at
the Cheung Kong Graduate School of Business in 2013.
Ms. Mang Su
has served as our independent
director since April 2015. Ms. Su currently serves as the president of Trends Media Group, or Trends, a major magazine publisher
in China with over 10 titles including Cosmopolitan, Esquire, Harper’s BAZAAR, Trendshome, and Trendshealth. Ms. Su joined
Trends in 1994 where she was instrumental in launching and managing Trend’s magazine portfolio. Ms. Su has accumulated extensive
media management experience through a career that spans many years and includes a diverse number of roles in editorial, advertising,
marketing and distribution positions. Ms. Su launched BAZAAR Charity Night in 2003. Ms. Su graduated from the China Conservatory
of Music, and received her EMBA degree from Cheung Kong Graduate School of Business.
Mr. Adam J. Zhao
has served as our
independent director since March 2016. Mr. Adam J. Zhao has been the chief financial officer and board secretary of PapayaMobile
since December 2014. Mr. Zhao is currently an independent director of eLong, Inc., a NASDAQ-listed company. Prior to joining
PapayaMobile, Mr. Zhao was the CFO and board secretary of Country Style Cooking Restaurant Chain, a NYSE-listed company, beginning
in January 2012. Prior to that, he was the corporate vice president of Ninetowns Internet Technology Group, beginning in August
2007. From 2004 to 2007, he was the CFO of Digital Media Group, which was acquired by VisionChina Media Inc., a NASDAQ-listed company.
Mr. Zhao's earlier experiences include investment management positions at New Hope Capital and serving as an investment director
at a Hong Kong investment company. Mr. Zhao received his bachelor's degree in economics from Beijing International Study
University in 1989 and his MBA from the University of Illinois in Chicago in 2003.
Mr. Huipu Liu
has served as
our senior vice president since February 2012. Prior to joining us, he was the vice president of human resources and marketing
of Jiayuan.com International Ltd., a NASDAQ-listed company, from 2009 and 2011. He was the general manager of Zhejiang Branch of
chinahr.com
from 2007 to 2009. From 2005 to 2007, he served as a deputy manager of the training department of Century 21
Real Estate China. He received his bachelor’s degree in engineering from University of Science and Technology Beijing in
China in 2003.
Mr. Yunsheng Zheng
served as
our co-chief financial officer between April 2014 and March 2016, and as our chief financial officer since April 2016, and is in
charge of our accounting and financial reporting. Prior to his tenure as our co-chief financial officer, Mr. Zheng served as our
vice president of finance since joining us in June 2012. Prior to joining us, he was the head of finance function for the new business
initiatives division of Nanjing FullShare Group, a private conglomerate in China, from 2009 to 2010. From 2006 to 2009, he was
the chief financial officer of BlueStar SecuTech Inc., and participated in the preparation for its initial public offering on London
Stock Exchange in 2007. Prior to that, Mr. Zheng worked at a few accounting firms, including as a senior manager at BDO Reanda,
successively for over six years. Mr. Zheng received a master’s degree in management from Stanford University in 2011
and a bachelor’s degree in financial accounting from Renmin University of China in 2001. Mr. Zheng is a certified public
accountant in China, a fellow of the Association of Chartered Certified Accountants and a chartered financial analyst.
Mr. Tony Tao Zhou
has served
as our vice president of logistics since July 2013. Prior to joining us, he served as a vice president in
Amazon.cn
, in
charge of its north China region logistics centers from 2009 to 2013. From 1999 to 2009, he worked at GE Healthcare as a manufacturing
process engineer in the U.S., as a material control engineer in Japan, as a finance cost analyst and held management roles overseeing
quality and productivity, project and warehousing, and served in a leadership role for eSourcing in China. He received the
Lean Six Sigma Black Belt certification while working at GE Healthcare. Mr. Zhou received his bachelor’s degree in mechanical
engineering from Beijing Union University in China in 1994.
For the fiscal year ended December 31,
2015, we paid an aggregate of RMB5.1 million (US$0.8 million) in cash to our executive officers, and we paid an aggregate of RMB0.3
million (US$50,000) in cash to our non-executive directors. We have not set aside or accrued any amount to provide pension, retirement
or other similar benefits to our executive officers and directors. Our PRC subsidiaries and VIEs are required by law to make contributions
equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment
insurance and other statutory benefits and a housing provident fund.
The following table summarizes, as of March
31, 2016, the options and restricted shares units granted under our 2011 plan and 2014 plan to our directors and executive officers,
excluding awards that were forfeited or cancelled after the relevant grant dates.
Name
|
|
Ordinary Shares
Underlying Options
Awarded
|
|
|
Exercise
Price
(US$/Share)
|
|
|
Date of Grant
|
|
Date of Expiration
|
Sean Shao
|
|
|
*
|
(1)
|
|
|
–
|
|
|
September 22, 2014
|
|
September 21, 2024
|
|
|
|
*
|
(1)
|
|
|
–
|
|
|
May 16, 2015
|
|
May 15, 2025
|
Huipu Liu
|
|
|
*
|
|
|
|
1.07692
|
|
|
February 23, 2012
|
|
February 28, 2022
|
|
|
|
*
|
|
|
|
1.07692
|
|
|
September 23, 2012
|
|
September 30, 2022
|
|
|
|
*
|
|
|
|
1.07692
|
|
|
May 1, 2013
|
|
April 30, 2023
|
|
|
|
*
|
|
|
|
15.00
|
|
|
March 31, 2015
|
|
April 1, 2025
|
Yunsheng Zheng
|
|
|
*
|
|
|
|
1.07692
|
|
|
September 23, 2012
|
|
September 30, 2022
|
|
|
|
*
|
|
|
|
15.00
|
|
|
March 31, 2015
|
|
April 1, 2025
|
Tony Tao Zhou
|
|
|
*
|
|
|
|
1.07692
|
|
|
August 1, 2013
|
|
July 31, 2023
|
|
|
|
*
|
|
|
|
15.00
|
|
|
March 31, 2015
|
|
April 1, 2025
|
Zhenquan Ren
|
|
|
*
|
(1)
|
|
|
–
|
|
|
April 24, 2015
|
|
April 23, 2025
|
Mang Su
|
|
|
*
|
(1)
|
|
|
–
|
|
|
April 24, 2015
|
|
April 23, 2025
|
Total
|
|
|
2,374,673
|
|
|
|
|
|
|
|
|
|
*Less than 1% of our total outstanding share capital.
|
(1)
|
Restricted share units.
|
As of March 31, 2016, other individuals
as a group hold options to purchase a total of 5,546,983 Class A ordinary shares of our company, with exercise prices ranging from
nil to US$15.0 per share, as well as 290,448 restricted shares units of our company.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements
with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period.
We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer,
such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment,
or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause
upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive
officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer
may resign at any time with a three-month advance written notice.
Each executive officer has agreed to hold,
both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except
as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our
confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients,
or the confidential or proprietary information of any third party received by us and for which we have confidential obligations.
The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive,
develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest
in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs
and trade secrets.
In addition, each executive officer has
agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically
for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our
suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity
as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships
with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether
as a principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly
or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s
termination, or in the year preceding such termination, without our express consent.
We have also entered into indemnification
agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive
officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being
a director or officer of our company.
2011 Global Share Plan
In March 2011, our board of directors approved
the 2011 plan, to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants
and promote the success of our business. On April 8, 2011, our board of directors approved that the maximum aggregate number
of our ordinary shares which may be issued pursuant to all awards under the 2011 plan is 10,401,229 shares. As of March 31, 2016,
options to purchase 5,546,983 ordinary shares have been granted and outstanding, excluding awards that were forfeited or cancelled
after the relevant grant dates.
The following paragraphs describe the principal
terms of the 2011 plan.
Types of Awards.
The 2011 plan
permits the awards of options and share purchase rights.
Plan Administration.
Our board
of directors or our compensation committee will administer the 2011 plan. The committee or the full board of directors, as applicable,
will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms
and conditions of each award grant.
Award Agreement.
Awards granted
under the 2011 plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which
may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates,
and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility.
We may grant awards
to our employees, directors and consultants of our company. However, we may grant options that are intended to qualify as incentive
share options only to our employees and employees of our parent companies and subsidiaries.
Vesting Schedule.
In general,
the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options.
The plan
administrator determines the exercise price for each award, which is stated in the award agreement. The vested portion of option
will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum
exercisable term is ten years from the date of a grant.
Transfer Restrictions
. Awards
may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise
provided by the plan administrator.
Termination and Amendment of the 2011
Plan.
Unless terminated earlier, the 2011 plan has a term of ten years. Our board of directors has the authority to amend
or terminate the plan. However, no such action may adversely affect in any material way any awards previously granted unless agreed
by the recipient.
2014 Plan
We adopted the 2014 plan in April 2014.
The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 plan is 6,300,000 Class A ordinary
shares initially. The number of shares reserved for future issuances under the 2014 plan will be increased by a number equal to
1.5% of the total number of outstanding shares on the last day of the immediately preceding calendar year, or such lesser number
of Class A ordinary shares as determined by our board of directors, on the first day of each calendar year during the term of the
2014 plan beginning in 2015. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 plan
is 8,499,519 Class A ordinary shares as of March 31, 2016. As of March 31, 2016, 339,247 restricted share units have been granted
under the 2014 plan.
The following paragraphs summarize the terms
of the 2014 plan.
Types of Awards.
The 2014 plan permits
the awards of options, restricted shares and restricted share units.
Plan Administration.
Our board or
a committee of one or more members of our board duly authorized for the purpose of the 2014 plan can act as the plan administrator.
Award Agreement.
Options, restricted
shares or restricted share units granted under the 2014 plan are evidenced by an award agreement that sets forth the terms, conditions
and limitations for each grant.
Eligibility.
We may grant awards
to our employees, directors or consultants. However, we may grant options that are intended to qualify as incentive share options
only to our employees and employees of our parent companies and subsidiaries.
Acceleration of Awards upon Change in
Control.
If a change in control, liquidation or dissolution of our company occurs, the plan administrator may, in its sole
discretion, provide for (i) all awards outstanding to terminate at a specific time in the future and give each participant the
right to exercise the vested portion of such awards during a specific period of time, or (ii) the purchase of any award for an
amount of cash equal to the amount that could have been attained upon the exercise of such award, or (iii) the replacement of such
award with other rights or property selected by the plan administrator in its sole discretion, or (iv) payment of award in cash
based on the value of ordinary shares on the date of the change-in-control transaction plus reasonable interest.
Exercise of Options.
The plan administrator
determines the exercise price for each award, which is stated in the award agreement. The vested portion of option will expire
if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable
term is the tenth anniversary after the date of a grant.
Exercise Price of Options.
The exercise
price in respect of any option shall be determined by the plan administrator and set forth in the award agreement which may be
a fixed or variable price related to the fair market value of the shares. The exercise price per share subject to an option may
be amended or adjusted in the absolute discretion of the plan administrator, the determination of which shall be final, binding
and conclusive.
Vesting Schedule.
In general, the
plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions.
Awards may
not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise
provided by the plan administrator.
Termination.
Unless terminated earlier,
the 2014 plan will terminate automatically in 2024.
Our board of directors consists of five
directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director who is in
any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or transaction with our company
shall declare the nature of his interest at a meeting of the directors. A general notice given to the directors by any director
to the effect that he is a member of any specified company or firm and is to be regarded as interested in any contract or transaction
which may thereafter be made with that company or firm shall be deemed a sufficient declaration of interest in regard to any contract
so made or transaction so consummated. Subject to the rules of NYSE and disqualification by the chairman of the relevant board
meeting, a director may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested.
The board may exercise all the powers of our company to borrow money, mortgage its business, 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. There is no age limit requirement for directors. None of our non-executive directors has a service contract with us that
provides for benefits upon termination of service.
Committees of the Board of Directors
We have three committees under the board
of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted
a charter for each of the three committees, which charters are available on our investor relations website at http://jumei.investorroom.com/.
Each committee’s members and functions are described below.
Audit Committee.
Our audit committee
consists of Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang Su. Mr. Sean Shao is the chairman of our audit committee. Our board
has determined that Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang Su satisfy the “independence” requirements of Section
303A of the Corporate Governance Rules of the NYSE and meet the independence standards under Rule 10A-3 under the Exchange Act.
Mr. Sean Shao currently also serves on the audit committees of: Trina Solar Limited, a NYSE-listed company; LightInTheBox Holdings
Co. Ltd., a NYSE-listed company; UTStarcom Holdings Corp., a NASDAQ-listed company; and China Biologic Products, Inc., a NASDAQ-listed
company. Our board of directors has determined that the simultaneous service of Mr. Sean Shao on the audit committees of these
public companies would not impair the ability of Mr. Sean Shao to effectively serve on the audit committee of our board of directors.
The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our
company. The audit committee is responsible for, among other things:
|
·
|
appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the
independent auditors;
|
|
·
|
reviewing with the independent auditors any audit problems or difficulties and management’s response;
|
|
·
|
discussing the annual audited financial statements with management and the independent auditors;
|
|
·
|
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken
to monitor and control major financial risk exposures;
|
|
·
|
reviewing and approving all proposed related party transactions;
|
|
·
|
meeting separately and periodically with management and the independent auditors; and
|
|
·
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance.
|
Compensation Committee.
Our
compensation committee consists of Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang Su. Mr. Zhenquan Ren is the chairman of our compensation
committee. Our board has determined that Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang Su satisfy the “independence”
requirements of Section 303A of the Corporate Governance Rules of the NYSE. The compensation committee assists the board in reviewing
and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers.
Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation
committee is responsible for, among other things:
|
·
|
reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and
other executive officers;
|
|
·
|
reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors;
|
|
·
|
reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
|
|
·
|
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant
to that person’s independence from management.
|
Nominating and Corporate Governance Committee.
Our
nominating and corporate governance committee consists of Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang Su. Ms. Mang Su is the chairwoman
of our nominating and corporate governance committee. Our board has determined that Mr. Sean Shao, Mr. Zhenquan Ren and Ms. Mang
Su satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The nominating
and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and
in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible
for, among other things:
|
·
|
selecting and recommending to the board nominees for election by the shareholders or appointment by the board;
|
|
·
|
reviewing annually with the board the current composition of the board with regards to characteristics such as independence,
knowledge, skills, experience and diversity;
|
|
·
|
making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of
the board; and
|
|
·
|
advising the board periodically with regards to significant developments in the law and practice of corporate governance as
well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate
governance and on any remedial action to be taken.
|
Duties of Directors
Under Cayman Islands law, our directors
have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also owe to our company
a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties
a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth
courts have moved 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 fulfilling their duty of care to us, our directors must ensure compliance with our memorandum
and articles of association, as amended and restated from time to time.
Terms of Directors and Officers
Our officers are appointed by and serve
at the discretion of our board of directors. Our directors are not subject to a term of office and hold office until such time
as they resign or are removed from office by ordinary resolution of the shareholders. A director will be removed from office automatically
if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies
or is found to be or becomes of unsound mind; (iii) without special leave of absence from the board of directors, is absent from
meetings of the board of directors for three consecutive meetings and the board of directors resolves that his office be vacated.
As of December 31, 2015, we had 2,869 full-time
employees, compared with 876 and 1,448 employees as of December 31, 2013 and 2014, respectively. The following table sets
forth the number of our full-time employees categorized by areas of operations as of December 31, 2015:
Function
|
|
Number of Employees
|
|
Products
|
|
|
354
|
|
Business development
|
|
|
186
|
|
Administration and management
|
|
|
293
|
|
Technology support
|
|
|
324
|
|
Logistics and delivery
|
|
|
1,027
|
|
Customer service
|
|
|
623
|
|
Marketing
|
|
|
61
|
|
Total
|
|
|
2,869
|
|
In addition to our full-time employees,
we used 519 contract workers dispatched to us by staffing agencies as of December 31, 2015. These contract workers are primarily
responsible for customer service, logistics and delivery services.
Our success depends on our ability to attract,
motivate, train and retain qualified personnel. We believe we offer our employees competitive compensation packages and an environment
that encourages self-development and, as a result, have generally been able to attract and retain qualified personnel and maintain
a stable core management team.
As required by regulations in China, we
participate in various employee social security plans that are organized by municipal and provincial governments, including pension,
unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required
under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances
of our employees, up to a maximum amount specified by the local government from time to time. Our employees are not covered by
any collective bargaining agreement. To date, we have not experienced any significant labor disputes.
Except as specifically noted, the following
table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2016 by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each person known to us to own beneficially more than 5% of our ordinary shares.
|
The calculations in the table below are
based on 146,634,596 ordinary shares outstanding as of March 31, 2016, comprising of 87,829,756 Class A ordinary shares and
58,804,840 Class B ordinary shares.
Beneficial ownership is determined in accordance
with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the
exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included
in the computation of the percentage ownership of any other person.
|
|
Ordinary Shares Beneficially Owned
|
|
|
|
Class A
ordinary
Shares
|
|
|
Class B
ordinary
Shares
|
|
|
Total ordinary
shares on an
as-converted
basis
|
|
|
Percentage
of total
ordinary
shares on
an as
converted
basis
|
|
|
% of aggregate
voting
power †
|
|
Directors and Executive Officers:**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo Ou Chen
(1)
|
|
|
–
|
|
|
|
50,892,198
|
|
|
|
50,892,198
|
|
|
|
34.7
|
|
|
|
75.3
|
|
Yusen Dai
(2)
|
|
|
–
|
|
|
|
7,912,642
|
|
|
|
7,912,642
|
|
|
|
5.4
|
|
|
|
11.7
|
|
Sean Shao
(3)
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Zhenquan Ren
(4)
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Mang Su
(5)
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Adam J. Zhao
(6)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Huipu Liu
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Yunsheng Zheng
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Tony Tao Zhou
|
|
|
*
|
|
|
|
–
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
|
|
|
*
|
|
|
|
58,804,840
|
|
|
|
59,445,212
|
|
|
|
40.5
|
|
|
|
87.1
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super ROI
Global Holding Limited
(7)
|
|
|
–
|
|
|
|
50,892,198
|
|
|
|
50,892,198
|
|
|
|
34.7
|
|
|
|
75.3
|
|
Sequoia funds
(8)
|
|
|
20,900,000
|
|
|
|
–
|
|
|
|
20,900,000
|
|
|
|
14.3
|
|
|
|
3.1
|
|
Xiaoping Xu
(9)
|
|
|
8,909,079
|
|
|
|
–
|
|
|
|
8,909,079
|
|
|
|
6.1
|
|
|
|
1.3
|
|
K2 Partners funds
(10)
|
|
|
4,931,384
|
|
|
|
–
|
|
|
|
4,931,384
|
|
|
|
3.4
|
|
|
|
0.7
|
|
Pinnacle High-Tech Limited
(11)
|
|
|
–
|
|
|
|
7,912,642
|
|
|
|
7,912,642
|
|
|
|
5.4
|
|
|
|
11.7
|
|
|
*
|
Less than 1% of our total outstanding shares.
|
|
**
|
Except for Mr. Sean Shao, Mr. Zhenquan Ren, Ms. Mang Su and Mr. Adam J. Zhao, the business address for our directors and executive
officers is 20th Floor, Tower B, Zhonghui Plaza, 11 Dongzhimen South Road, Dongcheng District, Beijing 100007, The People’s
Republic of China.
|
|
†
|
For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially
owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each
holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled
to ten votes per share on all matters submitted to them for a vote. Our Class A ordinary shares and Class B ordinary shares
vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by
law. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one
basis.
|
|
(1)
|
Represents 50,892,198 Class B ordinary shares directly held by Super ROI Global Holding Limited, a British Virgin Islands company
beneficially owned by Mr. Chen through a trust, as described in footnote (7) below.
|
|
(2)
|
Represents 7,912,642 Class B ordinary shares directly held by Pinnacle High-Tech Limited, a British Virgin Islands company
beneficially owned by Mr. Dai through a trust, as described in footnote (11) below.
|
|
(3)
|
The business address of Mr. Shao is 9H-7 Dongsanhuanzhonglu, Fortune Plaza, Tower A, Chao Yang District, Beijing, PRC 100020.
|
|
(4)
|
The business address of Mr. Zhenquan Ren is Room 1505, Building C, Jiaheliyuan, No. A 32 Xiaoyun Road, Chaoyang District, Beijing,
PRC 100027.
|
|
(5)
|
The business address of Ms. Mang Su is 21/F, Trends Building, The Place, No. 9 Guanghua Road, Chaoyang District, Beijing, PRC
100020.
|
|
(6)
|
The business address of Mr. Adam J. Zhao is 12nd Floor, Tower B, Qinghua Tongfang Science&Technology Plaza, No.1 Wangzhuang
Road, Haidian District, Beijing.
|
|
(7)
|
Represents 50,892,198 Class B ordinary shares directly held by Super ROI Global Holding Limited, a British Virgin Islands company
beneficially owned by Mr. Leo Ou Chen through a trust. The registered address of Super ROI Global Holding Limited is P.O.
Box 3321, Drake Chambers, Road Town, Tortola, British Virgin Islands.
|
|
(8)
|
The number of ordinary shares beneficially owned is as of December 31, 2015, as reported in a Schedule 13D filed by Sequoia
Capital China II LP on February 26, 2016, and consists of (i) 17,516,290 Class A ordinary shares directly held by Sequoia
Capital China II L.P., (ii) 440,990 Class A ordinary shares directly held by Sequoia Capital China Partners Fund II, L.P.,
and (iii) 2,942,720 Class A ordinary shares directly held by Sequoia Capital China Principals Fund II, L.P. Sequoia Capital
China II L.P., Sequoia Capital China Partners Fund II, L.P. and Sequoia Capital China Principals Fund II, L.P. are collectively
referred to as the Sequoia funds. The general partner of the Sequoia funds is Sequoia Capital China Management II, L.P., whose
general partner is SC China Holding Limited, a company incorporated in the Cayman Islands. SC China Holding Limited is wholly owned
by SNP China Enterprises Limited, a company wholly owned by Neil Nanpeng Shen. Mr. Shen disclaims beneficial ownership of the shares
held by the Sequoia funds, except to the extent of his pecuniary interest therein. The registered address of the Sequoia funds
is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. The percentage of beneficial ownership
and voting power was calculated based on the total number of our ordinary shares outstanding as of February 29, 2016.
|
|
(9)
|
The number of ordinary shares beneficially owned is as of December 31, 2015, as reported in a Schedule 13G/A filed by
Xiaoping Xu on February 5, 2016, and consists of (i) 6,754,339 Class A ordinary shares held by Success Origin Limited, a British
Virgin Islands company, (ii) 2,154,740 restricted ADSs representing 2,154,740 Class A ordinary shares held by Focus China Holdings
Limited. Both Success Origin Limited and Focus China Holdings Limited are wholly owned by Mr. Xiaoping Xu. The registered
address of Success Origin Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
The business address of Mr. Xiaoping Xu is Suite 525, China World Trade Tower 1, 1 Jianguomenwai Avenue, Chaoyang District, Beijing
100004, China. The percentage of beneficial ownership and voting power was calculated based on the total number of our ordinary
shares outstanding as of February 29, 2016.
|
|
(10)
|
The number of ordinary shares beneficially owned is as of December 31, 2015, as reported in a Schedule 13G/A filed by
K2 Partners LP on February 9, 2016, and consists of (i) 4,525,221 Class A ordinary shares directly held by K2 Partners
L.P. and (ii) 406,163 Class A ordinary shares directly held by K2 Partners. K2 Partners L.P. and K2 Partners are collectively referred
to as the K2 Partners funds. The general partner of K2 Partners L.P. is K2 Partners, a company incorporated in the Cayman Islands.
Voting and investment power of the shares held by K2 Partners L.P. is exercised by the investment committee of K2 Partners, which
consists of Keyi Chen, Werkun Krzysztof and Yu Li, each of whom disclaims beneficial ownership of the ordinary shares owned by
K2 Partners funds. The registered address of K2 Partners L.P. is P.O. Box 472, 2
nd
Floor Harbor Place, Grand Cayman
KY1-1106, Cayman Islands. The percentage of beneficial ownership and voting power was calculated based on the total number of our
ordinary shares outstanding as of February 29, 2016.
|
|
(11)
|
Represents 7,912,642 Class B ordinary shares directly held by Pinnacle High-Tech Limited, a British Virgin Islands company
beneficially owned by Mr. Yusen Dai through a trust. The registered address of Pinnacle High-Tech Limited is P.O. Box 3321,
Drake Chambers, Road Town, Tortola, British Virgin Islands.
|
To our knowledge, as of March 31, 2016,
53,089,293 of our Class A ordinary shares are held by one record holder in the United States, which is the depositary of our ADS
program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record
holders of our Class A ordinary shares in the United States. As of March 31, 2016, none of our Class B ordinary shares are held
by U.S. record holders.
Our ordinary shares are divided into Class A
ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while
holders of Class B ordinary shares are entitled to ten votes per share. Each Class B ordinary share is convertible into one Class A
ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares
under any circumstances. Upon any sale of Class B ordinary shares by a holder thereof to any person or entity that is not an affiliate
of such holder, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A
ordinary shares.
As of March 31, 2016, Mr. Leo Ou Chen owned
75.3% of the total voting rights in our company. 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. Share Ownership.”
|
B.
|
Related Party Transactions
|
Contractual Arrangements with Our Variable Interest Entities
and Their Respective Shareholders
Due to PRC legal restrictions on foreign
ownership and investment in value-added telecommunication service businesses, we conduct such activities through contractual arrangements
with Reemake Media, a consolidated VIE of ours in China. Through Beijing Jumei, we obtained control over Reemake Media in April
2011 by entering into a series of contractual arrangements with Reemake Media and the shareholders of Reemake Media. The contractual
arrangements, except for the exclusive consulting and services agreement, were subsequently amended and restated in January 2014.
Reemake Media holds our ICP License as an internet information provider and operates our website. For a description of these contractual
arrangements, see “Item 4. Information on the Company – C. Organizational Structure.”
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management
and Employees—B. Compensation – Employment Agreements and Indemnification Agreements.”
Registration Rights
Pursuant to our amended and restated shareholders
agreement, as amended, that we entered into in November 2011 with our then shareholders in connection with our issuance of preferred
shares prior to our initial public offering, we have granted certain registration rights to holders of our registrable securities,
which include our Class A ordinary shares issued pursuant to conversion of our preferred shares upon the completion of our initial
public offering in May 2014. Set forth below is a description of the registration rights granted under the agreement.
Demand Registration Rights
. At any
time after November 18, 2014, holders of at least 10% of our outstanding registrable securities have the right to demand that
we file a registration statement covering the registration of any registrable securities of such holders. We have the right to
defer filing of a registration statement for a period of not more than 150 days after the receipt of the request of the initiating
holders if our board of directors determines in good faith that filing of a registration will be materially detrimental to us and
our shareholders, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any securities
during such 12-month period. Further, if the registrable securities are offered by means of an underwriting and the underwriter
advises us in writing that marketing factors require a limitation of the number of securities to be underwritten, a maximum of
70% of such registrable securities may be reduced as required by the underwriters and the number of the registrable securities
will be allocated among the holders on a pro rata basis according to the number of registrable securities then outstanding held
by each holder requesting registration, provided that in no event may any registrable securities be excluded from such underwriting
unless all other securities are first excluded entirely. We are not obligated to effect more than two demand registrations.
Piggyback Registration Rights
. If
we propose to file a registration statement for a public offering of our securities, we must offer holders of our registrable
securities an opportunity to include in the registration all or any part of their registrable securities. If the managing underwriters
of any underwritten offering determine in good faith that marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriters may decide to exclude shares from the registration and the underwriting and to allocate
the number of securities first to us and second to each of holders requesting for the inclusion of their registrable securities
on a pro rata basis based on the total number of registrable securities held by each such holder and third, to holders of other
securities of our company, provided that (i) in no event may any registrable securities be excluded from such offering unless
all other securities are first excluded, and (ii) in no event may the amount of securities of selling holders of registrable
securities be reduced below 30% of the aggregate number of registrable securities requested to be included in such offering.
Form F-3 Registration Rights
. Any
holder of our outstanding registrable securities have the right to request that we effect a registration on Form F-3 for which
the reasonably anticipated aggregate offering price to the public would exceed US$0.5 million. We, however, are not obligated to
effect such registration if, among other things, (i) Form F-3 is not available for such offering by the holders of registrable
securities, and (ii) we have effected two Form F-3 registrations within the 12-month period preceding the date of such request
for Form F-3 registration. We have the right to defer filing of a Form F-3 registration statement for a period of not more than
60 days after the receipt of the request of relevant holders if our board of directors determines in good faith that filing
of such registration will be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more
than once in any 12-month period and cannot register any other securities during such 60-day period.
Expenses of Registration
. We will
bear all registration expenses, other than underwriting discounts and selling commissions incurred in connection with any demand,
piggyback or F-3 registration, except each holder that exercised its demand, piggyback or F-3 registration rights will bear such
holder’s proportionate share (based on the total number of shares sold in such registration other than for our account) of
all underwriting discounts and selling commissions and disbursements of one separate counsel for the holders.
Termination of Obligations
. We
have no obligation to effect any demand, piggyback or Form F-3 registration upon the fifth anniversary after the completion
of our initial public offering in May 2014.
Share Incentive Plan
See “Item 6. Directors, Senior Management
and Employees – B. Compensation – 2011 Global Share Plan” and “Item 6. Directors, Senior Management and
Employees – B. Compensation – 2014 Plan.”
Transactions with a Related Party
In the past, we purchased certain beauty
products from Beijing Jushangminghui Commerce and Trade Co., Ltd. and Beijing Fanbosha Commerce and Trade Co., Ltd., two PRC entities
controlled by a former employee of our company and his immediate family member. We believe the terms of transactions with the related
parties were similar to those with third-party suppliers. In 2015, we did not purchase any product from these two entities, and,
as of December 31, 2015, we had no balance due to or from either of these two entities.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
Item 8.
|
Financial Information
|
|
A.
|
Consolidated Statements and Other Financial Information
|
We have appended consolidated financial
statements at the end of this annual report filed as part of this annual report on Form 20-F.
Legal Proceedings
From time to time, we are subject to legal
proceedings, investigations and claims incidental to the conduct of our business.
In December 2014, four putative shareholder
class action lawsuits were filed in the United States District Courts for the Southern District of New York and the Eastern District
of New York against our company, certain current and former officers and directors of our company, and underwriters in our initial
public offering:
Lu v. Jumei International Holding Limited et al.
, Civil Action No. 14 CV 9826 (S.D.N.Y.) (filed on
December 11, 2014);
Yim v. Jumei International Holding Limited et al.
, Civil Action No. 14 CV 7269 (E.D.N.Y.) (filed
on December 12, 2014, voluntarily dismissed by plaintiffs on March 9, 2015);
Yin v. Jumei International Holding Limited et al.
,
Civil Action No. 14 CV 9957 (S.D.N.Y.) (filed on December 17, 2014); and
Brock v. Jumei International Holding Limited et
al.
, Civil Action No. 14 CV 9993 (S.D.N.Y.) (filed on December 18, 2014). The complaints in the above-mentioned putative
shareholder class action lawsuits allege that our company’s registration statement for our initial public offering and/or
certain subsequent press releases, financial statements, and other disclosures made by our company contained material misstatements
or omissions in violation of the federal securities laws. On March 9, 2015, the plaintiffs voluntarily dismissed without prejudice
the putative class action originally filed in the District Court for the Eastern District of New York,
Yim v. Jumei International
Holding Limited et al
. On June 22, 2015, the District Court for the Southern District of New York consolidated the remaining
three putative class actions into one action,
In re Jumei International Holding Limited Securities Litigation
, Civil Action
No. 14 CV 9826 (S.D.N.Y.), appointed a lead plaintiff and approved the lead plaintiff’s selection of lead counsel. On October
16, 2015, the lead plaintiff filed–purportedly on behalf a class of persons who allegedly suffered damages as a result of
their trading activities related to our ADSs between May 16, 2014 and November 19, 2014—a Consolidated Amended Complaint,
which advances similar allegations as the previously filed complaints, and alleges violations of Sections 11 and 15 of the Securities
Act of 1933, 15 U.S.C. §§ 77k and 77o and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.
§§ 78(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. On March 22, 2016, we and the
underwriters in our initial public offering filed a joint motion to dismiss the Consolidated Amended Complaint.
The action remains at its preliminary stages.
We believe the case is without merit and intend to defend the actions vigorously. For risks and uncertainties relating to the pending
cases against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We
have been named as a defendant in putative shareholder class action lawsuits that could have a material adverse impact on our business,
financial condition, results of operation, cash flows and reputation.”
Dividend Policy
Our board of directors has discretion on
whether to distribute dividends, subject to applicable laws. Under Cayman Islands law, a Cayman Islands company may pay a dividend
on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would
result in the company being unable to pay its debts due in the ordinary course of business. Even if our board of directors decides
to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We do not have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available
funds and any future earnings to operate and expand our business.
We are a holding company incorporated in
the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of
dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item
4. Information on the Company – B. Business Overview – Regulation – Regulations Relating to Dividend Distribution.”
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.
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.
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Item 9.
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The Offer and Listing
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A.
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Offer and Listing Details
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Our ADSs, each representing one of our Class
A ordinary share, have been listed on the NYSE since May 16, 2014. Our ADSs trade under the symbol “JMEI.” Update until
April 28, 2016 (starting from May 16, 2014), the trading price of our ADSs on the NYSE ranged from US$4.9 to US$39.5 per
ADS.
The following table provides the high and
low trading prices on the NYSE for the periods indicated below.
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Trading Price
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High
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Low
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Quarterly Highs and Lows
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2014
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Second Quarter 2014 (since May 16, 2014)
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32.49
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22.00
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Third Quarter 2014
|
|
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39.45
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|
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23.00
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Fourth Quarter 2014
|
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27.60
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|
|
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12.58
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2015
|
|
|
|
|
|
|
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First Quarter 2015
|
|
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17.77
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|
|
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12.11
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Second Quarter 2015
|
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28.17
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|
|
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15.18
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Third Quarter 2015
|
|
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22.65
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|
|
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8.32
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Fourth Quarter 2015
|
|
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11.89
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|
|
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7.51
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Monthly Highs and Lows
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|
|
|
|
|
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|
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October 2015
|
|
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11.89
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|
|
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9.40
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November 2015
|
|
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10.84
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|
|
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7.51
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December 2015
|
|
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10.45
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|
|
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8.48
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January 2016
|
|
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9.14
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|
|
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5.85
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February 2016
|
|
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6.47
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|
|
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4.90
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March 2016
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6.69
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|
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6.22
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April 2016 (through April 28, 2016)
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6.60
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6.21
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Not applicable.
Our ADSs, each representing one of our Class
A ordinary share, have been quoted on the NYSE system under the symbol “JMEI” since May 16, 2014.
Not applicable.
Not applicable.
Not applicable.
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Item 10.
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Additional Information
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Not applicable.
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B.
|
Memorandum and Articles of Association
|
We are a Cayman Islands exempted company
and our affairs are governed by our second amended and restated memorandum and articles of association and the Companies Law (2013
Revision) of the Cayman Islands, which we refer to as the Companies Law below. Our second amended and restated memorandum and articles
of association became effective in May 2014. The following are summaries of material provisions of our second 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 located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
Under our second amended and restated memorandum and articles of association, the objects of our company are unrestricted and we
have the full power and authority to carry out any object not prohibited by the laws of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior
Management and Employees—C. Board Practices.”
Ordinary Shares
Ordinary Shares
. Our ordinary shares
are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class
B ordinary shares have the same rights except for voting and conversion rights. Certificates representing our ordinary shares are
issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.
Conversion
. Each Class B ordinary
share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not
convertible into Class B ordinary shares under any circumstances. Upon any sale of Class B ordinary shares by a holder thereof
to any person or entity that is not an Affiliate (as defined in our second amended and restated articles of association) of such
holder, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A ordinary
shares. In addition, if at any time, Mr. Leo Ou Chen, Mr. Yusen Dai and their affiliates collectively own less than 5%
of the issued Class B ordinary shares, each issued and outstanding Class B ordinary share will be automatically and immediately
converted into one Class A ordinary share, and we will not issue any Class B ordinary shares thereafter.
Dividends
. The holders of our ordinary
shares are entitled to such dividends as may be declared by our board of directors, subject to the Companies Law and our articles
of association. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount
recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either
profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being
unable to pay its debts due in the ordinary course of business. Dividends received by each Class B ordinary share and Class A
ordinary share in any dividend distribution shall be the same.
Voting Rights
. On a show of hands
each shareholder is entitled to one vote or, on a poll, each holder of Class A ordinary shares is entitled to one vote, while each
holder of Class B ordinary shares is entitled to ten votes, voting together as one class on all matters that require a shareholder’s
vote. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman
of such meeting or any one or more shareholders present in person or by proxy.
A quorum required for a meeting of shareholders
consists of at least two holders of our shares being not less than an aggregate of fifty percent (50%) of all votes attaching to
all of our shares in issue and entitled to vote. Shareholders may be present in person or by proxy or, if the shareholder is a
legal entity, by its duly authorized representative. Shareholders’ meetings may be convened by the chairman or a majority
of our board of directors on its own initiative or upon a request to the directors by shareholders holding no less than one-third
of our voting share capital. Advance notice of at least ten days is required for the convening of our annual general shareholders’
meeting and any other general shareholders’ meeting.
An ordinary resolution to be passed at a
meeting by the shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting, while a special
resolution requires the affirmative vote of no less than two-thirds of the votes cast at a meeting. Both ordinary resolutions and
special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted
by the Companies Law and our second amended and restated memorandum and articles of association. A special resolution will be required
for important matters such as a change of name or making changes to our second amended and restated memorandum and articles of
association.
Transfer of Ordinary Shares
. Subject
to the restrictions set out below and the provisions above in respect of Class B ordinary shares, any of our shareholders may transfer
all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by
our board of directors.
Our board of directors may, in its absolute
discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board
of directors may also decline to register any transfer of any ordinary share unless:
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·
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the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and
such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
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·
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the instrument of transfer is in respect of only one class of shares;
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|
·
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the instrument of transfer is properly stamped, if required; and
|
|
·
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in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does
not exceed four.
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|
·
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a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time
require is paid to us in respect thereof.
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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, send to each of the transferor
and the transferee notice of such refusal.
The registration of transfers may, after
compliance with any notice required of the NYSE, be suspended and the register closed at such times and for such periods as our
board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended
nor the register closed for more than 30 days in any year as our board may determine.
Liquidation
. On a return of capital
on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among
the holders of ordinary shares shall be distributed among the holders of our 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. Any distribution of assets or capital to a holder of a Class A ordinary share
and a holder of a Class B ordinary share will be the same in any liquidation event. We are a “limited liability” company
registered under the Companies Law, and under the Companies Law, the liability of our members is limited to the amount, if any,
unpaid on the shares respectively held by them. Our second amended and restated memorandum of association contains a declaration
that the liability of our members is so limited.
Calls on Shares and Forfeiture of Shares
.
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a
notice served to such shareholders at least 14 days prior to the specified time and place of payment. The ordinary shares
that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender
of Ordinary Shares
. We may issue shares on terms that such shares are subject to redemption, at our option or at the option
of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of
directors or by a special resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner
and terms of such purchase have been approved by our board of directors or by ordinary resolution of our shareholders, or are otherwise
authorized by our memorandum and articles of association. Under the Companies Law, the redemption or repurchase of any share may
be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption
or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can, immediately
following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law
no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result
in there being no shares outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the
surrender of any fully paid share for no consideration.
Variations of Rights of Shares
. 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 be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with
the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class. The rights conferred
upon the holders of the shares of any class issued shall 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.
Issuance of Additional Shares
. Our
second amended and restated memorandum and articles of association authorizes our board of directors to issue additional ordinary
shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our second amended and restated memorandum
and articles of association also authorizes our board of directors to establish from time to time one or more series of preference
shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
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·
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the designation of the series;
|
|
·
|
the number of shares of the series;
|
|
·
|
the dividend rights, dividend rates, conversion rights, voting rights; and
|
|
·
|
the rights and terms of redemption and liquidation preferences.
|
Our board of directors may issue preference
shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting
power of holders of ordinary shares.
Inspection of Books and Records
.
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders
or our corporate records. However, we will provide our shareholders with annual audited financial statements.
Anti-Takeover Provisions
. Some provisions
of our second amended and restated memorandum and articles of association may discourage, delay or prevent a change of control
of our company or management that shareholders may consider favorable, including provisions that:
|
·
|
authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences,
privileges and restrictions of such preference shares without any further vote or action by our shareholders; and
|
|
·
|
limit the ability of shareholders to requisition and convene general meetings of shareholders.
|
However, under Cayman Islands law, our directors
may only exercise the rights and powers granted to them under our second amended and restated memorandum and articles of association
for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Exempted Company
. We are an exempted
company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and
exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands
may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an
ordinary company except that an exempted company:
|
·
|
does not have to file an annual return of its shareholders with the Registrar of Companies;
|
|
·
|
is not required to open its register of members for inspection;
|
|
·
|
does not have to hold an annual general meeting;
|
|
·
|
may issue negotiable or bearer shares or shares with no par value;
|
|
·
|
may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in
the first instance);
|
|
·
|
may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
|
|
·
|
may register as a limited duration company; and
|
|
·
|
may register as a segregated portfolio company.
|
“Limited liability” means that
the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company”
or elsewhere in this annual report.
D. Exchange Controls
The Cayman Islands currently has no exchange
control regulations or currency restrictions. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
Relating to Foreign Exchange,” “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
Relating to Dividend Distribution,” “Item 4. Information on the Company—B. Business Overview—Regulation—SAFE
Regulations on Offshore Special Purpose Companies Held by PRC Residents” and “Item 3. Key Information—D. Risk
Factors—Risks Relating to Doing Business in China—Governmental control of currency conversion may limit our ability
to utilize our net revenues effectively and affect the value of your investment.”
E. Taxation
To the extent that the discussion relates
to matters of Cayman Islands tax law, it represents the opinion of Maples and Calder, our Cayman Islands counsel. To the extent
that the discussion relates to matters of PRC tax law, it represents the opinion of Fangda Partners, our PRC counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes
on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance
tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except
for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the
Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our
company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law
and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the
PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%.
The implementation rules define the term “de facto management body” as the body that exercises full and substantial
control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In April 2009,
the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.
Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled
by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s
general position on how the “de facto management body” text should be applied in determining the tax resident status
of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a
PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China
only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the
PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval
by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company
seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board
members or senior executives habitually reside in the PRC.
We believe that Jumei International Holding
Limited is not a PRC resident enterprise for PRC tax purposes. Jumei International Holding Limited is not controlled by a PRC enterprise
or PRC enterprise group and we do not believe that Jumei International Holding Limited meets all of the conditions above. Jumei
International Holding Limited is a company incorporated outside the PRC. As a holding company, its key assets are its ownership
interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors
and the resolutions of its shareholders) are maintained, outside the PRC. In addition, we are not aware of any offshore holding
companies with a similar corporate structure as ours ever having been deemed a PRC “resident enterprise” by the PRC
tax authorities. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties
remain with respect to the interpretation of the term “de facto management body.”
If the PRC tax authorities determine that
Jumei International Holding Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold
a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our
ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized
on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear
whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained
by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to
apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable
tax treaty. However, it is also unclear whether non-PRC shareholders of Jumei International Holding Limited would be able to claim
the benefits of any tax treaties between their country of tax residence and the PRC in the event that Jumei International Holding
Limited is treated as a PRC resident enterprise.
Provided that (i) our Cayman Islands holding
company, Jumei International Holding Limited, is not deemed to be a PRC resident enterprise and (ii) holders of our ADSs and ordinary
shares who are not PRC residents purchase and sell our ADSs and ordinary shares through public traded stock market under the SAT
Circular 7 which was issued by the State of Administration on February 3, 2015, such holders will not be subject to PRC income
tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs.
United States Federal Income Tax Considerations
The following discussion is a summary of
United States federal income tax considerations relating to the ownership and disposition of our ADSs or Class A ordinary
shares by a U.S. Holder (as defined below) that holds our ADSs as “capital assets” (generally, property held for investment)
under the United States Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing United States
federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been
sought from the Internal Revenue Service, the IRS, with respect to any United States federal income tax consequences described
below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not discuss
all aspects of United States federal income taxation that may be important to particular holders in light of their individual investment
circumstances, including holders subject to special tax rules (including for example, banks or other financial institutions,
insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, cooperatives, pension plans,
partnerships and their partners, traders in securities that elect mark-to-market treatment, tax-exempt organizations (including
private foundations), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively) 10% or more of
our voting stock, holders who acquired their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise
as compensation, holders that hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive
sale or other integrated transaction for United States federal income tax purposes, or holders that have a functional currency
other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those discussed
below). This discussion, moreover, does not address any non-income tax (such as the U.S. federal estate and gift tax) or alternative
minimum tax consequences of the ownership and disposition of our ADSs or Class A ordinary shares or the Medicare tax. Each
U.S. Holder is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income
and other tax considerations with respect to the ownership and disposition of our ADSs or Class A ordinary shares.
General
For purposes of this discussion, a “U.S.
Holder” is a beneficial owner of our ADSs or Class A ordinary shares that is, for United States federal income tax purposes,
(i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a
corporation for United States federal income tax purposes) created in, or organized under the law of, the United States or any
state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the
primary supervision of a United States court and which has one or more United States persons who have the authority to control
all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under
the Code.
If a partnership (or other entity treated
as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or Class A ordinary shares,
the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the
partnership. Partnerships holding our ADSs or Class A ordinary shares and their partners are urged to consult their tax advisors
regarding the ownership and disposition of our ADSs or Class A ordinary shares.
For United States federal income tax purposes,
it is generally expected that a U.S. Holder of ADSs will be treated as the beneficial owner of the underlying shares represented
by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly, deposits
or withdrawals of Class A ordinary shares for ADSs will generally not be subject to United States federal income tax.
Passive Foreign Investment Company
Considerations
A non-United States corporation, such as
our company, will be classified as a PFIC, for United States federal income tax purposes for any taxable year, if either (i) 75%
or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of
the value of its assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce
or are held for the production of passive income (the “asset test”). For this purpose, cash and assets readily convertible
into cash are categorized as a passive asset and the company’s goodwill and other unbooked intangibles are taken into account.
Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of
passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income
of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Although the law in this regard is not entirely
clear, we treat our VIEs and each of their subsidiaries as being owned by us for United States federal income tax purposes, because
we control their management decisions and we are entitled to substantially all of the economic benefits associated with such entities,
and, as a result, we consolidate the results of their operations in our consolidated U.S. GAAP financial statements. If it were
determined, however, that we do not own the stock of our VIEs or any of their subsidiaries for United States federal income tax
purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year. Assuming we are the owner of
our VIEs and each of their subsidiaries for United States federal income tax purposes, and based upon our income and assets, including
goodwill, and the value of our ADSs and Class A ordinary shares, we do not believe that we were a PFIC for the taxable year ended
December 31, 2015 and do not anticipate becoming a PFIC in the foreseeable future.
While we do not expect to be a PFIC for
the current taxable year or in the foreseeable future, the determination of whether we are or will become a PFIC will depend in
part upon the value of our goodwill and other unbooked intangibles (which will depend upon the market value of our ADSs or ordinary
shares from time to time, which may be volatile).
The determination of whether we will be
or become a PFIC will also depend, in part on the composition of our income and our assets, which may be affected by how, and how
quickly, we spend our liquid assets. Under circumstances where we determine not to deploy significant amounts of cash for capital
expenditures and other general corporate purposes, our risk of becoming classified as a PFIC may substantially increase.
Furthermore, because there are uncertainties
in the application of the relevant rules, it is possible that the IRS may challenge our classification of certain income or assets
as non-passive, or our valuation of our goodwill and other unbooked intangibles, each of which may result in our company becoming
classified as a PFIC for the current or subsequent taxable years. Because determination of PFIC status is a fact-intensive inquiry
made on an annual basis and will depend upon the composition of our assets and income, and the continued existence of our goodwill
at that time, no assurance can be given that we are not or will not become classified as a PFIC. Our special United States counsel
expresses no opinion with respect to our PFIC status and also expresses no opinion with respect to our expectations regarding our
PFIC status. If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or Class A ordinary shares,
we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or Class A
ordinary shares.
The discussion below under “Dividends”
and “Sale or Other Disposition of ADSs or Class A Ordinary Shares” is written on the basis that we will not be
classified as a PFIC for United States federal income tax purposes. The United States federal income tax rules that apply if we
are treated as a PFIC are generally discussed below under “Passive Foreign Investment Company Rules.”
Dividends
Subject to the discussion below under “Passive
Foreign Investment Company Rules,” any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs
or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under United States federal
income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually
or constructively received by the U.S. Holder, in the case of Class A ordinary shares, or by the depositary, in the case of
ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles,
any distribution we pay will generally be treated as a “dividend” for United States federal income tax purposes. A
non-corporate U.S. Holder will be subject to tax on dividend income from a “qualified foreign corporation” at a lower
applicable capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that certain
holding period requirements are met. Dividends received on our ADSs or Class A ordinary shares will not be eligible for the dividends
received deduction allowed to corporations.
A non-United States corporation (other than
a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will
generally be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax
treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this
provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock (or
ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. Our ADSs are
listed on the NYSE, which is an established securities market in the United States, and the ADSs are expected to be readily tradable
for so long as they continue to be listed on the NYSE. Thus, we believe the dividends we pay on our ADSs will meet the conditions
required for the reduced tax rates. Since we do not expect that our Class A ordinary shares will be listed on an established
securities market, it is unclear whether dividends that we pay on our Class A ordinary shares that are not represented by
ADSs will meet the conditions required for the reduced tax rate.
In the event that we are deemed to be a
PRC resident enterprise under the PRC Enterprise Income Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends
paid on our ADSs or Class A ordinary shares. We may, however, be eligible for the benefits of the United States-PRC income
tax treaty. If we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such
shares are represented by the ADSs, would be eligible for the reduced rates of taxation described in the preceding paragraph.
Dividends will generally be treated as income
from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. Depending
on the U.S. Holder’s individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations,
to claim a foreign tax credit not in excess of any applicable treaty rate in respect of any foreign withholding taxes imposed on
dividends received on our ADSs or Class A ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit
for foreign tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholding,
but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign
tax credit are complex and their outcome depends in large part on the U.S. Holder’s individual facts and circumstances. Accordingly,
U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular
circumstances.
Sale or Other Disposition of ADSs
or Class A Ordinary Shares
Subject to the discussion below under “Passive
Foreign Investment Company Rules,” a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition
of ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized upon the disposition and
the holder’s adjusted tax basis in such ADSs or Class A ordinary shares. Any capital gain or loss will be long-term
if the ADSs or Class A ordinary shares have been held for more than one year and will generally be United States source gain
or loss for United States foreign tax credit purposes. Long-term capital gains of non-corporate taxpayers are currently eligible
for reduced rates taxation. In the event that gain from the disposition of the ADSs or Class A ordinary shares is subject
to tax in the PRC, such gain may be treated as PRC source gain under the United States-PRC income tax treaty. The deductibility
of a capital loss may be subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences
if a foreign tax is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign
tax credit under their particular circumstances.
Passive Foreign Investment Company
Rules
If we are classified as a PFIC for any taxable
year during which a U.S. Holder holds our ADSs or Class A ordinary shares, and unless the U.S. Holder makes a mark-to-market
election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless
of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution
paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three
preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or Class A ordinary shares), and
(ii) any gain realized on the sale or other disposition, including a pledge, of ADSs or Class A ordinary shares. Under
the PFIC rules:
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the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or Class A
ordinary shares;
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the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the
first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income;
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the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate
in effect for individuals or corporations, as appropriate, for that year; and
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the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable
year, other than a pre-PFIC year.
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If we are a PFIC for any taxable year during
which a U.S. Holder holds our ADSs or Class A ordinary shares and any of our subsidiaries is also a PFIC, such U.S. Holder
would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application
of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our
subsidiaries.
As an alternative to the foregoing rules,
a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock, provided
that such stock is regularly traded on a qualified exchange. Our ADSs (but not our Class A ordinary shares) are listed on
the NYSE, which is a qualified exchange for these purposes. We anticipate that our ADSs should qualify as being regularly traded,
but no assurances may be given in this regard. If a U.S. Holder makes this election, the holder will generally (i) include
as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end
of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the
adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but such deduction
will only be allowed to the extent of the amount previously included in income as a result of the mark-to-market election. The
U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market
election. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation
ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during
any period that such corporation is not classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S.
Holder recognizes upon the sale or other disposition of our ADSs in a year when we are a PFIC will be treated as ordinary income
and any loss will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount
previously included in income as a result of the mark-to-market election.
Because a mark-to-market election cannot
be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such
U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United
States federal income tax purposes.
We do not intend to provide information
necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different
from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or Class A
ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621 or such
other form as is required by the United States Treasury Department. Each U.S. Holder is urged to consult its tax advisor concerning
the United States federal income tax consequences of holding and disposing ADSs or Class A ordinary shares if we are or become
treated as a PFIC, including the possibility of making a mark-to-market election, the “deemed sale” and “deemed
dividend” elections and the unavailability of the election to treat us as a qualified electing fund.
Information Reporting
Certain U.S. Holders are required to report
information to the IRS relating to an interest in “specified foreign financial assets,” including shares issued by
a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000
(or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including an exception for shares held in custodial
accounts maintained with a United States financial institution). These rules also impose penalties if a U.S. Holder is required
to submit such information to the IRS and fails to timely do so.
In addition, U.S. Holders may be subject
to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our ADSs or
Class A ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the United
States information reporting rules to its particular circumstances.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC a registration
statement on Form F-1 (File No. 333-195229), as amended, including the prospectus contained therein, together with the
post-effective registration statement on Form F-1 (File No. 333-196001) to register additional securities that became effective
immediately upon filing, to register our Class A ordinary shares in relation to our initial public offering. We have also filed
with the SEC a related registration statement on F-6 (File No. 333-195711) to register the ADSs.
We are subject to the periodic reporting
and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information
with the SEC, including filing annually a Form 20-F within four months after the end of each fiscal year, which is December 31.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates
at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling
the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a
foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly
reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish The Bank of New York Mellon,
the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our 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.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative
Disclosures About Market Risk
Foreign Exchange Risk
A majority of our revenues and expenses
are denominated in RMB. Revenues and expenses generated by
Jumei Global
are denominated in Hong Kong dollars or U.S. dollars.
Our exposure to foreign exchange risk primarily relates to the U.S. dollar proceeds of the offerings of our equity securities.
As the impact of foreign currency risk on our operations was not material in the past, we have not used any forward contracts,
currency borrowings or derivative instruments to hedge our exposure to foreign currency exchange risk.
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 the
U.S. dollars we received from our initial public offerings into RMB to fund our operations, acquisitions, or for other uses within
the PRC, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion.
To the extent that we seek to convert RMB into U.S. dollars, depreciation of the RMB against the U.S. dollar would have an adverse
effect on the U.S. dollar amount we receive from the conversion. On the other hand, a decline in the value of the RMB against the
U.S. dollar could reduce the U.S. dollar equivalent of our financial results, the value of your investment in the company and the
dividends that we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADS.
We are not currently subject to any significant
direct foreign exchange risk and accordingly, we have not hedged exposures denominated in foreign currencies, nor do we have any
other derivative financial instruments outstanding. Based on the amount of our cash and cash equivalents and short-term investments
on hand as of December 31, 2015, a 1.0% change in the exchange rate between the RMB and the U.S. dollar would result in an
increase or decrease of RMB2.4 million to our cash and cash equivalents and short-term investments.
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 RMB5.7 million, RMB82.3 million and RMB114.1 million (US$17.6 million) in 2013, 2014 and 2015, respectively. Interest-earning
instruments carry a degree of interest rate risk. We had cash and cash equivalents and short-term investments of RMB2.9 billion
(US$451.9 million) as of December 31, 2015. Assuming such amount of cash and cash equivalents and short-term investments 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 RMB29.3 million.
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
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS Holders May Have to Pay
Persons depositing or withdrawing
shares or
ADS holders must pay:
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For:
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
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$0.05 (or less) per ADS
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Any cash distribution to ADS holders
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A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs
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Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
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$0.05 (or less) per ADSs per calendar year
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Depositary services
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Registration or transfer fees
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Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
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Expenses of the depositary
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Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) converting foreign currency
to U.S. dollars
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Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes
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As necessary
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Any charges incurred by the depositary or its agents for servicing the deposited securities
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As necessary
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The depositary collects its fees for delivery
and surrender of ADSs directly from investors depositing 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 collect any of its fees by deduction from any cash distribution payable to ADS holders that
are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those
services are paid.
Fees and Other Payments Made by the Depositary to Us
From time to time, the depositary may make
payments to us to reimburse and/or share revenue from the fees collected from ADS holders, or waive fees and expenses for services
provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS program. In 2015, we
did not receive any reimbursement from the depository for our expenses incurred in connection with the establishment and maintenance
of the ADS program.
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.
Jumei International
Holding Limited (the "Company"), through its consolidated subsidiaries and variable interest entities ("VIEs")
and VIEs’ subsidiaries (collectively referred to as the "Group") is primarily engaged in the operation to sell
or to facilitate third party merchants to sell beauty products, apparel and other lifestyle products in the People's Republic of
China (the "PRC" or "China") on its website Jumei.com, Jumeiglobal.com and through its mobile application.
The Group generates
merchandise sales as principal for the direct sales of beauty products to customers. Additionally, the Group generates marketplace
services revenue as a service provider for other vendors charging third-party merchant fees for the sale of beauty products, apparel
and other life style products, through the Group’s internet platform.
The Group’s
primary subsidiaries, VIE as of December 31, 2015 is set out below:
Prior to April 2011,
the Group carried out its operations through Reemake Media, a PRC entity incorporated in August 2009 by the Group’s founders
(the “Founders”).
In August 2010, the
Company was incorporated by Reemake Media’s shareholders under the laws of the Cayman Islands as the holding company of the
Group in order to facilitate international financing. In September 2010, the Company established a wholly-owned Hong Kong subsidiary,
Jumei Hongkong Limited to be the intermediate holding company. In March 2011, Jumei Hongkong Limited established a wholly-owned
PRC subsidiary, Jumeiyoupin (Beijing) Science and Technology Services Co., Ltd., or Beijing Jumei, which was a wholly foreign owned
enterprise (“WOFE”) and subsequently was renamed as Beijing Silvia Technology Service Co., Ltd..
Through Beijing Jumei,
the Group obtained control over Reemake Media in April 2011 by entering into a series of contractual arrangements with Reemake
Media and the shareholders of Reemake Media. The above series of transactions were accounted for as a reorganization of the Group
(“Reorganization”) which was in a manner similar to a pooling of interest with assets and liabilities at their historical
amounts in the Group's consolidated financial statements.
Under the exclusive
consulting and services agreement between Beijing Jumei and Reemake Media, dated April 8, 2011, Beijing Jumei has the exclusive
right to provide to Reemake Media consulting and services related to all technologies needed for Reemake Media’s business.
Beijing Jumei owns the exclusive intellectual property rights created as a result of the performance of this agreement. Reemake
Media agrees to pay Beijing Jumei an annual service fee. In addition, Beijing Jumei may provide other technology services specified
by Reemake Media from time to time, and charge Reemake Media for the services. This agreement will remain effective for an unlimited
term, unless Beijing Jumei and Reemake Media mutually agree to terminate the agreement in writing, or the agreement is required
to be terminated by applicable PRC laws. Reemake Media is not permitted to terminate the agreement in any event unless required
by applicable laws.
On January 24, 2014,
the Shareholders' Voting Rights Agreement, the Exclusive Purchase Option Agreement and the Equity Pledge Agreements relating to
Reemake Media were amended and restated to reflect the change of Nominee Shareholders' holding in the VIE entity. No other material
terms or conditions of these agreements were changed or altered. There was no impact to the Group’s effective control over
Reemake Media and the Group continued to consolidate Reemake Media.
There are other VIEs
and VIE’s subsidiaries whose financial statements amounts and balances are immaterial to the Group’s consolidated financial
statements.
It is possible that
the Group’s operation of certain of its operations and businesses through VIEs could be found by PRC authorities to be in
violation of PRC law and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and
businesses. While the Group’s management considers the possibility of such a finding by PRC regulatory authorities under
current law and regulations to be remote, on January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”)
released on its Website for public comment a proposed PRC law (the “Draft FIE Law”) that appears to include VIEs within
the scope of entities that could be considered to be foreign invested enterprises (or “FIEs”) that would be subject
to restrictions under existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law
introduces the concept of “actual control” for determining whether an entity is considered to be an FIE. In addition
to control through direct or indirect ownership or equity, the Draft FIE Law includes control through contractual arrangements
within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the PRC
and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed
to reach the Group’s VIE arrangements, and as a result the Group’s VIEs could become explicitly subject to the current
restrictions on foreign investment in certain categories of industry. The Draft FIE Law includes provisions that would exempt from
the definition of foreign invested enterprises entities where the ultimate controlling shareholders are either entities organized
under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent as to what type of enforcement action might be taken
against existing VIEs that operate in restricted or prohibited industries and are not controlled by entities organized under PRC
law or individuals who are PRC citizens. If a finding were made by PRC authorities, under existing law and regulations or under
the Draft FIE Law if it becomes effective, that the Group’s operation of certain of its operations and businesses through
VIEs, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses would have broad
discretion in dealing with such a violation, including levying fines, confiscating the Group’s income, revoking the business
or operating licenses of the affected businesses, requiring the Group to restructure its ownership structure or operations, or
requiring the Group to discontinue all or any portion of its operations. Any of these actions could cause significant disruption
to the Group’s business operations, and have a severe adverse impact on the Group’s cash flows, financial position
and operating performance.
The following are
financial statement amounts and balances of the Group's consolidating VIEs and VIEs’ subsidiaries as of December 31, 2014
and 2015 and for the years ended December 31, 2013, 2014 and 2015.
If the legal structure
and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC government could:
The imposition of
any of these penalties may result in a material and 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 right to direct the activities of VIEs and
VIEs’ subsidiaries or the right to receive their economic benefits, the Group would no longer be able to consolidate VIEs
and VIEs’ subsidiaries. The Group believes the likelihood of loss in respect of the Group’s current ownership structure
or the contractual arrangements with the VIE and its subsidiary is remote.
There is no VIE where
the Group has variable interest but is not the primary beneficiary. Currently there is no contractual arrangement that could require
the Group to provide additional financial support to VIE.
The consolidated financial
statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). The consolidated financial statements include the financial statements of the Company, its subsidiaries,
the VIEs and VIEs’ subsidiaries for which the Company is the ultimate primary beneficiary and has control through contracts.
Subsidiaries are those
entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern
the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a
majority of votes at the meeting of directors. A VIE is an entity in which the Company, or its subsidiary, through contractual
arrangements, exercise effective control over, bears the risks of, and enjoys the rewards normally associated with ownership of
the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All transactions and
balances among the Company, its subsidiaries, the VIEs and VIEs’ subsidiaries have been eliminated upon consolidation.
The
preparation of the Group’s consolidated financial statements in conformity with the U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities.
Actual results could differ materially from those estimates. Significant accounting estimates and assumptions reflected in the
Group’s consolidated financial statements mainly include consolidation of VIEs, gross versus net revenue recognition, sales
returns, rebates and subsidy, share-based compensation, uncertain tax positions, realization of deferred tax, fair value of assets
and liabilities acquired in business acquisition, assessment for impairment of long-lived assets and goodwill, inventory valuation
for excess and obsolete inventories, lower of cost and market of inventories and fair value of financial instruments. Changes in
facts and circumstances may result in revised estimates.
Effective July 1,
2015, the Group changed its reporting currency from United States dollars ("USD") to Chinese Renminbi ("RMB").
The functional currency of the Company and its subsidiaries incorporated in Hong Kong is United States dollar (“USD”),
the functional currency of subsidiaries incorporated in Korea is Korean Won (“KRW”), while the functional currency
of the other entities in the Group is RMB. Assets and liabilities are translated at the exchange rates on the balance sheet date,
equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average
rate for the periods. Translation adjustments arising from these are reported as foreign currency translation adjustments and are
shown as a component of other comprehensive income in the consolidated statements of changes in shareholders’ equity. Total
foreign currency translation adjustments, net of nil tax losses were RMB285 and RMB15,265 for the years ended December 31, 2013,
and 2014, respectively, net of nil tax gains were RMB130,668 for the year ended December 31, 2015.
Foreign currency transactions
denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are
included in the consolidated statements of comprehensive loss. Total exchange losses were RMB359 and RMB78,101 for the years ended
December 31, 2013 and 2015, and total exchange gains were RMB185 for the year ended December 31, 2014, respectively.
ASC 820 establishes
a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as
follows:
Level 1 — Observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include
other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable
inputs that are supported by little or no market activity.
ASC 820 describes
three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost
approach. The market approach uses prices and other relevant information generated from market transactions involving identical
or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost
approach is based on the amount that would currently be required to replace an asset.
Cash and cash equivalents
represent cash on hand and time deposits as well as highly liquid investments placed with banks, which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less and are readily convertible to known amounts of cash.
The Company's loans
receivable consist of entrusted loans and Convertible Loan. Entrusted loans is carried at amortized cost. An allowance for doubtful
accounts is recorded in the period in which a loss is determined to be probable. Allowance for entrusted loans for the years ended
December 31, 2014 and 2015 were RMB nil and RMB1,400, respectively.
Convertible Loan that
is not within the scope of ASC 320 “Investments - debt and equity securities” is accounted for under ASC 310 “Receivables”.
The initial investment amount was first allocated, based on their fair value, to any free standing instrument purchased together
with the Convertible Loan, and any embedded features requiring separate recognition under ASC 815 “Derivatives and hedging”.
Embedded features are required to be separately recognized as derivatives when they meet all the three criteria under ASC 815-15-25-1.
The remaining investment amount was recognized as the Convertible Loan, and was subsequently carried at amortized cost.
Accounts receivable,
net is carried at realizable value. The Group considers many factors in assessing the collectability of its receivables, such as,
the age of the amounts due, the customer’s payment history and credit-worthiness. An allowance for doubtful accounts is recorded
in the period in which a loss is determined to be probable. Accounts receivable, net balances are written off after all collection
efforts have been exhausted. Allowance for doubtful accounts for the years ended December 31, 2013, 2014 and 2015 were nil,
nil and RMB17,157, respectively.
Property and equipment
are stated at cost less accumulated depreciation and impairment. Property, equipment and software are depreciated over the estimated
useful lives on a straight-line basis. The estimated useful lives are as follows:
Expenditures for maintenance
and repairs are expensed as incurred. The gain or loss on the disposal of property, equipment and software is the difference between
the net sales proceeds and the carrying amount of the relevant assets and is recognized in the
consolidated
statements of comprehensive income
.
The Group performs
valuation of the intangible assets arising from business acquisition to determine the relative fair value to be assigned to each
asset acquired. The acquired intangible assets are recognized and measured at fair value and are expensed or amortized using the
straight-line approach over the assets estimated economic useful lives as follows:
Amortization expenses
for the years ended December 31, 2013, 2014 and 2015 were RMB120, RMB129 and RMB111, respectively.
Revenue comes primarily
from merchandise sales and marketplace services. The Group generates revenues from merchandise sales when the Group acts as principal
for the direct sales of beauty products to customers. The Group generates revenues from marketplace services when the Group acts
as the service provider for other vendors and charges third-party merchant fees for the sales of their products, which include
beauty products, apparel and other life style products. The Group collects cash from customers before or upon deliveries of products
mainly through banks, third party online payment platforms or delivery companies. Cash collected from customers before product
delivery is recognized as advances from customers first and then recognized as revenue upon deliveries and acceptances by customers.
Revenues from merchandise
sales and marketplace services are recognized when the following four criteria are met:
(1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed or determinable; and (4) collectability
is reasonably assured.
The Group recognizes
merchandise sales revenues upon acceptance of delivery of products by customers. Marketplace service revenues primarily consist
of fees charged to third-party merchants for selling their products through our internet platform and fees for providing fulfillment
services. The Group recognizes marketplace service revenues upon acceptances of deliveries by customers for sales that the Group
provides fulfillment services or upon shipping by third party merchants for sales for which the Group doesn’t provide fulfillment
services. For customer orders and cash collected from customers before delivery, the Group accounts for it in advance from customers.
The Group considers
several factors in determining whether it is appropriate to record the gross amount of product sales and related costs or the net
amount earned as service fees. Generally, when the Group is the primary obligor in a transaction, is subject to substantial inventory
risk, and has latitude in establishing prices, revenues are recorded at the gross sales price. If the Group does not have substantial
inventory risk or latitude in establishing prices and amounts earned are determined using a predetermined service rate, the Group
records the net amounts as marketplace service fees earned.
Sales allowances, which
reduce revenues, are estimated using management’s best estimate based on historical experience. Revenues are recorded net
of value-added taxes, business taxes and surcharges.
The Group periodically
provides discount coupons to its customers for use in purchases that require a minimum transaction value. Coupons may also be granted
to customers to incentivize a current purchase or a future purchase. Discounts for purchases are treated as a reduction of revenue
for the related transaction. The right to purchase discounted products in the future is not considered an element of an arrangement
within the scope of the multiple-element arrangements guidance in ASC 605, Revenue Recognition, as the right does not represent
a significant and incremental customer discount. Discounts for future purchases, when accepted by the customer, are treated as
a reduction of revenue when the future transaction is recognized. The Group also sells prepaid cards with discount. The discount
is treated as a reduction of revenue when the prepaid card is used. The prepaid cards have no expiration date. Cash receipts from
the sale of prepaid cards are initially recorded as advances from customers which is a current liability on the Company’s
Consolidated Balance Sheet.
Customers may earn
loyalty program points from the purchases from the Group. Customers may redeem the loyalty points for certain promotional products
or discount coupons to be used on future purchases. The Company accrues for the estimated incremental cost of redeeming the benefits
at the time the benefits are earned by the customer. Estimated incremental costs have been insignificant since the inception of
the respective loyalty programs.
Cost of revenue consists
primarily of cost of merchandise sold and inventory write-downs. The cost of revenues does not include shipping and handling expenses,
payroll, bonus and benefits of logistic staff or logistic centers rental expenses, therefore our cost of revenues may not be comparable
to other companies which include such expenses in their cost of revenues.
The Group periodically
receives consideration from certain vendors, representing rebates for products purchased and subsidies for the sales of the vendors'
products over a period of time. The rebates are not sufficiently separable from the Group’s purchase of the vendors’
merchandizes and they do not represent a reimbursement of costs incurred by the Group to sell vendors’ merchandizes. The
Group accounts for the rebates received from its vendors as a reduction to the price it pays for the merchandizes purchased and
therefore the Group records such amounts as a reduction of cost of revenues when recognized in the consolidated statements of comprehensive
income. Rebates are earned when meeting minimum purchase thresholds specified in the contracts. When rebates can be reasonably
estimated based on the Group’s past experience and current forecasts, a portion of the rebate is recognized as the Group
makes progress towards the purchase threshold. Subsidies are calculated based on the volume of products sold through the Group
and are recorded as a reduction of cost of revenues when the sales have been completed and the amount is determinable.
Fulfillment expenses
represent those costs incurred in shipping and operating and staffing the Group’s fulfillment and customer service centers,
including costs attributable to receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer
orders for shipment; collecting payments from customers and responding to inquiries from customers. Fulfillment also includes amounts
payable to third parties that assist the Group in payment collections, fulfillment and customer service operations. The shipping
costs included in fulfillment expenses were RMB156,287, RMB162,114 and RMB338,097 for the years ended December 31, 2013, 2014 and
2015, respectively.
Marketing expenses
mainly consist of advertising costs, promotion expenses, payroll and related expenses for employees engaged in marketing activities.
Advertising costs, which primarily spend on online and offline advertisements, are expensed when the services are received. The
advertising expenses were RMB310,697, RMB463,105 and RMB599,713 for the years ended December 31, 2013, 2014 and 2015, respectively.
Technology and content
expenses mainly consist of payroll and related costs for employees involved in application development, category expansion, editorial
content production and system support, as well as server charges and costs associated with telecommunications.
General and administrative
expenses mainly consist of payroll and related costs for employees involved in general corporate functions, including accounting,
finance, tax, legal, procurement, business development and human resources, professional fees and other general corporate costs
as well as costs associated with the use by these functions of facilities and equipment, such depreciation and rent expenses.
All stock-based awards
granted to the Founders, employees and directors, including Founders’ share, stock options and restricted share units (“RSUs”)
are measured at the grant date based on the fair value of the award and are recognized as expenses using straight line method,
net of estimated forfeitures, over the requisite service period, which is generally the vesting period. Forfeitures are estimated
at the time of grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
The
Binomial option pricing model is used to measure the fair value of stock options. The determination of the fair value is affected
by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected share
price volatility, expected forfeiture rate, risk-free interest rates, contract life and expected dividends.
The Company’s
subsidiaries, the VIEs and the VIEs’ subsidiaries in China participate in a government mandated, multi-employer, defined
contribution plan, pursuant to which certain retirement, medical, housing and other welfare benefits are provided to employees.
Chinese labor laws require the entities incorporated in China to pay to the local labor bureau a monthly contribution at a stated
contribution rate based on the monthly basic compensation of qualified employees. The Group has no further commitments beyond its
monthly contribution. Employee social benefits included as expenses in the consolidated statements of comprehensive income amounted
to RMB22,164, RMB32,790 and RMB46,387 for the years ended December 31, 2013, 2014 and 2015, respectively.
Generally, a government
grant is recognized as other income when the grant is received and the requirements associated with receipt of the grant have been
complied with. If the government grant is tied to the acquisition of long-lived assets, the grant is recognized as deduction of
the carrying value of the long lived assets, when the conditions specified in the grant have been met.
For the years ended
December 31, 2013, 2014 and 2015, the Group received government grants of RMB1,849, RMB54,372 and RMB44,904, respectively, which
were included in Others, net under Other income/ (expenses) in the consolidated statements of comprehensive income.
Current income taxes
are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable
or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes
are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to
that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in the consolidated
statement of comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
In order to assess
uncertain tax positions, the Group applies a more likely than not threshold and a two-step approach for the tax position measurement
and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely of being realized upon settlement.
Comprehensive income
is defined as the change in equity of the Group during a period arising from transactions and other events and circumstances excluding
transactions resulting from investments by shareholders and distributions to shareholders. Comprehensive income is reported in
the consolidated statements of comprehensive income. Accumulated other comprehensive income, as presented on the consolidated balance
sheets, consists of accumulated foreign currency translation adjustments and fair value changes of investment security.
The Group’s
subsidiaries, VIEs and VIEs’ subsidiaries established in the PRC are required to make appropriations to certain non-distributable
reserve funds.
In accordance with
the laws applicable to the Foreign Investment Enterprises established in the PRC, the Group’s subsidiaries registered as
wholly-owned foreign enterprise have to make appropriations from its after-tax profit (as determined under generally accepted accounting
principles in the PRC (“PRC GAAP”)) to reserve funds including general reserve fund, the enterprise expansion fund
and staff bonus and welfare fund. The appropriation to the general reserve fund must be at least 10% of the after-tax profits calculated
in accordance with PRC GAAP. Appropriation is not required if the general reserve fund has reached 50% of the registered capital
of the company. Appropriation to the enterprise expansion fund and staff bonus and welfare fund is made at the company’s
discretion.
In addition, in accordance
with the PRC Company Laws, the Group’s VIEs and VIEs’ subsidiaries registered as Chinese domestic company must make
appropriations from its after-tax profit as determined under the PRC GAAP to non-distributable reserve funds including statutory
surplus fund and discretionary surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax
profits as determined under PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered
capital of the company. Appropriation to the discretionary surplus fund is made at the discretion of the company.
The use of the general
reserve fund, enterprise expansion fund, statutory surplus fund and discretionary surplus fund are restricted to the offsetting
of losses or increases the registered capital of the respective company. The staff bonus and welfare fund is a liability in nature
and is restricted to fund payments of special bonus to employees and for the collective welfare of employees. All these reserves
are not allowed to be transferred to the company in terms of cash dividends, loans or advances, nor can they be distributed except
under liquidation.
For the years ended
December 31, 2013, 2014 and 2015, profit appropriation to statutory funds for the Group’s entities incorporated in the PRC
was approximately RMB1,232, RMB13 and RMB14,734, respectively. No appropriation to other reserves was made for any of the periods
presented.
Based on the criteria
established by ASC 280 “Segment Reporting”, the Group’s chief operating decision maker has been identified as
the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance
of the Group. The Group has internal reporting of revenue, cost and expenses that does not distinguish between segments, and reports
costs and expenses by nature as a whole. The Group does not distinguish between markets or segments for the purpose of internal
reporting. Hence, the Group has only one operating segment. As the Group’s long-lived assets and revenue are substantially
located in and derived from the PRC, no geographical segments are presented.
In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements
in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for
those goods or services. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting
periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016.
The Group is currently evaluating the impact of the adoption on its consolidated financial statements.
In February 2015,
the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis,” which provides
guidance for reporting entities that are required to evaluate whether they should consolidate certain legal entities. In accordance
with ASU 2015-02, all legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective
for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15,
2015. Early adoption is permitted. The implementation of this update is not expected to have any material impact on the Group’s
consolidated financial statements.
In February 2015,
the FASB issued ASU 2015-03 “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs”, which requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the
amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously
issued. The implementation of this update is not expected to have any material impact on the Group’s consolidated financial
statements.
In July 2015, the
FASB issued ASU 2015-11, “Inventory (Topic 330),” which modifies the accounting for inventory. Under this ASU, the
measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The
ASU defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation. The ASU is effective for reporting periods after December 15, 2016, with early
adoption permitted. The implementation of this update is not expected to have any material impact on the Group’s consolidated
financial statements.
In November 2015,
the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the
presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets
into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update
require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments
in this update are effective for fiscal years beginning after December 15, 2016, and interim periods therein and may be applied
either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Group is in the process of evaluating
the impact this new guidance will have on its consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, Leases. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires
a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments,
in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the
lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual
reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted.
The Group is currently evaluating the impact this new guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. For
employee share-based payment, ASU 2016-09 amendments related to the timing of when excess tax benefits are recognized, minimum
statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition
method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted.
Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares
to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess
tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied
prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement
of cash flows using either a prospective transition method or a retrospective transition method. In general, Amendments
simplify
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments
in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
Early adoption is permitted. The Group is currently evaluating the impact this new guidance will have on its consolidated financial
statements.
Assets that potentially
subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, short-term investments,
accounts receivable, net and other receivables.
The Group expects
that there is no significant credit risk associated with cash and cash equivalents and short-term investments, which were held
by reputable financial institutions in the jurisdictions where the Company, its subsidiaries, the VIEs and VIEs’ subsidiaries
are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit quality.
Accounts receivable
are typically unsecured and are derived from revenues earned from customers in the PRC. The risk with respect to accounts receivable
is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.
There are no customers
or suppliers from whom revenue or purchases individually represent greater than 10% of the total revenues or the total purchases
for the periods presented.
The Group’s
operating transactions and its assets and liabilities are mainly denominated in RMB. The account payable generated by Jumei Global
are denominated in Hong Kong dollars, U.S. dollars, Australian dollars, Japanese Yen, and Korean Won. We do not believe that the
currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure
to such risk. The Group’s cash and cash equivalents and short-term investments denominated in RMB that are subject to such
government controls amounted to RMB1,316,106 and RMB2,630,624 as of December 31, 2014 and 2015, respectively. The value of the
RMB is subject to changes by the central government policies and international economic and political developments that affect
the supply and demand of RMB in the foreign exchange market. In the PRC, certain foreign exchange transactions are required by
law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (the “PBOC”).
Remittances in currencies other than RMB by the Group in China must be processed through the PBOC or other China foreign exchange
regulatory bodies which require certain supporting documentation in order to affect the remittance.
As of December 31,
2014 and 2015, information about inputs into the fair value measurements of the Group’s assets that are measured at fair
value on a recurring basis in periods subsequent to their initial recognition is as follows:
The Group values its
investment security using quoted prices for the underlying security in active market, and accordingly, the Group classifies the
valuation techniques that use these inputs as Level 1.
On July 22, 2015,
the Group made a convertible loan investment of RMB558 million (the “Convertible Loan”) in BabyTree Inc. and its subsidiaries
and VIE in PRC (collectively, “BabyTree”).
According to the terms
of the Convertible Loan, the Convertible Loan bears no interest for the period before July 22, 2016 (the “Maturity date”),
however, if the loan is not repaid at maturity on time, 12% per annum would be charged for the loan outstanding period. On or prior
to the Maturity Date, if BabyTree completes its restructuring, the Group shall convert all outstanding loan balance into 11.6%
equity interests in BabyTree’s Chinese operation entity, subject to certain protective conversion price adjustments provisions
(the “Conversion Features”). In case the proposed restructuring is not completed before the Maturity Date, the Group
has the option to convert all or a portion of the outstanding balance of the Convertible loan to shares in BabyTree Inc. (Cayman).
In addition the Group has the right to make an additional RMB186 million loan under the same terms to Babytree at the end of 2015
(the “Call Option”), and if certain sales targets are not met by Babytree before the end of 2015, the Group has the
right to demand early repayment of RMB186 million of loan balance (the “Put Option”). On March 16, 2016, the Group
and BabyTree entered into a supplemental agreement to exercise the Put Option and the Group received RMB186 million of repayment
from BabyTree. In addition to the loan arrangements, the Group had also entered into framework agreements outlining business cooperation
with BabyTree, whereby the Group sell certain cosmetics and baby care products through BabyTree’s mobile apps and online
platform.
The Conversion Features
and the Put Option were considered as embedded derivatives that do not meet the criteria to be bifurcated and were accounted for
together with the loan receivable. The Call Option was considered as a freestanding derivative and is accounted for at fair value.
As such, the initial fair value of RMB16,000 of the Call Option was first allocated out from the initial Convertible Loan and recorded
as a freestanding derivative instrument. The Call Option expired at the end of 2015 without exercise. As such, the Call Option
value was written down to zero and recorded as a loss included in others, net.
The difference of
RMB16,000 between the carrying value and face value of the Convertible Loan was treated as a discount on Convertible Loan and is
amortized and recognized as interest income using the effective interest method.
To estimate the fair
value of the Call Option, the Company used the Monte Carlo Simulation Model ("Binomial-Model"), which is based on the
fair value of invested capital evaluated by market approach. The significant inputs for the valuation model included the following:
The Group subsequently
sold the investment for RMB39,751 in February 2016.
Depreciation expenses
for the years ended December 31, 2013, 2014 and 2015 were RMB8,099, RMB18,530 and RMB29,814, respectively.
Prior to January 1,
2012, the Group’s services revenues were subject to pay a business tax at a tax rate of 5%. The Ministry of Finance and the
State Administration of Taxation implemented a VAT pilot program replacing the business tax, beginning with Shanghai on January
1, 2012 and expanding to other regions on September 1, 2012. The Group’s service revenues are now subject to VAT at a rate
of 6%.
Under the PRC Provisional
Regulations on Value-Added Tax the Group’s merchandize revenue are subject to VAT at the rate of 17% for revenues generated
from sales of products, less any deductible VAT already paid or borne by such entity. The VAT balance is recorded in tax payable
in the Consolidated Balance Sheets.
The following table sets forth current
and deferred portion of income tax expenses/ (benefits) of the Group:
Under the current
laws of the Cayman Islands, the Group is not subject to tax on income or capital gain. Additionally, upon payments of dividends
to the shareholders, no Cayman Islands withholding tax will be imposed.
Entities incorporated
in Hong Kong are subject to Hong Kong profit tax at a rate of 16.5% since January 1, 2010.
Entities incorporated
in Korea are subject to Korea profit tax at a rate of 22%.
Entities incorporated
in the PRC are subject to the Corporate Income Tax Law (“CIT Law”) at a rate of 25%.
The CIT Law also provides
that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is
located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at
the rate of 25% for its global income. The Implementing Rules of the CIT Law merely define the location of the “de facto
management body” as “the place where the exercising, in substance, of the overall management and control of the production
and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” Based on a review of surrounding
facts and circumstances, the Group does not believe that it is likely that its operations outside of the PRC should be considered
a resident enterprise for PRC tax purposes.
In April 2008, the
State Administration of Taxation, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative
Rules for the certification of High and New Technology Enterprises (“HNTE”) specifying the criteria and procedures.
Reemake Media was granted as a HNTE in December 2012 and extended in September 2015, is entitled to the preferential enterprise
income tax rate of 15% from 2015 through 2018 and is in the process of renewal the HNTE.
Tianjin Cyril was
granted as a HNTE in October 2014, is entitled to the preferential enterprise income tax rate of 15% from 2014 through 2017.
According to the Notice
on the Enterprise Income Tax regarding Deepening Implementation of Grand Development of the Western Region issued by the State
Administration of Taxation, enterprises located in the western region of the PRC with principal revenue of over 70% generated from
encouraged category of western region are entitled to a preferential income tax rate of 15% for ten years from January 1, 2011
to December 31, 2020. Chengdu Jumei, which is located within the western region of the PRC and meets the criteria as set forth
in the notice, is entitled to the preferential income tax rate of 15% starting from 2013 upon approval by the relevant tax authority.
Substantially all
of the Group’s income before tax is from the operations in the PRC. The following table sets forth reconciliation between
the statutory CIT rate and the effective tax rate:
The permanent differences
in 2013, 2014 and 2015 were mainly attributable to non-tax deductible share based compensation expenses.
The aggregate amount
of the preferential tax were RMB22,610, RMB41,307 and RMB29,226 in 2013, 2014 and 2015, respectively, and the per share effect
of the preferential tax were RMB0.38, RMB0.36 and RMB0.20 in 2013, 2014 and 2015, respectively.
The following table sets forth the significant
components of the aggregate deferred tax assets:
The Group evaluates
the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on
the technical merits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2014 and 2015,
the Group did not have any significant unrecognized uncertain tax positions. The Group does not anticipate any significant increase
to our liability for unrecognized tax benefit within the next 12 months. Interest and penalties related to income tax matters,
if any, is included in income tax expense.
The CIT Law also imposes
a withholding income tax of 10% on dividends distributed by an Foreign Investment Enterprise (“FIE”) to its immediate
holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment
or place within China or if the received dividends have no connection with the establishment or place of such immediate holding
company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that
provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty
with China. According to the arrangement between the mainland China and Hong Kong Special Administrative Region on the Avoidance
of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by an FIE in China to its immediate holding
company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at
least 25% of the shares of the FIE).
In accordance with
accounting guidance, all undistributed earnings are presumed to be transferred to the parent company and are subject to the withholding
taxes. All FIEs are subject to the withholding tax from January 1, 2008.
According to Korean
Income Tax Law, a withholding income tax of 22% will be levied on the immediate holding company outside Korea when our subsidiaries
incorporated in Korea declare dividend out profit earned.
Under U.S. GAAP, undistributed
earnings are presumed to be transferred to the parent company and are subject to the withholding taxes. The presumption may be
overcome if the Company has sufficient evidence to demonstrate that the undistributed dividends will be re-invested and the remittance
of the dividends will be postponed indefinitely.
The Group intends
to re-invest all earnings generated from its PRC subsidiaries indefinitely or be subject to a significant withholding tax should
its policy change to allow for earnings distribution offshore. As of December 31, 2014 and 2015, the Group did not record any withholding
tax on the retained earnings of its FIEs in the PRC as the Company intends to re-invest its earnings for use in the operation and
expansion of its business in China. The unrecognized deferred tax liabilities for permanently re-invested earnings of the Group’s
FIEs in the PRC were RMB37,784, RMB77,865, and RMB108,525 as of December 31, 2014 and 2015, respectively.
The Group intends
to distribute all earnings generated by its Korean subsidiaries. The withholding tax were accrued for the earnings for RMB nil
and RMB3,852 for the years ended December 31, 2014 and 2015.
On June 25, 2010,
the Company issued equity interest with preferential rights for an aggregate consideration of RMB3,101. In conjunction with the
Reorganization in April 2011, the above equity interest was converted into 14,474,377 Series A-1 Convertible Redeemable Preferred
Shares (“Series A-1 Redeemable Preferred Shares”) for above financing.
On April 8, 2011,
upon the completion of the Reorganization, the Company issued 26,000,000 Series A-2 Convertible Redeemable Preferred Shares (“Series
A-2 Redeemable Preferred Shares”) for an aggregate consideration of RMB42,515.
On November 18, 2011,
the Company issued 5,571,428 Series B Convertible Redeemable Preferred Shares (“Series B Redeemable Preferred Shares”)
for an aggregate consideration of RMB38,106.
On December 31, 2013,
all the shareholders of the Company adopted a resolution and all the directors of the Company also approved to implement a dual
class voting structure (the “Dual Class Structure”). The Dual Class Structure was implemented immediately upon the
completion of the IPO of the Company on May 16, 2014. Holders of ordinary shares have the right to receive notice of, attend, speak
and vote at general meetings of the Company, and shall, at all times, vote together as one class on all matters submitted to a
vote for Members’ consent. Each Class A Ordinary Share shall be entitled to one (1) vote on all matters subject to the vote
at general meetings of the Company, and each Class B Ordinary Share shall be entitled to ten (10) votes on all matters subject
to the vote at general meetings of the Company. All of the Company’s shares held, directly or indirectly, by Mr. Leo Ou Chen
and Mr. Yusen Dai, and their respective affiliates (including shares held by Super ROI Global Holding Limited, Pinnacle High-Tech
Limited, or any other company, trust, nominee or agent, if any) was immediately and automatically converted and re-designated into
Class B ordinary shares on a one to one basis. Except for the Company’s shares held, directly or indirectly, by Mr. Leo Ou
Chen and Mr. Yusen Dai, and their respective affiliates, all of other outstanding ordinary shares prior to IPO were designated
as Class A Ordinary Shares and all of outstanding preference shares were automatically converted into Class A Ordinary Shares on
a one-for-one basis immediately upon the completion of the IPO.
The Company believes
that the incremental value for the super voting right is minimal as there was no change in control.
Upon completion of the
Company's IPO on May 16, 2014, the Company's shares were divided into Class A ordinary shares and Class B ordinary shares, at par
value of US$0.00025. As of December 31, 2015, 840,000,000 Class A ordinary shares, 60,000,000 Class B ordinary shares and 100,000,000
discretionary shares had been authorized, 146,634,596 ordinary shares had been issued and outstanding, of which 87,829,756 were
Class A ordinary shares and 58,804,840 were Class B ordinary shares.
In March 2011, Board
of directors of the Company approved “2011 Global Share Plan” (the “2011 Plan”). According to the Plan,
10,401,229 ordinary shares have been reserved to be issued to any qualified employees, directors and consultants as determined
by the Board. The option will expire the earlier of (i) termination of service with the Company, (ii) the tenth anniversary of
the grant date, unless an earlier time is set in the option award agreement.
Under the 2011 Plan,
these options have exercise prices ranging from nil to US$15.00 per ordinary share. The options will be exercisable only if option
holder continues employment or consultant provide services through each vesting date. Granted options will follow below vesting
schedules, one fourth (1/4) of which shall vest and become exercisable upon the first anniversary of the date of grant and one
forty-eight (1/48) of the shares subject to the option shall vest each month thereafter, subject to option holder continuing to
be a service provider through each vesting date.
On April 10, 2014,
the Company adopted the 2014 share incentive plan (the “2014 Plan”). The maximum aggregate number of shares which may
be issued pursuant to all awards under the 2014 Plan shall initially be 6,300,000 Class A ordinary shares, plus an annual increase
of 1.5% of the total outstanding share capital as of December 31 of the immediately preceding calendar year, or such lesser number
of Class A ordinary shares as determined by the board of directors of the Company on the first day of each fiscal year beginning
in 2015.
The Company granted
2,837,500, 500,000 and 745,000 serviced-based share options to its officers, director and employees for the years ended December
31, 2013, 2014 and 2015, respectively under the 2011 Plan and 2014 Plan. These awards generally vest over a four year term. These
awards are accounted for in accordance with
ASC 718
Compensation – Stock Compensation
.
Share-based compensation
expenses related to service-based share options of RMB15,520, RMB37,725 and RMB 38,416, were recognized in the consolidated statements
of comprehensive income for the years ended December 31, 2013, 2014 and 2015, respectively. The unamortized compensation costs
related to unvested awards not yet recognized were RMB74,363 as of December 31, 2015, adjusted for estimated forfeitures, and weighted
average period over which it would be recognized was 0.92 years. No income tax benefit was recognized in the consolidated statements
of comprehensive income for share-based compensation arrangements for the years ended December 31, 2013, 2014 and 2015, as no tax
deduction was claimed. There was no compensation cost capitalized for the years ended December 31, 2013, 2014 and 2015.
The summary of service-based
share options activities under the Share Incentive Plan as of December 31, 2015, and changes during the periods, is presented below:
The weighted average
grant date fair value of options vested during 2013, 2014, and 2015 was US$1.61, US$3.23, and US$5.76 respectively.
In March 2013, the
Company repurchased 910,000 shares of options, a portion of options granted in conjunction with the acquisition of Beijing Shengjinteng
for a cash consideration of RMB5,236. The options repurchased were fully vested and were repurchased with price lower than fair
value.
The share-based compensation
expenses are measured at the fair value of the award as calculated under the Binomial option-pricing model. Assumptions used in
the Binomial option-pricing model are presented below:
In accordance with
the shareholders agreement dated as of July 15, 2009, all ordinary shares ultimately owned by the Company’s Founders would
become subject to four-year vesting, with 25% vesting on the first anniversary and remainder vesting monthly thereafter in thirty-six
equal monthly installments. The Founders’ shares vest immediately in the event that i) Founder’s continuous status
as a service provider is terminated by the Company without cause; ii) there occurs a change in control of the Company or iii) there
occurs a Qualified IPO as defined in Redeemable Preferred Shares. The Company accounted for this arrangement similar to a reverse
stock split, followed by the grant of restricted stock awards subject to service vesting conditions, though these Founders’
shares are legally outstanding from the grant day. Accordingly, compensation cost was measured based on the fair value of the ordinary
shares at the grant date and was recognized over the requisite service period.
In connection with
the issuance of Redeemable Preferred Shares, the Company amended the vesting schedule of all Founders’ shares under which
Founders’ shares that were unrestricted became subject to vesting again with 1/48th of the options vesting each month after
the issuance of each Series of Redeemable Preferred Shares. The modification did not result in charge as there was no incremental
value resulted from the modification.
For the years ended
December 31, 2013, 2014 and 2015, the Company recognized share based compensation expense related to the Founders’ shares
of RMB722, RMB1,392, and nil, respectively. Shares were granted to the founders on July 15, 2009, and the fair value per share
at that time was US$0.01.
On October 28, 2013,
the Company entered into an agreement with Mr. Hui Liu, one of the Company’s Founders to accelerate all of Mr. Liu’s
Founder’s shares upon Mr. Liu’s departure from the Company on March 31, 2013. In conjunction with this agreement, Mr.
Liu also transferred 1,293,125 shares to one of the executive officers, at no additional consideration. The fair value of the transferred
shares amounted RMB96,764 was treated as share-based compensation to such executive officer for his past services.
On November 20, 2013,
Mr. Hui Liu sold 1,355,714 shares to such executive officer for RMB18,392. The difference of RMB88,241 between the fair value of
the shares amounted RMB106,633 and RMB18,392 was treated as share-based compensation to such executive officer for his past services.
The total fair value
of shares vested during 2013, 2014 and 2015 was RMB449,053, RMB1,922,067 and nil, respectively.
For the years ended December 31, 2013,
2014 and 2015, total share-based compensation expenses recognized by the Company for the RSUs granted were nil, RMB542, and RMB7,945,
respectively.
As of December 31, 2015, there were RMB25,290
of unrecognized share-based compensation expenses related to the RSUs granted. The expenses are expected to be recognized over
a weighted-average period of 3.2 years.
Immediately prior
to the completion of the IPO, the Company adopted Dual Class Structure. Holders of Class A ordinary shares and Class B ordinary
shares have the same rights, except for voting rights and conversion rights. Holders of Class A ordinary shares are entitled to
one vote per share in all shareholders' meetings, while holders of Class B ordinary shares are entitled to ten votes per share.
Each Class B ordinary share is convertible into one Class A ordinary share at any time at the discretion of the Class B shareholders
thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. The Class A and
Class B ordinary shares have the same rights except for voting rights. Therefore, the two-class method of computing earnings per
share is not applicable.
The following table
sets forth the computation of basic and diluted net income per share attributable to Jumei’s ordinary shareholders for the
periods indicated:
Potentially dilutive
securities that were not included in the calculation of dilutive net income per share because where their inclusion would have
been anti-dilutive included share options of nil, 295,770, and 1,098,037 for the years ended December 31, 2013, 2014 and 2015,
respectively.
The Group leases its
facilities and offices under non-cancelable operating lease agreements. The rental expenses were RMB38,090, RMB70,490 and RMB99,081
for the years ended December 31, 2013, 2014 and 2015, respectively.
As of December
31, 2015, future minimum commitments under non-cancelable agreements were as follows:
Other than those shown
above, the Group did not have any significant capital and other commitments, long-term obligations, or guarantees as of December
31, 2014 and 2015.
In December 2014,
four putative shareholder class action lawsuits were filed in the United States District Courts for the Southern District of New
York and the Eastern District of New York against our company, certain current and former officers and directors of our company,
and underwriters in our initial public offering: Lu v. Jumei International Holding Limited et al., Civil Action No. 14 CV 9826
(S.D.N.Y.) (filed on December 11, 2014); Yim v. Jumei International Holding Limited et al., Civil Action No. 14 CV 7269 (E.D.N.Y.)
(filed on December 12, 2014, voluntarily dismissed by plaintiffs on March 9, 2015); Yin v. Jumei International Holding Limited
et al., Civil Action No. 14 CV 9957 (S.D.N.Y.) (filed on December 17, 2014); and Brock v. Jumei International Holding Limited et
al., Civil Action No. 14 CV 9993 (S.D.N.Y.) (filed on December 18, 2014). The complaints in the above-mentioned putative shareholder
class action lawsuits allege that our company’s registration statement for our initial public offering and/or certain subsequent
press releases, financial statements, and other disclosures made by our company contained material misstatements or omissions in
violation of the federal securities laws. On March 9, 2015, the plaintiffs voluntarily dismissed without prejudice the putative
class action originally filed in the District Court for the Eastern District of New York, Yim v. Jumei International Holding Limited
et al. On June 22, 2015, the District Court for the Southern District of New York consolidated the remaining three putative class
actions into one action, In re Jumei International Holding Limited Securities Litigation, Civil Action No. 14 CV 9826 (S.D.N.Y.),
appointed a lead plaintiff and approved the lead plaintiff’s selection of lead counsel. On October 16, 2015, the lead plaintiff
filed–purported on behalf of a class of persons who allegedly suffered damages as a result of their trading activities related
to our ADSs between May 16, 2014 and November 19, 2014—a Consolidated Amended Complaint, which advances similar allegations
as the previously filed complaints, seeks to represent and alleges violations of Sections 11 and 15 of the Securities Act of 1933,
15 U.S.C. §§ 77k and 77o and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§
78(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. On March 22, 2016, we and the underwriters
in our initial public offering filed a joint motion to dismiss the Consolidated Amended Complaint.
The action remains
at its preliminary stages. The Group believes the case is without merit and intend to defend the actions vigorously.
During the years ended
December 31, 2013, 2014 and 2015, significant related party transactions were as follows:
(b) The Group had no balance with related parties as of December
31, 2014 and 2015.
The Group assessed
subsequent events through April 29, 2016, which is the date the consolidated financial statements were issued, and determined there
were no material events or transactions needing recognition or additional disclosure other than the followings:
On January 22, 2016,
the Group purchased 2,000,000 shares of Series A Preferred Shares from another online retailor incorporated in the United States
for cash consideration of US$15,000,000 which represents 16.67% of total outstanding shares of that entity.
On January 29, 2016,
the Group acquired land use rights with RMB81.6 million for 169,456 square meters of warehouse land in Suzhou, the PRC.
On February 17, 2016,
Jumei has received a non-binding proposal letter from Mr. Leo Ou Chen, Founder, Chairman of the Board of Directors and CEO of the
Company, Mr. Yusen Dai, Co-founder, Director and Vice President of Products of the Company, and the Sequoia funds, (together, the
"Buyer Group"), proposing a "going-private" transaction to acquire all of the outstanding ordinary shares of
Jumei not already owned by the Buyer Group for US$ 7.0 in cash per American depositary share ("ADS"), which represents
a premium of 26.6% above the average closing price of the Company's ADSs over the last 10 trading days.
On April 25, 2016,
the Group entered into a share purchase agreement ("Repurchase Agreement") with the non-controlling interests of one
our subsidiary incorporated in Korea. In accordance with the Repurchase Agreement, the Group will dispose 31.1% share of interests
of this subsidiary which the Group had 51% share of interests as of December 31, 2015, to its non-controlling interests at a cash
consideration of RMB19,363 (KRW3,454,819,695). Upon the completion of Repurchase Agreement, the Group will not control the subsidiary
any longer.
Relevant PRC laws
and regulations permit payments of dividends by the Company’s subsidiaries, the VIEs and VIEs’ subsidiaries incorporated
in the PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.
In addition, the Company’s subsidiaries, the VIEs and VIEs’ subsidiaries incorporated in the PRC are required to annually
appropriate 10% of their net after-tax income to the statutory general reserve fund prior to payment of any dividends, unless such
reserve funds have reached 50% of their respective registered capital. Even though the Company currently does not require any such
dividends, loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future
require additional cash resources from them due to changes in business conditions, to fund future acquisitions and development,
or merely to declare and pay dividends or distributions to our shareholders. Except for the above, there is no other restriction
on the use of proceeds generated by the Company’s subsidiaries, the VIEs and VIEs’ subsidiaries to satisfy any obligations
of the Company.
The Company performed
a test on the restricted net assets of consolidated subsidiaries, VIEs and the subsidiary of the VIEs (the "Restricted Net
Assets") in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), "General Notes to Financial
Statements" and concluded that the Restricted Net Assets did not exceed 25% of the consolidated net assets of the Company
as of December 31, 2015.