|
A.
|
Selected Financial Data
|
The following summary consolidated statements
of income data for the years ended December 31, 2015, 2016 and 2017, summary consolidated balance sheets data as of December 31,
2016 and 2017 and summary consolidated cash flow data for the years ended December 31, 2015, 2016 and 2017 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, 2013 and 2014, summary consolidated balance sheets data as of December 31,
2013, 2014 and 2015 and summary consolidated cash flow data for the years ended December 31, 2013 and 2014 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,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
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
|
|
|
2,556,139
|
|
|
|
3,355,914
|
|
|
|
7,113,278
|
|
|
|
6,174,721
|
|
|
|
5,634,156
|
|
|
|
865,954
|
|
Marketplace and other
services
|
|
|
434,977
|
|
|
|
531,617
|
|
|
|
229,681
|
|
|
|
102,462
|
|
|
|
182,676
|
|
|
|
28,077
|
|
Total net revenues
|
|
|
2,991,116
|
|
|
|
3,887,531
|
|
|
|
7,342,959
|
|
|
|
6,277,183
|
|
|
|
5,816,832
|
|
|
|
894,031
|
|
Cost of revenues
|
|
|
(1,754,539
|
)
|
|
|
(2,350,702
|
)
|
|
|
(5,225,669
|
)
|
|
|
(4,524,897
|
)
|
|
|
(4,527,284
|
)
|
|
|
(695,831
|
)
|
Gross profit
|
|
|
1,236,577
|
|
|
|
1,536,829
|
|
|
|
2,117,290
|
|
|
|
1,752,286
|
|
|
|
1,289,548
|
|
|
|
198,200
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(366,795
|
)
|
|
|
(434,691
|
)
|
|
|
(948,954
|
)
|
|
|
(769,651
|
)
|
|
|
(580,792
|
)
|
|
|
(89,266
|
)
|
Marketing expenses
|
|
|
(322,965
|
)
|
|
|
(499,115
|
)
|
|
|
(655,314
|
)
|
|
|
(427,827
|
)
|
|
|
(401,756
|
)
|
|
|
(61,749
|
)
|
Technology and content expenses
|
|
|
(62,068
|
)
|
|
|
(135,698
|
)
|
|
|
(169,694
|
)
|
|
|
(216,310
|
)
|
|
|
(200,342
|
)
|
|
|
(30,792
|
)
|
General and administrative expenses
|
|
|
(246,052
|
)
|
|
|
(102,527
|
)
|
|
|
(191,918
|
)
|
|
|
(206,243
|
)
|
|
|
(144,883
|
)
|
|
|
(22,268
|
)
|
Total operating expenses
(1)
:
|
|
|
(997,880
|
)
|
|
|
(1,172,031
|
)
|
|
|
(1,965,880
|
)
|
|
|
(1,620,031
|
)
|
|
|
(1,327,773
|
)
|
|
|
(204,075
|
)
|
Income/(loss) from operations
|
|
|
238,697
|
|
|
|
364,798
|
|
|
|
151,410
|
|
|
|
132,255
|
|
|
|
(38,225
|
)
|
|
|
(5,875
|
)
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,675
|
|
|
|
82,251
|
|
|
|
114,123
|
|
|
|
85,597
|
|
|
|
65,515
|
|
|
|
10,069
|
|
Others, net
|
|
|
771
|
|
|
|
56,397
|
|
|
|
(59,289
|
)
|
|
|
76,271
|
|
|
|
(45,393
|
)
|
|
|
(6,977
|
)
|
Share of income from equity method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,452
|
|
|
|
4,903
|
|
|
|
754
|
|
Impairment of investment security
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(114,789
|
)
|
|
|
-
|
|
|
|
-
|
|
Income/(loss) before tax
|
|
|
245,143
|
|
|
|
503,446
|
|
|
|
206,244
|
|
|
|
181,786
|
|
|
|
(13,200
|
)
|
|
|
(2,029
|
)
|
Income tax expenses
|
|
|
(88,576
|
)
|
|
|
(98,083
|
)
|
|
|
(71,403
|
)
|
|
|
(31,604
|
)
|
|
|
(23,778
|
)
|
|
|
(3,655
|
)
|
Net income/(loss)
|
|
|
156,567
|
|
|
|
405,363
|
|
|
|
134,841
|
|
|
|
150,182
|
|
|
|
(36,978
|
)
|
|
|
(5,684
|
)
|
Net income/(loss) attributable to
noncontrolling interests, net of tax nil
|
|
|
—
|
|
|
|
(222
|
)
|
|
|
(11,925
|
)
|
|
|
(7,958
|
)
|
|
|
-
|
|
|
|
-
|
|
Net income/(loss) attributable to Jumei International Holding Limited
|
|
|
156,567
|
|
|
|
405,141
|
|
|
|
122,916
|
|
|
|
142,224
|
|
|
|
(36,978
|
)
|
|
|
(5,684
|
)
|
Accretion to preferred share redemption value
|
|
|
(11,123
|
)
|
|
|
(4,629
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income allocation to participating Redeemable Preferred Shares
|
|
|
(46,473
|
)
|
|
|
(55,984
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income/(loss) attributable to Jumei's ordinary shareholders
|
|
|
98,971
|
|
|
|
344,528
|
|
|
|
122,916
|
|
|
|
142,224
|
|
|
|
(36,978
|
)
|
|
|
(5,684
|
)
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
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
|
|
|
59,475,739
|
|
|
|
115,090,686
|
|
|
|
145,901,672
|
|
|
|
149,477,388
|
|
|
|
149,790,335
|
|
|
|
149,790,335
|
|
- Diluted
|
|
|
83,196,788
|
|
|
|
125,217,054
|
|
|
|
149,758,825
|
|
|
|
150,069,205
|
|
|
|
149,790,335
|
|
|
|
149,790,335
|
|
Net income/(loss) per share attributable to Jumei's ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
1.66
|
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
(0.04
|
)
|
- Diluted
|
|
|
1.19
|
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
(0.04
|
)
|
Net income/(loss) per ADS attributable to Jumei's ordinary shareholders
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
1.66
|
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
(0.04
|
)
|
- Diluted
|
|
|
1.19
|
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
(0.04
|
)
|
|
(1)
|
Share-based compensation
expenses are allocated in operating expenses items as follows:
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Fulfillment expenses
|
|
|
2,347
|
|
|
|
5,865
|
|
|
|
6,860
|
|
|
|
6,299
|
|
|
|
390
|
|
|
|
60
|
|
Marketing expenses
|
|
|
2,963
|
|
|
|
10,017
|
|
|
|
8,621
|
|
|
|
8,062
|
|
|
|
7,726
|
|
|
|
1,187
|
|
Technology and content expenses
|
|
|
4,846
|
|
|
|
8,347
|
|
|
|
8,335
|
|
|
|
4,233
|
|
|
|
5,266
|
|
|
|
809
|
|
General and administrative expenses
|
|
|
191,092
|
|
|
|
14,888
|
|
|
|
22,545
|
|
|
|
19,678
|
|
|
|
10,328
|
|
|
|
1,587
|
|
|
(2)
|
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,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands except for share data)
|
|
Summary Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
61,655
|
|
Accounts receivable, net
|
|
|
17,116
|
|
|
|
26,942
|
|
|
|
76,937
|
|
|
|
28,868
|
|
|
|
22,334
|
|
|
|
3,433
|
|
Inventories
|
|
|
199,084
|
|
|
|
621,772
|
|
|
|
965,510
|
|
|
|
646,116
|
|
|
|
603,091
|
|
|
|
92,693
|
|
Total assets
|
|
|
1,191,962
|
|
|
|
4,549,430
|
|
|
|
4,991,673
|
|
|
|
4,746,101
|
|
|
|
4,967,233
|
|
|
|
763,451
|
|
Accounts payable
|
|
|
541,225
|
|
|
|
889,960
|
|
|
|
1,030,200
|
|
|
|
605,131
|
|
|
|
578,881
|
|
|
|
88,972
|
|
Total liabilities
|
|
|
729,818
|
|
|
|
1,179,697
|
|
|
|
1,347,661
|
|
|
|
858,969
|
|
|
|
1,025,310
|
|
|
|
157,589
|
|
Total mezzanine equity
|
|
|
107,955
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,696
|
|
|
|
10,251
|
|
Ordinary shares
|
|
|
135
|
|
|
|
237
|
|
|
|
239
|
|
|
|
244
|
|
|
|
244
|
|
|
|
38
|
|
Total shareholders' equity
|
|
|
354,189
|
|
|
|
3,369,733
|
|
|
|
3,644,012
|
|
|
|
3,887,132
|
|
|
|
3,875,227
|
|
|
|
595,611
|
|
Number of outstanding ordinary shares
|
|
|
79,124,394
|
|
|
|
145,205,128
|
|
|
|
146,634,596
|
|
|
|
149,706,286
|
|
|
|
149,884,681
|
|
|
|
149,884,681
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands except for share data)
|
|
Summary Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
524,750
|
|
|
|
422,444
|
|
|
|
151,497
|
|
|
|
83,518
|
|
|
|
(440,495
|
)
|
|
|
(67,706
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
(28,753
|
)
|
|
|
(2,575,715
|
)
|
|
|
1,383,691
|
|
|
|
(440,461
|
)
|
|
|
(1,309,126
|
)
|
|
|
(201,210
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
(5,236
|
)
|
|
|
2,486,702
|
|
|
|
4,417
|
|
|
|
13,285
|
|
|
|
(91,248
|
)
|
|
|
(14,025
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
110
|
|
|
|
(512
|
)
|
|
|
12,555
|
|
|
|
80,842
|
|
|
|
(59,455
|
)
|
|
|
(9,132
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
490,871
|
|
|
|
332,919
|
|
|
|
1,552,160
|
|
|
|
(262,816
|
)
|
|
|
(1,900,324
|
)
|
|
|
(292,073
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
188,337
|
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
353,728
|
|
Cash and cash equivalents at end of year
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
61,655
|
|
Exchange Rate Information
Our business is primarily conducted in
China and almost all of our revenues are denominated in RMB, and we report our financial results in RMB. 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 exchange rate set forth in the H.10 statistical release of the Board of Governors of the
Federal Reserve System, or 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 RMB6.5063 to US$1.00, the exchange rate set forth in the H,10
statistical release of the Federal Reserve Board December 29, 2017. 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 20,
2018, the exchange rate set forth in the H,10 statistical release of the Federal Reserve Board was RMB6.2945 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1704
|
|
|
|
6.2591
|
|
|
|
6.0402
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2869
|
|
|
|
6.4896
|
|
|
|
6.1870
|
|
2016
|
|
|
6.9430
|
|
|
|
6.6549
|
|
|
|
6.9580
|
|
|
|
6.4480
|
|
2017
|
|
|
6.5063
|
|
|
|
6.7350
|
|
|
|
6.9575
|
|
|
|
6.4773
|
|
October
|
|
|
6.6328
|
|
|
|
6.6254
|
|
|
|
6.6533
|
|
|
|
6.5712
|
|
November
|
|
|
6.6090
|
|
|
|
6.6200
|
|
|
|
6.6385
|
|
|
|
6.5967
|
|
December
|
|
|
6.5063
|
|
|
|
6.5932
|
|
|
|
6.6210
|
|
|
|
6.5063
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.2841
|
|
|
|
6.4233
|
|
|
|
6.5263
|
|
|
|
6.2841
|
|
February
|
|
|
6.3280
|
|
|
|
6.3183
|
|
|
|
6.3471
|
|
|
|
6.2649
|
|
March
|
|
|
6.2726
|
|
|
|
6.3174
|
|
|
|
6.3565
|
|
|
|
6.2685
|
|
April
(through April 20, 2018)
|
|
|
6.2945
|
|
|
|
6.2859
|
|
|
|
6.3045
|
|
|
|
6.2655
|
|
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, and Vipshop Holdings Limited,
which operates
VIP.com
and
Lefeng.com
. 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.
We incurred net losses in 2017, and we may incur net
losses again in the future.
We commenced our beauty products retail
business in March 2010 and have a limited operating history. Our total net revenues decreased by 14.5% from RMB7.3 billion
in 2015 to RMB6.3 billion in 2016, and decreased by 7.3% to RMB5.8 billion(US$894.0 million) from 2016 to 2017. 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 or remain negative, 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 companies with
a limited operating history may encounter.
We have incurred losses and we may continue to experience
losses in the future.
While we have achieved positive net income
in 2015 and 2016, we incurred net loss of RMB37.0 million (US$5.7 million) in 2017. We cannot assure you that we will be able
to generate net profits or positive cash flow from operating activities in the future. Our ability to achieve profitability depends
in large part on our ability to increase our gross margin of E-commerce and our operating income from the new businesses. We intend
to continue to expand our product portfolio and to offer value-added services with higher margins and optimize the operation of
new business, and we may continue to experience losses in the future.
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, 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 generally been growing 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, light luxury products as well as apparel and other lifestyle products,
pre-packaged food (excluding refrigerated food and frozen food). 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. Further, certain regulatory changes may negatively impact the
operations and financial performance of
Jumei Global
. For example, the change of PRC regulation of import tax on consumer
goods imported through cross-border e-commerce platforms resulted in a decline in sales volume and decrease in revenue from
Jumei
Global
.
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 2017, we worked with approximately 1,903
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, health supplements, light luxury products, apparel and other lifestyle products, and pre-packaged
food. 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 2,091, 2,244
and 1,903 suppliers and third-party merchants in 2015, 2016 and 2017, 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.
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, Chengdu, Guangzhou, Suzhou and Hong Kong, is essential
to our business. We have started and will continue integrating and consolidating our logistics centers to increase the overall
capacity of our fulfillment network, accommodate more customer orders and provide better coverage of our target markets. In January 2016,
we acquired land use rights for 169,456 square meters of warehouse land in Suzhou, on which we constructed a new self-owned logistics
center. We have been using the new logistics center in Suzhou since the third quarter of 2017. 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 49 third-party inter-city
transportation companies and local third-party delivery service providers companies to deliver parcels to our customers as of
December 31, 2017. 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, Chengdu, Guangzhou, Suzhou and Hong Kong. All
of our logistics centers are leased from third parties except our new logistic center in Suzhou. 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 have already finished the
construction of a self-owned logistics center in Suzhou. We expect to continue to invest in our fulfillment and technology capabilities
as our business further develops. 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 RMB655.3 million, RMB427.8 million and RMB401.8 million (US$61.7 million) in marketing expenses
in 2015, 2016 and 2017, 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.
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; and
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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. If our management team 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. For example, Tony
Tao Zhou, our vice president of logistics resigned for personal reasons in 2016, and Yusen Dai resigned for personal reasons in
2017. There can be no assurance that we will not have 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. We have been expanding marketing efforts
through live video broadcasting, the success of which depends largely on our pool of popular hosts. Popular hosts may cease to
be engaged by us, and we may be unable to attract new talent that can attract users or cause such users to increase the amount
of time spent on our platform or the amount of money spent on our merchandize. 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, and we have kept the number of our
dispatched contract workers lower than 10% of our total number of workforce since then. 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, acquisitions
or expansion into new businesses 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.
In addition, we have made investments in
complementary business and expanded into new businesses 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. For instance,
in 2017, we acquired 82.07% equity interest of Shenzhen Jiedian Technology Co., Ltd, or Jiedian, one of the leading players in
the portable power bank sharing business. Our strategic investment in Jiedian allows us to further expand our eco-system to the
forefront of mobile internet business and broaden our services to offline. We also invested in a Television drama series in 2017.
Expansion into diverse new areas involves new risks and challenges. Our lack of familiarity with these new areas and lack of relevant
customer data relating to these new areas may make it more difficult for us to anticipate customer demand and preferences. In
addition, Furthermore, we may not have much negotiating power in new areas of business and we may not be able to reach favorable
terms with our business partners. We may need to price aggressively to gain market share or remain competitive in new areas of
business. It may be difficult for us to achieve profitability in the new areas and our profit margin, if any, may be lower than
we anticipate, which would adversely affect our overall profitability and results of operations. We cannot assure you that we
will be able to recoup our investments in new businesses. In addition, 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 MOFCOM, the Ministry of Industry and Information
Technology, or MIIT, the State Administration of Radio and Television, or the SART, the Ministry of Culture and Tourism and State
Administration for Market Regulation, including the State Drug Administration under its supervision. 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."
We have recently engaged in live video
broadcasting business to expand our marketing efforts. Pursuant to relevant PRC laws, we are obligated to obtain Online Culture
Business Permit and we may be further required to obtain Video and Audio Program Internet Dissemination License before providing
live video broadcasting services. If we provide such services without required permit or license, we may be subject to rectification
orders, fines, suspension of business, as well as confiscation of service equipment or proceeds under PRC laws. We provide live
video broadcasting service through Chengdu Li'ao Culture Communication Co., Ltd., or Chengdu Li'ao, has obtained the required
Online Culture Business Permit, but is still applying for the Video and Audio Program Internet Dissemination License as of the
date of this annual report. "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, 2017, we had 89
leased properties for our offices, logistics centers, dormitories, customer service center and physical stores. The lessors of
all these leased properties have been able to provide proper ownership certificates for the properties we lease or prove their
rights to sublease the properties to us or 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 to RMB10,000 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, 2017, we leased
an aggregate of approximately 103 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 March 31,
2018, options to purchase 908,989 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 10,794,484 Class A ordinary shares as of March 31, 2018. As of March 31, 2018, 704,460 restricted
share units are granted and outstanding 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, 2017, we owned 432 registered trademarks,
copyrights to 69 software programs developed by us relating to various aspects of our operations, and 64 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.
As required by Section 404 of the Sarbanes-Oxley
Act of 2002 and related rules promulgated by SEC, our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2017 using criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that our internal
control over financial reporting was effective as of December 31, 2017. In addition, our independent registered public accounting
firm attested the effectiveness of our internal control and reported that our internal control over financial reporting was effective
as of December 31, 2017.
However, if we fail to maintain effective
internal control over financial reporting in the future, our management may not be able to conclude that we have effective internal
control over financial reporting at a reasonable assurance level. In addition, the process of designing and implementing an effective
financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic
and regulatory environments and to expend significant resources to maintain a financial reporting system that satisfies our reporting
obligations. Our failure to discover and address any other material weaknesses or deficiencies may result in inaccuracies in our
financial statements or delay in the preparation of our financial statements. 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. Ineffective internal
control over financial reporting could also expose us to increased risk of fraud or misappropriations of corporate assets and subject
us to potential delisting from the stock exchange on which our ADSs are listed, regulatory investigations or civil or criminal
sanctions.
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 global economic recession and the
slowdown in the Chinese economy may adversely affect our business, results of operations and 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, the economic slowdown in the Eurozone in 2014 and uncertainties over the impact of Brexit. The growth
rate of the Chinese economy has slowed down since 2012 compared to the previous decade 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, Africa, Ukraine and Syria. There have also been concerns about
the tensions in the relationship among China and other countries, including surrounding Asian countries, which may potentially
have various economic effects, such as foreign investors closing down their business or withdrawing their investment in China
and thus existing the China market. 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 prolonged
slowdown in the global or Chinese economy may have a negative impact on 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, 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
in April 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 90.04% owned by Mr. Leo Ou Chen, our founder, chairman
and chief executive officer, 8.85% owned by Mr. Yusen Dai, and 1.11% 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, our founder and principal
beneficial owner of our company, who is PRC citizen, possesses and controls 83.7% of the voting power of our company as of March 31,
2018. 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 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 90.04%, 8.85% and 1.11% equity interest, respectively, in Reemake
Media. 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. Mr. Leo Ou Chen
is also a director and executive officer of our company. We rely on Mr. Chen 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. Although the PRC government maintained its expansionary monetary policy in 2016, there have been signs of continuing
economic slowdown in China. 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 MOFCOM completed the solicitation of comments on this
draft in February 2015, and subsequently produced a draft for further review in November 2017, which will be submitted to
the National People’s Congress for review in 2018. However, there are still substantial uncertainties 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, our founder and principal beneficial owner, who is a PRC citizen, possesses and controls 83.7% of the voting
power of our Company as of March 31, 2018. 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.
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. SAFE issued the Circular on Reforming and
Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective June 19,
2016. Compared to SAFE Circular 19, SAFE Circular 16 provides that discretionary foreign exchange settlement apply to foreign
exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding Renminbi obtained
from foreign exchange settlement may be used to extend loans to related parties or repaying the inter-company loans (including
advances by third parties). However, since SAFE Circular 16 came into effect recently, there exist substantial uncertainties with
respect to its interpretation and implementation 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, 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, 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, among other things, changes in China's political and economic conditions and foreign exchange
policies. 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, including depreciation in 2016. Since
October 1, 2016, the RMB has joined the International Monetary Fund (IMF)'s basket of currencies that make up the Special
Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016,
the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows from China. With
the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization,
the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB
will not appreciate or depreciate significantly in value against the U.S. dollar in the future. 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 the U.S. dollar equivalent of our earnings,
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 anti-monopoly
regulating authority 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 relevant government authorities 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, and we plan to renew such certificate in September 2018. Tianjin Cyril Information Technology Co., Ltd., or Tianjin
Cyril, one of our PRC subsidiaries, has renewed its HNTE certificate in October 2017, with a valid period of three years. 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 filing with 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 RMB50. 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 15% consumption
tax will be levied on high-end cosmetics without tax preference under the new pattern, while no consumption tax will be levied
on ordinary cosmetics 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 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.
Besides, pursuant to the Notice of Relevant
Matters on Implementation of New Cross-Border E-Commerce Retail Importation Supervision and Administration Requirements, or the
New Cross-Border E-Commerce Tax Implementation Notice, issued by the General Administration of Customs on May 24, 2016, the
implementation of certain provisions of the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation will be suspended
until the expiration of a transition period, which, according to an announcement by a spokesman of MOFCOM in November 2016
and confirmed by an official MOFCOM news release issued on March 17, 2017, or the MOFCOM News Release, will be over by the
end of 2017. According to the New Cross-Border E-Commerce Tax Implementation Notice, the requirement of presenting customs clearance
for bonded goods purchased online is suspended in ten cities, and the requirement of presenting first-time import license, registration
or filing for online purchased cosmetics imported for the first time, nutrition supplements and other special food products, is
suspended until the end of transition period. Further, according to the MOFCOM News Release, from January 1, 2018 the retail
goods imported on cross-border e-commerce platforms will be temporarily treated as personal items which are not subject to stricter
regulation and higher tax rates applicable to general imported goods in 15 cross-border e-commerce trial areas. On September 20,
2017, the State Council extended the transition period of cross-border e-commerce retail importation regulation policy by a year
to the end of 2018, by which time the import goods from cross-border e-commerce retail will be temporarily regulated as personal
items. See "Item 4. Information on the Company — B. Business Overview — Regulation —Regulations on Tax-Import
Tax" for more information about the pattern change. Substantial uncertainties exist with respect to regulation pattern change
regarding the import tax on consumer goods imported through cross-border e-commerce platforms, which may substantially increase
import tax imposed on buyers and thus raise the price of goods sold on our online platform and 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 fully 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 full 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 full 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 full 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
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$2.00 to US$5.01 per ADS in 2017
.
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. Under Cayman Islands law, a Cayman Islands company may pay a dividend
out of either profit or additional paid-in capital, provided that in no circumstances may a dividend be paid if this would result
in the company being unable to pay its debts as they fall due in the ordinary course of business. 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, 2018, Mr. Leo Ou Chen held 50,892,198 Class B ordinary shares, representing approximately 83.7% 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, 2018, Mr. Leo
Ou Chen owns of 33.9% of our outstanding ordinary shares on an as-converted basis, representing 83.7% of the total voting power
of our outstanding ordinary shares. As a result, he has 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.
He 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 he is 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
as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our
shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the
underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance
with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to
the depositary. Upon receipt of your voting instructions, the depositary will vote the Class A ordinary shares underlying your
ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying
Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date
for the general meeting. Under our second amended and restated memorandum and articles of association, the minimum notice period
required to be given by our company to our registered shareholders to convene a general meeting is ten calendar days. When a general
meeting is convened, you may not receive sufficient advance notice of the meeting to permit you to withdraw the Class A ordinary
shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to
cast your vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting.
Furthermore, under our second amended and restated memorandum and articles of association, for the purposes of determining those
shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or
fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date
may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares
prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your
instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We
cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the
Class A ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry
out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise
your right to direct how the Class A ordinary shares underlying your ADSs are voted and you may have no legal remedy if the Class
A ordinary shares underlying 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 mainly in China and substantially all of our assets are located
outside of the United States. In addition, our directors and executive officers reside within China, and most of the assets of
these persons are located outside of the U.S. 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 (2018 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.
There is a significant risk that we will be classified
as a passive foreign investment company for United States federal income tax purposes, which would 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" ("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. Because
we currently hold, and expect to continue to hold, a substantial amount of cash, cash equivalents, investments that produce passive
income, and other passive assets, and because the fair market value of our assets is determined in part by reference to the market
price of our ADSs and Class A ordinary shares, we believe that we were a PFIC for U.S. federal income tax purposes for our
taxable year ended December 31, 2017, and unless the market price of our ADSs and Class A ordinary shares substantially
increases or the proportion of our assets producing passive income substantially decreases, we will very likely be a PFIC for
our current taxable year ending December 31, 2018. 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, there can be no assurance that
we will not be a PFIC for the current or any future taxable year.
If we are 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. 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 fiscal
year ended December 31, 2015, we ceased to be an "emerging growth company" and 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.
In the past, we have been named as a defendant
in a putative shareholder class action lawsuit in the United States, which has been dismissed by the court, but we may be involved
in more class action lawsuits in the future. Such lawsuits could 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 July 2012, Jumei Hongkong Limited established a wholly-owned
PRC subsidiary, Chengdu Jumeiyoupin Science and Technology Co., Ltd., or Chengdu 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, or VIE arrangements. The VIE arrangements, except for the exclusive consulting and
services agreement, were subsequently amended and restated in January 2014. The VIE arrangements with Reemake Media and
its shareholders through Beijing Jumei were terminated in April 2017, and we entered into VIE arrangements with
Reemake Media and its shareholders through Chengdu Jumei on the same day, no material terms or conditions of these agreements
were changed or altered and our control over Reemake Media remains unchanged. Reemake Media holds an ICP license for our
operation as an internet information provider and operates our website.
In addition to Reemake Media and its subsidiaries,
we have certain other consolidated VIEs. For example, we have VIE arrangements with Chengdu Li'ao through Tianjin Cyril. We provide
live video broadcasting service though Chengdu Li'ao.
The VIE arrangements we enter into with
our VIEs and their respective shareholders 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, 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 have registered 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 and South Korea. The subsidiary in South Korea was subsequently closed
in September 2016 and had never carried out any material business operation or held any operating license that was material
to our company during its lifetime. The subsidiary in Suzhou currently conducts the business of selling our merchandise sales
products.
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 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, or the Convertible Loan. Pursuant to the original loan agreement, 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 certain
equity interests in BabyTree's Chinese operating entity if BabyTree had completed its proposed restructuring. On March 16,
2016, we and the relevant BabyTree parties entered into a supplemental agreement to the loan agreement to accelerate RMB186.0
million of the balance of the Convertible Loan. Pursuant to the supplemental agreement, we received RMB186.0 million of repayment
from BabyTree and the balance of the Convertible Loan was reduced to RMB372 million. On September 8, 2016, we and the relevant
BabyTree parties entered into capital increase agreements to convert the remaining balance of the Convertible Loan to capital
injections into two of BabyTree's Chinese operating entities. We currently hold minority equity interests in each of these two
BabyTree operating entities.
In August 2016, we entered into definitive
agreements for investing approximately RMB100 million in a venture capital fund set up to focus on investments in the culture
and entertainment industries in China. The venture capital fund is locally set up, managed and operated in China.
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 (the "proposal"). Our board of directors has formed a special committee
consisting of two independent and disinterested directors, Mr. Sean Shao (as chairman) and Mr. Adam J. Zhao, to consider
the "going-private" proposal. On November 27, 2017, the special committee of our board of directors received a letter
from the buyer group, stating that it would withdraw the proposal with immediate effect.
In May 2017, we entered into a purchase
agreement and acquired a majority interest in Shenzhen Jiedian Technology Co., Ltd., or Jiedian, for cash consideration of RMB300
million (US$46.1 million). Subsequently, we acquired additional equity interests in Jiedian from the non-controlling interest
holders of Jiedian for a total cash consideration of RMB92,610 (US$14,234). As a result, we held 82.07% equity interest of Jiedian
as of December 31, 2017. We have agreed on non-binding key terms with a potential investor on its investment in Jiedian.
On July 28, 2017, we entered into definitive
agreements to invest an aggregate of RMB84 million (US$12.91 million) in the production of a television drama series titled "Here
to Heart". The series is based on a book of the same title, and has an expected total budget of RMB210 million (US$32.3 million).
The film is still in production as of December 2017.
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 801 2nd Avenue, Suite 403,
New York, NY 10017.
OVERVIEW
We are China's leading online retailer
specializing in beauty products. We believe that our internet platform is a trusted destination for consumers to discover and
purchase branded beauty products, baby, children and maternity products, pre-packaged food, 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 16.0 million,
15.4 million and 15.1 million in 2015, 2016 and 2017, respectively. Our suppliers and third-party merchants include brand owners,
brand distributors, resellers and certain exclusive product suppliers. We worked with approximately 1,903 suppliers and third-party
merchants in 2017.
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 2017, approximately 95.8%
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, live broadcasting function
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. We have at times pursued strategic investments and expanded into new businesses. For
example, we entered into the portable power bank sharing business in 2017 with our strategic investment in Jiedian. However, our
revenues attributable to this business were immaterial in 2017.
Our net revenues were RMB7.3 billion in
2015, RMB6.3 billion in 2016 and RMB5.8 billion (US$894.0 million) in 2017. Our net income was RMB134.8 million in 2015 and RMB150.2
million in 2016. But we incurred net loss of RMB37.0 million (US$5.7 million) in 2017. Our net cash provided by operating activities
were RMB151.5 million in 2015 and RMB83.5 million in 2016. But net cash used in operating activities of RMB440.5 million (US$67.7
million) in 2017.
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:
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Curated Sales
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Online
Shopping Mall
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Flash Sales
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Products
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Branded beauty products, baby, children and maternity products, light luxury products and
health supplements
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Branded beauty products
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Branded apparel and other lifestyle products
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Duration
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Usually one to three days
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Long-term offerings
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Usually five days
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Breadth of Offering
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Selected, focusing on SKUs
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Wide
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Selected, focusing on brands
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|
Pricing
|
|
Attractive price
|
|
Attractive price
|
|
Deep discount
|
|
|
|
|
|
|
|
Our Role
|
|
·
Select,
curate and recommend a carefully selected collection of SKUs each day
·
A
ct
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, Thailand, the United States,
Australia 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
|
Pre-packaged foods
|
|
Snacks, cereals and instant noodles
|
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
|
Pre-packaged foods
|
|
Snacks and cereals
|
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 16.0 million in 2015, 15.4
million in 2016 and 15.1 million in 2017. The number of new customers was approximately 10.9 million in 2015, 9.0 million in 2016
and 8.9 million in 2017. Orders placed by our repeat customers accounted for approximately 92.0%, 91.2% and 90.8% of our total
orders in 2015, 2016 and 2017, 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, live broadcasting and internet video-based
advertising campaigns aimed at promoting our brand image. We have been expanding our live broadcasting function by engaging and
cooperating with celebrities and popular hosts. Our live broadcasting function has proven to be an effective means of promoting
our products to our key consumer demographics.
As part of our latest marketing efforts,
we have invested to produce a Television drama series titled "Here to Heart" staring popular actors and actresses in
China, depicting city life of white collars targeting to turning viewers into our customers. We also launched a mini program in
WeChat selling exclusive products in January 2017.
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
top video sharing websites in China, embed our brand imagine into popular internet shows, and conduct offline advertising by placing
television commercials.
OUR SHOPPING 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 95.8% of our GMV was generated from our mobile platform in
the fourth quarter of 2017.
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. We introduced our live broadcasting
function exclusively on our mobile platform. Our live broadcasting function allows our users to watch live shows performed by
our hosts, to interact with our live hosts through communication and virtual gifting tools, and to conveniently purchase products
promoted by our hosts. Our mobile live broadcasting function has become an important marketing channel. 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 launched a mini program
selling products in WeChat to expand channels. 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 one additional physical stores 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 online.
OUR SUPPLIERS AND THIRD-PARTY MERCHANTS
Our suppliers and third-party merchants
include brand owners, brand distributors, resellers and exclusive product suppliers. In 2015, 2016 and 2017, we worked with approximately
2,091, 2,244 and 1,903 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 169 members as of December 31,
2017. 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 now settle all payments upon receipt. 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 in Northern China, Chengdu
in Western China, Guangzhou in Southern China, 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 284 customer service representatives as of December 31, 2017. 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 7-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. For health supplements,
we generally do not grant product return. 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 RMB10 for our merchandized products
and as well as 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
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 special promotional campaigns in March and August each year
to celebrate our anniversary. These special promotional campaigns typically increase the net revenues in the relevant quarters.
Our 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. 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, 2017, we owned 432 registered trademarks, copyrights to 69 software programs developed by us relating
to various aspects of our operations, and 64 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
,
the entity which operates
Dangdang.com
, and Vipshop Holdings Limited, which operates
VIP.com
and
Lefeng.com
.
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 2017 and became effective on July
28, 2017, 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 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.
On January 12, 2017, the State Council
issued the Notice on Several Measures for Expansion of Opening-up Policy and Active Use of Foreign Capital, or the Notice No. 5,
which purport to relax restriction on foreign investment in sectors including service, manufacturing and mining. Specifically,
the Notice No. 5 proposes to gradually open up telecommunication, Internet, culture, education and transportation industries
to foreign investors. However, there are still substantial uncertainties with respect to the implementing rules and regulations
of Notice No. 5.
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 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. 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 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. Jumei Hongkong Holding Limited operates our
jumeiglobal.com
website and owns the domain name.
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 State Administration for Market Regulation, to engage in the food distribution business. 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 food and cosmetic products
was taken over by the State Administration for Market Regulation. 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.
Pursuant to the newly revised Food Safety
Law, State Food and Drug Administration issued the Administrative Measures for the Licensing of Food Business Operations, effective
October 2015, which superseded Administrative Measures on Food Distribution Permits. Under Administrative Measures for the
Licensing of Food Business Operations, Food Business Operation Permits replaces Food Distribution Permit and Hygiene Permit for
Nutritional Supplements as license for food distribution (including nutritional supplements) or food service businesses. The Food
Distribution Permits and Hygiene Permit for Nutritional Supplements obtained before October 1, 2015 remain effective until
expiration of the effective terms. Reemake Media has obtained the new Food Business Operation Permit.
Online Culture Business Permit /
Video and Audio Program Internet Dissemination License.
We have recently engaged in live video broadcasting business to
expand our marketing efforts. Pursuant to Administrative Measures for the Business Activities of Online Performances issued by
Ministry of Culture and Tourism on December 2, 2016, business entities that engage in the business activities of online performances
shall apply for the Online Culture Business Permit in accordance with the Interim Administrative Provisions on Internet Culture,
and the business scope of the such permit shall specifically cover online performances. Where a performance channel is opened
for a domestic performer, the online performance service provider shall make filings on the performance channel to the Ministry
of Culture and Tourism for recordation within ten days. If we operate online performance without such required permits or filings,
we may be subject to penalties including fines, suspension of business, as well as confiscation of proceeds under PRC law, which
could adversely affect our business, financial condition and results of operations.
Pursuant to the Notice on Relevant Matters
about Strengthening the Administration of Internet Live Video and Audio Program Service issued by SART on September 2, 2016,
live video and audio program broadcasting service provider shall apply for the Video and Audio Program Internet Dissemination
License before broadcasting video programs online. According to the Internet Video and Audio Program Service Catalogue issued
by SAPPRFT on March 10, 2017, "transmission of video and audio programs uploaded by personal users" is categorized
as Type III Internet Video and Audio Program Service and substantially uncertainties exist with respect to whether our live video
broadcasting service falls into this category of service. If our live video broadcasting services are deemed as Video and Audio
Program Service by SART and we provide such service without required license, we may be subject to rectification orders, fines,
suspension of business, as well as confiscation of service equipment under PRC law. Further, the SART and the MIIT jointly issued
the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56, effective
January 2008 and amended in August 2015. Circular 56 requires all online audio/video service providers applying
for the Video and Audio Program Internet Dissemination Licenses to be either wholly state-owned or state-controlled.
We provide live video broadcasting service
though Chengdu Li'ao, and have obtained the Online Culture Business Permit, but have not obtained the Video and Audio Program
Internet Dissemination License.
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 Production Permit issued by the State Drug Administration or its local counterparts,
(ii) a Special Cosmetics Approval Certificate issued by the State 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 (iii) a Non-special Cosmetics Filing made with the local counterparts of the State 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, according to Provisions on the Administration
of Recordation of Domestic Consignees, Import Records and Sales Records of Imported Cosmetics issued by General Administration
of Quality Supervision, Inspection and Quarantine on August 15, 2016, if we import cosmetics directly from foreign producers,
we are obligated to make filings to local Entry & Exit Inspection and Quarantine Bureau as a "domestic consignee"
and maintain an import and sales record of imported cosmetics. Besides, 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 for Market Regulation
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.
The Network Security Law of the People's
Republic of China, or the Network Security Law, promulgated by the Standing Committee of the National People's Congress, took
effect on June 1, 2017. The Network Security Law requires that a network operator, which includes, among others, internet
information services providers, implement technical and other necessary measures in accordance with the provisions of applicable
laws and regulations as well as the mandatory requirements of the national and industrial standards to safeguard the secure and
stable operation of the networks, effectively respond to the network security incidents, prevent illegal and criminal activities,
and maintain the integrity, confidentiality and availability of network data. The Network Security Law emphasizes that any individuals
and organizations that use networks is required to comply with the PRC Constitution and laws and abide by public order, and shall
not endanger network security or make use of networks to engage in unlawful activities, such as endangering national security,
economic and social order, and infringing the reputation, privacy, intellectual property rights and other legal rights and interests
of other people. The Network Security Law has reaffirmed the basic principles and requirements as specified in other existing
laws and regulations on personal information protections, such as the requirements on the collection, use, processing, storage
and disclosure of personal information, and internet service providers being required to take technical and other necessary measures
to ensure the security of the personal information they have collected and prevent the personal information from being divulged,
damaged or lost. Any violation of the provisions and requirements under the Network Security Law may subject the internet service
providers to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites
or even criminal liabilities.
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 of Mobile Application
On June 28, 2016, the Cyberspace Administration
of China promulgated the Regulations for the Administration of Mobile Internet Application Information Services, which came into
effect as of August 1, 2016, requiring mobile application operators who provide information services through mobile Internet
applications, to: (i) verify the identities of registered users through mobile phone numbers or other similar means; (ii)
establish and improve procedures for protection of user information; (iii) establish and improve procedures for information
content censorship; (iv) ensure that users are given adequate information concerning an mobile application, and choice of
whether to install an mobile application and use of its functions; (v) respect and protect intellectual property rights;
and (vi) keep records of users' log-in information for 60 days.
If a mobile application operator who provides
information services through mobile application violates these regulations, mobile application stores through which the mobile
application operator distributes its mobile application may issue warnings, suspend the release of its mobile application, or
terminate the sale of its mobile application, and/or report such violations to governmental authorities.
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.
The State Administration of Industry and
Commerce issued the Interim Measures for No-Reason Return of Online Purchased Commodities within Seven Days, effective March 15,
2017, further clarifying the scope of exceptions of consumers' no-reason return rights, return procedures, online marketplace
platform providers' responsibility to formulate seven-day no-reason return rules and related consumer protection systems,
and supervise the merchants for compliance with seven-day no-reason return rules.
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 State Intellectual Property Office 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, 2017, we owned 432 registered trademarks in different
applicable trademark categories and were in the process of applying to register 48 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 RMB0.5 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 69 computer software copyrights in China as of December 31,
2017.
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, renewed its HNTE certificate in October 2017 with
a valid period of three years.
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 filing with 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. On November 19, 2017 the State Council
further amended the Interim Regulation of the People's Republic of China on Value Added Tax to reflect the normalization of such
pilot program. VAT is applicable at a rate of 6% in lieu of business tax for the services rendered by our PRC subsidiaries and
consolidated VIEs.
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 RMB50. 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 RMB1,000 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. Normally, a 17% value-added tax will be levied on most
products sold on our platform and a 15% consumption tax will be levied on high-end cosmetics without tax preference under the
new pattern, while no consumption tax will be levied on ordinary cosmetics products. Under this new pattern, the quota of RMB1,000
for each purchase order is raised to RMB2,000 and a new quota of RMB20,000 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 Administration for Market Regulation 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.
Further, pursuant to the Notice of Relevant
Matters on Implementation of New Cross-Border E-Commerce Retail Importation Supervision and Administration Requirements, or the
New Cross-Border E-Commerce Tax Implementation Notice, issued by the General Administration of Customs on May 24, 2016, the
implementation of certain provisions of the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation will be suspended
until the expiration of a transition period, which, according to an announcement by a spokesman of MOFCOM in November 2016
and confirmed by an official MOFCOM news release issued on March 17, 2017, or the MOFCOM News Release, shall be over by the
end of 2017. According to the New Cross-Border E-Commerce Tax Implementation Notice, the requirement of presenting customs clearance
for bonded goods purchased online is suspended in ten cities, and the requirement of presenting first-time import license, registration
or filing for online purchased cosmetics imported for the first time, nutrition supplements and other special food products, is
suspended until the end of transition period. Further, according to the MOFCOM News Release, from January 1, 2018 the retail
goods imported on cross-border e-commerce platforms will be temporarily treated as personal items which are not subject to stricter
regulation and higher tax rates applicable to general imported goods in 15 cross-border e-commerce trial areas. On September 20,
2017, the State Council extended the transition period for cross-border e-commerce retail importation regulation policy by a year
to the end of 2018, by which time, the import goods from cross-border e-commerce retail will be temporarily regulated as personal
items.
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. SAFE
issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts,
or SAFE Circular 16, effective June 2016. Compared to SAFE Circular 19, SAFE Circular 16 provides that discretionary foreign
exchange settlement apply to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and
the corresponding Renminbi obtained from foreign exchange settlement are allowed to extend loans to related parties or repaying
the inter-company loans (including advances by third parties). However, since SAFE Circular 16 came into effect recently, there
exist substantial uncertainties with respect to its interpretation and implementation 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.
SAFE promulgated the Circular on Further
Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular 3,
effective January 26, 2017. SAFE Circular 3 sets out various measures, including the following:
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·
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relaxing the policy restriction
on foreign exchange inflow to further enhance trade and investment facilitation, including (a) expanding the scope of foreign
exchange settlement for domestic foreign exchange loans, (b) allowing the capital repatriation for offshore financing against
domestic guarantee, (c) facilitating the centralized management of foreign exchange funds of multinational companies, and
(d) allowing the offshore institutions within pilot free trade zones to settle foreign exchange in domestic foreign exchange
accounts;
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·
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tightening genuineness and
compliance verification of cross-border transactions and cross-border capital flow, including (a) improving the statistics
of current account foreign currency earnings deposited offshore, (b) requiring banks to verify board resolutions, tax filing
form, and audited financial statements before wiring foreign invested enterprises' foreign exchange distribution above US$50,000,
(c) strengthening genuineness and compliance verification of foreign direct investments and (d) implementing full scale
management of offshore loans in Renminbi and foreign currencies by requiring the total amount of offshore loans be no higher than
30% of the onshore lender's equity shown on its audited financial statements of the last year.
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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.
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Organizational Structure
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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:
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(1)
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Leo Ou Chen, Yusen Dai and
Hui Liu hold 90.04%, 8.85% and 1.11% equity interests in Reemake Media, respectively.
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(2)
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Leo Ou Chen and Yusen Dai
hold 80% and 20% equity interest in Tianjin Yingxun Technology Co., Ltd., respectively.
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(3)
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Leo Ou Chen holds 100% equity
interests in Chengdu Li’ao Culture Communication Co., Ltd.
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(4)
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Leo Ou Chen and Yusen Dai
hold 80% and 20% equity interests in Jumei Film Media Wuxi Co., Ltd., respectively.
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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 VIE arrangements with Reemake Media
and its shareholders through Beijing Jumei were terminated in April 2017, and we entered into VIE arrangements with Reemake
Media and its shareholders through Chengdu Jumei on the same day. No material terms or conditions of these agreements were changed
or altered and our control over Reemake Media remains unchanged.
The following is a summary of the currently
effective contractual arrangements by and among our wholly-owned subsidiary, Chengdu Jumei, our VIE, Reemake Media, and the shareholders
of Reemake Media.
Shareholders' Voting Rights Agreement
.
On April 20, 2017, the shareholders of Reemake Media entered into a shareholders' voting rights agreement with Chengdu Jumei.
Pursuant to the shareholders' voting rights agreement, each of the shareholders of Reemake Media appointed Chengdu 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 20 years from the date of the agreement and shall be automatically extended for a period of one year
unless Chengdu Jumei selects to terminate the agreement. The agreement can be extended for unlimited times.
Equity Pledge Agreements
.
On April 20, 2017, Chengdu Jumei, Reemake Media and the shareholders of Reemake Media entered into an equity pledge agreements.
Pursuant to the 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, Chengdu 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 equity pledge agreement, 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 they will take all necessary measures to prevent Chengdu Jumei's rights
relating to the equity pledges from being prejudiced by the legal actions of the shareholders of Reemake Media. During the term
of the equity pledge agreements, Chengdu 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 the
agreement 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.
Exclusive Purchase Option Agreement.
On April 20, 2017, Chengdu Jumei, Reemake Media and the shareholders of Reemake Media entered into an exclusive purchase
option agreement. Pursuant to the exclusive purchase option agreement, each of the shareholders of Reemake Media irrevocably grants
Chengdu 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 lower
of : (1) the amount shareholders contributed to Reemake Media as registered capital for the equity interests to be purchased,
or (2) the lowest price permitted by applicable PRC law. The purchase consideration shall be refunded by the nominee shareholders
to Chengdu Jumei. In addition, Reemake Media grants Chengdu 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 Chengdu Jumei, the shareholders of Reemake Media may not,
and shall procure Reemake Media not to, transfer or otherwise dispose of their equity interests in Reemake Media or create or
allow any encumbrance on the equity interests, 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 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 Chengdu Jumei or its designated
representatives.
Exclusive Consulting and Services
Agreement
. Under the exclusive consulting and services agreement between Chengdu Jumei and Reemake Media, dated April 20,
2017, Chengdu Jumei has the exclusive right to provide to Reemake Media consulting and services related to all technologies needed
for Reemake Media's business. Chengdu Jumei owns the exclusive intellectual property rights created as a result of the performance
of this agreement. Reemake Media agrees to pay Chengdu Jumei an annual service fee, at an amount equal to 95% of Reemake Media's
annual revenue or an amount otherwise agreed by Chengdu Jumei and Reemake Media. In addition, Chengdu 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 Chengdu 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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·
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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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·
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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.
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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 12 thousand square meters of office, physical stores and customer service center space in
Beijing. As of December 31, 2017, we also have leased an aggregate of approximately 91 thousand square meters in office,
logistics center and/or customer service center space in Tianjin, Zhengzhou, Chengdu, Guangzhou, Suzhou 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, 2017 is shown below:
Location
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Space
(in thousands of
square meters)
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Use
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Lease Term (years)
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Beijing
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12
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Office, physical stores and customer service center
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One to five
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Tianjin
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29
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|
Logistics center and office
|
|
One to two
|
Zhengzhou
|
|
29
|
|
Office and logistics center
|
|
One to three
|
Chengdu
|
|
17
|
|
Office, logistics center and customer service center
|
|
One to four
|
Guangzhou
|
|
12
|
|
Office, Logistics center
|
|
One to three
|
Shenzhen
|
|
1
|
|
Office, Logistics center
|
|
One
|
Hong Kong
|
|
1
|
|
Logistics center
|
|
Two
|
We typically enter into leasing agreements
that are renewable every one to five years. We believe our existing facilities are sufficient for our near term needs.
On January 29, 2016, we acquired land
use rights with RMB84.1 million for 169,456 square meters of warehouse land in Suzhou, on which we constructed a self-owned logistics
center. We have been using this new logistics center in Suzhou since the third quarter of 2017.
|
Item 5.
|
Operating and Financial
Review and Prospects
|
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, baby, children and maternity products, light luxury products, pre-packaged food and health supplements 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, pre-packaged
food 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 RMB7.3 billion in
2015, RMB6.3 billion in 2016 and RMB5.8 billion (US$894.0 million) in 2017. Our net income was RMB134.8 million in 2015 and RMB150.2
million in 2016. But we incurred net loss of RMB37.0 million (US$5.7 million) in 2017. Our net cash provided by operating activities
were RMB151.5 million in 2015 and RMB83.5 million in 2016. But our net cash used in operating activities were RMB440.5 million
(US$67.7 million) in 2017.
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, baby, children and maternity products, light luxury products, pre-packaged food and health supplements 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 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,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
7,113,278
|
|
|
|
96.9
|
|
|
|
6,174,721
|
|
|
|
98.4
|
|
|
|
5,634,156
|
|
|
|
865,954
|
|
|
|
96.9
|
|
Marketplace and other services
|
|
|
229,681
|
|
|
|
3.1
|
|
|
|
102,462
|
|
|
|
1.6
|
|
|
|
182,676
|
|
|
|
28,077
|
|
|
|
3.1
|
|
Total net revenues
|
|
|
7,342,959
|
|
|
|
100.0
|
|
|
|
6,277,183
|
|
|
|
100.0
|
|
|
|
5,816,832
|
|
|
|
894,031
|
|
|
|
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 16.0 million in
2015, 15.4 million in 2016 and 15.1 million in 2017.
|
|
·
|
Total number of orders.
The total numbers of orders were approximately 73.2 million in 2015, 61.5 million in 2016 and 63.5 million in 2017.
|
|
·
|
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 RMB8.9 billion in 2015, RMB7.3 billion
in 2016 and RMB6.6 billion (US$1.0 billion) in 2017.
|
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 special promotional campaigns in March and August each year
to celebrate our anniversary. These special promotional campaigns typically increase our net revenues in the relevant quarters.
Our 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. Our future operating results will be affected
by the timing of promotional or marketing campaigns that we may launch from time to time.
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.
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 RMB599.7 million, RMB365.9 million and RMB319.3 million (US$49.1 million) in 2015, 2016
and 2017, respectively. The decrease of our advertising expenses are mainly due to a decrease in use of live streaming promotional
videos and a decrease in traditional advertising.
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. The decrease was mainly due to a decrease of server rental which
were replaced by self-owned servers in order to build up new network infrastructure to enhance efficiency and scalability.
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. The decrease was primarily attributed to greater efficiency in general and
administrative efforts.
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. HNTEs enjoy a preferential enterprise income tax rate of 15% upon filing with relevant
tax authorities. Reemake Media, our consolidated VIE, obtained its HNTE certificate in September 2015 with a valid period
of three years, and we plan to renew such certificate in 2018. Tianjin Cyril Information Technology Co., Ltd., or Tianjin
Cyril, one of our PRC Subsidiaries, has renewed its HNTE certificate in October 2017 with a valid period of three years.
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 filing with 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 sales 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 required by Section 404 of the Sarbanes-Oxley
Act of 2002 and related rules promulgated by SEC, our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2017 using criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that our
internal control over financial reporting was effective as of December 31, 2017. In addition, our independent registered public
accounting firm attested the effectiveness of our internal control and reported that our internal control over financial reporting
was effective as of December 31, 2017.
Our management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Shenzhen
Jiedian Technology Co., Ltd., of which we acquired control in 2017. As of December 31, 2017, Shenzhen Jiedian Technology Co.,
Ltd. constituted 9% and 6% of total and net assets, respectively, as of December 31, 2017 and contributed 1% and 340% of revenues
and net loss, respectively, for the year then ended.
However, if we fail to maintain effective
internal control over financial reporting in the future, our management may not be able to conclude that we have effective internal
control over financial reporting at a reasonable assurance level. In addition, the process of designing and implementing an effective
financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the
economic and regulatory environments and to expend significant resources to maintain a financial reporting system that satisfies
our reporting obligations. Our failure to discover and address any other material weaknesses or deficiencies may result in inaccuracies
in our financial statements or delay in the preparation of our financial statements. 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. Ineffective
internal control over financial reporting could also expose us to increased risk of fraud or misappropriations of corporate assets
and subject us to potential delisting from the stock exchange on which our ADSs are listed, regulatory investigations or civil
or criminal sanctions. 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.
Segment Reporting
Historically we had only one single reportable
segment because the CODM formerly relied on the consolidated results of operations when making decisions about allocating resources
and assessing performance. With the development of the new business initiatives, the CODM started to separately evaluate performance
and allocate resources by different business segments, thus we changed our reportable segments in 2017. Our principal operations
are currently organized into two business segments, the E-commerce segment and the New businesses segment, which are defined based
on the products and services provided. E-commerce represents e-commerce business. New businesses mainly includes film production,
Jiedian and other technology initiatives business. Accordingly, we updated the presentation of its reportable segments in prior
periods to conform to the current year’s presentation in accordance with ASC 280 Segment Reporting.
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.
We acquired Jiedian, one of the leading
players in the portable power bank sharing business. Jiedian facilitates master power charging boxes in highly frequented points
of interest, such as restaurants, bars, gyms, airports, train stations, shopping malls, beauty salons, hospitals and parks. Each
charging box contains multiple portable power banks. Revenue from the provision of portable power bank charging services is generally
recognized upon completion of the services.
Loans receivable, net
Our loans receivable consist of a loan
receivable from a venture capital fund with annual interest rate of from 4.35% and up to 10% based on different conditions.
Loan receivable is carried at amortized
cost. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable.
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. Write downs
are recorded in cost of revenues in the consolidated statements of comprehensive income.
Long-term investments
Long-term investments are comprised of
investments in privately-held companies and limited partnerships, which are accounted for under the cost method or equity method.
Cost method investments
In accordance with ASC 325-20, "Investments-Other:
Cost Method Investments", we account for our investment using the cost method of accounting when we do not have significant
influence over the investments' business and operations. We carry such investment at cost and recognize as income any dividends
received from a distribution of investee's earnings. We review the investment for impairment whenever events or changes in circumstances
indicate that the carrying value may no longer be recoverable.
Equity method investments
In accordance with ASC 323 "Investment-Equity
Method and Joint Ventures", we apply the equity method of accounting to equity investments, in common stock or in-substance
common stock, over which we have significant influence but do not own a majority equity interest or otherwise control. Significant
influence is generally considered to exist when we have an ownership interest in the voting stock of the investee between 20%
and 50%, and other factors, such as representation in the investee's board of directors, voting rights and the impact of commercial
arrangements, are considered in determining whether the equity method of accounting is appropriate. For the investment in limited
partnerships, where we hold less than a 20% equity or voting interest, our influence over the partnership operating and financial
policies is more than minor, and thus is subject to equity method as well.
Under the equity method of accounting,
the affiliated company's accounts are not reflected within our consolidated balance sheets and statements of comprehensive income;
however, our share of the earnings or losses of the affiliated company is reflected in the caption "share income from equity
method investments" in the consolidated statements of comprehensive income. An impairment charge is recorded if the carrying
amount of the investment exceeds its fair value and this condition is determined to be other-than temporary.
Investment security
We invest in marketable equity security
to meet business objectives. In accordance with ASC 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.
Fair value
Financial assets
and liabilities primarily consist of cash and cash equivalents, short-term investments, accounts receivable, net, loans receivable,
net, and certain other current assets, accounts payable, certain other current liabilities, long-term investments and investment
security.
Fair value is an
exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a liability.
The
carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, loans receivable, net, certain other
current assets, accounts payable, certain other current liabilities, approximate their fair value due to the short term maturities
of these instruments.
We
adopted ASC 820,
Fair Value Measurements and Disclosure
. ASC 820-10 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. Although the adoption of ASC 820 did not impact our financial
condition, results of operations or cash flows, ASC 820 requires additional disclosures to be provided on fair value measurement.
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.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the identifiable assets and liabilities acquired in a business acquisition.
Goodwill is not depreciated or amortized
but is tested for impairment on an annual basis as of December 31, and in between annual tests when an event occurs or circumstances
change that could indicate that the asset might be impaired. Commencing in September 2011, in accordance with the FASB revised
guidance on “Testing of Goodwill for Impairment,” a company first has the option to assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the
company decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting
unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required.
The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including
goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairment loss equal to the difference between
the implied fair value of the reporting unit’s goodwill and the carrying amount of goodwill will be recorded. Application
of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting
unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate
discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination
of fair value for each reporting unit. Goodwill was allocated to one and two reporting units as of December 31, 2016 and 2017,
respectively
Business Combinations
We account for our business combinations
using the purchase method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). The purchase
method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable
assets and liabilities we acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured
as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments
issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly
attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired
or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling
interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date
fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the
acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognized directly in earnings. The determination and allocation of fair values to the identifiable
assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies
requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal
values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine
the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s
current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle
and forecasted cash flows over that period.
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.
Share-Based Compensation
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. We adopted Accounting Standard
Update (“ASU”) ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting on January 1, 2017 and elected to account for forfeitures as they occur. There was no cumulative-effect adjustment
to retained earnings given that the historical estimated forfeiture rates approximated actual forfeiture rates.
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 March 31,
2018, options to purchase 908,989 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 10,794,484 Class A ordinary
shares as of March 31, 2018. As of March 31, 2018, 704,460 restricted share units are granted and outstanding under
the 2014 plan.
A summary of our share option activities
through March 31, 2018 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
|
|
August 1, 2017
|
|
|
500,000
|
|
|
|
2.21
|
|
|
|
1.25
|
|
|
|
2.25
|
|
|
|
0.04
|
|
August 1, 2017
|
|
|
100,000
|
|
|
|
2.23
|
|
|
|
1.25
|
|
|
|
2.25
|
|
|
|
0.02
|
|
December 1, 2017
|
|
|
500,000
|
|
|
|
2.50
|
|
|
|
1.77
|
|
|
|
2.97
|
|
|
|
0.47
|
|
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 December 1, 2017 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
|
|
|
August
1,
2017
|
|
|
December
1,
2017
|
|
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
|
%
|
|
|
2.33
|
%
|
|
|
2.41
|
%
|
Exercise multiples
(2)
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2
|
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.5
|
|
|
|
2.5
|
|
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
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility (%)
(4)
|
|
|
54
|
%
|
|
|
54
|
%
|
|
|
47
|
%
|
|
|
45
|
%
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
46
|
%
|
|
|
63
|
%
|
|
|
65
|
%
|
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
|
|
|
|
2.25
|
|
|
|
2.97
|
|
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.
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 over a vesting term of generally four years and starting January 1, 2017, accounts for forfeitures as they
occur.
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.
On August 1, 2016, we granted 100,000
restricted shares of our company to our employees, subject to four-year service vesting schedule.
On January 1, 2017, we granted 125,000
restricted shares of our company to our employees, subject to four-year service vesting schedule.
On March 31, 2017, we granted 250,000 restricted
shares of our company to our employees, subject to four-year service vesting schedule.
On May 8, 2017, we granted 100,000 restricted
shares of our company to our employees, subject to four-year service vesting schedule.
On August 1, 2017, we granted 600,000 share
options (at exercise price from US$2.21 to US$2.23 per share) to our employees, subject to four-year service vesting schedule.
On December 1, 2017, we granted 500,000
share options (at an exercise price of US$2.50 per share) and 100,000 restricted shares of our company to our employees, subject
to four-year service vesting schedule.
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. The Group
adopted ASU 2015-17, Income Taxes-Balance Sheet Classification of Deferred Taxes on January 1, 2017, which classifies all deferred
tax assets and liabilities as noncurrent. There was no impact to the prior period balance sheet as all deferred tax assets were
noncurrent in nature as of December 31, 2016.
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, 2016 and 2017, 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. On
April 20, 2017, the Contractual Agreements with Reemake Media and its shareholders through Beijing Jumei were terminated, and
simultaneously Chengdu Jumei entered into Contractual Agreements with Reemake Media and its shareholders. No material terms or
conditions of these agreements were changed or altered and there was no impact to our effective control over Reemake Media.
As a result of these contractual arrangements,
we maintain the ability to exercise effective control over our consolidated VIEs and VIEs’ 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 VIEs' 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 VIEs' 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
A list of recently issued accounting pronouncements
that are relevant to us is included in note 2 to our consolidated financial statements included elsewhere in this annual report.
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,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for share, per share and per ADS data)
|
|
Summary Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
7,113,278
|
|
|
|
96.9
|
|
|
|
6,174,721
|
|
|
|
98.4
|
|
|
|
5,634,156
|
|
|
|
865,954
|
|
|
|
96.9
|
|
Marketplace and other
services
|
|
|
229,681
|
|
|
|
3.1
|
|
|
|
102,462
|
|
|
|
1.6
|
|
|
|
182,676
|
|
|
|
28,077
|
|
|
|
3.1
|
|
Total net revenues
|
|
|
7,342,959
|
|
|
|
100.0
|
|
|
|
6,277,183
|
|
|
|
100.0
|
|
|
|
5,816,832
|
|
|
|
894,031
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
(5,225,669
|
)
|
|
|
(71.2
|
)
|
|
|
(4,524,897
|
)
|
|
|
(72.1
|
)
|
|
|
(4,527,284
|
)
|
|
|
(695,831
|
)
|
|
|
77.8
|
|
Gross profit
|
|
|
2,117,290
|
|
|
|
28.8
|
|
|
|
1,752,286
|
|
|
|
27.9
|
|
|
|
1,289,548
|
|
|
|
198,200
|
|
|
|
22.2
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(948,954
|
)
|
|
|
(12.9
|
)
|
|
|
(769,651
|
)
|
|
|
(12.3
|
)
|
|
|
(580,792
|
)
|
|
|
(89,266
|
)
|
|
|
(10.0
|
)
|
Marketing expenses
|
|
|
(655,314
|
)
|
|
|
(8.9
|
)
|
|
|
(427,827
|
)
|
|
|
(6.8
|
)
|
|
|
(401,756
|
)
|
|
|
(61,749
|
)
|
|
|
(6.9
|
)
|
Technology and content expenses
|
|
|
(169,694
|
)
|
|
|
(2.3
|
)
|
|
|
(216,310
|
)
|
|
|
(3.4
|
)
|
|
|
(200,342
|
)
|
|
|
(30,792
|
)
|
|
|
(3.4
|
)
|
General and administrative expenses
|
|
|
(191,918
|
)
|
|
|
(2.6
|
)
|
|
|
(206,243
|
)
|
|
|
(3.3
|
)
|
|
|
(144,883
|
)
|
|
|
(22,268
|
)
|
|
|
(2.5
|
)
|
Total operating expenses
|
|
|
(1,965,880
|
)
|
|
|
(26.7
|
)
|
|
|
(1,620,031
|
)
|
|
|
(25.8
|
)
|
|
|
(1,327,773
|
)
|
|
|
(204,075
|
)
|
|
|
(22.8
|
)
|
Income from operations
|
|
|
151,410
|
|
|
|
2.1
|
|
|
|
132,255
|
|
|
|
2.1
|
|
|
|
(38,225
|
)
|
|
|
(5,875
|
)
|
|
|
(0.7
|
)
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
114,123
|
|
|
|
1.6
|
|
|
|
85,597
|
|
|
|
1.4
|
|
|
|
65,515
|
|
|
|
10,069
|
|
|
|
1.1
|
|
Others, net
|
|
|
(59,289
|
)
|
|
|
(0.8
|
)
|
|
|
76,271
|
|
|
|
1.2
|
|
|
|
(45,393
|
)
|
|
|
(6,977
|
)
|
|
|
(0.8
|
)
|
Share of income from equity method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
2,452
|
|
|
|
0.0
|
|
|
|
4,903
|
|
|
|
754
|
|
|
|
0.1
|
|
Impairment of investment security, net of nil tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(114,789
|
)
|
|
|
(1.8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
—
|
|
Income before tax
|
|
|
206,244
|
|
|
|
2.9
|
|
|
|
181,786
|
|
|
|
2.9
|
|
|
|
(13,200
|
)
|
|
|
(2,029
|
)
|
|
|
(0.2
|
)
|
Income tax expenses
|
|
|
(71,403
|
)
|
|
|
(1.0
|
)
|
|
|
(31,604
|
)
|
|
|
(0.5
|
)
|
|
|
(23,778
|
)
|
|
|
(3,655
|
)
|
|
|
(0.4
|
)
|
Net income
|
|
|
134,841
|
|
|
|
1.9
|
|
|
|
150,182
|
|
|
|
2.4
|
|
|
|
(36,978
|
)
|
|
|
(5,684
|
)
|
|
|
(0.6
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(11,925
|
)
|
|
|
(0.2
|
)
|
|
|
(7,958
|
)
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
—
|
|
Net income attributable to Jumei's ordinary shareholders
|
|
|
122,916
|
|
|
|
1.7
|
|
|
|
142,224
|
|
|
|
2.3
|
|
|
|
(36,978
|
)
|
|
|
(5,684
|
)
|
|
|
(0.6
|
)
|
Year Ended December 31, 2017 Compared to Year Ended
December 31, 2016
Net revenues
. Our net revenues decreased
by 7.3% from RMB6.3 billion in 2016 to RMB5.8 billion (US$894.0 million) in 2017, which included RMB5.6 billion (US$866.0 million)
generated from merchandise sales and RMB182.7 million (US$28.1 million) generated from marketplace services. The decrease of net
revenue was primarily attributable to the decrease in active customers. The decrease in revenue from domestic merchandise was
a result of decline in sales volume, mainly attributable to the fierce competition in China’s online sales market. The number
of our active customers decreased from approximately 15.4 million in 2016 to approximately 15.1 million in 2017. The number of
our total orders increased from approximately 61.5 million in 2016 to approximately 63.5 million in 2017.
Cost of revenues
. Our cost of revenues
generally remain the same of RMB4.5 billion in 2016 as RMB4.5 billion (US$695.8 million) in 2017, which was mainly due to the
increase in sales tax under the regulation of import tax on consumer goods imported through cross-border e-commerce platforms.
Gross profit
. Our gross profit decreased
by 26.4% from RMB1.8 billion in 2016 to RMB1.3 billion (US$198.2 million) in 2017, and our gross profit as a percentage of net
revenues decreased from 27.9% to 22.2% during the same period. Our gross profit as a percentage of our net GMV decreased from
24.0% in 2016 to 19.5% in 2017. The lower gross profit margin in 2017 is mainly attributed to the change of PRC regulation of
import tax on consumer goods imported through cross-border e-commerce platforms.
Operating expenses
. Our operating
expenses decreased from RMB1.6 billion in 2016 to RMB1.3 billion (US$204.1 million) in 2017. Our operating expenses as a percentage
of our net GMV decreased from 22.2% in 2016 to 20.1% in 2017.
|
·
|
Fulfillment expenses
.
Our fulfillment expenses decreased from RMB769.7 million in 2016 to RMB580.8 million (US$89.3 million) in 2017. The decrease was
primarily attributable to the decrease in the number of orders fulfilled. The number of orders that we fulfilled decreased from
approximately 56.5 million in 2016 to approximately 52.8 million in 2017. Our fulfillment expenses as a percentage of our net
GMV remained stable at 8.8% from 2016 to 2017. In particular, expenses related to wrap pages and revolving materials decreased
mainly due to the decline in sales volume of baby and maternity products, which consume relatively higher level of wrap page expenses.
|
In 2017, we offer free shipping for two items or
above, or RMB299 or above order size. Although our shipping policies do not necessarily pass the full cost of shipping on to our
customers, these policies improve customers' shopping experience and promote customer loyalty, which in turn help us acquire and
retain customers. Shipping expenses amounted to RMB311.4 million in 2016 and RMB242.4 million (US$37.3 million) in 2017, primarily
because of a decrease in fulfilled orders generated by
Jumei Global
.
|
·
|
Marketing expenses
.
Our marketing expenses decreased from RMB427.8 million in 2016 to RMB401.8 million (US$61.7 million) in 2017, which was primarily
attributable to a decrease in use of live streaming promotional videos and a decrease in traditional advertising. Our marketing
expenses as a percentage of our net GMV slightly increased from 5.9% in 2016 to 6.1% in 2017.
|
|
·
|
Technology and content
expenses
. Our technology and content expenses decreased from RMB216.3 million in 2016 to RMB200.3 million (US$30.8 million)
in 2017. The decrease in our technology and content expenses was primarily attributable to the decrease of RMB26.5 million (US$4.1
million) in server rental and bandwidth fees, and the decrease of RMB2.6 million (US$0.4 million) in rental expenses. Our technology
and content expenses as a percentage of our net GMV remained at 3.0% in 2017 compared with 2016.
|
|
·
|
General and administrative
expenses
. Our general and administrative expenses decreased from RMB206.2 million in 2016 to RMB144.9 million (US$22.3 million)
in 2017, primarily due to the decrease of RMB30.5 million (US$4.7 million) in bad expenses and the decrease of RMB11.0 million
(US$1.7 million) in office expenses on general and administrative personnel. Our general and administrative personnel decreased
from 467 in 2016 to 412 in 2017. Our general and administrative expenses as a percentage of our net GMV increased from 2.8% in
2016 to 2.2% in 2017.
|
Interest income
. Our interest income
decreased from RMB85.6 million in 2016 to RMB65.5 million (US$10.1 million) in 2017 primarily due to reduced purchase of wealth
management products.
Other income/expense.
We had net
other expense of RMB45.4 million (US$7.0 million) in 2017 as compared to RMB76.3 million in 2016 of net other income we incurred
in 2016, primarily due to an exchange loss of RMB87.8 million (US$13.5 million) in 2017 and ADS reimbursement of RMB10.8 million
(US$1.7 million) recognized in 2017.
Income tax expense
. Our income tax
expense decreased RMB31.6 million in 2016 to RMB23.8 million (US$3.7 million) in 2017 primarily due to a decrease in our taxable
income. Our effective tax rate decreased from 17.4% in 2016 to negative 180.1% in 2017 due to the reverse of valuation allowance
accrued in 2017 as a result of that the entities previously projected as loss turned out to be gain in 2017.
Net income
. As a result of the foregoing,
our net income decreased from RMB150.2 million in 2016 to net losses of RMB37.0 million (US$5.7 million) in 2017.
Year Ended December 31, 2016 Compared to Year Ended
December 31, 2015
Net revenues
. Our net revenues decreased
by 14.5% from RMB7.3 billion in 2015 to RMB6.3 billion in 2016, which included RMB6.2 billion generated from merchandise sales
and RMB102.5 million generated from marketplace services. The decrease of net revenue was primarily attributable to the decrease
in active customers and total orders, especially such decrease as contributed by
Jumei Global
. The decrease in revenue
from
Jumei Global
was a result of decline in sales volume, mainly attributable to the change of PRC regulation of import
tax on consumer goods imported through cross-border e-commerce platforms. The number of our active customers decreased from approximately
16.0 million in 2015 to approximately 15.4 million in 2016. The number of our total orders decreased from approximately 73.2 million
in 2015 to approximately 61.5 million in 2016.
Cost of revenues
. Our cost of revenues
decreased from RMB5.2 billion in 2015 to RMB4.5 billion in 2016, which was generally in line with the decrease in merchandise
sales for the same period.
Gross profit
. Our gross profit decreased
by 17.2% from RMB2.1 billion in 2015 to RMB1.8 billion in 2016, and our gross profit as a percentage of net revenues decreased
from 28.8% to 27.9% during the same period. Our gross profit as a percentage of our net GMV increased from 23.7% in 2015 to 24.0%
in 2016. The lower gross profit margin in 2016 is mainly attributed to the change of PRC regulation of import tax on consumer
goods imported through cross-border e-commerce platforms.
Operating expenses
. Our operating
expenses decreased from RMB2.0 billion in 2015 to RMB1.6 billion in 2016. Our operating expenses as a percentage of our net GMV
increased from 22.0% in 2015 to 22.2% in 2016.
|
·
|
Fulfillment expenses
.
Our fulfillment expenses decreased from RMB949.0 million in 2015 to RMB769.7 million in 2016. The decrease was primarily attributable
to the decrease in the number of orders fulfilled. The number of orders that we fulfilled decreased from approximately 64.2 million
in 2015 to 56.5 million in 2016. Our fulfillment expenses as a percentage of our net GMV remained stable at 10.6% from 2015 to
2016. In particular, expenses related to wrap pages and revolving materials decreased mainly due to the decline in sales
volume of baby and maternity products, which consume relatively higher level of wrap page expenses.
|
In 2016, we offer free shipping for two items or
above, or RMB299 or above order size. Although our shipping policies do not necessarily pass the full cost of shipping on to our
customers, these policies improve customers' shopping experience and promote customer loyalty, which in turn help us acquire and
retain customers. Shipping expenses amounted to RMB338.1 million in 2015 and RMB311.4 million in 2016, primarily because a decrease
in fulfilled orders generated by
Jumei Global
.
|
·
|
Marketing expenses
.
Our marketing expenses decreased from RMB655.3 million in 2015 to RMB427.8 million in 2016, which was primarily attributable to
less spending on traditional marketing campaigns, partially offset by the increase of live broadcasting promotional videos as
our major marketing efforts. Our marketing expenses as a percentage of our net GMV decreased from 7.3% in 2015 to 5.9% in 2016.
|
|
·
|
Technology and content
expenses
. Our technology and content expenses increased from RMB169.7 million in 2015 to RMB216.3 million in 2016. The increase
in our technology and content expenses was primarily attributable to the increase of RMB12.8 million in server rental and bandwidth
fees, and the increase of RMB27.7 million in staff costs on technology and content personnel. Our technology and content personnel
increased from 674 in 2015 to 726 in 2016. Our technology and content expenses as a percentage of our net GMV increased from 1.9%
in 2015 to 3.0% in 2016.
|
|
·
|
General and administrative
expenses
. Our general and administrative expenses increased from RMB191.9 million in 2015 to RMB206.2 million in 2016, primarily
due to the increase of RMB5.1 million in staff costs on general and administrative personnel and the increase of RMB11.0 million
in professional consulting fees. Our general and administrative personnel increased from 403 in 2015 to 467 in 2016. Our general
and administrative expenses as a percentage of our net GMV increased from 2.2% in 2015 to 2.8% in 2016.
|
Interest income
. Our interest income
decreased from RMB114.1 million in 2015 to RMB85.6 million in 2016 primarily due to reduced purchase of wealth management products.
Other income/expense, net.
We had
net other income of RMB76.3 million in 2016, as compared to RMB59.3 million of net other expense we incurred in 2015, primarily
due to an exchange gain of RMB28.0 million in 2016 and ADS reimbursement of RMB10.6 million recognized in 2016.
Income tax expense
. Our income tax
expense decreased from RMB71.4 million in 2015 to RMB31.6 million in 2016 primarily due to a decrease in our taxable income. Our
effective tax rate decreased from 34.5% in 2015 to 17.4% in 2016 due to the reverse of valuation allowance accrued in 2015 as
a result of that the entities previously projected as loss turned out to be gain in 2016.
Net income
. As a result of the foregoing,
our net income increased from RMB134.8 million in 2015 to RMB150.2 million in 2016.
|
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,
2017, our principal sources of liquidity was RMB2.4 billion (US$364.8 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 next 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, 2017, our subsidiaries
in China held cash and cash equivalents and short-term investments in the amount of RMB2.1 billion (US$315.7 million), and our
consolidated VIEs and their subsidiaries held cash and cash equivalents and short-term investments in the amount of RMB9.5 million
(US$1.5 million), which includes cash reserved to settle payables to our subsidiary in China. We would need to accrue and pay
withholding taxes if we were to distribute funds from our subsidiaries in China to our offshore subsidiaries. We do not intend
to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in China for general corporate purpose.
The following table sets forth a summary
of our cash flows for the periods indicated:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by/(used in) operating activities
|
|
|
151,497
|
|
|
|
83,518
|
|
|
|
(440,495
|
)
|
|
|
(67,706
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
1,383,691
|
|
|
|
(440,461
|
)
|
|
|
(1,309,126
|
)
|
|
|
(201,210
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
4,417
|
|
|
|
13,285
|
|
|
|
(91,248
|
)
|
|
|
(14,025
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
12,555
|
|
|
|
80,842
|
|
|
|
(59,455
|
)
|
|
|
(9,132
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
1,552,160
|
|
|
|
(262,816
|
)
|
|
|
(1,900,324
|
)
|
|
|
(292,073
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
353,728
|
|
Cash and cash equivalents at end of year
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
61,655
|
|
Operating Activities
Net cash used in operating activities amounted
to RMB440.5 million (US$67.7 million) in 2017, which was primarily attributable to a net loss of RMB37.0 million (US$5.7 million),
adjusted for non-cash items of RMB204.0 million (US$31.3 million) and a net decrease of RMB119.5 million (US$18.4 million) in
change in working capital. The net decrease in change in working capital was primarily attributable to decreases in prepayments
of RMB236.4 million (US$36.3million) and accounts payable of RMB66.2 million (US$10.2 million), respectively, partially offset
by decreases in accrued expense of RMB171.2 million (US$26.3 million) and inventories of RMB32.0 million (US$4.9 million).
Net cash provided by operating activities
amounted to RMB83.5 million in 2016, which was primarily attributable to a net income of RMB150.2 million, adjusted for non-cash
items of RMB155.0 million and a net decrease of RMB221.7 million in change in working capital. The net decrease in change in working
capital was primarily attributable to a decrease in accounts payable of RMB455.9 million, partially offset by a decrease in inventories
of RMB307.2 million.
Net cash provided by operating activities
amounted to RMB151.5 million in 2015, which was primarily attributable to a net income of RMB134.8 million, adjusted for non-cash
items of RMB245.6 million and a net decrease of RMB228.9 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.
Investing Activities
Net cash used in investing activities amounted
to RMB1.3 billion (US$201.2 million) in 2017, which was primarily attributable to the maturity of RMB5.6 billion of our short
term investment, partially offset by our purchase of RMB4.3 billion of short term investment.
Net cash used in investing activities amounted
to RMB440.5 million in 2016, which was primarily attributable to the maturity of RMB3.1 billion of our short term investment,
partially offset by our purchase of RMB3.4 billion of short term investment.
Net cash provided by investing activities
amounted to RMB1.4 billion 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.
Financing Activities
Net cash used in financing activities amounted
to RMB91.2 million (US$14.0 million) in 2017, which was attributable to RMB92.6 million (US$14.2 million) purchase of redeemable
noncontrolling interests.
Net cash provided by financing activities
amounted to RMB13.3 million in 2016, which was attributable to RMB2.4 million of proceed from exercises of share options and RMB11.1
million of proceeds from bank loans which derived from a disposed subsidiary in South Korea.
Net cash provided by financing activities
amounted to RMB4.4 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.
Capital Expenditures
Our capital expenditures amounted to RMB36.5
million, RMB130.2 million and RMB586.3 million (US$90.1 million) in 2015, 2016 and 2017, respectively. Our capital expenditures
have been principally used for purchasing land use rights, 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. On January 29,
2016, we acquired land use rights with RMB84.1 million for 169,456 square meters of warehouse land in Suzhou. In 2017, our investment
on construction in process was RMB78.8 million (US$12.1 million).
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, 2017,
we had RMB42.6 million (US$6.5 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 Chengdu Jumei, Reemake Media and the shareholders of Reemake Media requires Reemake Media to pay service fees
in Renminbi to Chengdu 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 2015, 2016 and 2017 were increases of 1.6%, 2.1% 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.
We incurred RMB169.7 million, RMB216.3 million and RMB200.3 million (US$30.8 million) in technology and content development expenses
in 2015, 2016 and 2017, 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, 2017, we owned 432 registered trademarks, copyrights to 69 software programs developed by us relating
to various aspects of our operations, and 64 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,
2017 to December 31, 2017 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 RMB99.1 million, RMB95.7 million and RMB74.4 million (US$11.4
million) during the years ended December 31, 2015, 2016 and 2017, respectively.
As of December 31, 2017, future minimum
commitment under non-cancelable agreements were as follows:
RMB (in thousand)
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022 and
thereafter
|
|
Operating lease
|
|
|
154,171
|
|
|
|
60,443
|
|
|
|
46,913
|
|
|
|
31,043
|
|
|
|
15,772
|
|
|
|
-
|
|
Other than those shown above, we did not
have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2017.
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 10.
|
Additional Information
|
Not applicable.
|
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 (2018
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:
|
·
|
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;
|
|
·
|
the instrument of transfer
is in respect of only one class of shares;
|
|
·
|
the instrument of transfer
is properly stamped, if required; and
|
|
·
|
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.
|
|
·
|
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.
|
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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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.
In May, 2017, we entered into a purchase
agreement and acquired a majority interest in Shenzhen Jiedian Technology Co., Ltd., or Jiedian, for cash consideration of RMB300
million (US$46.1 million). Subsequently we acquired additional equity interests in Jiedian from the non-controlling interest holders
of Jiedian for a total cash consideration of RMB92.6 million (US$14.2 million). As a result, we held 82.07% equity interest of
Jiedian as of December 31, 2017.
In June, 2017, we entered into definitive
agreements to invest an aggregate of RMB84 million (US$12.9 million) in the production of a television drama series titled "Here
to Heart". We have not entered into any other material contracts other than these two and as described in "Item 4. Information
on the Company" or elsewhere in this annual report.
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in this annual report.
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."
To the extent that the discussion relates
to matters of Cayman Islands tax law, it represents the opinion of Maples and Calder (Hong Kong) LLP, 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 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 if, for any taxable year, 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. 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.
Because we currently hold, and expect to
continue to hold, a substantial amount of cash, cash equivalents, investments that produce passive income, and other passive assets,
and because the fair market value of our assets is determined in part by reference to the market price of our ADSs and Class A
ordinary shares, we believe that we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31,
2017, and unless the market price of our ADSs and Class A ordinary shares substantially increases or the proportion of our
assets producing passive income substantially decreases, we will very likely be a PFIC for our current taxable year ending December 31,
2018. 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. 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, there can be no assurance that we will not be a PFIC for the
current or any future taxable year. Our special U.S. counsel expresses no opinion with respect to our PFIC status and also expresses
no opinion with respect to our expectations regarding our PFIC status.
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, but there can be no assurance that our ADSs will continue to be considered readily
tradable on an established securities market in later years. 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
As discussed above, we believe that we
were a PFIC for the taxable year ended December 31, 2017, and we will very likely be classified as a PFIC for our current
taxable year ending December 31, 2018. 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.
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F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
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.
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I.
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Subsidiary Information
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Not applicable.