|
A.
|
Selected Financial Data
|
The following summary consolidated statements
of income/(loss) data for the years ended December 31, 2016, 2017 and 2018, summary consolidated balance sheets data as of December
31, 2017 and 2018 and summary consolidated cash flow data for the years ended December 31, 2016, 2017 and 2018 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, 2014 and 2015, summary consolidated balance sheets data as of December 31,
2014, 2015 and 2016 and summary consolidated cash flow data for the years ended December 31, 2014 and 2015 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.
The following
table
presents our selected consolidated statements of income/(loss) data for the
years indicated.
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
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
|
|
|
3,355,914
|
|
|
|
7,113,278
|
|
|
|
6,174,721
|
|
|
|
5,634,156
|
|
|
|
3,359,241
|
|
|
|
488,581
|
|
Services and others
|
|
|
531,617
|
|
|
|
229,681
|
|
|
|
102,462
|
|
|
|
182,676
|
|
|
|
929,627
|
|
|
|
135,210
|
|
Total net revenues
|
|
|
3,887,531
|
|
|
|
7,342,959
|
|
|
|
6,277,183
|
|
|
|
5,816,832
|
|
|
|
4,288,868
|
|
|
|
623,791
|
|
Cost of revenues
|
|
|
(2,350,702
|
)
|
|
|
(5,225,669
|
)
|
|
|
(4,524,897
|
)
|
|
|
(4,527,284
|
)
|
|
|
(3,198,195
|
)
|
|
|
(465,158
|
)
|
Gross profit
|
|
|
1,536,829
|
|
|
|
2,117,290
|
|
|
|
1,752,286
|
|
|
|
1,289,548
|
|
|
|
1,090,673
|
|
|
|
158,633
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(434,691
|
)
|
|
|
(948,954
|
)
|
|
|
(769,651
|
)
|
|
|
(580,792
|
)
|
|
|
(367,212
|
)
|
|
|
(53,409
|
)
|
Marketing expenses
|
|
|
(499,115
|
)
|
|
|
(655,314
|
)
|
|
|
(427,827
|
)
|
|
|
(401,756
|
)
|
|
|
(634,732
|
)
|
|
|
(92,318
|
)
|
Technology and content expenses
|
|
|
(135,698
|
)
|
|
|
(169,694
|
)
|
|
|
(216,310
|
)
|
|
|
(200,342
|
)
|
|
|
(198,408
|
)
|
|
|
(28,857
|
)
|
General and administrative expenses
|
|
|
(102,527
|
)
|
|
|
(191,918
|
)
|
|
|
(206,243
|
)
|
|
|
(144,883
|
)
|
|
|
(145,940
|
)
|
|
|
(21,226
|
)
|
Impairment of goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,291
|
)
|
|
|
(2,224
|
)
|
Total operating expenses
(1)
|
|
|
(1,172,031
|
)
|
|
|
(1,965,880
|
)
|
|
|
(1,620,031
|
)
|
|
|
(1,327,773
|
)
|
|
|
(1,361,583
|
)
|
|
|
(198,034
|
)
|
Income/(loss) from operations
|
|
|
364,798
|
|
|
|
151,410
|
|
|
|
132,255
|
|
|
|
(38,225
|
)
|
|
|
(270,910
|
)
|
|
|
(39,401
|
)
|
Other income/(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
82,251
|
|
|
|
114,123
|
|
|
|
85,597
|
|
|
|
65,515
|
|
|
|
94,043
|
|
|
|
13,678
|
|
Others, net
|
|
|
56,397
|
|
|
|
(59,289
|
)
|
|
|
76,271
|
|
|
|
(45,393
|
)
|
|
|
386,635
|
|
|
|
56,235
|
|
Share of income/(loss) from equity method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
2,452
|
|
|
|
4,903
|
|
|
|
(1
|
)
|
|
|
(0
|
)
|
Impairment of investment security
|
|
|
—
|
|
|
|
—
|
|
|
|
(114,789
|
)
|
|
|
—
|
|
|
|
(82,372
|
)
|
|
|
(11,981
|
)
|
Income/(loss) before tax
|
|
|
503,446
|
|
|
|
206,244
|
|
|
|
181,786
|
|
|
|
(13,200
|
)
|
|
|
127,395
|
|
|
|
18,531
|
|
Income tax expenses
|
|
|
(98,083
|
)
|
|
|
(71,403
|
)
|
|
|
(31,604
|
)
|
|
|
(23,778
|
)
|
|
|
(9,894
|
)
|
|
|
(1,439
|
)
|
Net income/(loss)
|
|
|
405,363
|
|
|
|
134,841
|
|
|
|
150,182
|
|
|
|
(36,978
|
)
|
|
|
117,501
|
|
|
|
17,092
|
|
Net income attributable to non-controlling interests, net of tax nil
|
|
|
(222
|
)
|
|
|
(11,925
|
)
|
|
|
(7,958
|
)
|
|
|
—
|
|
|
|
(272
|
)
|
|
|
(40
|
)
|
Net income/(loss) attributable to Jumei International Holding Limited
|
|
|
405,141
|
|
|
|
122,916
|
|
|
|
142,224
|
|
|
|
(36,978
|
)
|
|
|
117,229
|
|
|
|
17,052
|
|
Accretion to preferred share redemption value
|
|
|
(4,629
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income allocation to participating Redeemable Preferred Shares
|
|
|
(55,984
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income/(loss) attributable to Jumei's ordinary shareholders
|
|
|
344,528
|
|
|
|
122,916
|
|
|
|
142,224
|
|
|
|
(36,978
|
)
|
|
|
117,229
|
|
|
|
17,052
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
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
|
|
|
115,090,686
|
|
|
|
145,901,672
|
|
|
|
149,477,388
|
|
|
|
149,790,335
|
|
|
|
141,291,417
|
|
|
|
141,291,417
|
|
- Diluted
|
|
|
125,217,054
|
|
|
|
149,758,825
|
|
|
|
150,069,205
|
|
|
|
149,790,335
|
|
|
|
141,763,458
|
|
|
|
141,763,458
|
|
Net income/(loss) per share attributable to Jumei's ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
0.83
|
|
|
|
0.12
|
|
- Diluted
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
0.83
|
|
|
|
0.12
|
|
Net income/(loss) per ADS attributable to Jumei's ordinary shareholders:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
2.99
|
|
|
|
0.84
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
0.83
|
|
|
|
0.12
|
|
- Diluted
|
|
|
2.75
|
|
|
|
0.82
|
|
|
|
0.95
|
|
|
|
(0.25
|
)
|
|
|
0.83
|
|
|
|
0.12
|
|
Notes:
|
(1)
|
Share-based compensation expenses are allocated in operating
expenses items as follows:
|
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Fulfillment expenses
|
|
|
5,865
|
|
|
|
6,860
|
|
|
|
6,299
|
|
|
|
390
|
|
|
|
28
|
|
|
|
4
|
|
Marketing expenses
|
|
|
10,017
|
|
|
|
8,621
|
|
|
|
8,062
|
|
|
|
7,726
|
|
|
|
3,384
|
|
|
|
492
|
|
Technology and content expenses
|
|
|
8,347
|
|
|
|
8,335
|
|
|
|
4,233
|
|
|
|
5,266
|
|
|
|
3,515
|
|
|
|
511
|
|
General and administrative expenses
|
|
|
14,888
|
|
|
|
22,545
|
|
|
|
19,678
|
|
|
|
10,328
|
|
|
|
5,912
|
|
|
|
860
|
|
|
(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.
|
The following
table
presents our selected consolidated balance sheet data as of the dates indicated.
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands except for share data)
|
|
Summary Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
919,733
|
|
|
|
133,770
|
|
Short-term investments
|
|
|
2,524,420
|
|
|
|
363,000
|
|
|
|
700,000
|
|
|
|
1,972,277
|
|
|
|
1,427,346
|
|
|
|
207,599
|
|
Accounts receivable, net
|
|
|
26,942
|
|
|
|
76,937
|
|
|
|
28,868
|
|
|
|
22,334
|
|
|
|
25,849
|
|
|
|
3,760
|
|
Inventories
|
|
|
621,772
|
|
|
|
965,510
|
|
|
|
646,116
|
|
|
|
603,091
|
|
|
|
503,303
|
|
|
|
73,202
|
|
Total assets
|
|
|
4,549,430
|
|
|
|
4,991,673
|
|
|
|
4,746,101
|
|
|
|
4,967,233
|
|
|
|
5,142,205
|
|
|
|
747,903
|
|
Accounts payable
|
|
|
889,960
|
|
|
|
1,030,200
|
|
|
|
605,131
|
|
|
|
578,881
|
|
|
|
379,022
|
|
|
|
55,126
|
|
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands except for share data)
|
|
Total liabilities
|
|
|
1,179,697
|
|
|
|
1,347,661
|
|
|
|
858,969
|
|
|
|
1,025,310
|
|
|
|
1,404,434
|
|
|
|
204,268
|
|
Total mezzanine equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,696
|
|
|
|
66,638
|
|
|
|
9,692
|
|
Ordinary shares
|
|
|
237
|
|
|
|
239
|
|
|
|
244
|
|
|
|
244
|
|
|
|
244
|
|
|
|
35
|
|
Total shareholders' equity
|
|
|
3,369,733
|
|
|
|
3,644,012
|
|
|
|
3,887,132
|
|
|
|
3,875,227
|
|
|
|
3,671,133
|
|
|
|
533,943
|
|
Number of outstanding ordinary shares
|
|
|
145,205,128
|
|
|
|
146,634,596
|
|
|
|
149,706,286
|
|
|
|
149,884,681
|
|
|
|
124,079,453
|
|
|
|
124,079,453
|
|
The
following
table
presents
our selected cash flows for the
years indicated.
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(in thousands)
|
|
Summary Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
422,444
|
|
|
|
151,497
|
|
|
|
83,518
|
|
|
|
(440,495
|
)
|
|
|
(19,868
|
)
|
|
|
(2,888
|
)
|
Net cash (used in)/provided by investing activities
|
|
|
(2,575,715
|
)
|
|
|
1,383,691
|
|
|
|
(440,461
|
)
|
|
|
(1,309,126
|
)
|
|
|
907,359
|
|
|
|
131,970
|
|
Net cash provided by/(used in) financing activities
|
|
|
2,486,702
|
|
|
|
4,417
|
|
|
|
13,285
|
|
|
|
(91,248
|
)
|
|
|
(400,970
|
)
|
|
|
(58,319
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(512
|
)
|
|
|
12,555
|
|
|
|
80,842
|
|
|
|
(59,455
|
)
|
|
|
32,065
|
|
|
|
4,663
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
332,919
|
|
|
|
1,552,160
|
|
|
|
(262,816
|
)
|
|
|
(1,900,324
|
)
|
|
|
518,586
|
|
|
|
75,426
|
|
Cash and cash equivalents at beginning of year
|
|
|
679,208
|
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
58,344
|
|
Cash and cash equivalents at end of year
|
|
|
1,012,127
|
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
919,733
|
|
|
|
133,770
|
|
|
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 a 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.
Our limited operating history makes
it difficult to evaluate our business and prospects.
We commenced our beauty products retail business
in March 2010 and have a limited operating history. Our total net revenues decreased by 7.3% from RMB6.3 billion in 2016 to RMB5.8
billion in 2017, and further decreased by 26.3% to RMB4.3 billion (US$623.8 million) in 2018. We cannot assure you that we will
be able to 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. In addition,
as we have a limited operating history in the new service categories we offer, such as Jiedian power bank sharing business, and
we continue to expand our service offerings, it is difficult to evaluate our business and future prospects based on our historical
performance.
We have incurred losses in the past
and we may continue to experience losses in the future.
While we have achieved positive net income of
RMB117.5 million (US$17.1 million) in 2018, we incurred net loss of RMB37.0 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 net margin of our E-commerce and New Businesses. 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 has 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 might
not continue to have a 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.
Our expansion into new product categories
and of our Jumei Global sales channel may expose us to new challenges and more risks and may negatively impact our financial results.
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's 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's 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 2018, we worked with approximately 1,341
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 pr
oducts
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's 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 2,244, 1,903 and
1,341 suppliers and third-party merchants in 2016, 2017 and 2018, 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. In August 2018, we acquired
another land use right for 166,286 square meters in Tianjin, on which we are building a new self-owned logistics center. We intend
to start using the new logistics center in Tianjin in the second half of 2019. 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 37 third-party inter-city
transportation companies and local third-party delivery service providers companies to deliver parcels to our customers as of December
31, 2018. 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. We are also
constructing a warehouse in Tianjin. All of our logistics centers and warehouse are leased from third parties except our new logistic
center in Suzhou. If any of the landlords terminates the lease agreements with us, or materially alters 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 was rendered incapable of operations, then we may be unable to fulfill any orders
in any of the geographic areas that relies 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 in expanding our logistics
centers' 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. 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 have 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. We have purchased insurance for our Jiedian power banks from the China Pacific Insurance Company for product liability, but
it 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 in a cost-effective manner, 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 RMB427.8 million, RMB401.8 million and RMB634.7 million (US$92.3 million) in marketing expenses in 2016, 2017 and 2018,
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. 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 a majority 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. 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. Any compromise of our information security or of 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 quality of services 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, 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-competition,
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-competition, 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 merchandise. 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 in 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. 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
and acquisitions 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 in China. Our strategic investment in
Jiedian allows us to further expand our ecosystem 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. Furthermore, we may not have much negotiating
power in new areas of business and 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. For example, we incurred an
RMB27.7 million impairment loss for loan receivables and interest receivables and an RMB20.5 million impairment loss for a
long-term investment in 2018 from our investments. We may incur other significant impairment losses in the future. 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 governmental 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 the live video broadcasting
business to expand our marketing efforts. Pursuant to relevant PRC laws, we are obligated to obtain an Online Culture Business
Permit and we may be further required to obtain a 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 services through Chengdu Li'ao Culture Communication Co., Ltd., or Chengdu Li'ao. 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. See "Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
Relating to Foreign Investment" and "Item 4. Information on the Company—B. Business Overview—Regulation—Licenses
and Permits."
As of the date of this annual report, we have
not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities
regarding our conducting our business without the abovementioned 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.
In addition, the E-Commerce Law proposes a series
of stringent requirements on e-commerce platform operators. See "Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
Relating to E-Commerce, Internet Content and Information Security and Privacy" Complying with such requirements under the
E-Commerce Law will increase our costs and expenses and our business, financial condition and results of operations may be adversely
affected.
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.
Pursuant to the Individual Income Tax Law of
the PRC, as amended on August 31, 2018, which became effective on January 1, 2019, an individual's taxable income shall be an amount
equal to such individual's total annual income less a general deductible of RMB60,000 and various special deductibles permitted
under relevant laws. Determination and calculation of such special deductibles in accordance with relevant laws may result in an
increase of our operating costs and expenses. However, as these laws and the implementation of rules were only recently promulgated
and their interpretations have not been entirely settled yet, our determination and calculation of the special deductibles based
on our understanding may be different from how the tax authorities or our employees would do them. These differences may result
in inquiries or reassessment by the tax authorities, as well as disputes with our employees.
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, 2018, we had 86 leased properties
for our offices, logistics centers, warehouses, dormitories and customer service center. Some of the lessors of the leased properties
in China have not provided us with their property ownership certificates or any other documentation to prove their rights to lease
the 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, 2018, we leased an aggregate
of approximately 97 thousand square meters of properties for our offices, logistics centers, warehouses, dormitories and customer
service center. 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, 2019, options to purchase 685,577 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, 2019. As of March 31, 2019, options to purchase 1,437,232 ordinary shares are issued and outstanding and 560,045
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, 2018, we owned 546 registered trademarks, copyrights
to 72 software programs developed by us relating to various aspects of our operations, and 46 registered domain names, including
jumei.com
and
jumeiglobal.com
. See "Item 4. Information on the Company—B. Business Overview—Regulation—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 upon 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 upon. 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 2018, we were subject to intellectual property infringement
claims in China related to Jiedian power bank sharing business for an aggregate claim amount of RMB38 million.
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, 2018 using criteria established in "Internal Control—Integrated Framework (2013)"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management has
concluded that our internal control over financial reporting was not effective as of December 31, 2018 due to the existence of
a material weakness. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on
a timely basis. The material weakness that has been identified related to a deficiency in operating effectiveness in the Company’s
financial reporting department in obtaining sufficient information on a timely basis to assess and account for legal contingencies
in accordance with Accounting Standards Codification ("ASC") 450-20 ("ASC 450-20")
Loss Contingencies
.
Despite the fact that we failed to operate the abovementioned controls, we have properly corrected the resulting misstatements
and included the appropriate disclosures to our consolidated financial statements. See "Item 15—Controls and Procedures."
We
expect that we will incur more costs in the implementation of measures aimed at remediating our material weakness. However, the
implementation of these measures may not fully address the material weaknesses and deficiencies in our internal control over financial
reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weaknesses and control
deficiencies or our failure to discover and address any other material weakness or control deficiencies could result in inaccuracies
in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related
regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as
well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial
reporting significantly hinders our ability to prevent fraud.
We may need additional capital, and
financing may not be available on terms acceptable to us, or at all.
We believe our current cash and cash equivalents,
short-term investments and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the
next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments,
including any marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our
cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional
equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain
whether financing will be available in amounts or on terms acceptable to us, if at all.
A severe or prolonged 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 end of quantitative easing by the U.S. Federal Reserve, the economic slowdown in the Eurozone in 2014,
uncertainties over the impact of Brexit and the recent trade disputes between China and the U.S. 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 have also purchased
insurance for our Jiedian power banks from the China Pacific Insurance Company for product safety. However, we do not
maintain property insurance relating to our power bank sharing business. Our power banks and charging cabinets are scattered
around numerous places and may invite inappropriate handling, theft, vandalism and other damages, the financial cost and
impact of which could have a material adverse effect on our business and operating results. 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 Foreign Investment Entry
Clearance Negative List, promulgated in 2018, or the Negative List, and the Guidance Catalog of Industries for Foreign Investment
promulgated in 2007, as amended in 2015 and 2017, or the Catalog and other applicable laws and regulations. As provided for under
the Negative List and the Guidance Catalog, "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, a former director and employee of our company, 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.
Through our dual-class share structure, Mr.
Leo Ou Chen, our founder and principal beneficial owner of our company, who is a PRC citizen, possesses and controls 88.3% of the
voting power of our company as of March 31, 2019. 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
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 the laws of the Cayman Islands in respect of any conflict
relating to corporate governance. If we cannot resolve any conflict of interest or dispute between us and the shareholders of our
VIEs, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial
uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation
to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIEs owe additional
taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the
taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities
determine that the contractual arrangements between our wholly owned subsidiaries in China, our VIEs in China, and their respective
shareholders were not entered into on an arm's length basis in such a way as to result in an impermissible reduction in taxes under
applicable PRC laws, rules and regulations, and adjust our VIEs income in the form of a transfer pricing adjustment. A transfer
pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes,
which could in turn increase their tax liabilities without reducing our subsidiaries' tax expenses. In addition, the PRC tax authorities
may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations.
Our financial position could be materially and adversely affected if our VIEs' tax liabilities increase or if they are required
to pay late payment fees and other penalties.
We may lose the ability to use and
enjoy assets held by our VIEs that are material to the operation of our business if the entities go bankrupt or become subject
to dissolution or liquidation proceedings.
As part of our contractual arrangements with
our VIEs, they hold certain assets that are material to the operation of our business, including the ICP license, and the domain
names and trademarks. If our VIEs go bankrupt and all or part of their assets become subject to liens or rights of third-party
creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our
business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell,
transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our
VIEs undergo a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some
or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our
business, financial condition and results of operations.
Risks Related to Doing Business in China
Changes in China's economic, political
or social conditions or government policies could have a material and adverse effect on our business and operations.
Substantially all of our operations are located
in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant
degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment
of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by
the government. In addition, the Chinese government continues to play a significant role in regulating industry development by
imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through allocating
resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While the Chinese economy has experienced significant
growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese
government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures
may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results
of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition,
in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of
economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed
down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and adversely affect our
business and operating results.
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
The PRC legal system is based on written statutes
and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal
system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement
of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to
administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have
significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems.
Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in
a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies
and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual,
property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede
our ability to continue our operations.
We may be adversely affected by the
complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.
The PRC government extensively regulates the
internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet
industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement
involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions
may be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government
regulation of the internet industry include, but are not limited to, the following:
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We only have contractual control over our internet platform. We do not directly own the internet platform 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 interpretation and implementation of the newly adopted PRC Foreign Investment Law and how it may impact the viability
of our current corporate structure, corporate governance and business operations.
The 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." The Ministry of Commerce, or MOFCOM, published a discussion draft of the proposed Foreign Investment Law in January 2015,
or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual arrangements would also
be deemed as foreign-invested enterprises, or the FIEs, if they are ultimately "controlled" by foreign investors.
In
March 2019, the PRC National People's Congress promulgated the Foreign Investment Law, or the 2019 FIL, which will become effective
from January 1, 2020 and will replace the major existing laws and regulations governing foreign investment in the PRC. Pursuant
to the 2019 FIL, "
foreign investments" refer to investment activities conducted by foreign investors directly
or "indirectly" in the PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested
enterprises in the PRC solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property
portions or other similar rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects
in the PRC solely or jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations,
or as stipulated by the State Council.
Although the 2019 FIL does not
introduce the concept of "control" in determining whether a company should be considered as a FIE, nor does it provide
the
"variable interest entity" structure
as a method
of foreign investment, as the 2019 FIL is newly adopted and relevant government authorities may promulgate more laws, regulations
or rules on the interpretation and implementation of the 2019 FIL, the possibility cannot be ruled out that the concept of "control"
as stated in the 2015 Draft FIL may be embodied in, or the
"variable interest entity"
structure
adopted by us may be deemed as a method of foreign investment by, any of such future laws, regulations and rules.
If our
consolidated VIEs were deemed as a FIE under any of such future laws, regulations and rules, and any of the businesses that we
operate would be in any "negative list" for foreign investment
and
therefore be subject to any foreign investment restrictions or prohibitions
, further actions required to be taken by us
under such laws, regulations and rules may materially and adversely affect our business and financial condition.
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 have 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 entities by making loans to or additional capital contributions
to our PRC entities, subject to applicable government registration and approval requirements.
Currently, there is no statutory limit to the
amount of funding that we can provide to our PRC subsidiaries through capital contributions. However, the maximum amount we can
loan to our PRC subsidiaries and consolidated affiliated entities is subject to statutory limits. According to current PRC laws
and regulations, we can provide funding to our PRC subsidiaries through loans of up to either (i) the amount of the difference
between the respective registered total investment amount and registered capital of each of our PRC subsidiaries, or the Total
Investment and Registered Capital Balance, or (ii) two times, or the then-applicable statutory multiple, the amount of their respective
net assets, calculated in accordance with PRC GAAP, or the Net Assets Limit, at our election. We may also fund our PRC consolidated
affiliated entities through cross-border loans and the maximum amount would be their respective Net Assets Limit. Increasing the
Total Investment and Registered Capital Balance of our PRC subsidiaries is subject to governmental procedures and may require a
PRC subsidiary to increase its registered capital at the same time. If we choose to make a loan to a PRC entity based on its Net
Assets Limit, the maximum amount we would be able to loan to the relevant PRC entity would depend on the relevant entity's net
assets and the applicable statutory multiple at the time of calculation. PRC laws and regulations may also impose more stringent
limitations to cross-border loans, which will also have a negative impact on our ability to fund our PRC entities.
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 have 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 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 2018, 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. 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 Tianjin Cyril could have a material and adverse effect on our
results 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 16% 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.
The 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 jointly 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 nutritional 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. On November 28, 2018, the MOFCOM, the National
Development and Reform Commission, and the Ministry of Finance jointly issued the Notice on Improving the Supervision over Cross-border
E-Commerce Retail Imports, which came into effect on January 1, 2019. According to such Notice, the transition policy continued
to be adopted in 37 cross-border e-commerce trial areas, which means the retail goods imported on cross-border e-commerce platforms
will still be regulated as personal items, and the registration or filing requirements for first-imported goods will not apply,
except for goods that are temporarily prohibited from being imported from epidemic areas and goods for which risk emergency response
is initiated to address major risks in product quality and safety. The Cross-Border E-Commerce Retail Importation Goods Inventory
was also revised on November 30, 2018 to reflect such change.
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 the 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 a "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 derives 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. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S.
regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.
The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it
remains unclear what further actions the SEC and PCAOB will take to address the problem.
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 work papers 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 on the NYSE on May 16, 2014. The trading price of our ADSs has ranged from US$1.44
to US$4.03 per ADS in 2018. 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 toward Chinese companies in general, including us, regardless
of whether we have conducted any inappropriate activities. Furthermore, the stock market in general has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These
broad market and industry fluctuations may adversely affect 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, 2019, Mr. Leo Ou Chen beneficially owned
50,892,198 Class B ordinary shares, representing approximately 88.3% 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, 2019, Mr. Leo Ou Chen beneficially
owned 42.9% of our outstanding ordinary shares on an as-converted basis, representing 88.3% 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 upon 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:
|
·
|
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;
|
|
·
|
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security
registered under the Exchange Act;
|
|
·
|
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
|
|
·
|
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
|
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 is 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, 2018, 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, 2019. 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.
These rules and regulations have increased our legal and financial compliance costs and have made 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.
|
Item 4.
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Information on the Company
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A.
|
History and Development of the Company
|
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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·
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exercise effective control over our VIEs;
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·
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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.
|
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, a wholly owned subsidiary
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
was 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 Baby Tree's Chinese operating entities. In 2018,
in connection with the reorganization of BabyTree, our investment in one of the two operating entities
of Babytree in Mainland China was exchanged for a 7.79% equity interest of Babytree Group. We then partially disposed
of the investment in Babytree Group for a cash consideration of approximately US$86.5 million.
In August 2016, we entered into definitive agreements
for investing approximately RMB100 million into 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. In December 2018, we received repayment
of RMB60 million loan receivable from the venture capital fund. We assessed the collectability of the remaining loan receivable
of RMB13.3 million and related interest receivable of RMB14.4 million from the venture capital fund considering creditworthiness
and financial conditions of the borrower, and concluded that the outstanding loan receivable and related interest receivable was
not collectible. Accordingly, an impairment of RMB27.7 million was recognized in 2018. Same as the allowance for the loan receivable,
we also evaluated the recoverability of the investment and concluded that the investment was not recoverable. Accordingly, an impairment
of RMB34.2 million was recognized in 2018.
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.
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. As a result, we held 82.07% equity interest of Jiedian as of March 31, 2019.
On July 28, 2017, we entered into definitive
agreements to invest an aggregate of RMB84 million in the production of a television drama series titled "Here to Heart."
The series is based on a book of the same title. In April 2018, this television drama was broadcast on the Hu'nan TV station and
other online video platforms.
In November 2018, we entered into
definitive agreements for investing approximately RMB80 million in a venture capital fund set up, managed and operated with a
focus on investments in the e-commerce related industries in China. The venture capital fund is set up, managed and operated in
China.
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 10-56766999. 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 a fashion and lifestyle solutions provider
with a diversified portfolio of products on offer in China. We believe that our internet platform is a trusted destination for
consumers to discover and purchase branded beauty products, baby, children's 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's and maternity products and 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. For our E-commerce business,
the active customers totaled approximately 15.4 million, 15.1 million and 10.7 million in 2016, 2017 and 2018, respectively.
Our suppliers and third-party merchants include brand owners, brand distributors, resellers and certain exclusive
product suppliers. We worked with approximately 1,341 suppliers and third-party merchants in 2018.
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 2018, approximately 98.4% 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 and 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.
Our net revenues were RMB6.3 billion in 2016,
RMB5.8 billion in 2017 and RMB4.3 billion (US$623.8 million) in 2018. Our net income and net loss was RMB150.2 million and RMB37.0
million in 2016 and 2017, respectively, and our net income was RMB117.5 million (US$17.1 million) in 2018. Our net cash provided
by operating activities was RMB83.5 million in 2016, and our net cash used in operating activities was RMB440.5 million and RMB19.9
million (US$2.9 million) in 2017 and 2018, respectively.
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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|
|
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|
Products
|
|
Branded beauty products, baby, children's and maternity products, light luxury products and health supplements
|
|
Branded beauty products
|
|
Branded apparel and other lifestyle products
|
|
|
|
|
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|
Duration
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|
Usually one to three days
|
|
Long-term offerings
|
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Usually five days
|
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|
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|
|
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Breadth of Offering
|
|
Selected, focusing on SKUs
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Wide
|
|
Selected, focusing on brands
|
|
|
|
|
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Pricing
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Attractive price
|
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Attractive price
|
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Deep discount
|
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Our Role
|
|
·
Select,
curate and recommend a carefully selected collection of SKUs each day
·
A
ct
as principal
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|
·
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's 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 online 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
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Product description
|
Cosmetics
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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
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Perfume and cologne for women and men
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Body care
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Shampoo, conditioner and body wash
|
For
men
|
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Facial wash, firming lotion, astringent and moisturizer
|
For
baby and children
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Lip balm, lotion, shampoo, soap, essence oil, formula milk and diapers
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Light luxury products
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Bags, shoes, watches
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Health supplements
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Weight control products and nutritional supplements
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Pre-packaged foods
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Snacks, cereals and instant noodles
|
The following table illustrates the categories
of beauty products we sell through our online shopping mall format:
Product category
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|
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
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|
Product description
|
Womenswear
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|
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
|
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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 consistently 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 women for our E-commerce business. 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. For our e-commerce, the number of active customers
was approximately 15.4 million in 2016, 15.1 million in 2017 and 10.7 million in 2018. The number of new customers was
approximately 9.0 million in 2016, 8.9 million in 2017 and 6.1 million in 2018. Orders placed by repeat customers accounted
for approximately 91.2%, 90.8% and 87.9% of total orders in 2016, 2017 and 2018, 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 key consumer demographics.
As part of our latest marketing efforts, we
have invested in producing a television drama series titled "Here to Heart" starring 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, as well as sponsorship for
online video shows. 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 image 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 where they are aided by detailed product descriptions, thoughtful peer reviews and multi-angle picture
illustrations in making purchasing 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 98.4% of our GMV was generated from our mobile platform in the fourth
quarter of 2018.
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, 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. Our users can now freely browse
recommended short videos created by other users that may showcase our products or other fashion and beauty-related content on our
mobile application. Users can also easily access newsfeeds in video and photo formats from the users they choose to follow, including
many fashion influencers and celebrities. 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 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 SUPPLIERS AND THIRD-PARTY MERCHANTS
Our suppliers and third-party merchants include
brand owners, brand distributors, resellers and exclusive product suppliers. In 2016, 2017 and 2018, we worked with approximately
2,244, 1,903 and 1,341 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. 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 the 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 of 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
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.
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 221 customer service representatives as of December 31, 2018. 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 our 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 and/or undamaged, in their original condition and can be resold. For our merchandised baby and maternity products,
we generally grant product returns 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 returns 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 returns. 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,
as well as other products sold through our internet platform.
POWER BANK SERVICES
We entered into the portable power bank sharing
business in 2017 with our strategic acquisition of Jiedian. When users encounter a power bank cabinet, they may elect to use the
Jiedian mobile app or other major third-party mobile payment apps in China to scan the QR code painted on the cabinet. While users
need to pay a deposit of RMB99 to be eligible to rent the portable power banks when using the Jiedian mobile app, the deposit will
be waived when using the third-party mobile payment apps for certain users. After scanning the QR code, the assigned portable power
bank with designated power connector will be ejected from the cabinet automatically for the user to retrieve. Users can return
the portable power bank back to the cabinet and complete the rental once they no longer need it and pay for the rental fees calculated
based on usage time on their mobiles.
As of December 31, 2018, we had over 400,000
power bank cabinets deployed in over 300 cities across China. Our partners, including restaurant and coffee shop owners, public
transportation stations, hotels, beauty salons, hospitals, shopping malls and markets, could place our power bank cabinet that
consists of multiple separate portable power banks on their countertop. Our cabinets are capable of operating 24/7 with regular
rentals and returns while costing only 1kWh of electricity per week. Each power bank hosted in our cabinets is powered by our intelligent
adaptive and fast charging technologies, and insured by the China Pacific Insurance Company for product safety.
Users can search for cabinets close to their
locations through the Jiedian mobile app and third-party apps, along with the directions to and general information of the location,
including, for example, the average price range and opening hours of the establishment hosting the power bank cabinets. Users can
also find out whether there is any portable power bank in the selected cabinet with their designated power connector.
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 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, 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, 2018, we owned 546 registered trademarks, copyrights to 72 software programs developed by us relating to various
aspects of our operations, and 46 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
, Amazon China, 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 relatively 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 have also purchased insurance for our Jiedian power banks from
the China Pacific Insurance Company for product safety. 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 latest version of the Catalog took effect in July, 2017 and divides industries into two
categories: i.e., "Category of Industries Encouraged for Foreign Investment" and "Special Administrative Measures
(Negative List) for Foreign Investment Access," or the "Negative List." Industries not listed in the Catalog are
generally deemed "permitted" for foreign investment. Although the Negative List recently amended in June 2018 reduced
the number of industries that fall within the Negative List where foreign investment is prohibited or restrictions are imposed
upon the shareholding percentage or requirements on the composition of board or senior management, industries such as value-added
telecommunication services, including Internet information services, remain restricted from foreign investment.
Pursuant to the latest Catalog and the Negative
list, 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 and the Negative list, "e-commerce business"
is an exception to the above 50% restriction on foreign investment on the value-added telecommunication services. However, the
Catalog and the Negative list do 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 restrictions 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 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.
The Foreign Investment Law
.
On March 15, 2019, the National People's Congress approved the Foreign Investment Law, which will take effect on January 1, 2020
and replace three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative
Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.
The 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 invested enterprises in China. The Foreign Investment Law establishes the basic framework for the access to, and the
promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According to the Foreign Investment Law, "foreign
investment" refer to investment activities directly or indirectly conducted by one or more natural persons, business entities,
or otherwise organizations of a foreign country (collectively referred to as "foreign investor") within China, and the
investment activities include the following situations: (i) a foreign investor, individually or collectively with other investors,
establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares, shares in
assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively
with other investors, invests in a new project within China; and (iv) investments in other means as provided by laws, administrative
regulations, or the State Council.
According to the Foreign Investment Law, the
State Council will publish or approve to publish a catalog for special administrative measures, or the "negative list."
The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign invested entities that
operate in industries deemed to be either "restricted" or "prohibited" in the "negative list." Because
the "negative list" has yet to be published, it is unclear whether it will differ from the current Special Administrative
Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law provides that foreign-invested entities
operating in foreign restricted or prohibited industries will require market entry clearance and other approvals from relevant
PRC governmental authorities.
Furthermore, the Foreign Investment Law provides
that foreign invested enterprises established according to the existing laws regulating foreign investment may maintain their structure
and corporate governance within five years after the implementing of the Foreign Investment Law.
In addition, the Foreign Investment Law also
provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others,
that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue
stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and
reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is
prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of
asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds received
upon settlement by foreign investors within China, may be freely remitted inward and outward in RMB or a foreign currency. Also,
foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information
in accordance with the requirements.
Foreign Investment in Value-Added Telecommunications
Businesses
. The Regulations for Administration of Foreign-invested Telecommunications Enterprises promulgated by the PRC
State Council in December 2001 and subsequently amended in September 2008 and February 2016 set forth detailed requirements with
respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested
telecommunications enterprise. These regulations prohibit a foreign entity from owning more than 50% of the total equity interest
in any value-added telecommunications service business in China, and require the major foreign investor in any value-added telecommunications
service business in China have a good and profitable record and operating experience in this industry.
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, which remains effective until September 2021.
Online Culture Business Permit / Video
and Audio Program Internet Dissemination License
.
We have engaged in the 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 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. Cosmetics 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 designated 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 effect in July 2010. Under these measures, enterprises or other operators which engage in online commodities
trading and other services, and have been registered with the State Administration 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.
In August 2018, the Standing Committee of the
National People's Congress promulgated the E-Commerce Law, which took effect in January 2019. The E-commerce Law proposes a series
of requirements on e-commerce operators including individuals and entities carrying out business online, e-commerce platform operators
and merchants within the platform. For example, the E-Commerce Law requires e-commerce operators to respect and equally protect
consumers' legitimate rights and provide options to consumers without targeting their personal characteristics, and also requires
e-commerce operators to clearly point out to consumers their tie-in sales in which additional services or products are added by
merchants to a purchase, and not to assume consumers' consent to such tie-in sales by default. The e-commerce platform operators
are required under the E-Commerce Law to establish a credit evaluation system and publicize the credit evaluation rules, and provide
consumers with ways to evaluate products sold or services provided within the platform. The E-Commerce Law also requires e-commerce
platform operators to develop and continuously publish or make publicly available, prominently on its homepage, a link to its platform
service agreement and transaction rules, specifying the rights and obligations of relevant parties with respect to joining and
leaving the platform, quality assurance and protection of consumer rights and personal information, and to ensure convenience and
complete access to reading and downloading such service agreement and transaction rules by merchants and consumers. Moreover, according
to the E-Commerce Law, e-commerce platform operators who fail to take necessary actions when they know or should have known that
the merchants within the platform infringe others' intellectual property rights or the products or services provided by the merchants
do not meet the requirements for personal and property security, or otherwise infringe upon consumers' legitimate rights, will
be imposed a joint liability with the merchants; with respect to the products or services affecting consumers' life and health,
the e-commerce platform operators will bear relevant responsibilities if they fail to review the qualifications of merchants or
fail to safeguard the interests of the consumers. In addition, the E-Commerce Law requires e-commerce operators, including individuals
and entities carrying out business online, e-commerce platform operators and merchants on these platforms, to display prominently
on their home page the information contained in their business licenses or administrative permits relating to their operating businesses.
Failure to take necessary actions against merchants on the e-commerce platforms that are not in compliance with such requirements
may subject the e-commerce platform operators to rectification within a specified period and a fine between RMB20,000 and RMB100,000.
In December 2018, State Administration for Market
Regulation issued the "Opinions on Doing Well in E-Commerce Operator Registration" which requires e-commerce operators,
including individuals and entities carrying out business online, e-commerce platform operators and merchants on these platforms,
to register with the local branches of State Administration for Market Regulation, except for individuals selling agricultural
products or conducting certain transactions with minimum economic value and low volume, or those not required to make such registration
according to PRC laws and regulations. Pursuant to these opinions, the e-commerce platform operators shall provide identity information
of the merchants on their platform to local branches of State Administration for Market Regulation and prompt the merchants failing
to make such registrations to comply with the relevant registration requirements.
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's 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's 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's 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's Personal
Information issued by the MIIT in July 2013, any collection and use of user's 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 a 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 a 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 a mobile application, and choice of whether to install a 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, 2018, we owned 546 registered trademarks in different applicable trademark categories
and were in the process of applying to register 28 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 72 computer software copyrights in China as of December 31, 2018.
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 the 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.
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 engaged 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 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 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.
In April 2018, the Ministry of Finance and
the State Administration of Taxation jointly promulgated the Circular of the Ministry of Finance and the State Administration of
Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which: (i) for VAT taxable sales acts or importation
of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%,
respectively; (ii) for the purchase of agricultural products originally subject to the deduction rate of 11%, such deduction rate
shall be adjusted to 10%; (iii) for the purchase of agricultural products for the purpose of production and sales or consigned
processing of goods subject to the tax rate of 16%, such tax shall be calculated at the deduction rate of 12%; (iv) for exported
goods originally subject to the tax rate of 17% and the export tax refund rate of 17%, the export tax refund rate shall be adjusted
to 16%; and (v) for exported goods and cross-border taxable acts originally subject to the tax rate of 11% and the export tax refund
rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede
existing provisions which are inconsistent with Circular 32. The new VAT is applicable at a rate of 5% 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 nonresident 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.
The above-mentioned notice was abolished
pursuant to the New Cross-Border E-commerce Tax Notice. The goods imported through cross-border e-commerce platforms are now treated
as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption
tax and tariff. In general, a value-added tax at the rate of 17% (before May 1, 2018) and 16% (from May 1, 2018 onwards) is levied
on most products sold on the cross-border e-commerce platform and a 15% consumption tax on high-end cosmetics, while no consumption
tax is levied on skin care products, maternity and baby care products. As a preferential tax treatment, the New Cross-Border E-commerce
Tax Notice and the Notice on Improving the Tax Policies on Cross-Border E-Commerce Retail Imports, which was issued on November
29, 2018 provide that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB5,000 per purchase
order and RMB26,000 per year per buyer, there is a 30% discount off the applicable value-added tax and the consumption tax, and
the tariff is waived.
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 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."
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C.
|
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)
|
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 agreement.
Pursuant to the equity pledge agreement, 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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the ownership structures of our VIEs and wholly foreign-invested subsidiaries will not result in any violation of PRC laws
or regulations currently in effect; and
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the contractual arrangements among our subsidiaries, VIEs and their respective shareholders governed by PRC law are valid,
binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.
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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 interpretation
and implementation of the newly adopted 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 8 thousand square meters of office and customer service center space in Beijing.
As of December 31, 2018, we also have leased an aggregate of approximately 89 thousand square meters in office, logistics
center, warehouses and/or customer service center space in Tianjin, Zhengzhou, Chengdu, Guangzhou, Suzhou, Hong Kong and
Shenzhen. We lease most of our premises under operating lease agreements from independent third parties. A summary of our
leased properties as of December 31, 2018 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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8
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Office and customer service center
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|
One to three
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Tianjin
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28
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Logistics center and office
|
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One to three
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Zhengzhou
|
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29
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Office and logistics center
|
|
One
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Chengdu
|
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17
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Office, logistics center and customer service center
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One to three
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Guangzhou
|
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12
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Office, logistics center
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One to three
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Shenzhen
|
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2
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Office
|
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Two
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Hong Kong
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1
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Logistics center
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Two
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We typically enter into leasing agreements
that are renewable every one to three years. We believe our existing facilities are sufficient for our near-term needs.
On January 29, 2016, we acquired land use
rights with 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. We returned a part of the said
land to Suzhou Industrial Park Land and Resources Bureau for a total consideration of RMB53.3 million on February 22, 2019.
On March 8, 2018, we acquired land use rights
with RMB83.7 million for 166,286 square meters of land in Tianjin, on which we are in the process of constructing a self-owned
logistics and warehouse center.
|
Item 5.
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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. Key Information—D. Risk Factors" or in other parts of this annual report on Form 20-F.
Overview
We generate net revenues primarily
from merchandise sales and other services. We generate net revenues from merchandise sales when we act as principal for the
direct sale of beauty products, baby, children's and maternity products, light luxury products, pre-packaged food and health
supplements to customers. We generate net revenues from other services when we act as service provider for third-party
merchants and vendors and charge them fees for the sale or display of their products through our internet platform and when
we act as portable power bank sharing service provider and charge power bank sharing service fees and membership fees.
The following table summarizes the key features
of our two main revenue streams:
|
Revenue Stream
|
|
Merchandise Sales
|
|
Other Services
|
Products
|
Beauty products, baby, children's and maternity products, light luxury products, pre-packaged food and health supplements
|
|
Apparel and other lifestyle products, power bank sharing business and others
|
Sales formats
|
Curated sales and online shopping mall
|
|
Online marketplace service, power bank sharing service
|
Our Role
|
Act as principal
|
|
Act as service provider for third-party merchants and vendors principal in providing power bank sharing services
|
Our net revenues were RMB6.3 billion in
2016, RMB5.8 billion in 2017 and RMB4.3 billion (US$623.8 million) in 2018. Our net income and net loss was RMB150.2 million and
RMB37.0 million in 2016 and 2017, respectively, and our net income was RMB117.5 million (US$17.1 million) in 2018. Our net cash
provided by operating activities was RMB83.5 million in 2016, and our net cash used in operating activities was RMB440.5 million
and RMB19.9 million (US$2.9 million) in 2017 and 2018, respectively.
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 primarily from
merchandise sales and other services, which mainly include marketplace services and power bank sharing services. We also generate
revenues from our TV drama series production business. Merchandise sales revenues are generated when we act as principal for the
direct sale of beauty products, baby, children's 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.
We acquired Jiedian in 2017, one of the
leading players in the portable power bank sharing business in China. We deploy power bank cabinets in highly frequented points
of interest, such as restaurants, bars, gyms, airports, train stations, shopping malls, beauty salons, hospitals and parks. Each
power bank cabinet contains multiple portable power banks. When users encounter a power bank cabinet, they may elect to use the
Jiedian mobile app or other major third-party mobile payment apps in China to scan the QR code painted on the cabinet. Revenue
from power bank sharing business is mainly contributed to the power bank sharing service revenue and membership revenue.
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
6,174,721
|
|
|
|
98.4
|
|
|
|
5,634,156
|
|
|
|
96.9
|
|
|
|
3,359,241
|
|
|
|
488,581
|
|
|
|
78.3
|
|
Services and others
|
|
|
102,462
|
|
|
|
1.6
|
|
|
|
182,676
|
|
|
|
3.1
|
|
|
|
929,627
|
|
|
|
135,210
|
|
|
|
21.7
|
|
Total net revenues
|
|
|
6,277,183
|
|
|
|
100.0
|
|
|
|
5,816,832
|
|
|
|
100.0
|
|
|
|
4,288,868
|
|
|
|
623,791
|
|
|
|
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 for our E-commerce business. The numbers of our
active customers were approximately 15.4 million in 2016, 15.1 million in 2017 and 10.7 million in 2018.
|
|
·
|
Total number of orders.
For our E-commerce business the total numbers of orders were approximately 61.5 million in 2016,
63.5 million in 2017 and 38.0 million in 2018.
|
|
·
|
Net GMV.
We define net GMV as the sum of (i) net revenues generated from merchandise sales, (ii) net revenues generated
from marketplace services and adding back corresponding payables to our third-party merchants, and (iii) net revenues generated
from our Jiedian power bank sharing business. Our net GMV was RMB7.3 billion in 2016, RMB6.6 billion in 2017 and RMB4.6 billion
(US$670.0 million) in 2018.
|
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, inventory write-downs, commissions, depreciation and disposal of portable power bank and power bank cabinet,
film production cost and amortization of acquired intangible assets. 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.
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 RMB365.9 million, RMB319.3 million and RMB336.9 million (US$49.0 million) in 2016, 2017
and 2018, respectively.
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.
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.
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
Under the current Hong Kong Inland Revenue
Ordinance, from the year of assessment beginning on or after April 1, 2018, our subsidiaries incorporated in Hong Kong are subject
to profits tax at the rate of 8.25% on assessable profits up to HK$2,000,000; and 16.5% on any part of assessable profits over
HK$2,000,000. 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. 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 revenues of over 70% generated from the 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,
has been 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.
Any 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. 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."
In April 2018, the Ministry of Finance and
the State Administration of Taxation jointly promulgated the Circular of the Ministry of Finance and the State Administration of
Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which (i) for VAT taxable sales acts or importation
of goods originally subject to value-added tax rates of 17% and 11%, respectively, such tax rates shall be adjusted to 16% and
10%, respectively; (ii) for the purchase of agricultural products originally subject to a deduction rate of 11%, such deduction
rate shall be adjusted to 10%; (iii) for the purchase of agricultural products for the purpose of production and sales or consigned
processing of goods subject to a tax rate of 16%, such tax shall be calculated at the deduction rate of 12%; (iv) for exported
goods originally subject to a tax rate of 17% and an export tax refund rate of 17%, the export tax refund rate shall be adjusted
to 16%; and (v) for exported goods and cross-border taxable acts originally subject to a tax rate of 11% and an export tax refund
rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede
existing provisions which are inconsistent with Circular 32. The new VAT is applicable at a rate of 5% in lieu of business tax
for the services rendered by our PRC subsidiaries and consolidated VIEs.
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, 2018 using criteria established in "Internal Control—Integrated Framework (2013)"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management
has concluded that our internal control over financial reporting was not effective as of December 31, 2018 due to the existence
of a material weakness. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on
a timely basis.
The material weakness that has been identified
related to deficiency in operating effectiveness in the Company’s financial reporting department in obtaining sufficient
information on a timely basis to assess and account for legal contingencies in accordance with ASC 450-20
Loss Contingencies
.
In light of the material weakness abovementioned,
we subsequently involved internal and external resources to perform additional procedures to assess the impact of the contingencies,
and recorded adjustments in accordance with the external legal assessment results to correct the misstatements.
To remediate the material weakness in the
internal control relating to contingencies, we have started to take actions and intend to take these further actions in the remainder
of 2019:
|
·
|
Timely engagement of competent external legal counsel to provide legal opinions on significant lawsuits filed;
|
|
·
|
Providing training to the accounting and reporting department, as well as internal legal counsel, on U.S. GAAP knowledge and
requirements over the assessment of loss contingency under ASC 450-20;
|
|
·
|
Assessing the progress made on legal contingencies in a timely manner by formalizing a litigation inventory and tracking
process and report on a quarterly basis prepared by the internal legal counsel and reviewed by the senior management;
|
|
·
|
Improving timely communication between the internal legal counsel, external legal counsel, senior management, and the
accounting and reporting team to perform appropriate assessment of the financial statement impact from the existing and
potential legal cases;
|
|
·
|
Establishing effective monitoring and oversight controls over the commitment and contingency process to ensure internal controls
over the analysis and accounting for material litigation transactions are operating as designed; and
|
|
·
|
Strengthening internal audit function to timely detect and prevent control deficiencies over the commitment and contingency
process.
|
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 chief operating decision-maker, or "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 include film production, Jiedian and other technology initiatives business. Accordingly, we updated
the presentation of our reportable segments in prior periods to conform to the current year's presentation in accordance with ASC
280, Segment Reporting.
Revenue Recognition
We generate substantially all of our revenue
from merchandise sales and power bank sharing services. We also derive revenue from other sources mainly including marketplace
services and film production.
On January 1, 2018, we adopted ASC Topic
606, Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective method to those contracts which
were not completed as of January 1, 2018. The comparative information has not been restated for the years ended December 31, 2017
and 2016, and continues to be presented under ASC Topic 605, Revenue Recognition ("ASC 605"). The impact of adopting
the new revenue standard was not material to the consolidated financial statements and there was no adjustment to the opening balance
of retained earnings on January 1, 2018.
Revenue is recognized when our performance
obligation is satisfied in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring
goods or services to a customer. To determine revenue recognition, we perform the following five steps: (i) identify the contract
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance
obligation.
For contracts within the scope of ASC 606
at contract inception, we review the contract to determine which performance obligations it must deliver and which of these performance
obligations are distinct. We recognize revenue based on the amount of the transaction price that is allocated to each performance
obligation when that performance obligation is satisfied or as it is satisfied.
We consider several factors in determining
whether it is appropriate to record the gross amount or net amount of product sales or service fees. Generally, when we control
the specified goods or services, and are the primary obligor in a transaction, are subject to substantial inventory risk, and have
latitude in establishing prices, revenues are recorded at the gross sales price. If we do not control the specified goods or services,
and 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 service fees earned.
When either party to a revenue contract
has performed, we recognize a contract asset or a contract liability in the consolidated balance sheet, depending on the relationship
between our performance and the customer's payment.
Merchandise sales
We generate revenues from merchandise sales
when we act as principal for the direct sales of beauty products to customers. We collect cash from customers before or upon deliveries
of products mainly through banks, third-party online payment platforms or delivery companies. As we have a single performance obligation
to sell beauty products to the customers, we recognize merchandise sales revenues upon acceptance of delivery of products by customers.
Cash collected from customers before product delivery is recognized as contract liability, which is classified as advances from
customers. The Contract liability is transferred to revenue upon deliveries and acceptances by customers. We estimate the amount
of variable consideration including sales return using the expected value method and includes variable consideration in the transaction
price to the extent that it is probable that a significant reversal will not occur.
Power bank sharing business
We conduct power bank sharing business through
Jiedian, a subsidiary acquired in 2017, 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. A deposit is generally
required before a user places an order via the Jiedian application or certain third party platforms. We act as a principal in rendering
power bank sharing services and presents revenues on a gross basis.
We derive our power bank sharing service
revenue from fees paid by customers for each use of the power bank or for subscription for access to our network of power bank
during certain period of time, usually less than a month. Subscription fees are recognized on a straight-line basis over the subscription
period. The fees charged for each use of power bank is recognized when the power bank is returned to the charging box. The unsatisfied
performance obligations as of December 31, 2018 is insignificant.
The deposit will be refunded to a user upon
receipt of the request. If the power bank is lost or not returned by a user after a certain period of time, the deposit from the
user will not be repaid and the amount is recognized as revenue, with the corresponding carrying amount of the power bank recorded
in cost of revenues.
Others
We provide marketplace services as an agent
to various merchandise suppliers and financial service providers to facilitate the sales of or display their products on our platform.
We consider the merchandise suppliers and financial service providers as our customers, and receive fees from customers based on
a fixed rate of the sales of the customer's products. We recognize the fees from the merchandise suppliers upon acceptances of
deliveries by the buyers for the sales for which we provide fulfillment services or upon shipping by the suppliers for the sales
for which we don't provide fulfillment services. We recognize fees from financial service providers upon the sales of their products
from the leads generated by us.
We also generate revenue from film
production for sales of the rights to our customers for broadcasting on various platforms. The fee from customers is fixed
and recognized upon the delivery of the master tape to our customer as we have no further obligations.
Loans receivable, net
Our loans receivable consist of a loan receivable
from a venture capital fund with an annual interest rate from 4.35% to 10% based on different conditions and a loan receivable
from a third party with an annual interest rate of 4.35%.
A loan receivable is carried at amortized
cost. An allowance for doubtful accounts represents our best estimate of the losses inherent in the outstanding loans. Judgment
is required to determine the allowance amounts and whether such amounts are adequate to cover potential credit losses, and periodic
reviews are performed to ensure such amounts continue to reflect the best estimate of the losses inherent in the outstanding debts.
We consider many factors, including, but not limited to, the age of the amounts due, the payment history, the month of origination,
the purpose of the loans, creditworthiness, financial conditions of the borrower, terms of the loans, regulatory environment, and
the general economic conditions.
Inventories
Inventories consisting of products available
for sale, are stated at the lower of cost or net realizable value. 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 net realizable value due to slow-moving
merchandise and damaged goods, which are 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
Our long-term investments consist of equity
investments with and equity investments without readily determinable fair values and equity method investments.
Equity investments with and without
readily determinable fair values
Prior to adopting ASC Topic 321 ("ASC
321"), Investments—Equity Securities on January 1, 2018, we carried at cost our investments in investees that did not
have readily determinable fair value and over which we did not have significant influence, in accordance with ASC subtopic 325-20
("ASC 325-20"), Investments—Other: Cost Method Investments. We review the investment for impairment whenever events
or changes in circumstances indicated that the carrying value may no longer be recoverable.
We adopted ASC 321 on January 1, 2018 and
the cumulative effect of adopting the new standard on opening retained earnings is RMB16.6 million. Equity investments, except
for those accounted for under the equity method, those that result in consolidation of the investee and certain other investments,
are measured at fair value and any changes in fair value are recognized in earnings. For equity securities without readily determinable
fair values and that do not qualify for the existing practical expedient in ASC Topic 820, Fair Value Measurements and Disclosures
("ASC 820") to estimate fair value using the net asset value per share (or its equivalent) of the investment, we elected
to use the measurement alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for identical or similar investments of the same issuer, if any.
Pursuant to ASC 321, for equity investments
measured at fair value with changes in fair value recorded in earnings, we do not assess whether those securities are impaired.
For those equity investments that we elect to use the measurement alternative, we make a qualitative assessment of whether the
investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the entity
has to estimate the investment's fair value in accordance with the principles of ASC 820. If the fair value is less than the investment's
carrying value, the entity has to recognize an impairment loss in net income equal to the difference between the carrying value
and fair value. Prior to 2018, these securities were classified as available-for-sale securities and measured and recorded at fair
value with unrealized changes in fair value recorded through other comprehensive income.
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 the 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/(loss);
however, our share of the earnings or losses of the affiliated company is reflected in the caption "share of income/(loss)
from equity method investments" in the consolidated statements of comprehensive income/(loss). 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.
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, and certain
other current liabilities, approximate their fair value due to the short-term maturities of these instruments.
We adopted ASC 820. 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 for 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 two and two reporting units as of December 31, 2017 and 2018, 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 are 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 their 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 the 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") 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 approval of
our board of directors. As of March 31, 2019, options to purchase 685,577 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, 2019. As of March 31, 2019, options to purchase 1,437,232 ordinary shares are issued and outstanding and 560,045
RSUs are granted and outstanding under the 2014 plan.
A summary of our share option activities
through March 31, 2019 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
|
|
|
(1)
|
We estimated each 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)
|
Each 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 RSUs 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, account for forfeitures as they occur.
On March 31, 2015, we granted 248,575 RSUs
of our company, as well as 745,000 share options (at an exercise price of US$15.00 per share) to our employees, subject to a four-year
service vesting schedule.
On August 1, 2016, we granted 100,000 restricted
shares of our company to our employees, subject to a four-year service vesting schedule.
On January 1, 2017, we granted 125,000 restricted
shares of our company to our employees, subject to a four-year service vesting schedule.
On March 31, 2017, we granted 250,000 restricted
shares of our company to our employees, subject to a four-year service vesting schedule.
On May 8, 2017, we granted 100,000 restricted
shares of our company to our employees, subject to a four-year service vesting schedule.
On August 1, 2017, we granted 600,000 share
options (at an exercise price from US$2.21 to US$2.23 per share) to our employees, subject to a 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 a 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. We 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 our provision for income taxes. We recognize interests and penalties, if any,
under accrued expenses and other current liabilities on our balance sheet and under income tax expenses in our consolidated
statement of comprehensive income.
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 arrangements include a Shareholders' Voting Rights Agreement, Exclusive Consulting and Services Agreement,
an Exclusive Purchase Option Agreement and an Equity Pledge Agreements (collectively, the "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 VIE upon the 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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for share, per share and per ADS data)
|
|
Summary Consolidated Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
|
6,174,721
|
|
|
|
98.4
|
|
|
|
5,634,156
|
|
|
|
96.9
|
|
|
|
3,359,241
|
|
|
|
488,581
|
|
|
|
78.3
|
|
Services and others
|
|
|
102,462
|
|
|
|
1.6
|
|
|
|
182,676
|
|
|
|
3.1
|
|
|
|
929,627
|
|
|
|
135,210
|
|
|
|
21.7
|
|
Total net revenues
|
|
|
6,277,183
|
|
|
|
100.0
|
|
|
|
5,816,832
|
|
|
|
100.0
|
|
|
|
4,288,868
|
|
|
|
623,791
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
(4,524,897
|
)
|
|
|
(72.1
|
)
|
|
|
(4,527,284
|
)
|
|
|
77.8
|
|
|
|
(3,198,195
|
)
|
|
|
(465,158
|
)
|
|
|
(74.6
|
)
|
Gross profit
|
|
|
1,752,286
|
|
|
|
27.9
|
|
|
|
1,289,548
|
|
|
|
22.2
|
|
|
|
1,090,673
|
|
|
|
158,633
|
|
|
|
25.4
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(769,651
|
)
|
|
|
(12.3
|
)
|
|
|
(580,792
|
)
|
|
|
(10.0
|
)
|
|
|
(367,212
|
)
|
|
|
(53,409
|
)
|
|
|
(8.6
|
)
|
Marketing expenses
|
|
|
(427,827
|
)
|
|
|
(6.8
|
)
|
|
|
(401,756
|
)
|
|
|
(6.9
|
)
|
|
|
(634,732
|
)
|
|
|
(92,318
|
)
|
|
|
(14.8
|
)
|
Technology and content expenses
|
|
|
(216,310
|
)
|
|
|
(3.4
|
)
|
|
|
(200,342
|
)
|
|
|
(3.4
|
)
|
|
|
(198,408
|
)
|
|
|
(28,857
|
)
|
|
|
(4.6
|
)
|
General and administrative expenses
|
|
|
(206,243
|
)
|
|
|
(3.3
|
)
|
|
|
(144,883
|
)
|
|
|
(2.5
|
)
|
|
|
(145,940
|
)
|
|
|
(21,226
|
)
|
|
|
(3.4
|
)
|
Impairment of goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,291
|
)
|
|
|
(2,224
|
)
|
|
|
(0.4
|
)
|
Total operating expenses
|
|
|
(1,620,031
|
)
|
|
|
(25.8
|
)
|
|
|
(1,327,773
|
)
|
|
|
(22.8
|
)
|
|
|
(1,361,583
|
)
|
|
|
(198,034
|
)
|
|
|
(31.7
|
)
|
Income/(loss) from operations
|
|
|
132,255
|
|
|
|
2.1
|
|
|
|
(38,225
|
)
|
|
|
(0.7
|
)
|
|
|
(270,910
|
)
|
|
|
(39,401
|
)
|
|
|
(6.3
|
)
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
85,597
|
|
|
|
1.4
|
|
|
|
65,515
|
|
|
|
1.1
|
|
|
|
94,043
|
|
|
|
13,678
|
|
|
|
2.2
|
|
Others, net
|
|
|
76,271
|
|
|
|
1.2
|
|
|
|
(45,393
|
)
|
|
|
(0.8
|
)
|
|
|
386, 635
|
|
|
|
56,235
|
|
|
|
9.0
|
|
Share of income/(loss) from equity method investment
|
|
|
2,452
|
|
|
|
0.0
|
|
|
|
4,903
|
|
|
|
0.1
|
|
|
|
(1
|
)
|
|
|
(0
|
)
|
|
|
(0.0
|
)
|
Impairment of investment security, net of nil tax
|
|
|
(114,789
|
)
|
|
|
(1.8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(82,372
|
)
|
|
|
(11, 981)
|
|
|
|
(1.9
|
)
|
Income/(loss) before tax
|
|
|
181,786
|
|
|
|
2.9
|
|
|
|
(13,200
|
)
|
|
|
(0.2
|
)
|
|
|
127,395
|
|
|
|
18,531
|
|
|
|
3.0
|
|
Income tax expenses
|
|
|
(31,604
|
)
|
|
|
(0.5
|
)
|
|
|
(23,778
|
)
|
|
|
(0.4
|
)
|
|
|
(9,894
|
)
|
|
|
(1,439
|
)
|
|
|
(0.2
|
)
|
Net income/(loss)
|
|
|
150,182
|
|
|
|
2.4
|
|
|
|
(36,978
|
)
|
|
|
(0.6
|
)
|
|
|
117,501
|
|
|
|
17,092
|
|
|
|
2.7
|
|
Net income attributable to non-controlling interests
|
|
|
(7,958
|
)
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(272
|
)
|
|
|
(40
|
)
|
|
|
(0.0
|
)
|
Net income/(loss) attributable to Jumei's ordinary shareholders
|
|
|
142,224
|
|
|
|
2.3
|
|
|
|
(36,978
|
)
|
|
|
(0.6
|
)
|
|
|
117,229
|
|
|
|
17,052
|
|
|
|
2.7
|
|
Year Ended December 31, 2018 Compared
to Year Ended December 31, 2017
Net revenues
. Our net
revenues decreased by 26.3% from RMB5.8 billion in 2017 to RMB4.3 billion (US$623.8 million) in 2018, which included RMB3.4
billion (US$488.6 million) generated from merchandise sales and RMB929.6 million (US$135.2 million) generated from other
services. The decrease of net revenue was primarily attributable to the decrease in active customers and the decrease in a
total orders of our E-commerce business. 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. For our E-commerce business, the number
of our active customers decreased from approximately 15.1 million in 2017 to approximately 10.7 million in 2018. The number
of our total orders decreased from approximately 63.5 million in 2017 to approximately 38.0 million in 2018. Our revenues
from services and others increased from RMB182.7 million in 2017 to RMB929.6 million (US$135.2 million) in 2018, which mainly
attributed to the increase of revenue generated from power band sharing service.
Cost of revenues
. Our cost of revenues
decreased from RMB4.5 billion in 2017 to RMB3.2 billion (US$465.2 million) in 2018, which was in line with the decrease of net
revenues.
Gross profit
. Our gross profit decreased
by 15.4% from RMB1.3 billion in 2017 to RMB1.1 billion (US$158.6 million) in 2018, and our gross profit as a percentage of net
revenues increased from 22.2% to 25.4% during the same period. Our gross profit as a percentage of our net GMV increased from 19.5%
in 2017 to 23.7% in 2018. The higher gross profit margin in 2018 is mainly attributed to our increase in other services, which
include our marketplace service, power bank sharing service and film production.
Operating expenses
. Our operating
expenses increased from RMB1.3 billion in 2017 to RMB1.4 billion (US$198.0 million) in 2018. Our operating expenses as a percentage
of our net GMV increased from 20.1% in 2017 to 29.6% in 2018.
|
·
|
Fulfillment expenses
. Our fulfillment expenses decreased from RMB580.8 million in 2017 to RMB367.2 million (US$53.4
million) in 2018. The decrease was primarily attributable to the decrease in the number of orders fulfilled. The number of orders
that we fulfilled decreased from approximately 52.8 million in 2017 to approximately 32.3 million in 2018. Our fulfillment expenses
as a percentage of our net GMV decreased to 8.0% in 2018 from 8.8% in 2017.
|
In 2018, we offered 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 RMB242.4 million in 2017 and RMB142.7 million (US$20.8 million) in 2018, primarily
because of the decrease in expenses related to wrap pages and revolving materials, which is in line with the decline in sales volume
of products.
|
·
|
Marketing expenses
. Our marketing expenses increased from RMB401.8 million in 2017 to RMB634.7 million (US$92.3 million)
in 2018. The increase was primarily attributable to the increase in our online advertising via advertising networks, video sharing
websites, and social networking and microblogging sites, as well as sponsorship for online video shows. Our marketing expenses
as a percentage of our net GMV increased from 6.1% in 2017 to 13.8% in 2018.
|
|
·
|
Technology and content expenses
. Our technology and content expenses decreased from RMB200.3 million in 2017 to RMB198.4
million (US$28.9 million) in 2018. The decrease in our technology and content expenses was primarily attributable to the decrease
of RMB8.5 million in server rental and bandwidth fees, and the decrease of RMB1.8 million in share-based compensation. Our technology
and content expenses as a percentage of our net GMV increased from 3.0% in 2017 to 4.3% in 2018.
|
|
·
|
General and administrative expenses
. Our general and administrative expenses increased from RMB144.9 million in 2017
to RMB145.9 million (US$21.2 million) in 2018, primarily due to the increase in professional consulting fee in related to certain
legal cases, partially offset by the decrease in share-based compensation and rental expenses. Our general and administrative expenses
as a percentage of our net GMV increased from 2.2% in 2017 to 3.2% in 2018.
|
Interest income
. Our interest income
increased from RMB65.5 million in 2017 to RMB94.0 million (US$13.7 million) in 2018 primarily due to an increase in the purchase
of wealth management products.
Other income/expense.
We
had net other income of RMB386.6 million (US$56.2 million) in 2018 as compared to RMB45.4 million in 2017, primarily due to
the gain of RMB324.0 million (US$47.1 million), net of tax, from the disposal of an investment and the fair value fluctuation
of RMB46.6 million (US$6.8 million) in our investments. We had impairment loss of RMB82.4 million (US$12.0 million) in
2018.
Income tax expense
. Our income tax
expense decreased from RMB23.8 million in 2017 to RMB9.9 million (US$1.4 million) in 2018 primarily due to a decrease in our taxable
income. Our effective tax rate increased from negative 180.1% in 2017 to 7% in 2018 due to a reversal of valuation allowance accrued
in 2017 and withholding tax on disposal gain in 2018.
Net income
. As a result of the foregoing,
our net income was RMB117.5 million (US$17.1 million) in 2018, compared to net losses of RMB37.0 million in 2017.
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 in 2017, which included RMB5.6 billion generated from merchandise sales and
RMB182.7 million generated from marketplace and other services. The decrease of net revenue was primarily attributable to the decrease
in active customers. The decrease in revenue from domestic merchandise was the result of a 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 remained the same of RMB4.5 billion in 2016 as RMB4.5 billion 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 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 in 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 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 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 levels of wrap
page expenses.
|
In 2017, we offered 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 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 in 2017, which
was primarily attributable to a decrease in the 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 in 2017. The decrease in our technology and content expenses was primarily attributable to the decrease of RMB26.5 million
in server rental and bandwidth fees, and the decrease of RMB2.6 million in rental expenses. Our technology and content expenses
as a percentage of our net GMV remained stable 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 in 2017, primarily due to the decrease of RMB30.5 million in bad expenses and the decrease of RMB11.0 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 in 2017 primarily due to a reduction in the purchase of wealth management
products.
Other income/expense.
We had net
other expense of RMB45.4 million in 2017 as compared to RMB76.3 million of net other income we incurred in 2016, primarily due
to an exchange loss of RMB87.8 million in 2017 and ADS reimbursement of RMB10.8 million recognized in 2017.
Income tax expense
. Our income tax
expense decreased from RMB31.6 million in 2016 to RMB23.8 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 a reversal of valuation allowance accrued in
2017 as a result of the amount that the entities previously projected as a loss turning out to be a 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 in 2017.
|
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, 2018,
our principal sources of liquidity was RMB2.3 billion (US$341.4 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 are comprised 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, 2018, our subsidiaries
in China held cash and cash equivalents and short-term investments in the amount of RMB1.6 billion (US$229.7 million), and our
consolidated VIEs and their subsidiaries held cash and cash equivalents and short-term investments in the amount of RMB85.7 million
(US$12.5 million), which includes cash reserved to settle payables to our subsidiary in China. We would need to accrue and pay
withholding taxes if we were to distribute funds from our subsidiaries in China to our offshore subsidiaries. We do not intend
to repatriate such funds in the foreseeable future, as we plan to use our existing cash balance in China for general corporate
purposes.
The following table sets forth a summary
of our cash flows for the periods indicated:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by/(used in) operating activities
|
|
|
83,518
|
|
|
|
(440,495
|
)
|
|
|
(19,868
|
)
|
|
|
(2,888
|
)
|
Net cash (used in)/provided by investing activities
|
|
|
(440,461
|
)
|
|
|
(1,309,126
|
)
|
|
|
907,359
|
|
|
|
131,970
|
|
Net cash provided by/(used in) financing activities
|
|
|
13,285
|
|
|
|
(91,248
|
)
|
|
|
(400,970
|
)
|
|
|
(58,319
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
80,842
|
|
|
|
(59,455
|
)
|
|
|
32,065
|
|
|
|
4,663
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(262,816
|
)
|
|
|
(1,900,324
|
)
|
|
|
518,586
|
|
|
|
75,426
|
|
Cash and cash equivalents at beginning of year
|
|
|
2,564,287
|
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
58,344
|
|
Cash and cash equivalents at end of year
|
|
|
2,301,471
|
|
|
|
401,147
|
|
|
|
919,733
|
|
|
|
133,770
|
|
Operating Activities
Net cash used in operating activities amounted
to RMB19.9 million (US$2.9 million) in 2018, which was primarily attributable to a net income of RMB117.5 million (US$17.1 million),
adjusted for non-cash items of RMB4.7 million (US$0.7 million) and a net decrease of RMB132.6 million (US$19.3 million) in change
in working capital. The net decrease in change in working capital was primarily attributable to increases in prepayments of RMB184.8 million (US$26.9
million), accrued expense of RMB572.6 million (US$83.3 million) and purchase of operating equipment of RMB428.0 million (US$62.3
million), partially offset by decreases in accounts payable of RMB218.3 million (US$31.7 million) and inventories of RMB77.3
million (US$11.2 million).
Net cash used in operating activities amounted
to RMB440.5 million in 2017, which was primarily attributable to a net loss of RMB37.0 million, adjusted for non-cash items of
RMB204.0 million and a net decrease of RMB119.5 million in change in working capital. The net decrease in change in working capital was primarily attributable to increases in prepayments of RMB236.4 million and
accrued expense of RMB171.2 million, respectively, partially offset by decreases in accounts payable of RMB66.2 million and
inventories of RMB32.0 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.
Investing Activities
Net cash provided by investing activities
amounted to RMB907.4 million (US$132.0 million) in 2018, which was primarily attributable to the maturity of RMB5.4 billion (US$780.3
million) of short-term investments, partially offset by our purchase of RMB4.8 billion (US$695.2 million) of short-term investments
and RMB502.3 million (US$73.1 million
)
cash received from the disposal
of a long-term investment.
Net cash used in investing activities amounted
to RMB1.3 billion 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 investments.
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 investments.
Financing Activities
Net cash used in financing activities amounted
to RMB401.0 million (US$58.3 million) in 2018, which was primarily attributable to the RMB402.1 million (US$58.5 million) repurchase
of ordinary shares.
Net cash used in financing activities amounted
to RMB91.2 million in 2017, which was attributable to the RMB92.6 million purchase of redeemable non-controlling interests.
Net cash provided by financing activities
amounted to RMB13.3 million in 2016, which was attributable to RMB2.4 million of proceeds from exercises of share options and RMB11.1
million of proceeds from bank loans which derived from a disposed subsidiary in South Korea.
Capital Expenditures
Our capital expenditures amounted to RMB130.2
million, RMB586.3 million and RMB574.9 million (US$83.6 million) in 2016, 2017 and 2018, respectively. Our capital expenditures
have been principally used for purchasing operating equipment of our power bank sharing business, 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 and 2018, our investment on construction in process was RMB78.8 million and RMB47.7
million (US$6.9 million), respectively. We returned a part of that land to Suzhou Industrial Park Land and Resources Bureau for
a total consideration of RMB53.3 million in February 2019. On March 8, 2018, we acquired land use rights with RMB83.7 million for
166,286 square meters of land in Tianjin, on which we are in the process of constructing a self-owned warehouse center.
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, 2018, we had RMB44.2 million
(US$6.4 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. 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 2016, 2017 and 2018 were increases of 2.1%, 1.6% and 1.9%, 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.
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C.
|
Research and Development, Patents and Licenses, etc.
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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 RMB216.3 million, RMB200.3 million and RMB198.4 million (US$28.9 million) in technology and content development expenses
in 2016, 2017 and 2018, 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, 2018, we owned 546 registered trademarks, copyrights to 72 software programs developed by us relating to various
aspects of our operations, and 46 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, 2018
to December 31, 2018 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.
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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.
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F.
|
Tabular Disclosure of Contractual Obligations
|
We lease our facilities and offices under
non-cancellable operating lease agreements. The rental expenses were RMB95.7 million, RMB74.4 million and RMB68.8 million (US$10.0
million) during the years ended December 31, 2016, 2017 and 2018, respectively.
As of December 31, 2018, future minimum
commitments under non-cancelable agreements were as follows:
RMB (in thousands)
|
|
Total
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023 and
thereafter
|
|
Operating lease
|
|
|
89,509
|
|
|
|
45,400
|
|
|
|
29,011
|
|
|
|
15,098
|
|
|
|
-
|
|
|
|
-
|
|
Capital commitment
|
|
|
226,725
|
|
|
|
226,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital commitments refer to the logistic
warehouse construction in Tianjin under non-cancellable agreements. Other than those shown above, we did not have any significant
capital and other commitments, long-term obligations or guarantees as of December 31, 2018.
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.
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Item 10.
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Additional Information
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Not applicable.
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B.
|
Memorandum and Articles of Association
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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 account, 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 attached to
all of our shares in issue and entitled to vote. Shareholders may be present in person or by proxy or, if the shareholder is a
legal entity, by its duly authorized representative. Shareholders' meetings may be convened by the chairman or a majority of our
board of directors on its own initiative or upon a request to the directors by shareholders holding no less than one-third of our
voting share capital. Advance notice of at least ten days is required for the convening of our annual general shareholders' meeting
and any other general shareholders' meeting.
An ordinary resolution to be passed at a
meeting by the shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting, while a special
resolution requires the affirmative vote of no less than two-thirds of the votes cast at a meeting. Both ordinary resolutions and
special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted
by the Companies Law and our second amended and restated memorandum and articles of association. A special resolution will be required
for important matters such as a change of name or making changes to our second amended and restated memorandum and articles of
association.
Transfer of Ordinary Shares
. Subject
to the restrictions set out below and the provisions above in respect of Class B ordinary shares, any of our shareholders may transfer
all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by
our board of directors.
Our board of directors may, in its absolute
discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board
of directors may also decline to register any transfer of any ordinary share unless:
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·
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the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and
such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
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·
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the instrument of transfer is in respect of only one class of shares;
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·
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the instrument of transfer is properly stamped, if required;
|
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·
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in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does
not exceed four; and
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·
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a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time
require is paid to us in respect thereof.
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If our directors refuse to register a transfer
they are required within three months after the date on which the instrument of transfer was lodged, send to each of the transferor
and the transferee notice of such refusal.
The registration of transfers may, after
compliance with any notice required of the NYSE, be suspended and the register closed at such times and for such periods as our
board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended
nor the register closed for more than 30 days in any year as our board may determine.
Liquidation
. On a return of capital
on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among
the holders of ordinary shares shall be distributed among the holders of our ordinary shares on a pro rata basis. If our assets
available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses
are borne by our shareholders proportionately. Any distribution of assets or capital to a holder of a Class A ordinary share and
a holder of a Class B ordinary share will be the same in any liquidation event. We are a "limited liability" company
registered under the Companies Law, and under the Companies Law, the liability of our members is limited to the amount, if any,
unpaid on the shares respectively held by them. Our second amended and restated memorandum of association contains a declaration
that the liability of our members is so limited.
Calls on Shares and Forfeiture of Shares
.
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a
notice served to such shareholders at least 14 days prior to the specified time and place of payment. The ordinary shares that
have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender
of Ordinary Shares
. We may issue shares on terms that such shares are subject to redemption, at our option or at the option
of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of
directors or by a special resolution of our shareholders. Our company may also repurchase any of our shares; provided that the
manner and terms of such purchase have been approved by our board of directors or by ordinary resolution of our shareholders, or
are otherwise authorized by our memorandum and articles of association. Under the Companies Law, the redemption or repurchase of
any share may be paid out of our company's profits or out of the proceeds of a fresh issue of shares made for the purpose of such
redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can,
immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies
Law, no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result
in there being no shares outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the
surrender of any fully paid share for no consideration.
Variations of Rights of Shares
. If
at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class
of shares may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with
the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class. The rights conferred
upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the
shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class
of shares.
Issuance of Additional Shares
. Our
second amended and restated memorandum and articles of association authorizes our board of directors to issue additional ordinary
shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our second amended and restated memorandum
and articles of association also authorizes our board of directors to establish from time to time one or more series of preference
shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
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·
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the designation of the series;
|
|
·
|
the number of shares of the series;
|
|
·
|
the dividend rights, dividend rates, conversion rights, voting rights; and
|
|
·
|
the rights and terms of redemption and liquidation preferences.
|
Our board of directors may issue preference
shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting
power of holders of ordinary shares.
Inspection of Books and Records
.
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders
or our corporate records. However, we will provide our shareholders with annual audited financial statements.
Anti-Takeover Provisions
. Some provisions
of our second amended and restated memorandum and articles of association may discourage, delay or prevent a change of control
of our company or management that shareholders may consider favorable, including provisions that:
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·
|
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. 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. As a result, we held 82.07% equity interest of Jiedian as of March 31, 2019.
In June 2017, we entered into definitive
agreements to invest an aggregate of RMB84 million in the production of a television drama series titled, "Here to Heart."
In May 2018, we entered into a definitive
agreement to sell a certain number of ordinary shares of BabyTree Group, representing 4.0% of the total issued and outstanding
share capital of BabyTree Group immediately after the sale, to a third-party investor for an aggregate consideration of approximately
US$86.5 million.
In October 2018, we entered into non-cancellable
agreements to construct a logistic warehouse in Tianjin for a consideration of approximately RMB281.1 million.
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 a publicly 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 (by vote or value), 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, holders required to accelerate
the recognition of any item of gross income with respect to our ADSs or Class A ordinary shares as a result of such income being
recognized on an applicable financial statement 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, 25% or more (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, 2018,
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, 2019. 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, 2018, and we will very likely be classified as a PFIC for our current taxable year
ending December 31, 2019. 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.