F-1/A 1 d650703df1a.htm AMENDMENT NO.2 TO FORM F-1 AMENDMENT NO.2 TO FORM F-1
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As filed with the Securities and Exchange Commission on May 12, 2014

Registration No. 333-195229

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549             

 

 

AMENDMENT NO. 2

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933             

 

 

Jumei International Holding Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   5990   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

20th Floor, Tower B, Zhonghui Plaza

11 Dongzhimen South Road, Dongcheng District

Beijing 100007

The People’s Republic of China

+86 10-5676-6999

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Law Debenture Corporate Services Inc.

400 Madison Avenue, 4th Floor

New York, New York 10017

+1 212-750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3740-4700

 

Leiming Chen, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

+852 2514-7600

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount of

shares to be
registered (1)(2)

 

Proposed

maximum

offering price

per share

 

Proposed

maximum

aggregate

offering

price (1)(3)

 

Amount of

registration fee

Class A Ordinary Shares, par value $0.00025 per share (2)(3)

 

10,925,000

 

$21.50

 

$234,887,500

  $30,253.51(4)

 

 

(1)  Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act.
(2)  American depositary shares issuable upon deposit of Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-195711). Each American depositary share represents one Class A ordinary share.
(3)  Includes 1,425,000 Class A ordinary shares that are issuable upon the exercise of the underwriters’ option to purchase additional ADSs. Also includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
(4)  Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion Dated May 12, 2014.

9,500,000 American Depositary Shares

LOGO

Jumei International Holding Limited

Representing 9,500,000 Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, of Jumei International Holding Limited, or Jumei. Jumei is offering 9,500,000 ADSs. Each ADS represents one Class A ordinary share of our company, par value US$0.00025 per share.

Prior to this offering, there has been no public market for our ADSs or shares. It is currently estimated that the initial public offering price per ADS will be between US$19.50 and US$21.50. We have applied to list the ADSs on the NYSE under the symbol “JMEI.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

See “Risk Factors” beginning on page 14 for factors you should consider before buying the ADSs.

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per ADS      Total  

Initial public offering price

   US$                   US$               

Underwriting discount

   US$         US$     

Proceeds, before expenses, to Jumei

   US$         US$     

To the extent the underwriters sell more than 9,500,000 ADSs, the underwriters have an option to purchase up to an additional 1,425,000 ADSs from us at the initial public offering price less the underwriting discount, within 30 days after the date of this prospectus.

Immediately prior to the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Mr. Leo Ou Chen, our founder, chairman of the board of directors and chief executive officer, Mr. Yusen Dai, our co-founder, director and executive officer and their respective affiliates will beneficially own all of our issued Class B ordinary shares. The Class B ordinary shares outstanding immediately after the completion of this offering will constitute approximately 41.4% of our total outstanding shares and 87.6% of the then voting power, assuming (i) the underwriters do not exercise their option to purchase additional ADSs and (ii) we issue and sell 7,317,073 Class A ordinary shares to General Atlantic Singapore Fund Pte. Ltd. through a concurrent private placement, which number of shares has been calculated based on an assumed initial public offering price of US$20.50 per share, the midpoint of the estimated initial public offering price range set forth above. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes and 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.

We are a “controlled company” as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen will beneficially own a majority of the aggregate voting power of our company immediately after this offering, assuming the underwriters do not exercise their option to purchase additional ADSs.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on             , 2014.

 

 

 

Goldman Sachs (Asia) L.L.C.

     Credit Suisse   

J.P. Morgan

(on equal footing)   
   China Renaissance  
Piper Jaffray      Oppenheimer & Co.

 

 

Prospectus dated             , 2014.


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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     57   

Use of Proceeds

     58   

Dividend Policy

     59   

Capitalization

     60   

Dilution

     62   

Enforceability of Civil Liabilities

     64   

Corporate History and Structure

     66   

Selected Consolidated Financial and Operating Data

     70   

Recent Developments

     73   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     75   

Industry

     98   

Business

     102   

Regulation

     118   

Management

     130   

Principal Shareholders

     137   

Related Party Transactions

     140   

Description of Share Capital

     141   

Description of American Depositary Shares

     151   

Shares Eligible for Future Sales

     158   

Taxation

     160   

Underwriting

     167   

Expenses Related to this Offering

     176   

Legal Matters

     177   

Experts

     178   

Where You Can Find Additional Information

     179   

Index to Consolidated Financial Statements

     F-1   

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until             , 2014 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, a third-party research firm, to provide information regarding our market position in China. We refer to this report as the Frost & Sullivan report. The gross merchandise volume as stated in the Frost & Sullivan report is denominated in Renminbi.

Our Business

We are China’s No. 1 online retailer of beauty products as measured by gross merchandise volume, or GMV, with a market share of 22.1% in 2013, according to the Frost & Sullivan report. We have grown rapidly and substantially since we launched our jumei.com website in March 2010 and achieved our current scale and profitability with only approximately US$13 million in total funding from our private equity investors. We achieved US$483.0 million in net revenues and US$25.0 million in net income in 2013, with approximately 10.5 million active customers during the same period.

We believe that our internet platform is a trusted destination for consumers to discover and purchase branded beauty products and 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 curated sales represents a new online sales format, whereby we recommend a carefully selected collection of branded beauty products 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. 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, which have been essential for our rapid growth. Our active customers totaled approximately 1.3 million, 4.8 million and 10.5 million in 2011, 2012 and 2013, respectively. Orders placed by our repeat customers accounted for approximately 88.9% of our total orders in 2013. Our suppliers and third-party merchants include brand owners, brand distributors, resellers and certain exclusive product suppliers. We worked with approximately 1,700 suppliers and third-party merchants in 2013.

We believe consumers will increasingly shop online through mobile internet. Therefore, we have invested substantial resources to build a mobile platform 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 first quarter of 2014, approximately 49% of our GMV was generated through our mobile platform.

Our visionary management team has the foresight to identify and meet evolving customer needs and market opportunities in the beauty products market. Under our management’s leadership, we have attracted a large and loyal user base through our creative and cost-efficient marketing campaigns as well as word-of-mouth referrals resulting from our well-selected products and superior customer experience. We further enhance the

 

 

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attractiveness of our product offerings by entering into arrangements with beauty product suppliers for exclusive sales and distribution of selected products in China. We implement effective measures to control costs and operating expenses, which have enabled us to achieve and increase operating profitability.

Our net revenues were US$21.8 million in 2011, US$233.2 million in 2012 and US$483.0 million in 2013. We achieved net income of US$8.1 million in 2012 and US$25.0 million in 2013, compared to a net loss of US$4.0 million in 2011. Our net cash provided by operating activities were US$27.4 million in 2012 and US$84.8 million in 2013. Our net cash used in operating activities was US$2.0 million in 2011.

Our Industry

Growth of the Beauty Products Industry in China. According to the Frost & Sullivan report, China’s beauty products industry grew steadily over the past few years as total retail sales increased from RMB136.2 billion (US$22.5 billion) in 2010 to RMB220.9 billion (US$36.5 billion) in 2013, representing a compounded annual growth rate, or CAGR, of 17.5%, and is expected to further increase to RMB431.8 billion (US$71.3 billion) in 2018, representing a CAGR of 14.3% from 2013. According to the Frost & Sullivan report, Watsons, Jumei and Sephora are the three largest beauty products retailers in China in terms of GMV in 2013.

Online Retail Market in China. China has the largest internet community in the world, with approximately 617.6 million internet users as of December 31, 2013. This translates into approximately 2.5 times the size of the internet population in the U.S., according to the Frost & Sullivan report. Online retail sales as a percentage of total retail sales in China expanded from 3.3% in 2010 to 8.1% in 2013, and is expected to further increase to 13.0% in 2018, according to the Frost & Sullivan report. The increase in online versus offline retail sales reflects the fragmentation of the retail market in China, the increasing user acceptance of online retail and the improved fulfillment networks and payment options provided by online retailers.

Online retail sales of beauty products have grown rapidly in recent years. Online business to consumer, or B2C, beauty products sales reached RMB22.6 billion (US$3.7 billion) in 2013, up from RMB1.7 billion (US$0.3 billion) in 2010, representing a CAGR of 136.5%, and is expected to further increase to RMB94.6 billion (US$15.6 billion) in 2018, representing a CAGR of 33.2% from 2013, according to the Frost & Sullivan report. Online B2C beauty products sales as a percentage of total beauty products retail sales in China expanded from 1.3% in 2010 to 10.2% in 2013, and is expected to further increase to 21.9% in 2018, according to the Frost & Sullivan report.

The Emergence of M-Commerce in China. According to the Frost & Sullivan report, the smartphone user population in China reached 475.1 million in 2013. Active mobile commerce, or m-commerce, user population reached 144.4 million in China in 2013, a growth of 160.5% from 2012, and is expected to further increase to 762.6 million in 2018, representing a CAGR of 39.5% from 2013, according to the Frost & Sullivan report. The total retail sales through m-commerce amounted to RMB303.7 billion (US$50.2 billion) in 2013, representing a growth of 271.6% from 2012, and is expected to further increase to RMB2,226.8 billion (US$367.8 billion) in 2018, representing a CAGR of 49.0% from 2013, according to the Frost & Sullivan report.

The Emergence of Curated Sales. According to the Frost & Sullivan report, curated sales is a disruptive sales format compared to the traditional offline channels for beauty products. Curated sales is an innovative new sales format which features a limited number of products that are first selected, then recommended and offered for sale. Each curated product is usually on sale for a limited period of time on a curated sales platform, which helps focus user traffic on the featured brand and product.

 

 

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The recommendation feature of curated sales is conducive to generating frequent visits from customers as they seek information and guidance on the latest trends in the markets. As such, curated sales format helps build a loyal and engaged customer base and encourages repeat purchases. Furthermore, the curated sales format is especially effective in educating consumers in China about new beauty products and enhancing the profile of brands through online channels.

Unlike flash sales, the curated sales format is a more effective and efficient channel to introduce new products by guiding consumers’ purchase decisions. An operator of a curated sales platform can present and sell a carefully selected array of high quality products with purchase recommendations featuring detailed descriptions and extensive customer reviews, without imposing limit on the units available for sale for each product or offering steep price discounts.

Our Strengths

We believe the following key competitive strengths have contributed to our growth and success to date:

 

    China’s No. 1 online beauty products retailer;

 

    visionary management with exceptional marketing capabilities;

 

    robust mobile platform;

 

    trusted online retail brand for beauty products; and

 

    highly engaged and loyal customer base.

Our Strategies

Our goal is to become the online destination for female consumers and trendsetter for fashion and beauty. We intend to achieve our goal by pursuing the following growth strategies:

 

    extend our product offerings;

 

    strengthen our mobile platform;

 

    improve customer experience and enhance customer loyalty;

 

    increase our brand recognition;

 

    extend our operational capabilities; and

 

    pursue strategic alliances, investments and acquisition opportunities.

Our Challenges

Our ability to achieve our goal and execute our strategies are subject to risks and uncertainties, including those relating to our ability to:

 

    maintain and enhance the recognition and reputation of our Jumei ( LOGO ) brand;

 

    compete effectively;

 

    evaluate our prospects in light of our limited operating history;

 

    manage our growth or execute our strategies effectively;

 

    verify the authorization and authenticity of products sold on our internet platform;

 

    provide superior customer experience and offer products at attractive prices to meet customer needs and preferences;

 

 

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    manage and expand our relationships with suppliers and third-party merchants, and procure products at favorable terms;

 

    expand our fulfillment network and develop and maintain relationships with third-party delivery service providers; and

 

    attract, train and retain qualified personnel.

In addition, we face risks and uncertainties related to our corporate structure and doing business in China, including:

 

    risks associated with our control over Reemake Media, which is based on contractual arrangements rather than equity ownership, including our ability to use and enjoy assets held by Reemake Media that are material to the operation of our business, such as the domain names and trademarks held by Reemake Media;

 

    risks related to the potential conflict between PRC and Cayman Islands fiduciary duties owed by directors of Reemake Media and our company and the lack of framework for the resolution of fiduciary duty conflicts between these different jurisdictions;

 

    uncertainties associated with the interpretation and application of PRC regulations and policies, including those relating to the e-commerce industry in China; and

 

    risks related to our ability to use the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries as a result of PRC regulations and governmental control of currency conversion.

Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.

Corporate History and Structure

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 ( LOGO ) 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 under the laws of the Cayman Islands as our offshore holding company in order to facilitate international financing. In September 2010, we established a wholly-owned Hong Kong subsidiary, Jumei Hongkong Limited to be our intermediate holding company. In March 2011, Jumei Hongkong Limited established a wholly-owned PRC subsidiary, Jumei Youpin (Beijing) Science and Technology Services Co., Ltd., which was subsequently renamed as Beijing Silvia Technology Service Co., Ltd., or Beijing Jumei. In March 2014, we established a new wholly-owned Hong Kong subsidiary named Jumei Hongkong Holding Limited.

Due to PRC legal restrictions on foreign ownership and investment in the value-added telecommunication service businesses, we conduct such activities through contractual arrangements with Reemake Media, our consolidated variable interest entity in China. Through Beijing Jumei, we obtained control over Reemake Media in April 2011 by entering into a series of contractual arrangements with Reemake Media and the shareholders of Reemake Media. The contractual arrangements, except for the exclusive consulting and services agreement, were subsequently amended and restated in January 2014. Reemake Media holds our internet content provider license, or ICP License, as an internet information provider and operates our website. As a result of these contractual arrangements, Reemake Media is a variable interest entity of which we are the primary beneficiary. We have

 

 

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consolidated the financial results of Reemake Media and its subsidiary in our consolidated financial statements in accordance with U.S. GAAP.

Jumei Hongkong Limited established Shanghai Paddy Commerce and Trade Co., Ltd. in June 2012, Chengdu Jumei Youpin Science and Technology Co., Ltd. in July 2012, and Tianjin Cycil Information Technology Co., Ltd. and Tianjin Darren Trading Co., Ltd. in March 2013. Tianjin Darren Trading Co., Ltd. was subsequently renamed as Tianjin Qianmei International Trading Co., Ltd., in March 2014. In December 2013, Jumei Hongkong Limited established Tianjin Venus Technology Co., Ltd., a wholly owned subsidiary.

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated variable interest entity and its subsidiary, as of the date of this prospectus:

 

LOGO

 

(1) Leo Ou Chen, Yusen Dai and Hui Liu hold 82.30%, 8.85% and 8.85% equity interests in Reemake Media, respectively.

We are a “controlled company” as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen will beneficially own a majority of the aggregate voting power of our company immediately after this offering.

 

 

 

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Corporate Information

Our principal executive offices are located at 20th Floor, Tower B, Zhonghui Plaza, 11 Dongzhimen South Road, Dongcheng District, Beijing 100007, the People’s Republic of China. Our telephone number at this address is +86 10-5676-6999. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is jumei.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017 with telephone number +1 212-750-6474.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

 

    an “active customer” for a specified period are to a customer that made at least one purchase during the period;

 

    “ADSs” are to our American depositary shares, each of which represents one Class A ordinary share;

 

    “China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

    “GMV” are to gross merchandise volume, which is the total value of merchandise sold through our internet platform;

 

    our “internet platform” are to our jumei.com website and our mobile platform;

 

    “Jumei,” “we,” “us,” “our company” and “our” are to Jumei International Holding Limited, and, in the context of describing our business and results of operations, also include its subsidiaries, consolidated variable interest entity and subsidiary of the consolidated variable interest entity;

 

    “net GMV” are to the sum of (i) net revenues generated from merchandise sales, and (ii) net revenues generated from marketplace services and adding back corresponding payables to our third-party merchants; net GMV can be obtained from GMV by deducting value-added tax and surcharges, customer returns and cash coupons, and adding delivery fees charged to our customers;

 

    “ordinary shares” prior to the completion of this offering are to our ordinary shares, par value US$0.00025 per share, and upon and after the completion of this offering are to our Class A and Class B ordinary shares, par value US$0.00025 per share;

 

    “repeat customer” for a specified period are to any customer who (1) is an active customer during such period, and (2) had purchased products from us at least twice during the period from our inception to the end of such period. Orders placed by a repeat customer during a specified period include all orders placed by the customer during such period even if the customer made the first purchase from us in the same period;

 

    “RMB” and “Renminbi” are to the legal currency of China;

 

    “SKUs” are to stock keeping units; and

 

    “US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs.

 

 

 

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Certain operating data, economic and market data and regulatory information shown in Renminbi amounts in this prospectus are accompanied by translations into U.S. dollars solely for the convenience of the reader. Unless otherwise noted, all such translations from Renminbi to U.S. dollars in this prospectus were made at RMB6.0537 to US$1.0000, the noon buying rate for December 31, 2013 set forth in the H.10 statistical release of the Federal Reserve Board. Our net GMV amounts for the historical periods are denominated in RMB and were translated into US$ amounts using the applicable average exchange rate for each relevant period. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On May 2, 2014, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2591 to US$1.0000.

 

 

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The Offering

 

Offering price

We currently estimate that the initial public offering price will be between US$19.50 and US$21.50 per ADS.

 

ADSs offered by us and outstanding immediately after this offering

9,500,000 ADSs (or 10,925,000 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

Concurrent private placement

Concurrently with, and subject to, the completion of this offering, General Atlantic Singapore Fund Pte. Ltd., a non-US and non-affiliated entity, has agreed to purchase from us US$150,000,000 in Class A ordinary shares at a price per share equal to the initial public offering price per share, or the Concurrent Private Placement. Assuming an initial offering price of US$20.50 per share, the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus, the investor will purchase 7,317,073 Class A ordinary shares from us. Our proposed issuance and sale of Class A ordinary shares to the investor is being made through a private placement pursuant to an exemption from registration with the U.S. Securities and Exchange Commission under Regulation S of the Securities Act. Under the subscription agreement executed on May 6, 2014, if the initial offering price is greater than US$21.50 per ADS, the investor has the right to terminate the subscription agreement by written notice to us and the private placement will not be completed. The investor has agreed with the underwriters not to, directly or indirectly, sell, transfer or dispose of any Class A ordinary shares acquired in the private placement for a period of 180 days after the date of the final prospectus, subject to certain exceptions.

 

Ordinary shares outstanding immediately after this offering

141,987,272 ordinary shares, comprised of 83,182,432 Class A ordinary shares, including 9,500,000 Class A ordinary shares we will issue in this offering and 7,317,073 Class A ordinary shares we will issue in the Concurrent Private Placement, and 58,804,840 Class B ordinary shares (or 143,412,272 ordinary shares if the underwriters exercise their option to purchase additional ADSs in full, comprised of 84,607,432 Class A ordinary shares and 58,804,840 Class B ordinary shares).

 

The ADSs

Each ADS represents one Class A ordinary share, par value US$0.00025 per share.

 

  The depositary will hold Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

 

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  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Ordinary shares

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to ten votes. 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 which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares. For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to 1,425,000 additional ADSs.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$322.7 million from this offering and the Concurrent Private Placement, assuming an initial public offering price of US$20.50 per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the option to purchase additional ADSs.

 

 

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  We intend to use the net proceeds from this offering and the Concurrent Private Placement to invest in our marketing and branding efforts, including growing our exclusive products portfolio and setting up additional physical stores, expand our logistics network and enhance our fulfillment capabilities, strengthen our IT infrastructure and systems, and for general corporate purposes, including working capital needs and potential acquisitions, investments and alliances, although we are not currently negotiating any such transactions. See “Use of Proceeds” for more information.

 

Lock-up

We, our directors, executive officers and all of our existing shareholders, certain option holders and the Concurrent Private Placement investor have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of the final prospectus. In addition, through a letter agreement, we will instruct The Bank of New York Mellon, as depositary, not to accept any deposit of any ordinary shares or issue any ADSs until after 180 days following the date of the final prospectus unless we consent to such deposit or issuance. We will not provide such consent without the prior written consent of the representatives of the underwriters. The foregoing does not affect the right of ADS holders to cancel their ADSs and withdraw the underlying ordinary shares. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of 764,750 ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed share program.

 

Listing

We have applied to have the ADSs listed on the NYSE under the symbol “JMEI.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on             , 2014.

 

Depositary

The Bank of New York Mellon.

 

 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of income/(loss) data for the years ended December 31, 2011, 2012 and 2013, summary consolidated balance sheet data as of December 31, 2011, 2012 and 2013 and summary consolidated cash flow data for the years ended December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2011 have been derived from our audited consolidated balance sheet as of December 31, 2011, which is not included in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this “Summary Consolidated Financial and Operating Data” section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    Year Ended December 31,  
        2011             2012         2013  
    (in thousands of US$, except for
share, per share and per ADS
data)
 

Summary Consolidated Statements of Income/(Loss):

     

Net revenues:

     

Merchandise sales

    3,307        209,059        413,050   

Marketplace services

    18,481        24,165        69,946   
 

 

 

   

 

 

   

 

 

 

Total net revenues

    21,788        233,224        482,996   

Cost of revenues

    (2,788     (148,541     (283,317
 

 

 

   

 

 

   

 

 

 

Gross profit

    19,000        84,683        199,679   
 

 

 

   

 

 

   

 

 

 

Operating expenses: (1)

     

Fulfillment expenses

    (11,842     (28,884     (59,228

Marketing expenses

    (9,348     (36,484     (52,151

Technology and content expenses

    (739     (4,416     (10,023

General and administrative expenses

    (1,431     (4,761     (40,013
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    (23,360     (74,545     (161,415
 

 

 

   

 

 

   

 

 

 

Income/(loss) from operations

    (4,360     10,138        38,264   
 

 

 

   

 

 

   

 

 

 

Other income/(expenses)

     

Interest income, net

    6        199        916   

Others, net

    (150     (93     127   
 

 

 

   

 

 

   

 

 

 

Income/(loss) before tax

    (4,504     10,244        39,307   
 

 

 

   

 

 

   

 

 

 

Income tax benefit/(expense)

    475        (2,140     (14,303
 

 

 

   

 

 

   

 

 

 

Net Income/(loss)

    (4,029     8,104        25,004   
 

 

 

   

 

 

   

 

 

 

Accretion to preferred share redemption value

    (716     (1,688     (1,795

Income allocation to participating preferred shares

    —          (1,292     (7,403
 

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to ordinary shareholders

    (4,745     5,124        15,806   
 

 

 

   

 

 

   

 

 

 

 

 

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     Year Ended December 31,  
     2011     2012      2013  
     (in thousands of US$, except for share, per
share and per ADS data)
 

Weighted average number of ordinary shares used in per share calculations(3):

       

- Basic

     40,644,779        50,070,659         59,475,739   

- Diluted

     40,644,779        83,672,986         83,196,788   

Net income/(loss) per ordinary share:

       

- Basic

     (0.12     0.10         0.27   

- Diluted

     (0.12     0.06         0.19   

Net income/(loss) per ADS(2):

       

- Basic

     (0.12     0.10         0.27   

- Diluted

     (0.12     0.06         0.19   

Weighted average number of ordinary shares used in pro forma per share calculations(4):

       

- Basic

          105,521,544   

- Diluted

          129,242,593   

Pro forma net income per ordinary share (unaudited)(4):

       

- Basic

          0.24   

- Diluted

          0.19   

Pro forma net income per ADS (unaudited)(2)(4):

       

- Basic

          0.24   

- Diluted

          0.19   

 

(1)  Share-based compensation expenses are allocated in operating expense items as follows:

 

    Year Ended December 31,  
          2011                 2012               2013      
    (in thousands of US$)  

Fulfillment expenses

    —          —          382   

Marketing expenses

    —          —          481   

Technology and content expenses

    40        30        785   

General and administrative expenses

    167        234        31,144   

 

(2)  Each ADS represents one Class A ordinary share.
(3)  On April 8, 2011, we effected a 4,000-for-1 share split whereby all of our 50,000 then issued and outstanding ordinary shares of a par value of $1.00 each were converted into 200,000,000 ordinary shares of a par value of $0.00025 each. Concurrent with the share split, we repurchased an aggregate of 130,924,549 ordinary shares from the then existing shareholders. As a result of the share split, the number of our total authorized shares was increased from 50,000 to 200,000,000.
(4)  The unaudited pro forma basic and diluted net income per share data reflect the conversion of all outstanding preferred shares as if the conversion had occurred at the beginning of the year.

 

     As of December 31,  
     2011     2012      2013      2013
(Pro Forma
Unaudited)(1)
     2013
(Pro Forma
As Adjusted
Unaudited)(2)
 
     (in thousands of US$)  

Summary Consolidated Balance Sheet Data:

             

Cash and cash equivalents

     9,117        29,964         111,402         111,402         434,059   

Accounts receivable, net

     3,336        1,454         2,807         2,807         2,807   

Inventories

    
28
  
    14,748         32,653         32,653         32,653   

Total assets

     18,903        71,188         195,311         195,311         517,968   

Accounts payable

     970        38,592         88,766         88,766         88,766   

Total liabilities

    
9,712
  
    53,592         119,651         119,651         119,651   

Total mezzanine equity

     13,701        15,389         17,184         —           —     

Total shareholders’ equity/(deficit)

     (4,510     2,207         58,476         75,660         398,317   

 

 

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(1)  The pro forma data in the balance sheet data table above reflect the automatic conversion of all of our preferred shares that are issued and outstanding into 46,045,805 ordinary shares on a one-for-one basis immediately prior to the completion of this offering.
(2)  The pro forma as adjusted data in the balance sheet data table above reflect (i) the redesignation of 58,804,840 ordinary shares held by Super ROI Global Holding Limited and Pinnacle High-Tech Limited into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the automatic conversion and redesignation of all of the remaining ordinary shares and preferred shares that are issued and outstanding into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the sale of Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$20.50 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs and (iv) the issuance and sale of 7,317,073 Class A ordinary shares to an investor through the Concurrent Private Placement, with net proceeds of US$145.5 million to us.

 

     Year Ended December 31,  
         2011             2012         2013  
     (in thousands of US$)  

Summary Consolidated Cash Flow Data:

      

Net cash provided by/(used in) operating activities

     (2,009     27,360        84,806   

Net cash used in investing activities

     (2,027     (6,601     (4,643

Net cash provided by/(used in) financing activities

     10,140        —          (833

Effect of exchange rate changes on cash and cash equivalents

     50        88        2,108   
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     6,154        20,847        81,438   

Cash and cash equivalents at beginning of year

     2,963        9,117        29,964   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     9,117        29,964        111,402   
  

 

 

   

 

 

   

 

 

 

The following table presents summary operating data for the periods indicated:

 

     Year Ended December 31,  
         2011              2012          2013  
     (in thousands, except for net
GMV, which is in thousands of
US$)
 

Summary Operating Data:

        

Net GMV

     92,269         327,255         816,570   

Active customers

     1,290         4,824         10,536   

Repeat customers

     694         2,716         6,529   

New customers

     1,217         4,165         8,224   

Total orders

     4,484         15,714         35,962   

Orders placed by repeat customers

     3,888         13,605         31,955   

Orders fulfilled by our logistics centers

     4,460         15,630         30,281   

 

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Any harm to our Jumei ( LOGO ) 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 ( LOGO ) 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. If we are unable to preserve our reputation, enhance our brand recognition or increase positive awareness of our internet platform, products and services, it may be difficult for us to maintain and grow our customer base, and our business and growth 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, such as Lefeng, 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 E-Commerce China Dangdang Inc., which operates Dangdang.com. See “Business—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

 

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expansion of their products and services. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and devote substantially more resources to their website and system development than us. In addition, new and enhanced technologies may increase the competition in the online retail market. Increased competition may reduce our profitability, market share, customer base and brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.

Our limited operating history makes it difficult to evaluate our business and prospects.

We commenced our beauty products retail business in March 2010 and have a limited operating history. Since our inception, we have experienced rapid growth in our business. Our total net revenues increased by 970.4% from US$21.8 million in 2011 to US$233.2 million in 2012 and further increased by 107.1% to US$483.0 million in 2013. We incurred a net loss of US$4.0 million in 2011 and achieved net income of US$8.1 million in 2012. Our net income increased by 208.5% from US$8.1 million in 2012 to US$25.0 million in 2013. However, our historical growth rate may not be indicative of our future performance. We cannot assure you that we will be able to achieve similar results or grow at the same rate as we did in the past. Growth may slow and net revenues or net income may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending, increasing competition, slowing growth of our overall market, fulfillment bottlenecks, emergence of alternative business models, changes in government policies or general economic conditions. It is difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in rapidly evolving markets may be exposed. You should consider our prospects in light of the risks and uncertainties that fast-growing companies with a limited operating history may encounter.

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

We have been growing rapidly since our inception. Expansion has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage and motivate our workforce and manage our relationships with customers, suppliers, brand owners, third-party merchants and other service providers. As we selectively increase our product offerings, we will need to work with different groups of new suppliers and third-party merchants efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers, brand owners and third-party merchants. All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures. We cannot assure you that we will be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business and prospects.

Our expansion into new product categories and third-party marketplace business may expose us to new challenges and more risks.

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 apparel and other lifestyle products. Expansion into new product categories involve new risks and challenges. Our lack of familiarity with these products and lack of relevant customer data relating to these products may make it more difficult for us to keep pace with the evolving customer demands and preferences.

 

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We are also a service provider to third party merchants who sell beauty products as well as apparel and other lifestyle products on our internet platform and charge service fees for such sales. For 2013, our net revenues generated from our marketplace services accounted for approximately 14.5% of our total net revenues. Our third-party merchants of apparel and other lifestyle products use their own delivery systems or service providers to deliver products to our customers, which makes it difficult for us to ensure that our customers get the same service for other products sold by us on our internet platform. If any third-party merchant does not control the quality of the products that it sells, or if it does not deliver the products or delivers products that are materially different from its description of them, or if it sells counterfeit or defective products or products without proper authorization on our internet platform and we fail to discover or take necessary measures to prevent such behavior, the reputation of our internet platform and our Jumei ( LOGO ) brand may be materially and adversely affected, and we could face claims that we should be held liable for any losses and damages arising from such misbehavior or infringement. See “Regulation—Regulation Relating to Product Quality and Consumer Protection.” In addition, the supplier relationships, customer acquisition analytics and working capital requirements for our marketplace business may not be the same as those for our online direct sales operations, which may complicate the management of our business. In order for our marketplace business to be successful, we must continue to identify and attract new third-party merchants, and we may not be successful in this regard.

We have limited experience and operating history in our new product categories and our marketplace services, 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 eventually achieve profitability, 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 2013, we worked with approximately 1,700 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. Over 75% of our net revenues in 2013 were generated from products supplied or sold by suppliers and third-party merchants that had provided us with written authorization documents. 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

 

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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 plan to adopt 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 “Regulation—Regulation Relating to Distribution of Cosmetics.”

Under our standard form agreements, we require suppliers or third-party merchants to indemnify us for any losses we suffer or any costs that we incur due to any products we source from these suppliers or any products sold by these third-party merchants. However, not all of our agreements with suppliers and third-party merchants have such terms, and for those agreements that have such terms, we may not be able to successfully enforce our contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights. Enforcing our contractual rights under those agreements will incur significant costs and efforts and will divert our management’s attention from day-to-day operations. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

If counterfeit products are sold on our internet platform, our reputation and financial results could be materially and adversely affected.

Suppliers and third-party merchants on our internet platform are separately responsible for sourcing the products that are sold on our internet platform. Although we have adopted measures to verify the authenticity of products sold on our internet platform and to immediately remove any counterfeit products found on our internet platform, these measures may not always be successful. 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 we sell.” 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.

 

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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. We had 547 customer service representatives as of December 31, 2013. 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 apparel products. However, our sales of these new products may not increase to a level that would substantially reduce our dependence on online sales of beauty products. We face intense competition from other online retailers of beauty products and from established companies with physical stores that are moving into the online space. Any event that results in a reduction in our sales of beauty products could materially and adversely affect our ability to maintain or increase our current level of net revenue and business prospects.

If we fail to manage and expand our relationships with suppliers and third-party merchants, or otherwise fail to procure products at favorable terms, our business and growth prospects may suffer.

We worked with approximately 500, 700 and 1,700 suppliers and third-party merchants in 2011, 2012 and 2013, respectively. Our suppliers and third-party merchants include brand owners, brand distributors, resellers

 

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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 beauty products to us or the third-party merchants may be prevented from selling beauty products, apparel and other lifestyle products at our internet platform at any time, which may adversely affect our business and net revenues. In addition, if our suppliers cease to provide us with favorable payment terms, our requirements for working capital may increase and our operations may be materially and adversely affected. We will also need to establish new supplier and third-party merchant relationships to ensure that we have access to a steady supply of products on favorable commercial terms. If we are unable to develop and maintain good relationships with suppliers and third-party merchants that would allow us to obtain a sufficient amount and variety of authentic and quality products on acceptable commercial terms, it may limit our ability to offer sufficient products sought by our customers, or to offer these products at prices acceptable to them. Any negative developments in our relationships with suppliers and third-party merchants could materially and adversely affect our business and growth prospects. If we fail to attract new suppliers and third-party merchants to sell their products to us or offer their products on our internet platform due to any reason, our business and growth prospects may be materially and adversely affected.

We plan to expand our fulfillment network. If we are not able to manage such expansion 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 Beijing, Shenyang, Kunshan, Chengdu and Guangzhou, is essential to our business. We plan to set up more logistics centers to increase our warehouse capacity, accommodate more customer orders and provide better coverage of our target markets. As we continue to add logistics center capability, our fulfillment network becomes increasingly complex and challenging to operate. We cannot assure you that we will be able to lease facilities suitable to our needs on commercially acceptable terms or at all. We may not be able to recruit a sufficient number of qualified employees with regards to the expansion of our fulfillment network. In addition, the expansion of our fulfillment infrastructure may strain our managerial, financial, operational and other resources. If we fail to manage such expansion successfully, our growth potential, business and results of operations may be materially and adversely affected.

We depend on numerous third-party delivery service providers to deliver our products, and if they fail to provide reliable delivery services, our business and reputation may be materially and adversely affected.

We used a network of 49 third-party inter-city transportation companies and local third-party delivery service providers companies to deliver parcels to our customers as of December 31, 2013. 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

 

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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 directly and those offered and sold by third-party merchants on our internet platform are stored in our logistics centers. We have logistics centers in each of Beijing, Shenyang, Kunshan, Chengdu and Guangzhou. All of our logistics centers are leased from third parties. If any of the landlords terminate the lease agreements with us, or materially alter any existing arrangements with us, we may be forced to leave the premises and may not be adequately compensated for our investments or at all, and our business, results of operations and financial condition may be materially and adversely affected as a result.

Our ability to process and fulfill orders accurately and provide high quality customer service depends on the smooth operation of our logistics centers. Our fulfillment infrastructure may be vulnerable to damage caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake, human error and other events. If any of our logistics centers were rendered incapable of operations, then we may be unable to fulfill any orders in any of the geographic areas that rely on that center. We do not carry business interruption insurance, and the occurrence of any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition and results of operations.

We may not be able to recoup the capital expenditures or investments we make to expand and upgrade our fulfillment and technology capabilities.

We have invested and will continue to invest significantly in expanding our logistics centers and upgrading our technology platform. Furthermore, we plan to lease additional logistics centers in 2014 and purchase additional warehousing equipment. We expect to continue to invest in our fulfillment and technology capabilities as our business further develops. We also intend to continue to add personnel and other resources to our logistics centers and technology platform. We are likely to incur costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. We may not be able to recover our capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect our profitability.

 

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If we fail to adopt new technologies or adapt our website, mobile application and systems to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our internet platform. Our competitors are constantly developing innovations and introducing new products to increase their customer base and enhance user experience. As a result, in order to attract and retain customers and compete against our competitors, we must continue to invest significant resources in research and development to enhance our information technology and improve our existing products and services for our customers. The internet and the online retail industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of website, mobile application and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to use new technologies effectively or adapt our website, mobile application, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

We may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.

We sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality or counterfeit. For example, beauty products in general, regardless of their authenticity or quality, may cause allergic reactions or other illness that may be severe for certain customers. Sales and distributions of products on our internet platform could expose us to product liability claims relating to personal injury and may require product recalls or other actions. Third parties that suffered such injury may bring claims or legal proceedings against us as the retailer of the products or as the marketplace service provider. See “Regulation—Regulation Relating to Product Quality and Customer 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 third-party liability insurance or product liability insurance in relation to products we sell. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.

If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.

We have incurred expenses on a variety of different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the levels of product sales that we anticipate. We incurred US$9.3 million, US$36.5 million and US$52.2 million in marketing expenses in 2011, 2012 and 2013, 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

 

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activities in the past and may lead to significantly higher marketing expenses in the future. While our innovative marketing campaigns, including our “I endorse myself” micro-films starring our senior executive officers, have proven to be highly successful, we cannot assure you that we can continue to produce, or benefit from, such unique and effective marketing campaigns in the future. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our net revenues to decline and negatively impact our profitability.

If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory of SKUs. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our customers may not order products in the quantities that we expect. It may be difficult to accurately forecast demand, and determine appropriate product or component. We generally have the right to return unsold items for most of our products to our suppliers. In order to secure more favorable commercial terms, we may need to continue to enter into supply arrangements without unconditional return clauses or with more restrictive return policies.

If we fail to manage our inventory effectively or negotiate favorable credit terms with third party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers in order to secure the right to return products to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results of operations and financial condition.

Uncertainties relating to the growth and profitability of the online retail industry in China in general, and the development of the online curated and flash sales business models in particular, could adversely affect our net revenues and business prospects.

We generate substantially all of our net revenues from online retailing. While online retailing has existed in China since the 1990s, only recently have certain online retailers become profitable. The curated and flash sales business models were not introduced to China until recently. The long-term viability and prospects of various online retail business models in China, particularly the online curated and flash sales business models, remain relatively untested. Our future results of operations will depend on numerous factors affecting the development of the online curated and flash sales business and, more broadly, the online retail industry in China, many of which are beyond our control. These factors include:

 

    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;

 

    the trust and confidence level of online shopping consumers in China, as well as changes in customer demographics and consumer tastes and preferences;

 

    the selection, price and popularity of products that we and our competitors offer online;

 

    the emergence and development of alternative retail channels or business models that better address the needs of consumers;

 

    the development of fulfillment, payment and other ancillary services associated with online purchases.

 

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A decline in the popularity of online shopping or more specifically, of online curated and flash sales, or any failure by us to adapt our internet platform and improve the online shopping experience of our customers in response to trends and consumer requirements, may adversely affect our net revenues and business prospects.

Furthermore, the online retail industry is very sensitive to macroeconomic changes, and retail purchases tend to decline during recessionary periods. Many factors outside of our control, including inflation and deflation, volatility of stock and property markets, interest rates, tax rates and other government policies and unemployment rates can adversely affect consumer confidence and spending, which could in turn materially and adversely affect our growth prospects and profitability.

The proper functioning of our technology platform is essential to our business. Any failure to maintain the satisfactory performance of our internet platform could materially and adversely affect our business and reputation.

The satisfactory performance, reliability and availability of our technology platform are critical to our success and our ability to attract and retain customers and provide quality customer service. Substantially all of our sales of products are made online through our internet platform. Our mobile customer experience relies on the effective use of mobile devices, operating systems, networks and standards that we do not control. Our net revenues depend on the number of visitors who shop on our internet platform and the volume of orders we fulfill. Any system interruptions caused by telecommunications failures, errors encountered during system upgrades or system expansions, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our internet platform, leakage of confidential customer information, degraded order fulfillment performance, or additional shipping and handling costs, which may, individually or collectively, materially and adversely affect our business, reputation, financial condition and results of operations. In addition, any system failure or interruption could cause material damage to our reputation and brand image if our systems are perceived to be insecure or unreliable. For example, during a sales campaign in March 2013, our system was overwhelmed by unexpected spikes of large user traffic. As a result, our website was down for a couple of hours and we encountered backlogs and delays in our logistics and delivery systems. We subsequently resolved the problems, upgraded our technology system and significantly expanded its peak traffic handling capacities. We have not had any similar system failure since then. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. Because of our brand recognition in the online retail industry in China, we believe we are a particularly attractive target for such attacks. We have experienced in the past, and may experience in the future, such attacks and unexpected interruptions. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences could reduce customer satisfaction, damage our reputation and result in a significant decrease in our net revenues.

Additionally, we must continue to upgrade and improve our technology platform to support our business growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If our existing or future technology platform does not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

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Any deficiencies in China’s telecommunication infrastructure could impair our ability to sell products over our internet platform, which could cause us to lose customers and materially and adversely affect our results of operations.

Substantially all of our sales of products are made online through our internet platform. Our business depends on the performance and reliability of the telecommunication infrastructure in China. The availability of our internet platform depends on telecommunications carriers and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. Almost all access to the internet and mobile internet is maintained through state-owned telecommunication carriers under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and service providers to present our internet platform to consumers. We have experienced service interruptions in the past, which were typically caused by service interruptions at the underlying external telecommunications service providers, such as the internet data centers and broadband carriers from which we lease services. Service interruptions prevent consumers from viewing our internet platform and placing orders, and frequent interruptions could frustrate customers and discourage them from attempting to place orders, which could cause us to lose customers and adversely affect our results of operations.

Failure to protect confidential information of our customers and network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

A significant challenge to the online retail industry is the secure transmission of confidential information over public networks. Substantially all of the orders and some of the payments for products we offer are made through our internet platform. In addition, some online payments for our products are settled through third-party online payment services. We also share certain personal information about our customers with contracted third-party delivery service providers, such as their names, addresses, phone numbers and transaction records. In such cases, maintaining complete security for the transmission of confidential information on our technology platform, such as customer names, personal information and billing addresses, is essential to maintaining customer confidence.

We have adopted security policies and measures, including encryption technology, to protect our proprietary data and customer information. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our customers’ visits on our website. Such individuals or entities obtaining our customers’ confidential or private information may further engage in various other illegal activities using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our customers may elect to make payment for purchases at our website. The contracted third-party delivery service providers we use may also violate their confidentiality obligations and disclose or use information about our customers illegally. Although we do not believe that we will be held responsible for any such illegal activities, any negative publicity on our website’s safety or privacy protection mechanism and policy could have a material and adverse effect on our public image and reputation. We cannot assure you that similar events will not occur in the future. Any compromise of our information security or contracted third-party delivery service providers’ information security measures could have a material and adverse effect on our reputation, business, prospects, financial condition and results of operations.

Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently come under increased public scrutiny. As online retailing continues to evolve, we believe that increased regulation by the PRC government of data privacy on the internet is likely. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store, process and

 

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share data with our customers, suppliers and third-party merchants. We generally comply with industry standards and are subject to the terms of our own privacy policies.

Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause our customers to lose trust in us. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of online retailing and other online services generally, which may reduce the number of orders we receive.

Payment methods used on our internet platform subject us to third-party payment processing-related risks.

We accept payments using a variety of methods, including payment on delivery, online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms such as Alipay. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment and cash on delivery options. We also rely on third parties to provide payment processing services. For example, we use contracted third-party delivery service providers for our cash on delivery payment options. The delivery personnel of our contracted third-party delivery service providers collect the payment on our behalf, and we require the contracted third-party delivery service providers to remit the payment collected to us on the following day. If these companies fail to remit the payment collected to us in a timely fashion or at all, if they become unwilling or unable to provide these services to us, or if their services quality deteriorates, our business could be disrupted. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adversely affected.

Our delivery and return policies may adversely affect our results of operations.

We have adopted shipping policies that do not necessarily pass the full cost of shipping on to our customers. We also have adopted customer-friendly return policies that make it convenient and easy for customers to change their minds after completing purchases. These policies improve customers’ shopping experience and promote customer loyalty, which in turn help us acquire and retain customers. However, these policies also subject us to additional costs and expenses, which we may not be able to recoup through increased net revenues. Our ability to handle a large volume of returns is unproven. If our return rates are higher than we expected, or such return policy is misused by a significant number of customers, our costs may increase significantly and our results of operations may be materially and adversely affected. In addition, as we cannot resell returned products that are not in their original packaging or return the products to our suppliers pursuant to our contracts with them. If return rates for such products increase significantly, we may experience an increase in our inventory balance, which may adversely affect our working capital. If we revise these policies to reduce our costs and expenses, our customers may be dissatisfied, which may result in losing existing customers or failing to acquire new customers at a desirable pace, which may materially and adversely affect our results of operations.

 

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We may be the subject of anti-competitive, harassing, or other detrimental conduct by third parties including complaints to regulatory agencies, negative blog postings, and the public dissemination of malicious characterization of our business that could harm our reputation and cause us to lose market share, customers and net revenues and adversely affect the price of our ADSs.

We have been subject to negative postings and other media exposure on our business in the past. We may become the target of anti-competitive, harassing, or other detrimental conduct by third parties. Such conduct includes complaints, anonymous or otherwise, to regulatory agencies. We may be subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Additionally, allegations, directly or indirectly against us, may be posted in internet chat-rooms or on blogs or any websites 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 prospectus. Our management team has only been working together since the inception of our company. If they cannot work together effectively or efficiently, our business may be severely disrupted. If one or more of our executive officers were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. Our business, financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain personnel. If any of our executive officers joins a competitor or forms a competing business, we may lose customers, suppliers, know-how and key professionals and staff members. Our executive officers have entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

If we are unable to recruit, train and retain qualified personnel or sufficient workforce while controlling our labor costs, our business may be materially and adversely affected.

We intend to hire additional qualified employees to support our business operations and planned expansion. Our future success depends, to a significant extent, on our ability to recruit, train and retain qualified personnel, particularly technical, fulfillment, marketing and other operational personnel with experience in the online retail industry. Our experienced mid-level managers are instrumental in implementing our business strategies, executing our business plans and supporting our business operations and growth. The effective operation of our managerial and operating systems, logistics centers, customer service center and other back office functions also depends on the hard work and quality performance of our management and employees. Since our industry is characterized by high demand and intense competition for talent and labor, we can provide no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. Our logistics centers also require a significant number of blue-collar workers, and these

 

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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. Rising inflation in China, which has had a disproportionate impact on everyday essentials such as food, is also putting pressure on wages. In addition, as we are still a young company, our ability to train and integrate new employees into our operations may also be limited and may not meet the demand for our business growth on a timely fashion, or at all. If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.

Increases in labor costs or restrictions in the supply of labor in China may materially and adversely affect our business, financial condition and results of operations.

We currently use workers dispatched by third-party labor service agents to provide customer service, logistics and delivery services. As of December 31, 2013, approximately 64.4% of our work force were dispatched by third-party labor service agents. Under such labor arrangement, we may incur joint liabilities if such third-party labor service agents infringe such dispatched workers’ rights. Such labor arrangement does not comply with the Interim Provisions on Labor Dispatch issued in January 2014, which became effective on March 1, 2014, that provides the number of dispatched contract workers hired by an employer shall not exceed 10% of the total number of its work force. We are required to formulate a plan to reduce the number of our dispatched contract workers to below the statutory limits prior to March 1, 2016. Although we are allowed to continue to engage the dispatched workers pursuant to our existing agreements with labor service agents entered into before December 28, 2012, we will need to replace them with full-time employees after the expiration of these contracts. We expect this may result in an increase in our labor cost. If we are found to be in violation of the new rules regulating contract workers, we may be ordered by the labor authority to rectify the noncompliance by entering into written employment contracts with our contract workers, and if we fail to rectify within the time period specified by the labor authority, we may be subject to a penalty ranging from RMB5,000 to RMB10,000 per dispatched worker. See “Regulation—Regulation on Employment”.

We source our products exclusively from third-party suppliers in China. 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 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 new labor contract law and related regulations impose greater liabilities on employers and may significantly increase the costs of workforce reductions. If we or our suppliers decide to significantly change or reduce our workforces, the new labor contract law could adversely affect our ability to make such changes in a timely, favorable and effective manner. Any of these events may adversely affect our business, financial condition and results of operations.

Future strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation and results of operations.

We may in the future enter into strategic alliances with various third parties to further our business purposes from time to time. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor their actions. To the extent the third parties suffer negative publicity or harm to their reputations from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.

 

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In addition, if we are presented with appropriate opportunities, we may acquire additional assets, technologies or businesses that are complementary to our existing business. Future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. The costs of identifying and consummating acquisitions may be significant. We may also incur significant expenses in obtaining approvals from shareholders and relevant government authorities in China and elsewhere in the world. Acquired assets or businesses may not generate the financial results we expect. In addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. The cost and duration of integrating newly acquired businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of operations.

Any lack of requisite approvals, licenses or permits applicable to our business or failure to comply with PRC laws and regulations may have a material and adverse impact on our business, financial condition and results of operations.

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the Ministry of Commerce, the Ministry of Industry and Information Technology, or MIIT. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of online retailing and distribution of food and nutritional supplements, including entry into these industries, the scope of permissible business activities, licenses and permits for various business activities, and foreign investment. We are required to hold a number of licenses and permits in connection with our business operation, including the ICP license, food distribution permit, 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 “Regulation—Regulations Relating to Foreign Investment” and “Regulation—Licenses and Permits.”

As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities regarding our conducting our business without the above mentioned approvals and permits. However, we cannot assure you that we will not be subject to any penalties in the future. As online retailing is still evolving in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to online retail businesses. For example, we are providing mobile applications to mobile device users. It is uncertain if our variable interest entity 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 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. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations.

We are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory

 

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employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we shall make supplemental social insurance and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition and results of operations may be adversely affected.

Our use of some leased properties could be challenged by third parties or government authorities, which may cause interruptions to our business operations.

As of the date of this prospectus, we had 18 leased properties for our offices, logistics centers, customer service center and offline store. The lessors of nine leased properties have not been able to provide proper ownership certificates for the properties we lease or prove their rights to sublease the properties to us or do not hold legal certificates to legally lease properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities, our leases could be invalidated. We may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. In addition, our leasehold interests in leased properties have not been registered with relevant PRC government authorities as required by PRC law, which may expose us to potential fines ranging from RMB1,000 (US$165) to RMB10,000 (US$1,652) per unit leasehold.

As of the date of this prospectus, 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 the date of this prospectus, we leased an aggregate of approximately 97 thousand square meters of properties for our offices, logistics centers, customer service center and offline store. 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 the date of this prospectus. As of the date of this prospectus, options to purchase 7,131,792 ordinary shares are issued and outstanding under the

 

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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. As of the date of this prospectus, we have not granted any incentive shares 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. We currently own 12 computer software copyrights in China relating to various aspects of our operations. As of December 31, 2013, we owned 165 registered trademarks, copyrights to 12 software programs developed by us relating to various aspects of our operations, and 10 registered domain names, including jumei.com. See “Business—Intellectual Property.” 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

 

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may be other third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently infringe. We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against us in China, the United States or any other jurisdictions. In addition, we strive to closely monitor the products offered on our internet platform, and also require suppliers and third-party merchants to indemnify us for any losses we suffer or any costs that we incur in relation to the products we source from such suppliers or the products offered by such third-party merchants on our internet platform. However, we cannot be certain that these measures would be effective in completely preventing the infringement of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. Further, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.

Finally, we use open source software in connection with parts of our technology platform. Companies that incorporate open source software into their own products and services have, from time to time, faced claims challenging the ownership of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our source code or pay damages for breach of contract could be harmful to our business results of operations and financial condition.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm, or our independent accountant, has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of December 31, 2012 and 2013 and for the years ended December 31, 2011, 2012 and 2013, we and our independent accountant identified one “material weakness” in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, and other control deficiencies. The material weakness identified related to our lack of sufficient and competent financial reporting and accounting personnel to implement key controls over period end financial reporting and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements. Following the identification of the material weakness and other control deficiencies, we have taken measures and plan to continue to take measures to remedy these deficiencies. For details of these remedies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting.” However, the implementation of these measures may not fully address the material weakness 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 weakness and control deficiencies or our failure to

 

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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.

Furthermore, it is possible that, had our independent accountant conducted an audit of our internal control over financial reporting, such accountant might have identified additional material weaknesses and deficiencies. Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2015. In addition, once we cease to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act, or the JOBS Act, our independent accountant must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent accountant, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

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 and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.

The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies went into a recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis since 2011

 

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and the slowdown of the Chinese economy in 2012. It is unclear whether the Chinese economy will resume its high growth rate. 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 also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and tensions in the relationship between China and Japan. Economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the 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 also purchase cargo transportation insurance from time to time to cover our beauty products in transit. However, as the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance or product liability insurance, nor do we maintain key-man life insurance. 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 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 Reemake Media 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 not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended in 2011, and other applicable laws and regulations.

We are a Cayman Islands company and our PRC subsidiaries are considered foreign-invested enterprises. Accordingly, 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 an affiliated PRC

 

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entity, Reemake Media, which holds our ICP License as an internet information provider. Reemake Media is 82.30% owned by Mr. Leo Ou Chen, our founder, chairman and chief executive officer, 8.85% owned by Mr. Yusen Dai, our founder, director and executive officer, and 8.85% owned by Mr. Hui Liu, a non-employee beneficial owner of our company. All of the shareholders of Reemake Media are PRC citizens. We entered into a series of contractual arrangements with Reemake Media and its shareholders, which enable us to:

 

    exercise effective control over Reemake Media;

 

    receive substantially all of the economic benefits of Reemake Media; and

 

    have an exclusive option to purchase all or part of the equity interests and assets in Reemake Media when and to the extent permitted by PRC law.

Because of these contractual arrangements, we are the primary beneficiary of Reemake Media and hence consolidate its financial results as our variable interest entity under U.S. GAAP. For a detailed discussion of these contractual arrangements, see “Corporate History and Structure.”

In the opinion of Fangda Partners, our PRC legal counsel, (i) the ownership structure of Beijing Jumei and Reemake Media in China, both currently and immediately after giving effect to this offering, does not result in any violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between Beijing Jumei, Reemake Media and its 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. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If our ownership structure, contractual arrangements and businesses of our PRC subsidiaries or our variable interest entity are found to be in violation of any existing or future PRC laws or regulations, or our PRC subsidiaries or our variable interest entity 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:

 

    revoking the business licenses and/or operating licenses of such entities;

 

    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 variable interest entity;

 

    imposing fines, confiscating the income from our PRC subsidiaries or our variable interest entity, or imposing other requirements with which we or our variable interest entity may not be able to comply;

 

    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our variable interest entity and deregistering the equity pledges of our variable interest entity, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our variable interest entity; or

 

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

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 variable interest entity that most significantly impact its economic performance, and/or our failure to receive the economic benefits from our variable interest entity, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.

 

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We rely on contractual arrangements with our variable interest entity and its 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 Reemake Media and its shareholders to hold our ICP License as an internet information provider. For a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entity. For example, our variable interest entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its 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 Reemake Media, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Reemake Media, 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 variable interest entity and its shareholders of their obligations under the contracts to exercise control over our variable interest entity. The shareholders of our consolidated variable interest entity 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 variable interest entity. 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 variable interest entity or its 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 variable interest entity 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 variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

If our variable interest entity or its 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 shareholders of Reemake Media were to refuse to transfer their equity interest in Reemake Media 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 variable interest entity, and our ability to

 

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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 variable interest entity 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 our variable interest entity, Reemake Media, owning 82.30%, 8.85% and 8.85% equity interest, respectively, in Reemake Media. Mr. Leo Ou Chen is our founder, chairman of board of directors and chief executive officer, Mr. Yusen Dai is our founder, director and executive officer, and Mr. Hui Liu is a non-employee beneficial owner of our company. These individuals have the beneficial ownership of 40.7%, 6.3% and 4.7%, respectively, of the total outstanding shares of our company prior to the completion of this offering. See “Principal Shareholders.” The shareholders of Reemake Media may have potential conflicts of interest with us. These shareholders may breach, or cause our variable interest entity to breach, or refuse to renew, the existing contractual arrangements we have with them and our variable interest entity, which would have a material and adverse effect on our ability to effectively control our variable interest entity and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Reemake Media 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 these shareholders and our company. Each of Mr. Leo Ou Chen and Mr. Yusen Dai is also a director and executive officer of our company. We rely on Mr. Chen and Mr. Dai to abide by the laws of the Cayman Islands and China, which provide that directors owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. There is currently no specific and clear guidance under PRC laws that address any conflict between PRC laws and laws of Cayman Islands in respect of any conflict relating to corporate governance. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Reemake Media, 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 variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entity 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 Beijing Jumei, our wholly-owned subsidiary in China, Reemake Media, our variable interest entity in China, and its 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 Reemake Media’s 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 Reemake Media for PRC tax purposes, which could in turn increase its tax liabilities without reducing Beijing Jumei’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on Reemake Media for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our variable interest entity’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

 

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We may lose the ability to use and enjoy assets held by our variable interest entity that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our variable interest entity, this entity holds certain assets that are material to the operation of our business, including the ICP License, and the domain names and trademarks. If our variable interest entity goes bankrupt and all or part of its 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 variable interest entity 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 variable interest entity undergoes 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.

 

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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:

 

    We only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment in businesses providing value-added telecommunication services 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.

 

    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 variable interest entity 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 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.

 

    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.

 

    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.

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

 

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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, our PRC variable interest entity, holds an ICP License and 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.

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 Beijing Jumei to adjust its taxable income under the contractual arrangements it currently has in place with our variable interest entity in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—Contractual arrangements in relation to our variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entity 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

 

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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 “—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.”

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 this offering 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 this offering to fund our PRC subsidiaries by making loans to or additional capital contributions to our PRC subsidiaries, subject to applicable government registration and approval requirements.

Any loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. For example, the current amounts of approved total investment and registered capital of Beijing Jumei are approximately US$6.5 million and US$6.5 million, respectively, which means Beijing Jumei cannot obtain any loans from our entities outside of China currently.

We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce or its local counterpart. 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. Furthermore, SAFE promulgated a circular in November 2010, SAFE Circular No. 59, which tightens the regulations over settlement of net proceeds from overseas offerings like this offering and requires that the settlement of net proceeds must be consistent with the description in the prospectus for the offering. In November 2011, SAFE also promulgated a SAFE Circular No. 45, which, among other things, restricts a foreign-invested enterprise from using RMB converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. These circulars may significantly limit our ability to use Renminbi converted from the net proceeds of this offering to fund establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies by our PRC subsidiaries, or to establish new consolidated variable interest entities in the PRC.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular No. 142, SAFE Circular No. 59 and SAFE Circular No. 45, we cannot assure you that we will be able to complete the necessary government registrations or

 

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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 expect to receive from this offering 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 variable interest entity.

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 this offering to extend loans to our variable interest entity, a PRC domestic company. Meanwhile, we are not likely to finance the activities of our variable interest entity by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in value-added telecommunications services. In addition, due to the restrictions on a foreign-invested enterprise’s use of Renminbi converted from foreign-currency registered capital under PRC regulations, including SAFE Circular No. 142, SAFE Circular No. 59 and SAFE Circular No. 45, as described under the foregoing risk factor, our PRC subsidiaries may be unable to use the Renminbi converted from their registered capital to provide loans to our variable interest entity. We currently do not plan to use the proceeds from this offering to fund the operations of Reemake Media, our variable interest entity. 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 variable interest entity. We will assess the working capital requirements of our variable interest entity on an ongoing basis and, if needed, may have our PRC subsidiaries to use their capital from operating activities to provide financial support to our variable interest entity.

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 China’s foreign exchange policies. In July 2005, the PRC government changed its decade-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. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. For almost two years after July 2008, this appreciation was halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the Chinese government has allowed the RMB to appreciate slowly against the U.S. dollar again. There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar.

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 we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the RMB relative to U.S. dollars would affect our financial results reported in U.S. dollar terms regardless of any underlying change in our business or results of operations.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and

 

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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 approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, as amended, and, if required, we cannot predict whether we will be able to obtain such approval.

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, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.

Our PRC counsel, Fangda Partners, has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval is not required for the listing and trading of our ADSs on the NYSE in the context of this offering, given that:

 

    The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to the M&A Rules; and

 

    no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules.

However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and the CSRC’s opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this

 

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offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the CSRC or other PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the 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 M&A Rules discussed in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the Ministry of Commerce shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the Ministry of Commerce that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

The Notice 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 Companies, or SAFE Circular No. 75, requires PRC residents who make direct or indirect investments in offshore special purpose companies to register those investments with local branches of SAFE and to update such registration in the event of any significant changes with respect to that offshore company. PRC subsidiaries of that offshore company are required to urge the PRC resident shareholders to update their registration as required. See “Regulation—SAFE Regulations on Offshore Special Purpose Companies Held by PRC Residents” for more information about SAFE Circular No. 75. 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. 75 and other related rules. Mr. Leo Ou Chen and Mr. Yusen Dai, our founders and principal beneficial owners of our company, and Mr. Hui Liu, a beneficial owner of our company, have completed required registrations with the local counterpart of SAFE in relation to our financing and restructuring in accordance with SAFE Circular No. 75, and are in the process of updating their registrations in relation to the subsequent changes to our

 

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shareholding structure. 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. 75 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 will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. 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 “Regulation—SAFE Regulations on Employee Stock Incentive Plan.”

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 variable interest entity, obtained its HNTE certificate in December 2012 with a valid period of three years. Therefore, Reemake Media is eligible to enjoy a preferential tax rate of 15% from 2012 through 2014, as long as it maintains the HNTE qualification and obtains approval from the relevant tax authority. If Reemake Media fails to maintain its HNTE qualification or renew its qualification when its current term expires, its applicable enterprise income tax rate may increase to 25%, which could have an adverse effect on our financial condition and results of operations.

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

 

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December 31, 2020. Chengdu Jumei, which is located within the western region of the PRC and meets the criteria as set forth in the notice, is entitled to the preferential income tax rate of 15% starting from 2013 upon approval by the relevant tax authority. 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.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe Jumei International Holding Limited is not a PRC resident enterprise for PRC tax purposes. See “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.

 

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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 “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.

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective on January 1, 2008.

Under SAT Circular 698, except for the purchase and sale of equity through a public securities market, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that has an effective tax rate of less than 12.5% or does not tax foreign income of its residents, the non-resident enterprise, being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” this Indirect Transfer. The PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. There is little guidance and practical experience as to the application of SAT Circular 698, and it is possible that the PRC tax authorities would pursue our offshore shareholders to conduct a filing regarding our offshore share transfer transactions where non-resident investors were involved and would request our PRC subsidiary to assist in such filing. In addition, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698, which may have a material adverse effect on our financial condition and results of operations or the non-resident investors’ investments in us.

 

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The PRC tax authorities have the discretion under SAT Circular 59 and SAT Circular 698 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. 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 SAT Circular 59 or SAT Circular 698, 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.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection

Auditors of companies that 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 (United States), or 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. Because our auditor is located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor is not currently inspected by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted recently by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against five accounting firms, including our independent registered public accounting firm, in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this sanction. Accordingly, the sanction will not become effective until after a full appeal process is concluded and a final decision is issued by the SEC. We are not involved in the proceedings brought by the SEC against the accounting firms. However, our independent registered public accounting firm is one of the four accounting firms subject to the six-month suspension from practicing before the SEC in the initial administrative law decision. We may therefore be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms.

On May 24, 2013, the 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 Ministry of

 

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Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. However, it is not clear how these recent developments could affect the SEC’s final decision in the case against the five accounting firms or any subsequent appeal to courts that the accounting firms may initiate. Therefore, it is difficult to determine the final outcome of the administrative proceedings and the potential consequences thereof.

If our independent registered public accounting firm were denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, delisting of our Class A ordinary shares from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Related to This Offering and our American Depositary Shares

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We intend to list our ADSs on the NYSE. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The market price for our ADSs may be volatile.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings, including internet and e-commerce companies, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material and adverse effect on the market price of our ADSs.

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

 

    regulatory developments affecting us, our customers, suppliers or our industry;

 

    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;

 

    actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

    changes in financial estimates by securities research analysts;

 

    conditions in the online retail industry;

 

    announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

    additions to or departures of our senior management;

 

    detrimental negative publicity about us, our management or our industry;

 

    fluctuations of exchange rates between the RMB and the U.S. dollar;

 

    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and

 

    sales or perceived potential sales of additional ordinary shares or ADSs.

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 our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$17.71 per ADS, representing the difference between the assumed initial public offering price of US$20.50 per ADS, the midpoint of the estimated range of the initial public offering price, and our net tangible book value per ADS as of December 31, 2013, after giving effect to the net proceeds to us from this offering and the Concurrent Private Placement. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options.

As we do not expect to pay dividends in the foreseeable future after this offering, 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 after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering 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.

 

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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 after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Immediately after the completion of this offering, we will have 141,987,272 ordinary shares outstanding including 9,500,000 Class A ordinary shares represented by ADSs, assuming (i) the underwriters do not exercise their option to purchase additional ADSs and (ii) we will issue and sell 7,317,073 Class A ordinary shares to an investor through the Concurrent Private Placement. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining Class A ordinary shares outstanding after this offering and the Class B ordinary shares will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

After completion of this offering, certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. 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. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

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.

Immediately prior to the completion of this offering and subject to the approval of our existing shareholders, we expect to create a dual-class voting structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share based on our proposed dual-class voting structure. We will issue Class A ordinary shares represented by our ADSs in this offering. 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.

Mr. Leo Ou Chen and Mr. Yusen Dai, who beneficially owns 47.0% of the aggregate voting power of our company as of the date of this prospectus, will beneficially own approximately 87.6% of the aggregate voting power of our company immediately after this offering, assuming (i) the underwriters do not exercise their option to purchase additional ADSs, and (ii) we will issue and sell 7,317,073 Class A ordinary shares to an investor through the Concurrent Private Placement, due to the disparate voting powers associated with our two classes of ordinary shares. See “Principal Shareholders.” As a result of the dual class share structure and the concentration of ownership, Mr. Chen and Mr. Dai will 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

 

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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.

Currently, our directors and executive officers collectively own an aggregate of 57.5% of our outstanding ordinary shares on a fully-converted basis. Upon the completion of this offering, they will collectively own an aggregate of 50.9% of our outstanding ordinary shares, representing 89.6% of the total voting power of our outstanding ordinary shares after this offering, assuming (i) the underwriters do not exercise their option to purchase additional ADSs and (ii) we will issue and sell 7,317,073 Class A ordinary shares to an investor through the Concurrent Private Placement. As a result, they have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets and election of directors.

They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. 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 “Principal Shareholders.”

In addition, we will be a “controlled company” as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen will beneficially own a majority of the aggregate voting power of our company immediately after this offering. For so long as we remain a controlled company, we are permitted to elect to rely on certain exemptions from corporate governance rules:

 

    an exemption from the rule that a majority of our board of directors must be independent directors;

 

    the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities;

 

    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

 

    the requirement of an annual performance evaluation of the nominating and corporate governance and compensation committees.

As a result, our independent directors may not have as much influence over our corporate governance as they would if we were not a controlled company.

You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the post-offering memorandum and articles of association we expect to adopt, the minimum notice period required to convene a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow

 

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you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our operations in China and substantially all of our assets are located in China. In addition, our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

 

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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 memorandum and articles of association, the Companies Law (2013 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from 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 responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. 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. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

A significant portion of the net proceeds of this offering is allocated for general corporate purposes, which may include working capital needs and potential acquisitions, partnerships and alliances. Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

The post-offering memorandum and articles of association that we expect to adopt will 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.

We expect to adopt, subject to the approvals by shareholders, an amended and restated memorandum and articles of association that will become effective immediately upon the completion of this offering. The post-offering memorandum and articles of association will 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

 

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authority to our board 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 an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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 will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

As a 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

 

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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 plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing standards applicable to U.S. domestic issuers.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to United States investors in the ADSs or Class A ordinary shares.

Depending upon the value of our assets, which may be determined based, in part, on the market value of our ADSs and Class A ordinary shares, and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Based on our current income and assets and projections as to the value of our Class A ordinary shares and ADSs pursuant to this offering, we do not expect to be classified as a PFIC for the current taxable year or in the foreseeable future. While we do not anticipate becoming a PFIC, fluctuations in the market price of our ADSs or Class A ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. In addition, although the law in this regard is not entirely clear, we treat our variable interest entity as being owned by us for United States federal income tax purposes, because we control its management decisions and we are entitled to substantially all of the economic benefits associated with this entity, and, as a result, we consolidate the results of its operations in our consolidated U.S. GAAP financial statements. If it is determined, however, that we do not own the stock of our variable interest entity for United States federal income tax purposes, we may be treated as a PFIC for the current and any subsequent taxable years. Because of the uncertainties in the application of the relevant rules and because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets for that year, there can be no assurance that we will not be a PFIC for the current or any future taxable year. The overall level of our passive assets will be affected by how, and how quickly, we spend our liquid assets and the cash raised in this offering. Under circumstances where gross income from activities that produce passive income significantly increase relative to our gross income from activities that produce non-passive income or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.

If we were to be or become classified as a PFIC, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations—General”) may incur significantly increased United States 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 acquiring, holding, and disposing of ADSs or Class A ordinary shares if we are or become classified as a PFIC. For more information see “Taxation— United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” and “—Passive Foreign Investment Company Rules.”

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur 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. As a company with less than US$1.0 billion in net revenues for our

 

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last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to 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. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and 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, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it 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 suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

    our goals and strategies;

 

    our future business development, financial conditions and results of operations;

 

    the expected growth of the retail and online retail markets in China;

 

    our expectations regarding demand for and market acceptance of our products and services;

 

    our expectations regarding our relationships with customers, suppliers and third-party merchants;

 

    our plans to invest in our fulfillment infrastructure and technology platform;

 

    competition in our industry; and

 

    relevant government policies and regulations relating to our industry.

These forward-looking statements involve various risks and uncertainties. Although we believe our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The online retail industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the online retail industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. 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 prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering and the Concurrent Private Placement of US$322.7 million, or US$349.8 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$20.50 per ADS, the midpoint of the price range shown on the front cover page of this prospectus. A US$1.00 change in the assumed initial public offering price of US$20.50 per ADS would increase, in the case of an increase, or decrease, in the case of a decrease, the net proceeds to us from this offering by US$8.8 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We plan to use the net proceeds of this offering and the Concurrent Private Placement to invest in our marketing and branding efforts, including setting up additional physical stores and growing our exclusive products portfolio, expand our logistics network and enhance our fulfillment capabilities, strengthen our IT infrastructure and systems, and for general corporate purposes, which may include working capital needs and potential acquisitions, investments and alliances, although we are not currently negotiating any such transactions.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Related to This Offering—You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.”

Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

In using the proceeds of this offering and the Concurrent Private Placement, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Our Corporate Structure—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 this offering 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.”

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends, subject to applicable laws. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulations Relating to Dividend Distribution.”

If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2013:

 

    on an actual basis;

 

    on a pro forma basis to reflect the automatic conversion of all of our preferred shares that are issued and outstanding into 46,045,805 ordinary shares on a one-for-one basis immediately prior to the completion of this offering.

 

    on a pro forma as adjusted basis to reflect (i) the redesignation of 58,804,840 ordinary shares held by Super ROI Global Holding Limited and Pinnacle High-Tech Limited into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the automatic conversion and redesignation of all of the remaining ordinary shares and preferred shares that are issued and outstanding into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the sale of 9,500,000 Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$20.50 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs and (iv) the issuance and sale of 7,317,073 Class A ordinary shares to an investor through the Concurrent Private Placement, with net proceeds of US$145.5 million to us.

 

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You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2013  
     Actual      Pro Forma(1)      Pro Forma As
Adjusted(1)
 
     (in thousands of US$)  

Preferred shares:

        

Series A-1 convertible redeemable preferred shares, $0.00025 par value, 14,474,377 shares authorized, issued and outstanding on an actual basis, and none outstanding on a pro forma or pro forma as adjusted basis

     647         —           —     

Series A-2 convertible redeemable preferred shares, $0.00025 par value, 26,000,000 shares authorized, issued and outstanding on an actual basis, and none outstanding on a pro forma or pro forma as adjusted basis

     8,854         —           —     

Series B convertible redeemable preferred shares, $0.00025 par value, 7,428,571 shares authorized, 5,571,428 issued and outstanding on an actual basis, and none outstanding on a pro forma or pro forma as adjusted basis

     7,683         —           —     

Shareholders’ equity:

        

Ordinary shares, $0.00025 par value, 152,097,052 shares authorized, 79,124,394 shares issued and outstanding on an actual basis and 125,170,199 shares outstanding on a pro forma basis. Class A ordinary shares, $0.00025 par value, 840,000,000 shares authorized, 83,182,432 shares issued and outstanding on a pro forma as adjusted basis, Class B ordinary shares, $0.00025 par value, 60,000,000 shares authorized, 58,804,840 shares issued and outstanding on a pro forma as adjusted basis.

     20         32         36   

Additional paid-in capital (2)

     32,652         49,824         372,477   

Statutory reserves

     449         449         449   

Retained earnings

     24,238         24,238         24,238   

Accumulated other comprehensive income

     1,117         1,117         1,117   
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity (2)

     58,476         75,660         398,317   
  

 

 

    

 

 

    

 

 

 

Total capitalization (2)

     75,660         75,660         398,317   
  

 

 

    

 

 

    

 

 

 

 

(1)  The pro forma information and the pro forma as adjusted information discussed above are illustrative only. Our additional paid-in capital, total shareholders’ equity and total capitalization upon the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2)  Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 change in the assumed initial public offering price of US$20.50 per ADS, the midpoint of the range set forth on the cover page of this prospectus, would increase, in the case of an increase, or decrease, in the case of a decrease, each of additional paid-in capital, total Jumei shareholders’ equity and total capitalization by US$8.8 million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of December 31, 2013 was US$73.3 million, or US$0.93 per ordinary share as of that date and US$0.93 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to (i) our sale of the ADSs offered in this offering at the assumed initial public offering price of US$20.50 per ADS, the midpoint of the estimated range of the initial public offering price, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the issuance and sale in the Concurrent Private Placement of 7,317,073 Class A ordinary shares, calculated based on the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus, with net proceeds of US$145.5 million to us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after December 31, 2013, other than to give effect to (i) our sale of the ADSs offered in this offering at the assumed initial public offering price of US$20.50 per ADS, the midpoint of the estimated range of the initial public offering price, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the issuance and sale in the Concurrent Private Placement of 7,317,073 Class A ordinary shares, calculated based on the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus, with net proceeds of US$145.5 million to us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been US$396.0 million, or US$2.79 per ordinary share and US$2.79 per ADS. This represents an immediate increase in net tangible book value of US$1.86 per ordinary share and US$1.86 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$17.71 per ordinary share and US$17.71 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Assumed initial public offering price

   US$ 20.50       US$ 20.50   

Net tangible book value as of December 31, 2013

   US$ 0.93       US$ 0.93   

Pro forma net tangible book value after giving effect to the conversion of our preferred shares

   US$ 0.59       US$ 0.59   

Pro forma as adjusted net tangible book value after giving effect to (i) the conversion of our preferred shares, (ii) this offering and (iii) the Concurrent Private Placement

   US$ 2.79       US$ 2.79   

Amount of dilution in net tangible book value to new investors in this offering

   US$ 17.71       US$ 17.71   

A US$1.00 change in the assumed public offering price of US$20.50 per ADS would increase, in the case of an increase, or decrease, in the case of a decrease, our pro forma as adjusted net tangible book value after giving effect to this offering by US$8.8 million, the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.07 per ordinary share and US$0.07 per ADS and the dilution in pro forma as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.93 per ordinary share and US$0.93 per ADS, assuming (i) no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses and (ii) the issuance and sale in the Concurrent Private Placement of 7,317,073 Class A ordinary shares, calculated based on the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus, with net proceeds of US$145.5 million to us.

 

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The following table summarizes, on a pro forma as adjusted basis as of December 31, 2013, the differences between existing shareholders as of December 31, 2013 and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us in this offering and the Concurrent Private Placement, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent     Amount      Percent       

Existing shareholders

     125,170,199         88.2   US$ 13.2 million         3.7   US$ 0.11       US$ 0.11   

New investors

     16,817,073         11.8   US$ 344.7 million         96.3   US$ 20.50       US$ 20.50   
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     141,987,272         100.0   US$ 357.9 million         100.0     
  

 

 

    

 

 

   

 

 

    

 

 

      

The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 7,131,792 ordinary shares issuable upon exercise of outstanding share options at a weighted average exercise price of US$1.59 per share, and there are 3,269,437 ordinary shares available for future issuance upon the exercise of future grants under our 2011 plan. No share-based award has been granted under our 2014 plan as of the date of this prospectus. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

    political and economic stability;

 

    an effective judicial system;

 

    a favorable tax system;

 

    the absence of exchange control or currency restrictions; and

 

    the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

    the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors as compared to the United States; and

 

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. All of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017 as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder, our legal counsel as to Cayman Islands law, has also advised us that a shareholder may, in limited circumstances, commence an action against persons who have allegedly wronged the company, where the company itself has failed to enforce such claim against such persons directly. Such action is brought on the basis of a primary right of the company, but is asserted by a shareholder on behalf of the company commonly known as a “derivative action.” Generally, claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company’s articles of association. Civil proceedings are generally commenced by originating process (by writ or originating summons). A shareholder may commence proceedings in the Cayman Islands and may instruct an attorney to act on the shareholder’s behalf. Service of proceedings on the company is effected through the delivery of the originating process at the registered office of the company. There are no particular formalities that a non-resident shareholder must comply with to initiate and commence proceedings in the Cayman Islands.

Maples and Calder, our legal counsel as to Cayman Islands law, and Fangda Partners, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

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    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

There is uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Maples and Calder has advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:

 

  (a) is given by a foreign court of competent jurisdiction;

 

  (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;

 

  (c) is final;

 

  (d) is not in respect of taxes, a fine or a penalty; and

 

  (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

Fangda Partners has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in the PRC for disputes relating to contracts or other property interests, the PRC court may accept a course of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if (a) the contract is signed and/or performed within the PRC, (b) the subject of the action is located within the PRC, (c) the company (as defendant) has seizable properties within the PRC, (d) the company has a representative organization within the PRC, or (e) other circumstances prescribed under the PRC law. The action may be initiated by a shareholder through filing a complaint with the PRC court. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies.

In addition, it will be difficult for U.S. shareholders to orginate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

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 ( LOGO ) 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 under the laws of the Cayman Islands as our offshore holding company in order to facilitate international financing. In September 2010, we established a wholly-owned Hong Kong subsidiary, Jumei Hongkong Limited to be our intermediate holding company. In March 2011, Jumei Hongkong Limited established a wholly-owned PRC subsidiary, Jumei Youpin (Beijing) Science and Technology Services Co., Ltd., which was subsequently renamed as Beijing Silvia Technology Service Co., Ltd, or Beijing Jumei. In March 2014, we established a new wholly-owned Hong Kong subsidiary named Jumei Hongkong Holding Limited.

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, our consolidated variable interest entity in China. Through Beijing Jumei, we obtained control over Reemake Media in April 2011 by entering into a series of contractual arrangements with Reemake Media and the shareholders of Reemake Media. The contractual arrangements, except for the exclusive consulting and services agreement, were subsequently amended and restated in January 2014. Reemake Media holds our ICP License as an internet information provider and operates our website.

These contractual arrangements allow us to:

 

    exercise effective control over Reemake Media;

 

    receive substantially all of the economic benefits of Reemake Media; and

 

    have an exclusive option to purchase all or part of the equity interests and assets in Reemake Media at the lowest price when and to the extent permitted by PRC law.

As a result of these contractual arrangements, Reemake Media is a variable interest entity of which we are the primary beneficiary. We have consolidated the financial results of Reemake Media and its subsidiary in our consolidated financial statements in accordance with U.S. GAAP.

Jumei Hongkong Limited established Shanghai Paddy Commerce and Trade Co., Ltd., or Shanghai Paddy, in June 2012, Chengdu Jumei Youpin Science and Technology Co., Ltd., or Chengdu Jumei, in July 2012, and Tianjin Cycil Information Technology Co., Ltd., or Tianjin Cycil, 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. In December 2013, Jumei Hongkong Limited established Tianjin Venus Technology Co., Ltd., a wholly owned subsidiary.

The business scope of each of our wholly owned subsidiaries in the PRC (Beijing Jumei, Shanghai Paddy, Chengdu Jumei, Tianjin Cycil, Tianjin Qianmei and Tianjin Venus) contains the business of development of computer software and technology, which falls in the encouraged category under the Guidance Catalog of Industries for Foreign Investment, or the Catalog. The business scope of Shanghai Paddy and Tianjin Qianmei each contains the business of online sales, which falls in the restricted category under the Catalog and which can be conducted by wholly foreign-owned enterprises subject to approvals from the competent government authorities. Shanghai Paddy and Tianjin Qianmei have received approvals from the competent commerce authorities for operation of their online sales business. The other businesses listed in the business scope of each of these wholly owned subsidiaries are not listed in the Catalog and thus fall in the permitted category for foreign investment under PRC law. See “Regulation—Regulation Relating to Foreign Investment.”

 

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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.

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated variable interest entity and its subsidiary, as of the date of this prospectus:

 

LOGO

 

(1) Leo Ou Chen, Yusen Dai and Hui Liu hold 82.30%, 8.85% and 8.85% equity interests in Reemake Media, respectively.

We are a “controlled company” as defined under NYSE Listed Company Manual because Mr. Leo Ou Chen will beneficially own a majority of the aggregate voting power of our company immediately after this offering.

The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Beijing Jumei, our variable interest entity, Reemake Media, and the shareholders of Reemake Media.

Shareholders’ Voting Rights Agreement. On January 24, 2014, the shareholders of Reemake Media entered into an amended and restated shareholders’ voting rights agreement with Beijing Jumei in replacement of the previous shareholders’ voting rights agreement dated April 8, 2011. Pursuant to the amended and restated

 

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shareholders’ voting rights agreement, each of the shareholders of Reemake Media appointed Beijing Jumei’s designated person as their attorney-in-fact to exercise all shareholder rights, including, but not limited to, attending the shareholders’ meeting, voting all matters of Reemake Media requiring shareholder approval, appointing or removing directors and executive officers, and disposing of all or part of the shareholder’s equity interests in Reemake Media. The shareholders’ voting rights agreement will remain in force for an unlimited term, unless all the parties to the agreement mutually agree to terminate the agreement in writing.

Equity Pledge Agreements. On January 24, 2014, Beijing Jumei, Reemake Media and the shareholders of Reemake Media entered into amended and restated equity pledge agreements in replacement of the previous equity pledge agreements dated April 8, 2011, as amended on August 6, 2011. Pursuant to the amended and restated equity pledge agreements, each of the shareholders of Reemake Media pledges all of their equity interests in Reemake Media to guarantee their and Reemake Media’s performance of their obligations under the contractual arrangements including, but not limited to, the exclusive consulting and services agreement, exclusive purchase option agreement and shareholders’ voting rights agreement. If Reemake Media or its shareholders breach their contractual obligations under these agreements, Beijing Jumei, as pledgee, will have the right to dispose of the pledged equity interests. The shareholders of Reemake Media agree that, during the term of the amended and restated equity pledge agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests, and they also agree that Beijing Jumei’s rights relating to the equity pledges shall not be prejudiced by the legal actions of the shareholders of Reemake Media, their successors or their designatees. During the term of the amended and restated equity pledge agreements, Beijing Jumei has the right to receive all of the dividends and profits distributed on the pledged equity interests. The equity pledges will become effective on the date when the pledge of equity interests contemplated in these agreements are registered with the relevant administration for industry and commerce in accordance with the PRC Property Rights Law and will remain effective until Reemake Media and its shareholders discharge all their obligations under the contractual arrangements. We have completed the registration of the equity pledges with the relevant office of the administration for industry and commerce in accordance with the PRC Property Rights Law.

Exclusive Purchase Option Agreement. On January 24, 2014, Beijing Jumei, Reemake Media and the shareholders of Reemake Media entered into an amended and restated exclusive purchase option agreement in replacement of the previous exclusive purchase option agreement dated April 8, 2011. Pursuant to the amended and restated exclusive purchase option agreement, each of the shareholders of Reemake Media irrevocably grants Beijing Jumei an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholders’ equity interests in Reemake Media, and the purchase price shall equal the amount that the shareholders contributed to Reemake Media as registered capital for the equity interests to be purchased, or be the lowest price permitted by applicable PRC law. In addition, Reemake Media grants Beijing Jumei an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of Reemake Media’s assets at the lowest price permitted by applicable PRC law. Without the prior written consent of Beijing Jumei, Reemake Media may not increase or decrease the registered capital, dispose of its assets, terminate any material contract or enter into any contract that is in conflict with its material contracts, appoint or remove any management members, distribute dividends to the shareholders, guarantee its continuance, amend its articles of association and provide any loans to any third parties. The shareholders of Reemake Media agree that, without the prior written consent of Beijing Jumei, they will not transfer or otherwise dispose of their equity interests in Reemake Media or create or allow any encumbrance on the equity interests. The amended and restated exclusive purchase option agreement will remain effective until all equity interests in Reemake Media held by its shareholders and all assets of Reemake Media are transferred or assigned to Beijing Jumei or its designated representatives.

Exclusive Consulting and Services Agreement. Under the exclusive consulting and services agreement between Beijing Jumei and Reemake Media, dated April 8, 2011, Beijing Jumei has the exclusive right to provide to Reemake Media consulting and services related to all technologies needed for Reemake Media’s business. Beijing Jumei owns the exclusive intellectual property rights created as a result of the performance of

 

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this agreement. Reemake Media agrees to pay Beijing Jumei an annual service fee, at an amount that is agreed by Beijing Jumei and Reemake Media otherwise. In addition, Beijing Jumei may provide other technology services specified by Reemake Media from time to time, and charge Reemake Media for the services at a rate mutually agreed by the parties. This agreement will remain effective for an unlimited term, unless Beijing Jumei and Reemake Media mutually agree to terminate the agreement in writing, or the agreement is required to be terminated by applicable PRC law. Reemake Media is not permitted to terminate the agreement in any event unless required by applicable law.

In the opinion of Fangda Partners, our PRC legal counsel:

 

    the ownership structures of Reemake Media and Beijing Jumei, both currently and immediately after giving effect to this offering, will not result in any violation of PRC laws or regulations currently in effect; and

 

    the contractual arrangements among Beijing Jumei, Reemake Media and its shareholders governed by PRC law both currently and immediately after giving effect to this offering are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. If the PRC government finds that the agreements that establish the structure for operating our online retail business do not comply with PRC government restrictions on foreign investment in e-commerce and related businesses, including but not limited to online retail businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to Reemake Media 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 “Risk Factors—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.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of income/(loss) data for the years ended December 31, 2011, 2012 and 2013, selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013 and selected consolidated cash flow data for the years ended December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2011 have been derived from our audited consolidated balance sheet as of December 31, 2011, which is not included in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this “Selected Consolidated Financial and Operating Data” section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands of US$, except for
share, per share and per ADS data)
 

Selected Consolidated Statements of Income/(Loss):

      

Net revenues:

      

Merchandise sales

     3,307        209,059        413,050   

Marketplace services

     18,481        24,165        69,946   
  

 

 

   

 

 

   

 

 

 

Total net revenues

     21,788        233,224        482,996   

Cost of revenues

     (2,788     (148,541     (283,317
  

 

 

   

 

 

   

 

 

 

Gross profit

     19,000        84,683        199,679   
  

 

 

   

 

 

   

 

 

 

Operating expenses: (1)

      

Fulfillment expenses

     (11,842     (28,884     (59,228

Marketing expenses

     (9,348     (36,484     (52,151

Technology and content expenses

     (739     (4,416     (10,023

General and administrative expenses

     (1,431     (4,761     (40,013
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     (23,360     (74,545     (161,415
  

 

 

   

 

 

   

 

 

 

Income/(loss) from operations

     (4,360     10,138        38,264   
  

 

 

   

 

 

   

 

 

 

Other income/(expenses)

      

Interest income, net

     6        199        916   

Others, net

     (150     (93     127   
  

 

 

   

 

 

   

 

 

 

Income/(loss) before tax

     (4,504     10,244        39,307   
  

 

 

   

 

 

   

 

 

 

Income tax benefit/(expense)

     475       
(2,140

    (14,303
  

 

 

   

 

 

   

 

 

 

Net Income/(loss)

     (4,029     8,104        25,004   
  

 

 

   

 

 

   

 

 

 

Accretion to preferred share redemption value

     (716     (1,688     (1,795

Income allocation to participating preferred shares

     —          (1,292     (7,403
  

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to ordinary shareholders

     (4,745     5,124        15,806   
  

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,  
     2011     2012      2013  
     (in thousands of US$, except for share, per
share and per ADS data)
 

Weighted average number of ordinary shares used in per share calculations(3):

       

- Basic

     40,644,779        50,070,659         59,475,739   

- Diluted

     40,644,779        83,672,986         83,196,788   

Net income/(loss) per ordinary share:

       

- Basic

     (0.12     0.10         0.27   

- Diluted

     (0.12     0.06         0.19   

Net income/(loss) per ADS(2):

       

- Basic

     (0.12     0.10         0.27   

- Diluted

     (0.12     0.06         0.19   

Weighted average number of ordinary shares used in pro forma per share calculations(4):

       

- Basic

          105,521,544   

- Diluted

          129,242,593   

Pro forma net income per ordinary share (unaudited)(4):

       

- Basic

          0.24   

- Diluted

          0.19   

Pro forma net income per ADS (unaudited)(2)(4):

       

- Basic

          0.24   

- Diluted

          0.19   

 

(1)  Share-based compensation expenses are allocated in operating expense items as follows:

 

    Year Ended December 31,  
          2011                 2012                 2013        
    (in thousands of US$)  

Fulfillment expenses

    —          —          382   

Marketing expenses

    —          —          481   

Technology and content expenses

    40        30        785   

General and administrative expenses

    167        234        31,144   

 

(2)  Each ADS represents one Class A ordinary share.
(3)  On April 8, 2011, we effected a 4,000-for-1 share split whereby all of our 50,000 then issued and outstanding ordinary shares of a par value of $1.00 each were converted into 200,000,000 ordinary shares of a par value of $0.00025 each. Concurrent with the share split, we repurchased and retired an aggregate of 130,924,549 ordinary shares from the then existing shareholders. As a result of the share split, the number of our total authorized shares was increased from 50,000 to 200,000,000.
(4)  The unaudited pro forma basic and diluted net income per share data reflect the conversion of all outstanding preferred shares as if the conversion had occurred at the beginning of the year.

 

     As of December 31,  
     2011     2012      2013      2013
(Pro Forma
Unaudited)(1)
     2013
(Pro Forma As
Adjusted
Unaudited)(2)
 
    

(in thousands of US$)

 

Selected Consolidated Balance Sheet Data:

             

Cash and cash equivalents

     9,117        29,964         111,402         111,402         434,059   

Accounts receivable, net

     3,336        1,454         2,807         2,807         2,807   

Inventories

     28        14,748         32,653         32,653         32,653   

Total assets

     18,903        71,188         195,311         195,311         517,968   

Accounts payable

     970        38,592         88,766         88,766         88,766   

Total liabilities

     9,712        53,592         119,651         119,651         119,651   

Total mezzanine equity

     13,701        15,389         17,184         —           —     

Total shareholders’ (deficit)/equity

     (4,510     2,207         58,476         75,660         398,317   

 

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(1)  The pro forma data in the balance sheet data table above reflect the automatic conversion of all of our preferred shares that are issued and outstanding into 46,045,805 ordinary shares on a one-for-one basis immediately prior to the completion of this offering.
(2)  The pro forma as adjusted data in the balance sheet data table above reflect (i) the redesignation of 58,804,840 ordinary shares held by Super ROI Global Holding Limited and Pinnacle High-Tech Limited into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the automatic conversion and redesignation of all of the remaining ordinary shares and preferred shares that are issued and outstanding into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the sale of Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$20.50 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise their option to purchase additional ADSs and (iv) the issuance and sale of Class A ordinary shares to an investor through the Concurrent Private Placement, with net proceeds of US$145.5 million to us.

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands of US$)  

Selected Consolidated Cash Flow Data:

      

Net cash provided by/(used in) operating activities

     (2,009     27,360        84,806   

Net cash provided used in investing activities

     (2,027     (6,601     (4,643

Net cash provided by/(used in) financing activities

     10,140        —          (833

Effect of exchange rate changes on cash and cash equivalents

     50        88        2,108   
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     6,154        20,847        81,438   

Cash and cash equivalents at beginning of year

     2,963        9,117        29,964   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     9,117        29,964        111,402   
  

 

 

   

 

 

   

 

 

 

The following table presents selected operating data for the periods indicated:

 

     Year Ended December 31,  
     2011      2012      2013  
     (in thousands, except for net
GMV, which is in thousands of
US$)
 

Selected Operating Data:

        

Net GMV

     92,269         327,255         816,570   

Active customers

     1,290         4,824         10,536   

Repeat customers

     694         2,716         6,529   

New customers

     1,217         4,165         8,224   

Total orders

     4,484         15,714         35,962   

Orders placed by repeat customers

     3,888         13,605         31,955   

Orders fulfilled by our logistics centers

     4,460         15,630         30,281   

 

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RECENT DEVELOPMENTS

The following sets forth certain unaudited consolidated statements of operations data for the three months ended March 31, 2014, compared to certain unaudited consolidated statement of operations data for the three months ended March 31, 2013. We have prepared these unaudited consolidated statements of operations data on the same basis as our audited consolidated financial statements. These unaudited consolidated statements of operations data reflect all adjustments, consisting only of normal and recurring adjustments, which we consider necessary for a fair statement of our results of operations for the period presented. We cannot assure you that our results for the three months ended March 31, 2014 will be indicative of our financial results for the full year ending December 31, 2014 or for future periods. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included elsewhere in this prospectus for information regarding trends and other factors that may affect our results of operations.

 

     Three Months Ended  
     March 31,
2014
    March 31,
2013
 
     (in thousands of US$
and unaudited)
 

Net Revenues

    

Merchandise sales

     129,833        96,229   

Marketplace services

     25,026        14,680   
  

 

 

   

 

 

 

Total revenues

     154,859        110,909   

Cost of revenues

     (86,517     (69,824
  

 

 

   

 

 

 

Gross profit

     68,342        41,085   

Operating expenses

    

Fulfillment expenses

     (19,886     (13,905

Sales and marketing expenses

     (23,432     (14,375

Technology and content expenses

     (4,256     (1,644

General and administrative expenses

     (3,656     (1,515
  

 

 

   

 

 

 

Total operating expenses

     (51,230     (31,439
  

 

 

   

 

 

 

Income from operations

     17,112        9,646   
  

 

 

   

 

 

 

Other income/(expenses)

    

Interest income

     884        248   

Others, net

     2,693        (16
  

 

 

   

 

 

 

Income before tax

     20,689        9,878   
  

 

 

   

 

 

 

Income tax expense

     (4,138     (2,034
  

 

 

   

 

 

 

Net income attributable to Jumei International Holding Limited

     16,551        7,844   
  

 

 

   

 

 

 

Accretion to preferred share redemption value

     (520     (449

Income allocation to participating Redeemable Preferred Shares

     (5,538     (2,437
  

 

 

   

 

 

 

Net income attributable to ordinary shareholders

     10,493        4,958   
  

 

 

   

 

 

 

Net revenues. Our net revenues for the three months ended March 31, 2014 were US$154.9 million, consisting of merchandise sales of US$129.9 million and marketplace services net revenues of US$25.0 million, as compared with net revenues of US$110.9 million for the same period in 2013. This increase was primarily attributable to the increase in the number of active customers and total orders. The number of our active customers increased to approximately 4.9 million for the three months ended March 31, 2014 from approximately 3.7 million for the same period in 2013. The number of our total orders increased to approximately 11.4 million for the three months ended March 31, 2014 from approximately 8.7 million for the same period in 2013, among which the total number of orders fulfilled by our logistics centers increased to approximately 8.9 million for the three months ended March 31, 2014 from 7.4 million for the same period in

 

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2013. Our net GMV was US$271.3 million for the three months ended March 31, 2014, as compared with net GMV of US$190.5 million for the same period in 2013.

Gross profit. Our gross profit for the three months ended March 31, 2014 was US$68.3 million, as compared with US$41.1 million for the same period in 2013. Our gross profit as a percentage of net revenues increased to 44.1% from 37.0% during the same periods. The higher gross profit as a percentage of net revenues for the three months ended March 31, 2014 is mainly attributed to the increased percentage of net revenues generated from exclusive products sold, which generally have higher margins, and the increased percentage of net revenues generated from our marketplace services, from which we do not incur cost of revenues, as compared with the same period in 2013. Our gross profit as a percentage of net GMV increased to 25.2% for the three months ended March 31, 2014 from 21.6% for the same period in 2013, primarily due to the increased gross profit generated from our merchandise sales, especially from exclusive products sold.

Income from operations. Our income from operations for the three months ended March 31, 2014 was US$17.1 million, as compared with US$9.6 million for the same period in 2013. Our operating expenses increased to US$51.2 million for the three months ended March 31, 2014 from US$31.4 million for the same period in 2013 primarily due to our business expansion. Our operating expenses as a percentage of net GMV increased to 18.9% for the three months ended March 31, 2014 from 16.5% for the same period in 2013, primarily due to our increased sales and marketing expenses.

Net income. Our net income for the three months ended March 31, 2014 was US$16.6 million, as compared with US$7.8 million for the same period in 2013.

We incurred US$1.4 million in share-based compensation expenses for the three months ended March 31, 2014, as compared with US$0.1 million for the same period in 2013. Share-based compensation expenses are allocated in operating expense items as follows:

 

     Three Months Ended  
     March 31,
2014
     March 31,
2013
 
     (in thousands of US$)  

Fulfillment expenses

     226         —     

Marketing expenses

     393         —     

Technology and content expenses

     242         6   

General and administrative expenses

     505         134   

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are China’s No. 1 online retailer of beauty products as measured by GMV, with a market share of 22.1% in 2013, according to the Frost & Sullivan report. We offer beauty products, apparel and other lifestyle products on our internet platform. Our current sales formats consist of curated sales, online shopping mall and flash sales. We use two of these sales formats on our internet platform for beauty products: curated sales and online shopping mall, pursuant to which we either sell beauty products directly to customers as a principal or act as a service provider for third-party merchants who sell beauty products on our internet platform. Apparel and other lifestyle products are sold through flash sales, pursuant to which we act as service provider for third-party merchants to sell their products.

We generate net revenues from merchandise sales and marketplace services. We generate net revenues from merchandise sales when we act as principal for the direct sale of beauty products to customers. We generate net revenues from marketplace services when we act as service provider for third-party merchants and charge them fees for the sale of their products through our internet platform, including fees we charge for providing fulfillment and delivery services for products that are fulfilled by our logistics centers.

The following table summarizes the key features of our two revenue streams:

 

    

Revenue Stream

    

Merchandise Sales

  

Marketplace Services

Products

   Beauty products    Beauty products    Apparel and other lifestyle products

Sales formats

   Curated sales and online shopping mall    Curated sales and online shopping mall    Flash sales

Our Role

  

•   Act as principal

  

•   Act as service provider for third-party merchants

  

•   Act as service provider for third-party merchants

We have built a large, highly engaged and loyal customer base, as well as a wide variety of well-selected products. Our active customers totaled approximately 1.3 million in 2011, 4.8 million in 2012 and 10.5 million in 2013. We also closely monitor the total number of orders as an indicator of revenue trends. The total numbers of orders were approximately 4.5 million in 2011, 15.7 million in 2012 and 36.0 million in 2013, among which approximately 86.7%, 86.6% and 88.9%, respectively, were orders placed by repeat customers.

We implement effective measures to control costs and operating expenses, which have enabled us to achieve and increase operating profitability. Under our management’s leadership, we have attracted a large and loyal user base through our creative and cost-efficient marketing campaigns as well as word-of-mouth referrals resulting from our high quality products and superior customer experience.

Our net revenues were US$21.8 million in 2011, US$233.2 million in 2012 and US$483.0 million in 2013. We achieved net income of US$8.1 million in 2012 and US$25.0 million in 2013, and recorded a net loss of US$4.0 million in 2011. Our net cash provided by operating activities were US$27.4 million in 2012 and US$84.8 million in 2013. Our net cash used in operating activities was US$2.0 million in 2011.

 

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Key Factors Affecting Our Results of Operations

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. Unfavorable changes in any of these general factors could affect the demand for the products we sell and could materially and adversely affect our results of operations.

While our business is influenced by general factors affecting China’s online retail industry, 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.

Key Components of Results of Operations

Net revenues

We generate net revenues from merchandise sales and marketplace services. Merchandise sales revenues are generated when we act as principal for the direct sale of beauty products to customers through our internet platform. Merchandise sales revenues are recorded on a gross basis, net of surcharges and taxes. Marketplace services revenues are generated when we act as service provider to third-party merchants and charge them fees for the sale of beauty products as well as apparel and other lifestyle products through our internet platform, including fees for providing fulfillment and delivery services for products that are fulfilled by our logistics centers.

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,  
     2011     2012     2013  
     US$      %     US$      %     US$      %  
     (in thousands, except for percentages)  

Net revenues

               

Merchandise sales

     3,307         15.2     209,059         89.6     413,050         85.5

Marketplace services

     18,481         84.8     24,165         10.4     69,946         14.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total net revenues

     21,788         100.0     233,224         100.0     482,996         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.

 

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The numbers of our active customers were approximately 1.3 million in 2011, 4.8 million in 2012 and 10.5 million in 2013, among which approximately 53.8%, 56.3% and 62.0%, respectively, were repeat customers.

 

    Total number of orders. We closely monitor the total number of orders as an indicator of revenue trends. The total numbers of orders were approximately 4.5 million in 2011, 15.7 million in 2012 and 36.0 million in 2013, among which approximately 86.7%, 86.6% and 88.9%, respectively, were orders placed by repeat customers. Our own logistics centers fulfilled approximately 4.5 million orders in 2011, 15.6 million orders in 2012 and 30.3 million orders in 2013.

 

    Net GMV. We define net GMV as the sum of (i) net revenues generated from merchandise sales, and (ii) net revenues generated from marketplace services and adding back corresponding payables to our third-party merchants. We consider net GMV an important indicator of our growth and business performance as it measures the volume of transactions through our merchandise sales as well as marketplace. Our net GMV was US$92.3 million in 2011, US$327.3 million in 2012 and US$816.6 million in 2013.

Since March 2010, we have primarily focused on selling beauty products by conducting direct sales as principal and providing marketplace services as service provider. In September 2011, we started to provide marketplace services to third-party merchants to sell apparel and other lifestyle products on our internet platform. Historically most of our total net revenues have been derived from the direct sale of beauty products which we expect will continue to grow and comprise a majority of our total net revenues in the near future. In the meantime, sales of apparel and other lifestyle products by third-party merchants have grown and contributed to a higher percentage of our total net revenues since 2012.

Sales in the traditional retail industry are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies in China, including us, hold special promotional campaigns on festivals or days popular among young people, such as November 11 each year, which falls in the fourth quarter. We also hold a special promotional campaign in March each year to celebrate our anniversary. These special promotional campaigns typically increase our net revenues in the relevant quarters. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth but seasonality may increase in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

Cost of Revenues

Our cost of revenues primarily consists of cost of goods sold and inventory write-downs. The cost of goods sold does not include shipping and handling expenses, payroll, bonus and benefits of fulfillment staff or rental expenses for logistics centers. Therefore, our cost of revenues may not be comparable to other companies which include such expenses in their cost of revenues. We procure inventory from our suppliers and our inventory is recorded at the lower of cost or estimated marketable value. As net revenues generated from our marketplace services are recorded on a net basis, our cost of revenues are all attributable to our net revenues from merchandise sales.

Operating Expenses

Our operating expenses consist of fulfillment expenses, marketing expenses, technology and content expenses and general and administrative expenses. Share-based compensation expenses are included in our operating expenses when incurred. Our operating expenses have been growing in absolute terms but have decreased as a percentage of our total net GMV due to our increased economies of scale.

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;

 

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collecting payments from customers; and customer services. Fulfillment expenses also include amounts payable to third parties that assist us in fulfillment and customer service operations. We will continue to invest in our fulfillment and delivery network to support our long-term growth and expect that our fulfillment expenses will continue to increase in absolute amount as a result of our continued business growth.

Marketing expenses. Marketing expenses consist primarily of advertising expenses, promotion expenses, and payroll and related expenses for personnel engaged in marketing. Advertising expenses, which are primarily spent on online and offline advertising, are expensed when the relevant services are received. Advertising expenses totaled US$9.2 million, US$35.9 million and US$50.2 million in 2011, 2012 and 2013, respectively. As we enhance our brand awareness and expand our market share by engaging in additional brand promotional activities, we expect our marketing expenses to increase in the foreseeable future.

Technology and content expenses. Technology and content development expenses consist primarily of payroll and related costs for employees involved in application development, category expansion, editorial content production on our internet platform and system support expenses, as well as server charges and costs associated with telecommunications. As we continue to expand our technological capabilities to support our anticipated growth and enhance customer experience, we expect our technology and content expenses to continue to increase in absolute amount in the foreseeable future.

General and administrative expenses. General and administrative expenses consist primarily of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal, procurement, business development and human resources, professional fees and other general corporate costs, as well as costs associated with the use of facilities and equipment for these general corporate functions, such as depreciation and rental expenses. As our business further grows and we become a public company after the completion of this offering, we expect our general and administrative expenses to continue to increase in absolute amount in the foreseeable future.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax in the Cayman Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the Cayman Islands.

Hong Kong

Our subsidiaries incorporated in Hong Kong are subject to the uniform tax rate of 16.5%. Under the Hong Kong tax laws, they are exempt from Hong Kong income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on the payment of dividends. No provision for Hong Kong tax has been made in our consolidated financial statements, as our Hong Kong subsidiaries did not generate any assessable income in 2011, 2012 or 2013.

PRC

Our PRC subsidiaries and our consolidated variable interest entity 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 variable interest entity are all subject to the tax rate of 25% for the periods presented in the consolidated financial statements included elsewhere in this prospectus.

 

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In April 2008, the State Administration of Taxation, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures for the certification of high and new technology enterprises, or HNTEs. Reemake Media, our variable interest entity, was recognized as a HNTE in December 2012, and is entitled to the preferential enterprise income tax rate of 15% from 2012 through 2014.

According to the Notice on the Enterprise Income Tax regarding Deepening Implementation of Grand Development of the Western Region issued by the State Administration of Taxation, enterprises located in the western region of the PRC with principal revenues of over 70% generated from encouraged category of the western region are entitled to a preferential income tax rate of 15% for ten years from January 1, 2011 to December 31, 2020. Chengdu Jumei, which is located within the western region of the PRC and meets the criteria as set forth in the notice, is entitled to the preferential income tax rate of 15% starting from 2013 upon approval by the relevant tax authority.

Under the PRC Enterprise Income Tax Law and its implementation rules, dividends from our PRC subsidiaries paid out of profits generated after January 1, 2008, are subject to a withholding tax of 10%, unless there is a tax treaty with China that provides for a different withholding arrangement. Distributions of profits generated before January 1, 2008 by our PRC subsidiaries are exempt from PRC withholding tax.

Under the PRC Enterprise Income Tax Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. See “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 prospectus.

Internal Control Over Financial Reporting

Prior to this offering, we were a private company with limited accounting personnel and other resources to address our internal controls and procedures. Our independent registered public accounting firm, or our independent accountant, has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of December 31, 2012 and 2013 and for the years ended December 31, 2011, 2012 and 2013, we and our independent accountant identified one “material weakness” in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, and other control deficiencies. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that

 

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there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified related to our lack of sufficient and competent financial reporting and accounting personnel to implement key controls over period end financial reporting and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements.

We are in the process of implementing a number of measures to address the material weakness that has been identified, including: (i) developing a set of comprehensive accounting manuals, (ii) implementing comprehensive key controls over period end reporting process, (iii) organizing regular internal U.S. GAAP trainings, (vi) formed a system reporting team with experienced managers and staff with appropriate accounting and system knowledge to develop a more comprehensive and integrated financial and operating reporting system, and (v) establishing an internal control team in the finance department to ensure the accuracy and timeliness of the financial reporting.

However, we cannot assure you that we will remediate our material weakness in a timely manner. See “Risk Factors—Risks Related to Our Business—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.”

 

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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 prospectus. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

 

     Year Ended December 31,  
     2011     2012     2013  
     US$     %     US$     %     US$     %  
     (in thousands, except for percentages)  

Net Revenues

            

Merchandise sales

     3,307        15.2     209,059        89.6     413,050        85.5

Marketplace services

     18,481        84.8     24,165        10.4     69,946        14.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     21,788        100.0     233,224        100.0     482,996        100.0

Cost of revenues

     (2,788     12.8 %     (148,541     63.7 %     (283,317     58.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     19,000        87.2 %     84,683        36.3 %     199,679        41.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Fulfillment expenses

     (11,842     54.4     (28,884     12.4     (59,228     12.3

Marketing expenses

     (9,348     42.9     (36,484     15.6     (52,151     10.8

Technology and content expenses

     (739     3.4     (4,416     1.9     (10,023     2.1

General and administrative expenses

     (1,431     6.6     (4,761     2.0     (40,013     8.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (23,360     107.2     (74,545     32.0     (161,415     33.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) from operations

     (4,360     20.0 %     10,138        4.3 %     38,264        7.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income/(expenses)

            

Interest income

     6        0.0     199        0.1     916        0.2

Others, net

     (150     0.7 %     (93     0.0 %     127        0.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before tax

     (4,504     20.7 %     10,244        4.4 %     39,307        8.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit/(expense)

     475        2.2 %     (2,140     0.9 %     (14,303     3.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

     (4,029     18.5     8,104        3.5 %     25,004        5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion to preferred share redemption value

     (716     3.3     (1,688     0.7     (1,795     0.4

Income allocation to participating preferred shares

     —          —          (1,292     0.6     (7,403 )       1.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to ordinary shareholders

     (4,745     21.8 %     5,124        2.2 %     15,806        3.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

     (4,029     18.5     8,104        3.5     25,004        5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net revenues. Our net revenues increased by 107.1% from US$233.2 million in 2012 to US$483.0 million in 2013, which included US$413.1 million generated from merchandise sales and US$69.9 million generated from marketplace services. This increase was primarily attributable to the increase in the number of active customers and total orders. The number of our active customers increased significantly from approximately 4.8 million in 2012 to approximately 10.5 million in 2013. The number of our total orders increased from approximately 15.7 million in 2012 to approximately 36.0 million in 2013, among which the total number of orders fulfilled by our logistics centers increased from approximately 15.6 million in 2012 to 30.3 million 2013.

Cost of revenues. Our cost of revenues increased from US$148.5 million in 2012 to US$283.3 million in 2013, which was in line with the increase in merchandise sales for the same period.

 

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Gross profit. Our gross profit increased by 135.8% from US$84.7 million in 2012 to US$199.7 million in 2013 and our gross profit as a percentage of net revenues increased from 36.3% to 41.3% during the same period. The higher gross profit as a percentage of net revenues in 2013 is mainly attributed to the increased percentage of net revenues generated from exclusive products sold, which generally have higher margins, and our marketplace services, which do not incur cost of revenues, as compared with 2012. Gross profit from our merchandise sales as a percentage of net revenues increased from 28.9% in 2012 to 31.4% in 2013, primarily because of the increased percentage of net revenues generated from exclusive products sold and our improved economies of scale. Our gross profit as a percentage of our net GMV decreased from 25.9% in 2012 to 24.5% in 2013, primarily due to the increased percentage of net revenues generated from our marketplace services, from which we earn service fees.

Operating expenses. Our operating expenses increased from US$74.5 million in 2012 to US$161.4 million in 2013 primarily due to our significant business expansion. Our operating expenses as a percentage of our net GMV decreased from 22.8% in 2012 to 19.8% in 2013, primarily due to the increase in economies of scale, increased sales of apparel and other lifestyle products through our marketplace services, and increased effectiveness of our advertising efforts.

 

    Fulfillment expenses. Our fulfillment expenses increased from US$28.9 million in 2012 to US$59.2 million in 2013. The increase was primarily attributable to the significant increase in the number of orders fulfilled, higher staff compensation and benefits due to headcount increase, and increase in rental expenses in connection with our expanded logistics center facilities. The number of orders that we fulfilled increased from approximately 15.6 million in 2012 to 30.3 million in 2013. Our fulfillment personnel increased from 1,031 as of December 31, 2012 to 1,778 as of December 31, 2013. Fulfillment-related rental expenses increased from US$0.6 million in 2012 to US$2.7 million in 2013.

Our fulfillment expenses as a percentage of our net GMV decreased from 8.8% in 2012 to 7.3% in 2013, as we continued to enjoy economies of scale and attracted more third-party merchants to sell products through our marketplace services for which we do not provide fulfillment services.

 

    Marketing expenses. Our marketing expenses increased from US$36.5 million in 2012 to US$52.2 million in 2013, which was primarily attributable to our increased online marketing and brand promotion activities. Our marketing expenses as a percentage of our total net revenues decreased from 15.6% in 2012 to 10.8% in 2013 primarily due to increased effectiveness of our advertising efforts. Our marketing expenses as a percentage of our net GMV decreased from 11.2% in 2012 to 6.4% in 2013, primarily due to increased effectiveness of our advertising efforts.

 

    Technology and content expenses. Our technology and content expenses increased from US$4.4 million in 2012 to US$10.0 million in 2013. The increase in our technology and content expenses was primarily attributable to higher compensation and benefits for the technology and content staff due to headcount increase, and higher expenses incurred in maintaining our internet platform. Our technology and content personnel increased from 210 as of December 31, 2012 to 362 as of December 31, 2013. Our technology and content expenses are a percentage of our net GMV decreased slightly from 1.3% in 2012 to 1.2% in 2013, primarily due to our increased operational efficiency.

 

    General and administrative expenses. Our general and administrative expenses increased from US$4.8 million in 2012 to US$40.0 million in 2013, primarily due to higher share-based compensation and higher administrative staff compensation and benefits due to headcount increase. Our share-based compensation expense related to general and administrative expenses increased from US$0.2 million in 2012 to US$31.1 million in 2013, which included two one-time share-based compensations of US$30.2 million in total to an executive officer. Our general and administrative personnel increased from 219 as of December 31, 2012 to 283 as of December 31, 2013. Our general and administrative expenses as a percentage of our net GMV increased from 1.5% in 2012 to 4.9% in 2013, primarily due to higher share-based compensation and higher administrative staff compensation and benefits due to headcount increase.

 

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Interest income. Our interest income increased from US$0.2 million in 2012 to US$0.9 million in 2013 primarily due to the increased amount of cash held in our bank deposits and the interest earned on short-term investment products.

Income tax expense. Our income tax expense increased from US$2.1 million in 2012 to US$14.3 million in 2013 primarily due to an increase in our taxable income. Our effective tax rate increased from 21% in 2012 to 36% in 2013 due to increase of US$32.5 million in share based compensation expenses, which were not tax deductible.

Net income. As a result of the foregoing, our net income increased from US$8.1 million in 2012 to US$25.0 million in 2013.

Year ended December 31, 2012 Compared to Year Ended December 31, 2011

Net revenues. Our net revenues increased from US$21.8 million in 2011 to US$233.2 million in 2012, which included US$209.0 million generated from merchandise sales and US$24.2 million generated from marketplace services. The rapid growth in our net revenues was primarily due to the significant increase in our active customers and total orders. The number of our active customers increased significantly from approximately 1.3 million in 2011 to approximately 4.8 million in 2012. The number of our total orders increased from approximately 4.5 million in 2011 to approximately 15.7 million in 2012, among which the total number of orders fulfilled by our logistics centers increased from approximately 4.5 million in 2011 to approximately 15.6 million 2012.

Cost of revenues. Our cost of revenues increased from US$2.8 million in 2011 to US$148.5 million in 2012, primarily attributable to a significant increase in our merchandise sales of beauty products.

Gross profit. Our gross profit increased from US$19.0 million in 2011 to US$84.7 million in 2012. Our gross profit as a percentage of net revenues decreased from 87.2% to 36.3% during the same periods. The lower gross profit as a percentage of net revenues in 2012 was mainly due to the decreased percentage of net revenues generated from our marketplace services. This was partially offset by the increased gross profit margin of our merchandise sales which was in turn due to our improved economies of scale and higher percentage of net revenues generated from exclusive products. The gross profit from our merchandise sales as a percentage of our total net revenues increased from 15.7% in 2011 to 28.9% in 2012. Our gross profit as a percentage of our net GMV increased from 20.6% in 2011 to 25.9% in 2012, primarily due to the decreased percentage of net revenues generated from our marketplace services, from which we earn service fees.

Operating expenses. Our operating expenses increased from US$23.4 million in 2011 to US$74.5 million in 2012 primarily due to our significant business expansion. Our operating expenses as a percentage of our net GMV decreased from 25.3% in 2011 to 22.8% in 2012, primarily due to the increase in economies of scale and higher operational efficiency.

 

    Fulfillment expenses. Our fulfillment expenses increased from US$11.8 million in 2011 to US$28.9 million in 2012. The increase was primarily attributable to the significant increase in the number of orders that we fulfilled and higher staff compensation and benefits. The number of orders that we fulfilled increased from approximately 4.5 million in 2011 to 15.6 million in 2012. Our fulfillment personnel increased from 930 as of December 31, 2011 to 1,031 as of December 31, 2012.

Our fulfillment expenses as a percentage of our net GMV decreased from 12.8% in 2011 to 8.8% in 2012 primarily as a result of increased economies of scale.

 

   

Marketing expenses. Our marketing expenses increased from US$9.3 million in 2011 to US$36.5 million in 2012, primarily attributable to our increased online marketing and brand promotion

 

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activities. Our marketing expenses as a percentage of our total net revenues decreased from 42.9% in 2011 to 15.6% in 2012 mainly due to the decreased percentage of net revenues generated from our marketplace services as we focused more on developing merchandise sales of beauty products in 2012. As a result, a significantly smaller portion of net revenues were recognized on a net basis rather than on a gross basis in 2012. Our marketing expenses as a percentage of our net GMV increased from 10.1% in 2011 to 11.2% in 2012, primarily due to increased online marketing and brand promotion activities.

 

    Technology and content expenses. Our technology and content expenses increased from US$0.7 million in 2011 to US$4.4 million in 2012, primarily because we incurred higher technology and content staff compensation and benefits due to headcount increase. Our technology and content personnel increased from 48 as of December 31, 2011 to 210 as of December 31, 2012. Our technology and content expenses as a percentage of our total net revenues decreased from 3.4% to 1.9% during the same periods as a result of our increased economies of scale. Our technology and content expenses as a percentage of our net GMV increased from 0.8% in 2011 to 1.3% in 2012, primarily due to higher technology and content staff compensation and benefits due to headcount increase.

 

    General and administrative expenses. Our general and administrative expenses increased from US$1.4 million in 2011 to US$4.8 million in 2012 primarily due to headcount increase. Our general and administrative personnel increased from 57 as of December 31, 2011 to 219 as of December 31, 2012. Our general and administrative expenses as a percentage of our total net revenues decreased from 6.6% to 2.0% during the same periods as we achieved greater operational efficiency. Our general and administrative expenses as a percentage of our net GMV decreased from 1.6% in 2011 to 1.5% in 2012 as we achieved greater operational efficiency.

Interest income. Our interest income increased from US$6 thousand in 2011 to US$0.2 million in 2012 primarily due to the increased amount of cash held in our bank deposits and the interest earned on short-term investment products.

Income tax benefit/expense. Our income tax benefit was US$0.5 million in 2011 and our income tax expense was US$2.1 million in 2012 as we incurred a loss in 2011, and turned profitable in 2012.

Net income. As a result of the foregoing, we recorded a net income of US$8.1 million in 2012, while we recorded a net loss of US$4.0 million in 2011.

 

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Selected Quarterly Results of Operations

The following table presents our unaudited consolidated results of operations for the three-month periods ended on the dates indicated. You should read the following table in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information on the same basis as our audited consolidated financial statements. This unaudited consolidated financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair representation of our financial position and operating results for the quarters presented.

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
    (in thousands of US$ and unaudited)  

Net revenues:

               

Merchandise sales

    41,503        50,431        58,683        58,442        96,229        93,716        104,885        118,220   

Marketplace services

    3,089        6,336        7,014        7,726        14,680        15,049        18,369        21,848   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    44,592        56,767        65,697        66,168        110,909        108,765        123,254        140,068   

Cost of revenues:

    (31,081     (36,348     (42,112     (39,000     (69,824     (63,582     (69,448     (80,463
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    13,511        20,419        23,585        27,168        41,085        45,183        53,806        59,605   

Operating expenses:(1)

               

Fulfillment expenses

    (5,564     (6,837     (7,829     (8,654     (13,905     (12,649     (15,059     (17,615

Marketing expenses

    (7,811     (8,705     (8,537     (11,431     (14,375     (8,908     (12,375     (16,493

Technology and content expenses

    (757     (1,045     (1,254     (1,360     (1,644     (2,222     (2,855     (3,302

General and administrative expenses

    (776     (1,142     (1,151     (1,692     (1,515     (1,874     (3,099     (33,525
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (14,908     (17,729     (18,771     (23,137     (31,439     (25,653     (33,388     (70,935
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) from operations

    (1,397     2,690        4,814        4,031        9,646        19,530        20,418        (11,330
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income/(expenses):

               

Interest income

    6        24        49        120        248        213        201        254   

Others, net

    (3     (10     (15     (65     (16     165        (5     (17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before tax

    (1,394     2,704        4,848        4,086        9,878        19,908        20,614        (11,093
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefits /(expenses)

    291        (564     (1,012     (855     (2,034     (4,099     (4,261     (3,909
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

    (1,103     2,140        3,836        3,231        7,844        15,809        16,353        (15,002
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion to preferred share redemption value

    (422     (422     (422     (422     (449     (449     (449     (448

Income allocation to participating Redeemable Preferred Shares

    —          (365     (989     (767     (2,437     (5,367     (5,567     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to ordinary shareholders

    (1,525     1,353        2,425        2,042        4,958        9,993        10,337        (15,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Share-based compensation expenses are allocated in operating expense items as follows:

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
                (in thousands of US$ and unaudited)              

Fulfillment expenses

    —          —          —          —          —          —          151        231   

Marketing expenses

    —          —          —          —          —          116        181        184   

Technology and content expenses

    8        8        8        6        6        276        234        269   

General and administrative expenses

    40        44        44        106        134        228        308        30,474   

The following table sets forth our net GMV in each of the quarters for the period between January 1, 2012 and December 31, 2013.

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
    (in thousands of US$)  

Net GMV

    59,176        81,378        91,805        94,896        190,490        176,078        207,679        242,323   

We have experienced continued growth in our quarterly total net revenues for the eight quarters in the period from January 1, 2012 to December 31, 2013, except for a slight decrease in the second quarter of 2013. During these quarters, we experienced continued increases in both the number of active customers and the number of orders, except for the second quarter of 2013. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth. However, sales in the traditional retail industry are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies in China, including us, hold special promotional campaigns on festivals or days popular among young people, such as November 11 each year, which falls in the fourth quarter. We also hold a special promotional campaign in March each year to celebrate our anniversary. These special promotional campaigns typically increase the net revenues in the relevant quarters. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results. Our future operating results will be affected by the timing of promotional or marketing campaigns that we may launch from time to time.

We have experienced continued growth in our quarterly gross profit for the eight quarters in the period from January 1, 2012 to December 31, 2013. Our gross profit as a percentage of net revenues was lower in the first quarter as compared with the other quarters in each of 2012 and 2013. This is primarily because we had the highest volume of promotional and marketing activities in the first quarter of each of these years. Similarly, our gross profit as a percentage of net GMV was lower in the first quarter as compared with the other quarters in each of 2012 and 2013, primarily because of the higher volume of promotional and marketing activities. Due to our limited operating history, the gross profit 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.

We experienced continued growth in our net income for the eight quarters in the period from January 1, 2012 to December 31, 2013, except for the fourth quarters of 2012 and 2013. This is because we had higher marketing expenses associated with promotional activities in the fourth quarter of 2012 and 2013. We incurred a net loss in the fourth quarter of 2013 primarily because we had significantly higher share-based compensation expenses in such quarter as compared with the other quarters in 2012 and 2013. Our share-based compensation expenses in the fourth quarter of 2013 included two one-time share-based compensations items of US$30.2 million in total to an executive officer. See “—Critical Accounting Policies and Estimates—Share-Based Compensation.”

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash generated by operating activities and the issuance of preferred shares in private placement. As of December 31, 2011, 2012, and 2013, we had US$9.1

 

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million, US$30.0 million and US$111.4 million, respectively, in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on hand, short term bank demand deposits and liquid investments. Among the cash and cash equivalent as of December 31, 2013, US$108.3 million was denominated in Renminbi and US$3.1 million was denominated in U.S. dollars. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the 12 months following this offering. We may, however, need additional capital in the future to fund our continued operations.

Although we consolidate the results of our consolidated variable interest entity, we only have access to the assets or earnings of our consolidated variable interest entity through our contractual arrangements with them. See “Corporate History and 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, 2013, our subsidiaries held cash and cash equivalents in the amount of US$81.7 million, and our consolidated variable interest entity and its subsidiary held cash and cash equivalents in the amount of US$29.2 million, which includes cash reserved to settle payables to our subsidiary in China. We would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiaries in China to our offshore subsidiaries. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in China for general corporate purpose.

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands of US$)  

Net cash provided by/(used in) operating activities

     (2,009     27,360        84,806   

Net cash used in investing activities

     (2,027     (6,601     (4,643

Net cash provided by/(used in) financing activities

     10,140        —          (833
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     50        88        2,108   
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     6,154        20,847        81,438   

Cash and cash equivalents at beginning of year

     2,963        9,117        29,964   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     9,117        29,964        111,402   
  

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities amounted to US$84.8 million in 2013, which was primarily attributable to a net income of US$25.0 million, adjusted for non-cash items of US$34.0 million and a net increase of US$25.8 million in change in working capital. The net increase in change in working capital was primarily attributable to an increase in accounts payable of US$48.0 million and an increase in tax payable of US$11.9 million, which was partially offset by an increase in advance to suppliers of US$18.7 million, an increase in inventories of US$17.7 million and a decrease in advance from customers of US$1.3 million. The increases in accounts payable and inventories are primarily due to the significant increase in the total orders that we fulfilled which was in turn attributable to the rapid expansion of our business operations.

Net cash provided by operating activities amounted to US$27.4 million in 2012, which was primarily attributable to a net income of US$8.1 million and a net increase of US$18.1 million in change in working capital. The net increase in change in working capital was primarily attributable to an increase in accounts payable of US$37.5 million, which was partially offset by an increase in inventories of US$15.1 million and an increase in prepayments and other assets US$8.2 million. The increases in accounts payable and inventories are primarily due to the significant increase in the total orders that we fulfilled which was in turn attributable to the rapid expansion of our business operations.

 

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Net cash used in operating activities amounted to US$2.0 million in 2011, which was primarily attributable to a net loss of US$4.0 million, partially offset by a net increase of US$3.4 million in change in working capital. The net increase in change in working capital was primarily attributable to an increase in advances from customers of US$2.5 million, an increase in tax payable of US$2.6 million and an increase in accrued expenses and other liabilities of US$1.6 million, which was partially offset by an increase in accounts receivable of US$3.2 million.

Investing Activities

Net cash used in investing activities amounted to US$4.6 million in 2013, which was primarily attributable to our renovation and purchase of equipment for new logistics centers and our newly leased office in Beijing.

Net cash used in investing activities amounted to US$6.6 million in 2012, which was primarily attributable to our purchase of short term investments and purchase of property, equipment and software.

Net cash used in investing activities amounted to US$2.0 million in 2011, which was primarily attributable to our payments for acquisition of Beijing Shengjinteng and purchase of property, equipment and software.

Financing Activities

Net cash used in financing activities amounted to US$0.8 million in 2013, which was attributable to the repurchase of vested options.

Net cash provided by financing activities amounted to US$10.1 million in 2011, which was primarily attributable to proceeds from our issuance of preferred share to investors. We did not engage in any financing activities in 2012.

Capital Expenditures

Our capital expenditures amounted to US$0.6 million, US$2.1 million and US$4.6 million in 2011, 2012 and 2013, respectively. In the past, our capital expenditures were principally used for renovation and purchase of equipment for new logistics centers and our new leased office in Beijing.

Contractual Obligations

We lease our facilities and offices under non-cancellable operating lease agreements. The rental expenses were US$0.5 million, US$2.0 million and US$6.2 million during the years ended December 31, 2011, 2012 and 2013, respectively.

As of December 31, 2013, future minimum commitment under non-cancelable agreements were as follows:

 

US$ (in thousand)

   Total      2014      2015      2016      2017      2018 and
thereafter
 

Operating lease

     22,850         9,336         8,115         4,879         260         260   

Server custody and bandwidth fee

     154         154         —           —           —           —     

Business acquisition payment

     656         656         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     23,660         10,146         8,115         4,879         260         260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other than those shown above, we did not have any significant unrecognized uncertain tax positions, capital and other commitments, long-term obligations, or guarantees as of December 31, 2012 and 2013.

 

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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 variable interest entity 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, 2013, we had US$0.4 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 Beijing Jumei, Reemake Media and the shareholders of Reemake Media requires Reemake Media to pay service fees in Renminbi to Beijing Jumei in the manner and amount set forth in such agreement. After paying the applicable withholding taxes and making appropriations for the statutory reserve, the remaining net profits of our PRC subsidiaries would be available for distribution to our offshore companies. As an offshore holding company of our PRC subsidiaries and consolidated variable interest entity, we may make loans to our PRC subsidiaries and consolidated variable interest entity. Any loans to our PRC subsidiaries are subject to foreign exchange loan registrations with relevant governmental authorities in China, and loans by us to our variable interest entity, which is a domestic PRC entity, must be approved by the National Development and Reform Commission and must also be registered with SAFE or its local branches. We may also finance our subsidiaries by means of capital contributions. See ‘‘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 this offering 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 variable interest entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. See “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.”

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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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 consumer price index in China increased by 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. 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.

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 prospectus.

Revenue Recognition

We generate revenue primarily from merchandise sales and marketplace services. We generate revenues from merchandise sales when we act as principal for the direct sale of beauty products to customers. We generate revenues from marketplace services when we act as the service provider for third-party merchants and charge third-party merchant fees for the sales of their products, which include beauty products, apparel and other lifestyle products, through our internet platform. We collect cash from customers, before or upon deliveries of products, through third party online payment platforms or delivery companies.

Revenues from merchandise sales and marketplace services are recognized when the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

We recognize merchandise sales revenues upon acceptance of delivery of products by customers. Marketplace services revenues primarily consist of fees charged to third-party merchants for selling their products through our internet platform and fees for providing fulfillment services. We recognize marketplace services revenues upon acceptance of delivery by customers for sales that we provide fulfillment services or upon shipping by third-party merchants for sales for which we do not provide fulfillment services.

We consider several factors in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as service fees. When we are the primary obligor in a transaction, we are subject to substantial inventory risk, and have the latitude in establishing prices, revenues are recorded at the gross sales price. If we do not have substantial inventory risk or latitude in establishing prices and amounts earned are determined using a predetermined service fee rate, we record the net amounts as marketplace services fees earned.

Sales allowances, which reduce revenues, are estimated using management’s best judgment based on historical experience. Revenues are recorded net of value-added taxes, business taxes and surcharges.

Inventories

Inventories, consisting of products available for sale, are stated at the lower of cost or market. Cost of inventory is determined using the weighted average cost method. Adjustments are recorded to write down the

 

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cost of inventory to the estimated market value due to slow-moving merchandise and damaged goods, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment. We take ownership, risks and rewards of the products purchased, but have limited return right with certain vendors. Write downs are recorded in cost of revenues in the Consolidated Statements of Comprehensive Income/(Loss).

Share-Based Compensation

All share-based awards to our founders and employees are measured at the grant date based on the fair value of the awards. Share-based compensation, net of forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. We used the binomial option pricing model to determine the fair value of share options and account for share-based compensation expenses using an estimated forfeiture rate at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expenses were recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. Historically, our share-based compensation expenses were relatively low, except for the three months ended December 31, 2013.

We adopted the 2011 plan in March 2011. The maximum number of ordinary shares in respect of which share awards may be granted under the 2011 plan is 10,401,229. The 2011 plan will terminate automatically 10 years after its adoption, unless terminated earlier by our board’s approval. As of the date of this prospectus, options to purchase 7,131,792 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. As of the date of this prospectus, no share-based award has been granted under our 2014 plan.

A summary of our share option activities through the date of this prospectus 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   

 

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We estimated the fair value of share options using the binomial option-pricing model with the assistance from an independent valuation firm. The fair value of each option grant up to April 1, 2014 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
 

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

Exercise multiples (2)

    2.8        2        2.8        2.8        2.8        2        2.8        2        2.8        2.8        2.2   

Expected dividend yield (3)

    0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00

Expected volatility (%) (4)

    54     54     47     45     44     44     44     43     43     43     43

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   

 

Notes:

(1)  We estimated risk-free interest rate based on the yield to maturity of U.S. dollar denominated Chinese Government bonds with a maturity similar to the expected expiry of the term.
(2)  The exercise multiple is estimated as the ratio of fair value of underlying shares over the exercise price as at the time the option is exercised, based on a consideration of research study regarding exercise pattern based on historical statistical data.
(3)  We have never declared or paid any cash dividends on our capital stock, and we do not anticipate any dividend payments on our ordinary shares in the foreseeable future.
(4)  We estimated expected volatility based on the annualized standard deviation of the daily return embedded in historical share prices of comparable companies with a time horizon close to the expected expiry of the term.

Determining the fair value of our ordinary shares 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.

In October 2013, we entered into an agreement with a former employee of our company to accelerate vesting of all his incentive shares upon his departure from our company on March 31, 2013. In conjunction with this agreement, the former employee also transferred 1,293,125 ordinary shares of our company to one of our executive officers, at no additional consideration. The fair value of the transferred shares amounted to US$15.8 million, which was treated as share-based compensation to such executive officer for his past services. In November 2013, the former employee sold 1,355,714 ordinary shares of our company to the executive officer for US$3.0 million. The difference of US$14.4 million between the fair value of the ordinary shares of US$17.4 million and the transfer price of US$3.0 million was treated as share-based compensation to the executive officer for his past services.

In April 2014, we granted options to purchase 500,000 ordinary shares to our employees at the exercise price of US$15.00. The options are subject to a four-year vesting schedule.

Fair Value of Our Ordinary Shares

We are a private company with no quoted market prices for our ordinary shares. We have therefore needed to make estimates of the fair value of our ordinary shares at various dates for the purposes of (a) determining the fair value of our ordinary shares at the date of issuance of convertible instruments as one of the inputs into determining the intrinsic value of the beneficial conversion feature, if any; (b) determining the fair value of our ordinary shares at the date of the grant of a share-based compensation award to our employees as one of the

 

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inputs into determining the grant date fair value of the award; (c) determining the fair value of preferred shares and ordinary shares at the respective issuance date; (d) the grant of options in conjunction with a business acquisition; and (e) transfer of ordinary shares between existing shareholders.

The following table sets forth the fair value of our ordinary shares estimated at different times with the assistance from an independent valuation firm.

 

Date

   Fair Value
Per Share
(US$)
     DLOM     Discount
Rate
    Type of Valuation    Purpose of
the

Valuations

January 16, 2011

     0.09         30     32.00   Retroactive    (d)

April 08, 2011

     0.09         30     30.00   Retroactive    (a), (b),(c)

November 18, 2011

     0.66         25     30.00   Retroactive    (a), (b),(c)

February 23, 2012

     0.80         25     28.00   Retroactive    (a), (b)

September 23, 2012

     2.83         20     25.00   Retroactive    (a), (b)

April 18, 2013

     6.66         15     20.00   Contemporaneous    (a), (b)

August 01, 2013

     7.91         10     19.00   Contemporaneous    (a), (b)

October 28, 2013

     12.20         10     19.00   Contemporaneous    (e)

November 20, 2013

     12.83         10     18.50   Contemporaneous    (e)

December 31, 2013

     13.52         10     18.00   Contemporaneous    (a), (b)

April 1, 2014

     20.02         5     17.00   Contemporaneous    (a), (b)

In determining the fair value of our ordinary shares, we applied the income approach/ discounted cash flow, or DCF, analysis based on our projected cash flow using management’s best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

The major assumptions used in calculating the fair value of ordinary shares include:

 

    Weighted average cost of capital, or WACC: WACCs of 32%, 30%, 30%, 28%, 25%, 20%, 19%, 19%, 18.5%, 18% and 17% were used for dates as of January 16, 2011, April 8, 2011, November 18, 2011, February 23, 2012, September 23, 2012, April 18, 2013, August 1, 2013, October 28, 2013, November 20, 2013, December 31, 2013 and April 1, 2014, respectively. The WACCs were determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk membership, company size and non-systematic risk factors

 

    Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, two publicly traded companies in China’s e-commerce industry and three publicly traded companies in the U.S. e-commerce industry were selected for reference as our guideline companies.

 

    Discount for lack of marketability, or DLOM: DLOM was quantified by the Black-Scholes option pricing model. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as it can take into consideration factors like timing of a liquidity event, such as an initial public offering, and estimated volatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higher the implied DLOM. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. DLOM remained in the range of 5% to 30% in the period from 2011 to 2014.

The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenues and net income growth rates, as well as major milestones that we have achieved, contributed significantly to the increase in the fair value of our ordinary shares from March 2011 to April 2014. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the

 

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fair values are consistent with our business plan. These assumptions include: no material changes in the existing political, legal and economic conditions in China; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain. The risk associated with achieving our forecasts were assessed in selecting the appropriate discount rates, which ranged from 17% to 32%.

 

    Option-pricing method was used to allocate enterprise value to prefer and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” or the Practice Aid. The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock.

 

    The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board of directors and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our shares to range from 27% to 49% based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, the allocations between preference and ordinary shares would have been different.

The determined fair value of the ordinary shares increased from US$6.66 per share as of April 18, 2013 to US$7.91 per share as of August 1, 2013. We believe the change in the fair value of ordinary shares is primarily attributable to the following factors:

 

    In the third quarter of 2013, we strengthened our senior management team by recruiting a new vice president, as well as new managers in our research and development department.

 

    As we accumulated more operation experience, our revenues generated from apparel and other lifestyle products achieved strong growth.

 

    As a result of milestone events described above and the continuous growth of our business, the discount rate is further decreased from 20% as of April 18, 2013 to 19% as of August 1, 2013.

 

    As we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of DLOM from 15% as of April 18, 2013 to 10% as of August 1, 2013.

The determined fair value of the ordinary shares increased from US$7.91 per share as of August 1, 2013 to US$12.20 per share as of October 28, 2013. We believe the change in the fair value of ordinary shares is primarily attributable to the following factors:

 

    In the fourth quarter of 2013, we further improved the functionality and user experience of our mobile platform and achieved strong growth in sales on our mobile platform.

 

    We opened our first offline physical store in Beijing to strengthen our brand reputation.

 

    We increased sales of private label and exclusive products, which generally have higher margin than other products.

 

    Our net GMV increased during the period.

The determined fair value of the ordinary shares increased from US$12.20 per share as of October 28, 2013 to US$12.83 per share as of November 20, 2013. We believe the change in the fair value of ordinary shares is primarily attributable to the following factors:

 

    As we progressed towards an initial public offering, we reduced our discount rate from 19% on October 28, 2013 to 18.5% on November 20, 2013 to reflect a reduction in risk as a private company.

 

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The determined fair value of the ordinary shares increased from US$12.83 per share as of November 20, 2013 to US$13.52 per share as of December 31, 2013. We believe the change in the fair value of ordinary shares is primarily attributable to the following factors:

 

    Our net GMV increased during the period.

 

    The contribution of sales through our mobile platform to our total sales increased during the period.

 

    As we developed a longer track record in achieving revenue growth, we reduced the discount rate from 18.5% on November 20, 2013 to 18% on December 31, 2013 to reflect lower perceived risks of our business model.

The determined fair value of the ordinary shares increased from US$13.52 per share as of December 31, 2013 to US$20.02 per share as of April 1, 2014. We believe the change in the fair value of ordinary shares is primarily attributable to the following factors:

 

    During the period, we experienced significant growth in our net GMV, net income and the contribution of sales through our mobile platform, and achieved higher than previously estimated gross margin.

 

    As we continued to achieve strong revenue growth and move closer to the expected timing towards our initial public offering, the perceived risks of our business model should be further lowered. As such, we reduced the discount rate from 18% on December 31, 2013 to 17% on April 1, 2014.

 

    We made the first public filing of our registration statement with respect to this offering in April 2014. As we move closer to the expected timing towards our initial public offering , the liquidity of our shares increased and the DLOM decreased from 10% on December 31, 2013 to 5% on April 1, 2014, and we adjusted our offering probability from 80% on December 31, 2013 to 90% on April 1, 2014. Because our preferred shares will be automatically converted into ordinary shares and the liquidation preference of preferred shares will no longer exist upon the completion of this offering, the increase in the estimated offering probability resulted in a greater portion of our value being allocated to ordinary shares.

Income taxes

Current income taxes are provided on the basis of net income/(loss) 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 statement of comprehensive income/(loss) in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

Uncertain tax positions

The guidance prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining its provision for income taxes. We recognize interests and penalties, if any, under accrued expenses and other current liabilities on our balance sheet and under others, net in our Consolidated Statement of Comprehensive Income/(Loss).

 

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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.

We evaluate the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2011 and 2012 and 2013, we did not have any material unrecognized uncertain tax position.

Consolidation of Variable Interest Entity

In order to comply with the PRC law and regulations which prohibit foreign control of companies involved in the value-added telecommunication service businesses, we operate our website in the PRC through our variable interest entity, Reemake Media. 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 individuals shareholders of Reemake Media. These contractual agreements include shareholders’ voting rights agreement, exclusive consulting and services agreement, exclusive purchase option agreement and equity pledge agreements. As a result of these contractual arrangements, we maintain the ability to exercise effective control over Reemake Media, receive substantially all of the economic benefits and have an exclusive option to purchase all or part of the equity interests and assets in Reemake Media when and to the extent permitted by PRC law at a minimum price. We conclude that Reemake Media is our variable interest entity, of which we are the primary beneficiary. As such, we consolidated the financial results of Reemake Media 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 variable interest entity upon occurrence of certain events listed in ASC 810-10-35-4. We will also continuously reconsider whether we are the primary beneficiary of our variable interest entity as facts and circumstances change. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry.”

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

Our operating transactions and assets and liabilities are mainly denominated in Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi 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 Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.

We estimate that we will receive net proceeds of approximately US$322.7 million from this offering and the Concurrent Private Placement if the underwriters do not exercise their option to purchase additional ADSs, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on

 

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the assumed initial offering price of US$20.50 per ADS. Assuming that we convert the full amount of the net proceeds from this offering and the Concurrent Private Placement into RMB, a 10% appreciation of the U.S. dollar against RMB, from a rate of RMB6.0537 to US$1.00 to a rate of RMB6.6591 to US$1.00, will result in an increase of RMB195.3 million in our net proceeds. Conversely, a 10% depreciation of the U.S. dollar against the RMB, from a rate of RMB6.0537 to US$1.00 to a rate of RMB5.4483 to US$1.00, will result in a decrease of RMB195.3 million in our net proceeds.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We generated interest income of US$6 thousand, US$0.2 million and US$0.9 million in 2011, 2012, and 2013, respectively. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, which is an update to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward exists. The guidance requires an entity to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, except for when a net operating loss carryforward is not available as of the reporting date to settle taxes that would result from the disallowance of the tax position or when the entity does not intend to use the deferred tax asset for purposes of reducing the net operating loss carryforward. The guidance is effective for fiscal years beginning after December 15, 2013 and for interim periods within that fiscal year. We do not expect the adoption of this pronouncement to have a significant impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-02, “Intangibles—Goodwill and Other”, which is an update allowing an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the amendments that elects the accounting alternative in this Update should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. The guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within that fiscal year. We do not expect the adoption of this pronouncement to have a significant impact on its consolidated financial statements.

The JOBS Act provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

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INDUSTRY

We operate in the fast growing beauty products market in China. According to the Frost & Sullivan report, beauty products comprise a wide variety of categories including skin care, oral care, hair care, bath and body, cosmetics, fragrance and beauty accessories.

Growth of the Beauty Products Industry in China

According to the Frost & Sullivan report, China’s beauty products industry grew steadily over the past few years as total retail sales increased from RMB136.2 billion (US$22.5 billion) in 2010 to RMB220.9 billion (US$36.5 billion) in 2013, representing a CAGR of 17.5%, and is expected to further increase to RMB431.8 billion (US$71.3 billion) in 2018, representing a CAGR of 14.3% from 2013. The following chart sets forth the historical and expected beauty products retail sales in China for the periods indicated:

Beauty Products Retail Sales in China, 2010-2018E

 

LOGO

Source: the Frost & Sullivan report

The key growth drivers of the beauty products industry in China include:

 

    Growing awareness of personal appearance. Chinese consumers are becoming increasingly conscious about their appearance, especially China’s young generation, and are willing to spend more to enhance their appearance. As a result, a wide range of beauty products have become an irreplaceable part of Chinese customers’ daily routines.

 

    Relatively low consumption on beauty products. The per capita consumption of Chinese consumers on beauty products is currently lower than those of other major countries or regions, such as the U.S., Japan and South Korea. The table below shows the per capita consumption on beauty products in China as compared with other countries.

Per Capita Consumption of Beauty Products in 2012

 

LOGO

Source: the Frost & Sullivan report

 

    China’s continued economic growth and increase in disposable income and living standards. According to the Frost & Sullivan report, China’s nominal GDP is expected to increase at a CAGR of 9.9% between 2013 and 2018, and China’s per capita annual disposable income of urban householders is expected to increase from RMB28,099.5 (US$4,641.7) in 2013 to RMB52,937.9 (US$8,744.7) in 2018, representing a CAGR of 13.5%.

 

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Beauty products are distributed to end users through various types of distribution channels. Compared with traditional department stores and supermarkets, distribution channels such as online retailers and specialty retail stores have developed significantly in recent years, offering consumers alternative options to purchase beauty products. According to the Frost & Sullivan report, Watsons, Jumei and Sephora are the three largest beauty products retailers in China in terms of GMV in 2013.

Online Retail Market in China

China has the largest internet community in the world, with approximately 617.6 million internet users as of December 31, 2013. This translates into approximately 2.5 times the size of the internet population in the U.S., according to the Frost & Sullivan report.

E-commerce has experienced rapid growth in China in recent years. Total online retail sales in China reached RMB1,923.9 billion (US$317.8 billion) in 2013, compared to RMB523.1 billion (US$86.4 billion) in 2010, representing a CAGR of 54.4%, and is expected to further increase to RMB5,650.8 billion (US$933.4 billion) in 2018, representing a CAGR of 24.0% from 2013, according to the Frost & Sullivan report. The number of online shoppers in China has increased significantly, growing from 160.5 million in 2010 to 301.9 million in 2013, representing a CAGR of 23.4%, and the total number of online shoppers is expected to further increase to 774.1 million in 2018, representing a CAGR of 20.7% from 2013, according to the Frost & Sullivan report.

Online retail sales as a percentage of total retail sales in China expanded from 3.3% in 2010 to 8.1% in 2013, and is expected to further increase to 13.0% in 2018, according to the Frost & Sullivan report. The increase in online versus offline retail sales reflects the fragmentation of the retail market in China, the increasing user acceptance of online retail and the improved fulfillment networks and payment options provided by online retailers.

For consumers who shop online, quality and authenticity are becoming increasingly important, especially in specialized areas such as beauty products. Consumers in China are becoming less price sensitive and more reliant on the brand and reputation of online retailers when purchasing products online. For online retailers, strong negotiation power with upstream brand owners and suppliers, as well as ability to provide convenient and enhanced customer experience, including customer-friendly after-sales return policy, comprehensive and high quality product reviews and illustrations, and attractive pricing, create effective barriers to entry.

Online non-platform retailers normally adopt one of two types of models, including model of browsing and impulse buying, such as Jumei, with advantages of product pre-selection and curation, and model of searching to fulfill a need, such as JD.com, with advantages of pricing, assortment and fulfillment speed.

Online retail sales of beauty products have grown rapidly in recent years. Online B2C beauty products sales reached RMB22.6 billion (US$3.7 billion) in 2013, up from RMB1.7 billion (US$0.3 billion) in 2010, representing a CAGR of 136.5%, and is expected to further increase to RMB94.6 billion (US$15.6 billion) in 2018, representing a CAGR of 33.2% from 2013, according to the Frost & Sullivan report. Online B2C beauty products retail sales as a percentage of total beauty products retail sales in China expanded from 1.3% in 2010 to 10.2% in 2013, and is expected to further increase to 21.9% in 2018, according to the Frost & Sullivan report. In terms of GMV in 2013, Jumei is the largest online beauty products retailer in China with 22.1% market share, over 2.5 times that of the nearest industry player, according to the Frost & Sullivan report.

 

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Online B2C Beauty Products Sales and Penetration Rate, 2010-2018E

 

LOGO

Source: the Frost & Sullivan report

As compared with other types of merchandise, such as consumer electronics and apparel, beauty products are well-suited to be sold through online retailers. This is because beauty products enjoy certain characteristics, such as high value-to-weight ratio, low fulfillment costs per unit, long product life cycle and low return rates, which make them desirable and favorable products for online retailers. At the same time, customers generally find making purchases of beauty products online a more efficient and pleasant experience, especially when major B2C online retailers offer the guarantee of genuine products and comprehensive customer services, including guaranteed return policies.

Despite the growth in the online retail market of beauty products in the last few years, the online B2C beauty products market in China remains under-penetrated compared to other developed economies, such as Japan and South Korea.

The Emergence of M-Commerce in China

According to the Frost & Sullivan report, the smartphone user population in China reached 475.1 million in 2013. Active m-commerce user population reached 144.4 million in China in 2013, a growth of 160.5% from 2012, and is expected to further increase to 762.6 million in 2018, representing a CAGR of 39.5% from 2013, according to the Frost & Sullivan report. The total retail sales through m-commerce amounted to RMB303.7 billion (US$50.2 billion) in 2013, representing a growth of 271.6% from 2012, and is expected to further increase to RMB2,226.8 billion (US$367.8 billion) in 2018, representing a CAGR of 49.0% from 2013, according to the Frost & Sullivan report.

Compared with traditional PC-based e-commerce, m-commerce is highly accessible for people on-the-go, allowing consumers to utilize their daily fragmented time to browse products and make purchases online. The following chart sets forth the historical and expected online sales from PC internet platform and mobile platform in China for the periods indicated:

Retail Sales from PC Internet Platform and from Mobile Platform, 2010-2018E

 

LOGO

Source: the Frost & Sullivan report

 

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The Emergence of Curated Sales

According to the Frost & Sullivan report, curated sales is a disruptive sales format compared to the traditional offline channels for beauty products. Curated sales is an innovative new sales format and features a limited number of products first being selected before being recommended and offered for sale. Each curated product is usually on sale for a limited period of time on a curated sales platform, which helps focus user traffic on the featured brand and product.

The recommendation feature of curated sales is conducive to generating frequent visits from customers as they seek information and guidance on the latest trends in the markets. As such, the curated sales format helps build a loyal and engaged customer base and encourage repeat purchases. Furthermore, the curated sales format is especially effective in educating consumers in China about new beauty products and enhancing the profile of brands through online channels.

Unlike flash sales, the curated sales format is a more effective and efficient channel to introduce new products by guiding consumers’ purchase decisions. An operator of curated sales platform can present and sell a carefully selected array of high quality products with purchase recommendations featuring detailed descriptions and extensive customer reviews, without imposing limit on the units available for sale for each product or offering steep price discounts.

 

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BUSINESS

OVERVIEW

We are China’s No. 1 online retailer of beauty products as measured by GMV, with a market share of 22.1% in 2013, according to the Frost & Sullivan report. We have grown rapidly and substantially since we launched our jumei.com website in March 2010 and achieved our current scale and profitability with only approximately US$13 million in total funding from our private equity investors. We achieved US$483.0 million in net revenues and US$25.0 million in net income in 2013, with approximately 10.5 million active customers during the same period.

We believe that our internet platform is a trusted destination for consumers to discover and purchase branded beauty products, and 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 curated sales represents a new online sales format, whereby we recommend a carefully selected collection of branded beauty products 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. 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, which have been essential for our rapid growth. Our active customers totaled approximately 1.3 million, 4.8 million and 10.5 million in 2011, 2012 and 2013, respectively. Orders placed by our repeat customers accounted for approximately 88.9% of our total orders in 2013. Our suppliers and third-party merchants include brand owners, brand distributors, resellers and certain exclusive product suppliers. We worked with approximately 1,700 suppliers and third-party merchants 2013.

We believe consumers will increasingly shop online through mobile internet. Therefore, 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 first quarter of 2014, approximately 49% of our GMV was generated through our mobile platform.

Our visionary management team has the foresight to identify and meet evolving customer needs and market opportunities in the beauty products market. Under our management’s leadership, we have attracted a large and loyal user base through our creative and cost-efficient marketing campaigns as well as word-of-mouth referrals resulting from our well-selected products and superior customer experience. We further enhance the attractiveness of our product offerings by entering into arrangements with beauty product suppliers for exclusive sales and distribution of selected products in China. We implement effective measures to control costs and operating expenses, which have enabled us to achieve and increase operating profitability.

Our net revenues were US$21.8 million in 2011, US$233.2 million in 2012 and US$483.0 million in 2013. We achieved net income of US$8.1 million in 2012 and US$25.0 million in 2013, compared to a net loss of US$4.0 million in 2011. Our net cash provided by operating activities were US$27.4 million in 2012 and US$84.8 million in 2013. Our net cash used in operating activities was US$2.0 million in 2011.

 

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OUR STRENGTHS

We believe the following key competitive strengths have contributed to our growth and success to date:

China’s No. 1 Online Beauty Products Retailer

We are China’s No. 1 online retailer of beauty products as measured by GMV in 2013, according to the Frost & Sullivan report. Our market share among China’s online beauty products retailers was 22.1%, as measured by GMV in 2013, which was over 2.5 times the market share of the nearest competitor, according to the Frost & Sullivan report. Our jumei.com website is the most visited online beauty products website in China, based on the number of daily unique visitors in 2013, according to the Frost & Sullivan report. We have experienced rapid growth since we launched jumei.com website in March 2010. We had active customers of approximately 1.3 million, 4.8 million and 10.5 million in 2011, 2012 and 2013, respectively. In 2013, we acquired approximately 8.2 million new customers, compared to approximately 4.2 million in 2012 and 1.2 million in 2011.

We have achieved a market leading position through our strong execution capabilities and word-of-mouth referrals in acquiring customers, suppliers and third-party merchants. These factors have enabled us to attract a large base of highly engaged and loyal customers, and offer a well-selected collection of products, driving our fast growth. We believe our market leading position creates a high barrier to entry for competitors.

Visionary Management with Exceptional Marketing Capabilities

We have a visionary founding management who identified the online sales of beauty products as a unique opportunity in the e-commerce space. Beauty products are well-suited to be sold through online retailers as they enjoy certain characteristics such as high value-to-weight ratio, low fulfillment costs per unit, long product life cycle and low return rates, which make them desirable and favorable products for online retailers.

Exceptional marketing expertise. Having seized this unique opportunity in the e-commerce industry, we leveraged our creative and effective marketing capabilities to become a leading player in the online beauty products retail market. Through creative and cost-efficient marketing campaigns and strong word-of-mouth referrals, we have been able to attract new user traffic at relatively low cost. For example, we launched an in-house produced Jumei online advertisement video as a part of our 2013 anniversary special promotion. The video went viral and attracted approximately five million views on Youku.com within three months. Such nationwide publicity on the internet has significantly elevated our jumei.com brand and directly contributed to record high sales of over two million orders in three days during our March 2013 anniversary special promotion. The number of our total active customers increased from approximately 1.3 million in 2011 to 4.8 million in 2012 and further to 10.5 million in 2013.

Unique value to customers and brands. We believe our visionary management has built a business model that creates value for customers through featured product recommendations on our internet platform. This helps to educate and guide our customers and satisfy their demands, which is evidenced by a track record of high repeat purchase rates on our internet platform. We also work closely with beauty products brand owners to understand the value proposition of each SKU, and help brand owners reach their target customers and increase sales and awareness of their brands through our internet platform.

Rapid path to profitability. All of the above factors have contributed to our rapid path to profitability. We achieved our current scale and profitability with only approximately US$13 million funding in total from our private equity investors. We achieved US$483.0 million in net revenues and US$25.0 million in net income in 2013.

Robust Mobile Platform

We believe consumers of beauty products will increasingly shop online through mobile internet. Therefore, we have invested substantial resources to build a mobile platform that is dedicated to providing a superior mobile shopping experience. Through our easy to use mobile platform, our customers can browse our recommended

 

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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 whenever they have a few minutes of free time regardless of their locations. Our Android- and iOS-based mobile applications allow customers to quickly and efficiently view, discover, select and purchase our product offerings. We also host special promotions and sales events that are only available on our mobile platform, as well as push targeted sales events based on our analysis of the purchasing and browsing behaviors of our mobile users, which serve to further enhance our customers’ shopping experience. As a result, sales through our mobile platform have grown significantly since its launch in May 2012. Approximately 38.4% of our GMV was generated from our mobile platform in the fourth quarter of 2013, up from 10.8% of GMV in the fourth quarter of 2012. In the first quarter of 2014, we generated approximately 49% of GMV from our mobile platform.

Trusted Online Retail Brand for Beauty Products

We believe we are a trusted online destination for beauty products among Chinese consumers. Customers come to us for our high quality products, strong product selection and recommendation expertise, as well as our high-quality customer service.

We believe that the authenticity of beauty products is one of the most important issues for online customers. To increase consumer confidence and enhance the protection of consumer rights, the Authentic Beauty Products Alliance, or the Alliance, was launched in July 2013. The Alliance aims for the entire beauty products industry to commit to authentication, and we believe it is the first nationwide organization focusing on the authenticity of beauty products in the industry. We were one of the founding organizers of the Alliance, whose organizers also include China Quality Long March ( LOGO ), one of the most influential nationwide not-for-profit organizations focusing on product quality in China. A significant portion of our beauty product offerings have authentication pin numbers that customers can check and trace to the product source on the Alliance’s website or websites of the participating brands. The Alliance had 71 members as of December 31, 2013.

Furthermore, we are currently in collaboration with a leading institution in China to conduct periodic laboratory tests on randomly selected samples of beauty products provided by our suppliers and third-party merchants. The tests are designed to analyze the chemical composition of sample beauty products to ensure their authenticity. We believe we are one of the first companies in the beauty industry to implement such testing procedures in order to commit to the high quality standards of beauty products sold through our internet platform. We have recently placed orders for spectrum analysis equipment in order to increase the sampling size of beauty products tested and to establish in-house capability for conducting such tests.

We have developed an insightful knowledge and understanding of our customers’ needs and preferences by analyzing historical sales data, seasonality impact, customer feedbacks and fashion trends. We believe our strong product selection and recommendation expertise and curated sales format deliver value, quality and convenience for our customers and enhance our trendsetting brand image. In addition, we offer high-quality customer services, including speedy product delivery and a thirty-day product return policy for all beauty products.

During our 2013 anniversary special promotion from March 1 to March 3, 2013, we achieved record high sales of over two million orders in three days, which is a testament to our brand influence. Our brand became popular primarily through strong word-of-mouth referrals, and is supplemented by our creative marketing campaigns. Our widely recognized and trusted brand has enabled us to generate a large amount of direct traffic to our website and mobile applications.

Highly Engaged and Loyal Customer Base

We have attracted a large, highly engaged and loyal customer base. Our curated sales and online shopping mall sales formats have been proven by our fast growth as effective ways to encourage and satisfy our customers’ desire to purchase beauty products conveniently. We engage our customers by providing a curated selection of products at attractive prices, coupled with superior customer services. In addition, the unique product offerings and functions on our user-friendly mobile platform further enhance customer engagement and stickiness. We believe our high level of customer engagement and unique shopping experience have enabled us to attain a large

 

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and fast growing customer base. Our focus on providing a high quality customer experience has led to strong customer loyalty, increasing repeat purchases and growing willingness of our customers to try new products. The total number of our repeat customers represented approximately 53.8%, 56.3% and 62.0%, respectively, of the total number of our active customers in 2011, 2012 and 2013, and orders placed by our repeat customers accounted for approximately 86.7%, 86.6% and 88.9%, respectively, of our total orders during the same periods. Furthermore, we continuously engage our customers through our large and active online review community where customers can share their reviews and ratings of the products they purchase through us. Many of our customers contribute to our online review community through providing in-depth essay-type product reviews featuring photos.

In addition, we continue to gain higher wallet share from our existing customer base by constantly improving the collection of products offered for sale on our internet platform. For example, we launched our flash sales channel for apparel and other lifestyle products in the fourth quarter of 2011 to address the diverse needs of our customers and were able to successfully identify and monetize cross-selling opportunities. We believe we have successfully expanded our product offerings and categories.

OUR STRATEGIES

Our goal is to become the online destination for female consumers and trendsetter for fashion and beauty. We intend to achieve our goal by pursuing the following growth strategies:

Extend Our Product Offerings

We plan to take various initiatives, such as developing exclusive beauty products and exploring complementary product categories, to extend our product offerings, which will help us attract additional customers, enhance the shopping experience of our existing customer base, encourage repeat purchases and increase customer engagement and loyalty.

Exclusive Beauty Products. We intend to enter into more exclusivity arrangements with popular beauty product suppliers and continue to grow our private label business. With our leadership position and growing market share, we believe that both established and emerging brands will increasingly rely on us as a major channel to access and expand in the Chinese market. We will utilize our strong merchandising expertise and deep understanding of customers’ needs and preferences to select more suppliers to enter into exclusive arrangements with, which will further enrich and differentiate our product offerings from those of our competitors. We will seek to strengthen and increase our business relationships with popular brands for the sale of selected SKUs and sets of beauty products exclusively on our internet platform and with global brands to gain exclusive distribution rights for the sale of their products in China.

Category Expansion in Complementary Products. We have a high percentage of repeat customers who come to us frequently seeking product recommendations. Therefore we are able to identify and cross-sell other categories of products that are suitable to our loyal customers, as evidenced by the success of the sale of our apparel and other lifestyle products on our internet platform through flash sales. We plan to expand the range of product offerings to fulfill the diverse needs of our existing and potential customers. We believe this will increase our cross selling capabilities in order to further encourage customers’ spending on our internet platform.

Strengthen Our Mobile Platform

We believe mobile internet is the future for online retail business and is highly conducive to the sale of beauty products. We plan to convert existing website users to become users of our mobile platform, attract new customers to our mobile platform and further increase sales generated from our mobile platform. We plan to customize text messages and mobile push notifications of sales events through our mobile platform to increase user engagement and repeat purchases. We also intend to grow our mobile platform through organic growth, as well as selected strategic alliances with and potential strategic acquisitions of businesses that are complementary to ours.

 

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Improve Customer Experience and Enhance Customer Loyalty

We are dedicated to improving customer experience and enhancing customer loyalty. We intend to increase our fulfillment speed, improve the packaging of our products and offer more customized services, including enhanced product recommendations, to our users. In addition, we intend to continue using social media platforms to engage with our customers and to receive real-time feedback on our product and services. We plan to further refine our internet platform by building better consumer interface and mobile applications. For our elite status members, we intend to offer more membership benefits, such as exclusive discounts and member events.

To further enhance customer experience and strengthen our brand image and presence, we plan to engage in more offline interaction with our users, including the opening of physical stores in selected regions in China. We opened our first physical store in Beijing in December 2013. By establishing additional physical stores, we can showcase our high product quality, professional knowledge in beauty and skincare as well as superior customer services, which we believe will foster trust and loyalty among our new and existing customers and enhance our online sales. We will also continue to interact with customers through creative personal touches in our order packages, which we believe further enhances the overall shopping experience and increases customer engagement.

Increase Our Brand Recognition

We have built our brand awareness through word-of-mouth referrals and creative and cost-effective marketing campaigns. To make Jumei a household name for beauty products in China, we will further increase the awareness and recognition of our Jumei brand through continuing innovation, cost-effective and expanded marketing and promotion initiatives nationwide, as well as opening additional physical stores in select regions in China. We also plan to continue to work with trusted suppliers and the Authentic Beauty Products Alliance to offer more authenticated products. In addition, we intend to develop in-house product testing capabilities for routine and random sampling of beauty products to ensure their quality and authenticity.

Extend Our Operational Capabilities

We will continue to extend our operational capabilities to support our long-term growth. We also intend to upgrade our existing logistics centers in order to more efficiently manage inventories and product delivery and establish additional logistics centers in strategic locations across China to improve our nationwide fulfillment capabilities. We will strengthen our collaborations with local delivery companies and establish our in-house delivery team to further improve the speed of last mile product delivery. We will continue to enhance and improve the responsiveness, functionality and features of our jumei.com website and our mobile platform through continuous investment in our IT infrastructure. We plan to adopt rigorous data analytics and develop proprietary technology to better understand our customers’ browsing and shopping patterns and personal preferences and then target our sales events to them with the goal of maximizing relevance, engagement, sales and repeat purchases. In addition, we plan to improve our management information system to allow accurate and timely monitoring of our product sales and inventory levels.

Pursue Strategic Alliances, Investments and Acquisition Opportunities

In addition to growing our business through internal initiatives, we may pursue strategic alliances, investments and potential acquisitions that are complementary to our business and operations, including opportunities that can help us promote our brand to new customers, expand our product offerings, improve our technology and enhance our mobile applications and platform. For example, we are exploring with Dickson Concepts (International), a renowned luxury goods retailer, ways to enrich our product portfolio, strengthen online curation and personalization, and better integrate our customers’ online and offline shopping experience.

 

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OUR SALES FORMATS

We currently utilize three sales formats: curated sales, online shopping mall and flash sales. We have adopted a curated sales model to sell branded beauty products on our internet platform. Supplementing our curated sales, we also sell a wider selection of branded beauty products in our online shopping mall to enhance customer stickiness. We offer apparel and other lifestyle products that are sold by third-party merchants to satisfy our customers’ growing needs and enhance their shopping experience.

Sales of Beauty Products

We have adopted two complementary sales formats on our internet platform for beauty products: curated sales and online shopping mall, pursuant to which we either sell beauty products directly to customers as a principal or act as a service provider for third-party merchants who sell beauty products on our internet platform. We provide our customers with the same shopping experience regardless of whether the beauty products are sold by us or by third-party merchants.

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 beauty products for a limited period of time at attractive prices. We carefully select popular beauty products that primarily appeal to females in China. We select and update over 100 SKUs for curated sales every day and each SKU is generally on sale for one to three days.

Online Shopping Mall. In addition to curated sales, we offer a wider selection of branded beauty products through our online shopping mall on a long-term basis and at attractive prices to enhance customer stickiness. Our shopping mall allows customers to browse products based on category, functionality, brand, price and whether they are sold exclusively by us. We collaborate with an extensive range of international and domestic suppliers and third-party merchants, who offer diversified and branded beauty products. Our online shopping mall offered over 800 SKUs in 2011, 4,600 SKUs in 2012 and 10,200 SKUs in 2013.

Sales of Apparel and Other Lifestyle Products

In addition to beauty products, 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.

Flash Sales. Launched in December 2012, our flash sales format features virtual stores of selected third-party merchants, offering apparel and accessories, footwear, handbags and luggage, baby, children and maternity products, 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. By offering products through our flash sales format, we help third party merchants reach their target customers and increase awareness of their brands. Unlike curated sales format, which focuses on SKUs, our flash sales focus on brands. We host sales events for brands via our flash sales format that normally last for five days and we select the brands for each sales event based on our understanding of customer preferences and needs. During each sales event, the third party merchants introduce and offer an extensive range of products at deep discounts. We hosted over 9,100 sales events in 2013.

 

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The following table summarizes the key features of our three sales formats:

 

   

Curated Sales

 

Online Shopping Mall

 

Flash Sales

Products

  Branded beauty products   Branded beauty products   Branded apparel and other lifestyle products

Duration

  Usually one to three days   Long-term offerings   Usually five days

Breadth of Offering

  Selected, focusing on SKUs   Wide   Selected, focusing on brands

Pricing

  Attractive price   Attractive price   Deep discount

Our Role

 

•   Select, curate and recommend a carefully selected collection of SKUs each day

 

•   Act mainly as principal; sometimes as service provider for third-party merchants

 

 

•   Merchandize a wider selection of products

 

•   Act mainly as principal; sometimes as service provider for third-party merchants

 

 

•   Select brands

 

•   Act as service provider for third-party merchants

 

PRODUCT OFFERINGS

Product Categories

We offer high quality and affordable beauty products. Since our inception, we have sold over 30,000 SKUs of beauty products, and we currently have over 10,000 SKUs of such products available on our internet platform. The following table illustrates the categories of beauty products we sell:

 

Product category

  

Product description

Cosmetics

   Foundation, powder, concealer, makeup remover, eye liner, eye shadow, brow powder, brow pencil, mascara, lip gloss, lipstick and nail polish

Skin care

   Facial cleanser, whitening products, sun block, moisturizer, facial mask, eye mask, eye gel, exfoliating scrub, lotion, cream pore cleanser, lip care and toner

Cosmetic applicators

   Brush, puff, curler, hair iron and shaver

Fragrance

   Perfume and cologne for women and men

Body care

   Shampoo, conditioner and body wash

For men

   Facial wash, firming lotion, astringent and moisturizer

For baby and children

   Lip balm, lotion, shampoo, soap, essence oil, formula milk and diapers

 

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We supplement our product offerings with apparel and other lifestyle products through flash sales format as illustrated by the following table:

 

Product category

  

Product description

Womenswear

   Women’s apparel, featuring a variety of apparel for different age groups, including casual wear, jeans, dresses, outerwear and swimsuits

Footwear

   Shoes for women and men designed in a variety of styles, for both casual and formal occasions

Lingerie

   Underwear, stockings and pajamas

Handbags and luggage

   Purses, satchels, backpacks, duffel bags and luggage

Baby, children and maternity

   Apparel, gear and accessories, furnishings and decor, toys and games for boys, girls, infants and toddlers of all age groups and maternity clothes

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

Luxury goods

   Internationally-known premium designer apparel, footwear, handbags and accessories

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. Examples of such exclusive arrangements include, among others, selected SKUs and sets of beauty products under the Sengansenka brand of Shiseido, KOSE China, and multiple brands of the Amorepacific Group, such as LANEIGE. We do not substantially depend on any of our exclusive products suppliers. We also have exclusive distribution rights for the sale of beauty products under global brands seeking to enter into the Chinese market.

Our exclusive products have proven to be highly popular among our customers. For example, our Hippo Family brand of face masks has constantly ranked as one of the most popular curated sales products on our internet platform since its debut.

CUSTOMERS

Our large, engaged and loyal customer base is the key to our success. The majority of our active customers are females. We believe female customers will gradually increase their spending on beauty products as their age and income increase. The loyalty of our customer base is demonstrated by the repeat purchase rates and growing willingness of our customers to try new products on our internet platform. The numbers of our active customers were approximately 1.3 million in 2011, 4.8 million in 2012 and 10.5 million in 2013, among which approximately 53.8%, 56.3% and 62.0%, respectively, were repeat customers. Orders placed by our repeat customers accounted for approximately 86.7%, 86.6% and 88.9%, respectively, of our total orders during the same periods. Our ability to attract and retain customers has contributed significantly to our revenue growth.

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

 

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platform. As a result, we have been able to build a large, engaged and loyal customer base with relatively low customer acquisition cost. Our cost-effective marketing campaigns have allowed us to have relatively low marketing expenses.

For example, in February 2013, we launched an in-house produced Jumei brand video titled “I endorse myself,” which featured TV and online advertisements in the form of tastefully cinematographed micro-films starring our senior executive officers. We crafted our campaign slogans to echo with the sentiments of the post-1980s generation of young Chinese and inspired them to endorse their own lifestyles. Our “I endorse myself” marketing campaign soon developed into a viral internet meme as our brand video was adopted and reproduced by Chinese internet users to express themselves. As a result, this marketing campaign has helped us to amplify our brand image as the trendsetter of beauty and stylish living.

As part of our viral marketing strategy, we offer various incentives to our existing customers in order to increase their spending and loyalty. Our customers can earn cash coupons for eligible purchases and gain elite membership status, which offers enhanced benefits such as larger cash coupon rewards, exclusive products and free samples. We offer gifts and lucky draw promotions on our internet platform. Our customers can also earn cash coupons for successful referrals of new members and customers. In addition, we encourage our customers to share their shopping experiences with us through social media and networking websites in China.

We conduct online advertising via search engines, portals, advertising networks, video sharing websites, and social networking and microblogging sites. Our collaboration with search engines is mainly through paid search, whereby we purchase key words and brand-link products. With the help of online advertising networks, we can run our advertisements through a variety of online media. We also upload our promotional videos to popular video sharing websites in China and conduct offline advertising by placing television commercials. We plan to continue to enhance such online and offline advertising efforts as we continue to grow our business.

OUR INTERNET PLATFORM

Our jumei.com website

Our jumei.com website is the most visited online beauty products website in China, based on the number of daily unique visitors in 2013, according to the Frost & Sullivan report. Integrating convenience, aesthetics and functionality, our website aims to actively drive consumer spending by strategically featuring a carefully selected catalog of popular items. We focus on creating a superior online shopping experience for our customers whereby they are aided by detailed product descriptions, thoughtful peer reviews and multi-angle picture illustrations in making purchase decisions. Our website interface is fully integrated with our warehouse management system, enabling us to track order and delivery status on a real-time basis.

Our website design offers several user-friendly features that enhance customer experience and convenience:

 

    Browsing. Our jumei.com home page arranges our product offerings into three segments, namely separate webpages for curated sales of beauty products, store fronts of beauty products by brands in our online shopping mall, and flash sales of apparel and other lifestyle products. We provide customers with detailed product information, including product specifications, user guides, photographs, peer reviews and ratings.

 

    Sales Functionalities. We create a thrilling and enjoyable shopping experience for our customers by allowing them to view the popularity of each product and see other users who are viewing the products, and by featuring countdown clocks and “Almost Sold-out” banners 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 the same interface.

 

   

Product Reviews. To help customers make informed purchasing decisions, we devote a large part of our website to display recent purchase records for each beauty product to highlight the item’s popularity and encourage previous purchasers to share their feedback. Our product description and

 

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reviews 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. We have established a large and active online review community. As of December 31, 2013, there were approximately 797,000 product reviews and approximately 23.7 million short customer comments on our 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 website allows users to follow other customers who have posted reviews and to receive feeds on the purchase history of such customers. We believe these product reviews and functions provide valuable information to our potential and existing customers, create positive customer experience, and as a result, promote repeat visits and purchases.

 

    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

We believe consumers of beauty products will increasingly shop online through mobile internet. Therefore, we have invested substantial resources to build a mobile platform dedicated to providing a superior mobile shopping experience. Sales through our mobile platform have grown significantly since its launch in May 2012. Approximately 38.4% of our GMV was generated from our mobile platform in the fourth quarter of 2013, up from 10.8% of GMV in the fourth quarter of 2012. In the first quarter of 2014, we generated approximately 49% of GMV from our mobile platform.

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. The layout of products offered on our mobile applications is intuitive and easy to use. Customers can browse our recommended product selections, in particular our curated sales which are immediately accessible as soon as our mobile applications are activated on their mobile devices, and make quick purchases at any time and regardless of their locations. In addition, customers can conveniently browse and search for products based on brand, category, product functionality, and can sort product listings by popularity, price and discount level. Users may also subscribe to future curated sales notifications sent by our mobile applications.

The unique product offerings and functions on our mobile platform further enhance mobile user experience and engagement. We have also launched some of our sales events a few hours earlier on mobile applications to further boost traffic and purchases on our mobile platform. Some selected products and sales events are offered exclusively on our mobile applications to increase their popularity. In addition, we are in collaboration with telecommunication service providers by offering free data usage to customers shopping on our mobile applications. We offer selected products exclusively on our mobile applications to increase their popularity. We also seek to provide customers with a customized shopping experience through analyzing and understanding their transaction histories and browsing patterns on our mobile application and develop targeted sales events to increase customer stickiness and enhance cross-selling opportunities. A direct dial feature on our mobile platform allows users to call our customer service with a single click. We periodically send product promotional information to our mobile application users through text messages and mobile push notifications. We also continuously work on developing additional features to better utilize mobile device functionalities to enhance user experience.

 

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Our Physical Store

To complement our internet platform, we opened our first physical store in Beijing in December 2013, which showcases our high quality products, professional knowledge in beauty and skincare as well as superior customer services. After our customers have sampled our products, they are encouraged and guided to make purchases on our website through the tablets in our store or on our mobile applications through their mobile devices with the assistance of free wi-fi provided in our store. Our customers can also directly purchase beauty products sold at our physical store. However, we do not offer any discount on products sold directly offline, so as to encourage our customers to make purchases on our website. We plan to open additional physical stores to establish our presence in major cities in China, to build greater trust with our customers and to further broaden our brand awareness.

OUR SUPPLIERS AND THIRD-PARTY MERCHANTS

Since our inception, we have attracted a broad group of suppliers for beauty products and third-party merchants for beauty, apparel and other lifestyle products. Our suppliers and third-party merchants include brand owners, brand distributors, resellers and exclusive product suppliers. In 2011, 2012 and 2013, we worked with approximately 500, 700 and 1,700 suppliers and third-party merchants, respectively. We believe our reputation as a brand incubator and our ability to assist suppliers and third-party merchants in effectively selling their inventory and fulfilling their demand for marketing will help us attract new suppliers and third-party merchants and build stronger ties with our existing ones.

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

 

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China Quality Long March ( LOGO ), one of the most influential nationwide not-for-profit organizations focusing on product quality in China. The Alliance invites our beauty product suppliers to become members, whereby they agree to place stickers containing unique authentication pin numbers on their products sold through us. Customers may then peel the sticker to reveal authentication pin numbers and validate the product authenticity through the Alliance website or websites of the participating brands. The Alliance had 71 members as of December 31, 2013. A significant portion of our beauty products are sold with verifiable authentication pin numbers.

In addition to the Alliance, we are currently in collaboration with a leading institution in China to conduct periodic laboratory tests on randomly selected samples of beauty products provided by our suppliers and third-party merchants. The tests are designed to analyze the chemical composition of sample beauty products to ensure their authenticity. We intend for such testing to be conducted on a weekly basis on a randomly selected set of beauty products from different suppliers or third-party merchants. Any non-compliant products identified will subject the supplier or third-party merchant to fines of up to five times the value of the merchandise as well as permanent termination of business relationship with such supplier or third-party merchant. We believe we are one of the first companies in the beauty industry to implement such testing procedures in order to commit to the high quality standards of beauty product offerings sold through our internet platform.

Furthermore, we diligently examine the product sourcing channel and qualification of our suppliers, carefully inspect all beauty products delivered to our logistics centers, and reject or return products that do not meet our quality standards or the purchase order specifications. We also reject any products with broken or otherwise compromised packaging. In addition, we inspect all products before shipment from our logistics centers to our customers and conduct random periodic quality checks on our inventory. For non-compliant products, we immediately take them off from our internet platform. Furthermore, we typically require suppliers and third-party merchants to pay deposits or provide advance payment guarantees. 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.

Inventory management. We generally do not pay in advance for the beauty products that we purchase from our suppliers for curated sales or for our online shopping mall. Most of our suppliers of beauty products grant us a credit term of 30 days. For selected suppliers, we only have to settle payment after such products are sold to our customers.

Brand Success Story

The following examples illustrate how emerging beauty product brands have benefited from our internet platform:

On December 12, 2012, the first Hippo Family product debuted on our internet platform. Within 16 hours of its launch, we sold approximately 6,300 units of the Hippo Family face mask with minimal marketing cost. To further boost the popularity of the Hippo Family brand, we embedded various Hippo Family products into our promotional micro-films. Since the first season of the micro-films hit video-sharing websites in June 2013, sales revenues of the Hippo Family brand quadrupled to approximately RMB10 million (US$1.7 million) on a quarterly basis.

When Brand A, a Chinese skincare products brand, first appeared on our internet platform in 2011, its annual online sales revenues were relatively small. Since 2011, we have been working closely with Brand A to enhance its brand image. After more than two years of cooperation, the total annual online sales of Brand A quadrupled to over RMB200 million (US$33.0 million) in 2013, among which the sales through our internet platform were over RMB100 million (US$16.5 million).

 

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PAYMENT AND FULFILLMENT

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