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20-F 1 tv488614_20f.htm 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
♣ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
ω ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017
OR
♣ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
♣ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number 001-36896
JMU Limited
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
North Guoquan Road 1688 Long
No. 75, Building A8, 6F
Yangpu District, Shanghai 200438
People’s Republic of China
(Address of principal executive offices)
Frank Zhigang Zhao
Chief Financial Officer
North Guoquan Road 1688 Long
JMU Limited
No. 75, Building A8, 6F
Yangpu District, Shanghai 200438
People’s Republic of China
Phone: +86 21 6015 1166
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
American depositary shares, each representing 18
ordinary shares, par value US$0.00001 per share
Name of each exchange on which registered
The Nasdaq Global Market
Ordinary shares, par value US$0.00001 per share
The Nasdaq Global Market*
* Not for trading, but only in connection with the listing on the Nasdaq Global Market of American depository shares,
each representing 18 ordinary shares
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of
the period covered by the annual report.
1,475,307,852 Ordinary Shares (excluding 900,818 ordinary shares in the form of ADS that are reserved for issuance
upon the exercise of share awards) as of December 31, 2017
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
♣ Yes ω No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
♣ Yes ω No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
♣ Yes ω No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
♣ Yes ω No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or
an emerging growth company. See the definitions of “large accelerated filer,”, “accelerated filer” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ♣
Non-accelerated filer ω
Accelerated filer ♣
Emerging growth company ω
(Do not check if a smaller reporting company)
If an emerging growth company that prepares its financial statements in accordance with U.S.GAAP, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
♣
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting
Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in
this filing:
U.S. GAAP ω
International Financial Reporting Standards
as issued by the International Accounting
Standards Board ♣
Other ♣
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item
the registrant has elected to follow.
♣ Item 17 ♣ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
♣ Yes ω No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13
or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
♣ Yes ♣ No
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TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4.
Information on the Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8.
Financial Information
Item 9. The Offer and Listing.
Item 10. Additional Information.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
Item 12. Description of Securities Other than Equity Securities.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Item 14E.Use of Proceeds.
Item 15. Controls and Procedures.
Item 16.
Item
16A.
Audit Committee Financial Expert.
Item 16B.Code of Ethics.
Item 16C.Principal Accountant Fees and Services
Item
16D.
Exemptions from the Listing Standards for Audit Committees.
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant’s Certifying Accountant.
Item
16G.
Corporate Governance.
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1
1
2
2
2
2
36
53
53
67
77
79
80
80
97
98
99
99
99
99
99
101
101
101
101
101
101
101
102
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Mine Safety Disclosure
Item
16H.
PART III
Item 17. Financial Statements.
Item 18. Financial Statements.
Item 19. Exhibits.
i
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103
103
103
103
103
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Conventions Used in this Annual Report
INTRODUCTION
In this annual report, unless otherwise indicated or the context otherwise requires, references to:
∂
∂
∂
∂
∂
∂
∂
∂
“we”, “us”, “our company”, or “our” refers to JMU Limited, which was formerly known as Wowo
Limited, its subsidiaries and its consolidated affiliated entities;
“ordinary shares” refer to our ordinary shares, par value US$0.00001 per share;
“ADS” refers to our American depositary shares, each of which represents 18 ordinary shares;
“Our VIE” refers to Shanghai Zhongmin Supply Chain Management Co. Ltd., which together with its
subsidiaries, we consolidate as variable interest entities;
“Our WFOE” refers to Shanghai Zhongming Supply Chain Management Co. Ltd., our subsidiary in China
that is a wholly foreign-owned enterprise and has entered into contractual arrangements that give it
effective control over Our VIE;
“China” or the “PRC” refers to the People’s Republic of China excluding, for the purpose of this annual
report only, Hong Kong, Macau and Taiwan;
“Renminbi” or “RMB” refers to the legal currency of China; and
“$”, “US$”, “dollars” or “U.S. dollars” refers to the legal currency of the United States.
Our reporting and functional currency is U.S. dollar. This annual report contains translations of certain foreign
currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of
Renminbi into U.S. dollars were made at RMB6.5063 to $1.00, the noon buying rate on December 29, 2017 as set forth
in the H.10 statistical release of the U.S. Federal Reserve Board.
Special Note Regarding Forward-Looking Statements
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and uncertainties, including
statements based on our current expectations, assumptions, estimates and projections about us and our industry. In some
cases, these forward-looking statements can be identified by words or phrases such as “aim”, “anticipate”, “believe”,
“estimate”, “expect”, “going forward”, “intend”, “ought to”, “plan”, “project”, “potential”, “seek”, “may”, “might”,
“can”, “could”, “will”, “would”, “shall”, “should”, “is likely to” and the negative form of these words and other similar
expressions. The forward-looking statements included in this annual report relate to, among others:
∂
∂
∂
∂
∂
our goals and strategies;
our prospects, our business development, the growth of our operations, and our financial condition and
results of operations;
our plans to enhance supplier and customer experience, upgrade our infrastructure and increase our service
offerings;
our expectations regarding demand for and market acceptance of our services;
competition in our industry in China; and
1
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∂
fluctuations in general economic and business conditions in China.
These forward-looking statements involve various risks and uncertainties. Although we believe that our
expectations expressed in these forward-looking statements are reasonable, our expectations could later be found to be
incorrect. Our actual results could be materially different from our expectations. You should thoroughly read this annual
report and the documents that we refer to with the understanding that our actual future results may be materially
different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary
statements.
This annual report contains certain data and information that we obtained from various government and private
publications. Statistical data in these publications also include projections based on a number of assumptions. Our
industry might not grow at the rate projected by market data, or at all. Failure of our industry to grow at the projected
rate may have a material adverse effect on our business and the market price of our ADSs. Furthermore, if any one or
more of the assumptions underlying the market data is later found to be incorrect, actual results could differ from the
projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
A.
Selected Financial Data
The following selected consolidated statements of operations for the years ended December 31, 2015, 2016 and
2017, and selected consolidated balance sheet data as of December 31, 2016 and 2017, have been derived from our
audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements
of operations data for the years ended December 31, 2013 and 2014, and consolidated balance sheet data as of December
31, 2013, 2014 and 2015 are derived from our consolidated financial statements not included in this annual report, the
first two years of which have been restated due to the divestment of the discontinued operations in the year of 2015. Our
consolidated financial statements are prepared and presented in accordance with accounting principles generally
accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results
expected for future periods. You should read this selected financial data section together with our consolidated financial
statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this
annual report.
2
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Selected Consolidated Financial Data
Year ended December 31,
2013
(Note)
2017
2015
(US$ in thousands, except share and share related data)
2014
(Note)
2016
Selected consolidated statements of operations data:
Revenues
Related parties
Third parties
Cost of revenues
Gross (loss)/profit
Operating expenses:
Selling and Marketing
General and administrative
Impairment loss
Total operating expenses
Loss from operations
Interest income/(expense), net
Other income, net
Loss before provision for income taxes
Provision for income tax benefits
Loss from continuing operations
Discontinued operations:
Net (loss)/income from discontinued operations
Provision for income tax benefits
Net (loss)/income from discontinued operations,
net of tax
Net loss
Less: Net loss attributable to noncontrolling interests
Net loss attributable to JMU Limited
Deemed dividend on Series A-1 preferred shares
Deemed dividend on Series A-2 preferred shares
Deemed dividend on Series B preferred shares
Net loss attributable to holders of ordinary shares
of JMU Limited
Net loss per share:
Basic-ordinary share
Diluted-ordinary share
Net loss per share from continuing operations
Basic-ordinary share
Diluted-ordinary share
Net (loss)/income per share from discontinued
operations
Basic-ordinary share
Diluted-ordinary share
—
—
—
—
—
(73)
—
(73)
(73)
—
—
(73)
—
(73)
—
—
—
—
—
(4,323)
—
(4,323)
(4,323)
—
—
(4,323)
—
(4,323)
542
10,935
(13,220)
(1,743)
(5,360)
(12,911)
(85,935)
(104,206)
(105,949)
7
46
(105,896)
1,250
(104,646)
10,078
63,123
(72,857)
344
17,485
71,251
(88,187)
549
(20,405)
(7,531)
(15,207)
(6,697)
— (147,018)
(168,922)
(168,373)
(411)
28
(168,756)
6,857
(161,899)
(27,936)
(27,5920)
26
39
(27,527)
2,234
(25,293)
(32,180)
81
(39,546)
—
11,076
—
(32,099)
(39,546)
11,076
—
—
—
—
—
—
(32,172)
—
(32,172)
(43,869)
(13)
(43,856)
(93,570)
—
(93,570)
(25,293)
—
(25,293)
(161,899)
—
(161,899)
1,199
34,336
2,106
1,445
36,947
2,422
442
1,203
720
—
—
—
—
—
—
(69,813)
(84,670)
(95,935)
(25,293)
(161,899)
(0.23)
(0.23)
(0.00)
(0.00)
(0.28)
(0.28)
(0.03)
(0.03)
(0.09)
(0.09)
(0.10)
(0.10)
(0.23)
(0.23)
(0.25)
(0.25)
0.01
0.01
(0.02)
(0.02)
(0.02)
(0.02)
—
—
(0.11)
(0.11)
(0.11)
(0.11)
—
—
Note: Due to the divestment of our group buying business in 2015, the results of operations from the group buying
business is reclassified as discontinued operations and the consolidated statements of operations for the years
ended December 31, 2013 and 2014 have been restated to reflect such reclassification.
As of December 31,
2013
2017
2015
(US$ in thousands, except share and share related data)
2016
2014
Selected consolidated balance sheet data:
Total current assets
11,640
10,306
41,083
13,428
14,055
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Total assets
Total current liabilities
Total liabilities
Total (deficit)/equity
Total liabilities, mezzanine equity and deficit
B.
Capitalization and indebtedness.
Not applicable.
C.
Reasons for the offer and use of proceeds.
Not applicable.
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23,375
96,425
96,425
(156,889)
23,375
20,343
67,500
129,466
(233,776)
20,343
342,774
24,950
38,093
304,681
342,774
274,045
15,227
25,648
248,397
274,045
136,142
22,806
32,592
103,550
136,142
3
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D.
Risk factors.
Risks Relating to Our Business and Industry
We have a limited operating history and our business model is subject to uncertainties, which makes it difficult to
evaluate our business.
We disposed of our group buying business in September 2015. Our current business of providing integrated
B2B services to food service suppliers and customers only started in late 2014, and we have only owned it since June
2015. The limited history of our current operations makes it difficult for you to evaluate our business, financial
performance and prospects, and our historical growth rate might not be indicative of our future performance. We cannot
assure you that our current business of providing integrated B2B services to food service suppliers and customers will
grow as rapidly as we expect or achieve the critical mass needed for long-term success. Our business model of building a
fair business ecosystem for food service businesses in China and cultivating the traditional offline food service
businesses using internet tools is still a new business model in China, while the catering and hotel industries in China are
growing rapidly and we face consistent challenges to innovate our business and service model to serve our customers.
Given the limited history of our business model and its fast and iterative developments, it is difficult to predict if our
growth will be sustainable in the future, and the market might evolve in ways that are difficult to anticipate. You should
consider our prospects in light of the risks and uncertainties that fast-growing companies in a rapidly evolving market
might encounter. These risks and difficulties include, but are not limited to:
∂
∂
∂
∂
∂
a new and relatively unproven business model;
our ability to anticipate and adapt to a developing market and industry;
high expenditures associated with our geographic expansion, brand promotion and marketing activities;
our need to achieve greater brand recognition;
our ability to attract sufficient suppliers and customers in the food services industry and generate sufficient
net sales or cash flow;
∂ market acceptance of our business model;
∂
∂
difficulties in managing rapid growth in personnel and operations; and
our ability to compete in the market.
Currently we are charging our customers low margin in our direct sales operation, and not charging any
commission or service fees for third-party sellers to use our platform. There is no assurance that we can keep the
expansion of our B2B business at the current pace after we start to apply higher margins to transactions in our direct
sales business and charge service fees for third-party sellers, and our ability to leverage our scale of business to have our
platform users to continue using our services with margins and service charges is uncertain.
We cannot be certain that our business strategy will be successful or that we will successfully address these
risks. Failure to address any of the risks described above could have an adverse effect on our business, financial
condition and results of operations.
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We have a history of losses, have spent substantial amounts in operating expenses and could require additional
funding in the future.
We have invested substantial amounts of cash into research and development and business development to take
the market share and develop our business at a fast pace. Our current food-industry B2B service business has incurred
net loss in the amount of US$291.8 million since we acquired it in June 2015, primarily due to goodwill impairment of
US$213.2 million and impairment of US$19.8 million provided for long-lived assets, and because we have not been
charging service fees or margins for a majority of all transactions on our platform as part of our strategy to achieve scale
of business. We have incurred net losses and experienced negative cash flow from operating activities since our
inception. In addition, we had net current liabilities as of December 31, 2017. As we continue to expand and develop, we
expect to continue to incur losses in the near future.
We expect to continue to spend additional amounts in operating expenses in line with our projected growth. We
received net proceeds of US$37.3 million from our initial public offering on April 8, 2015 and the underwriters’ exercise
of the over-allotment option, after deducting underwriting discounts and commissions and offering expenses payable by
us. Additionally, we received US$15.0 million in a private placement transaction with our co-chairperson Mr. Maodong
Xu in September 2015. In May 2017, we received a loan of RMB35.0 million (US$5.4 million) from our principal
shareholder. In April 2018, we received additional loans of RMB70.0 million (US$11.1 million) from our principal
shareholders. We believe that our current cash and cash equivalents and anticipated cash flow from operations, together
with commitments by our principal shareholders Ms. Xiaoxia Zhu and Ms. Huimin Wang to provide the necessary
financial support, will be sufficient to meet our anticipated cash needs for the next 12 months from the date of this
annual report. However, we may require additional cash due to changing business conditions or other future
developments, including any investments we may decide to pursue. If these resources are insufficient to satisfy our cash
requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional
equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in
increased debt service obligations and could result in operating and financing covenants that would restrict our
operations. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If we are
unable to raise additional capital in sufficient amounts or on terms acceptable to us when needed, we may have to
significantly delay, scale back or discontinue a certain portion of our operations. Any of these events could significantly
harm our business, financial condition and prospects.
We may need to recognize significant impairment losses in connection with past and future acquisitions, which may
have a material and adverse effect on our financial results.
We acquired Join Me Group (HK) Investment Company Limited, or JMU HK, in June 2015 to establish our
food-industry B2B services. We may acquire other companies that are complementary to our business in the future. We
record goodwill if the purchase price paid in an acquisition exceeds the amount assigned to the fair value of the assets
acquired and liabilities assumed, and we also obtained long-lived intangible assets in some acquisitions. We are required
to test goodwill and long-lived assets for impairment annually, or more frequently if events or changes in circumstances
indicate that it might be impaired in accordance with ASC 350, “Intangibles – Goodwill and Other” and ASC 360-10,
“Impairment and Disposal of Long-Lived Assets.” The carrying amount of goodwill amounted to approximately
US$108.9 million as of December 31, 2017 after the annual impairment test, and the impairment losses of US$85.9
million, nil and US$127.3 million were recognized during the years ended December 31, 2015, 2016 and 2017,
respectively. We have also provided impairment of US$19.8 million for long-lived assets during the year ended
December 31, 2017. If the carrying amount of goodwill or long-lived assets in connection with past or future
acquisitions is determined to be further impaired, we will be required to recognize additional impairment losses and our
financial results will be adversely and materially affected.
If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be
materially and adversely affected.
Our current food-industry B2B service has grown substantially since its inception, and we expect continued
growth in our business, revenues and number of employees. We plan to further expand our technology platform, enrich
value-added services to our clients and increase our product offerings. We also plan to integrate our service platform
with key customers’ ERP system to optimize their supply chain management and increase their orders on our platform.
In addition, as we increase our product offerings, we will need to work with new suppliers and third-party sellers
efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers and third-
party sellers. To support our growth, we also plan to continue implementing a variety of new and upgraded managerial,
operating, financial and human resources systems, procedures and controls. All these efforts will require significant
managerial and financial resources. We cannot assure you that we will be able to effectively manage our growth or to
implement all these systems, procedures and control measures successfully. If we are not able to manage our growth or
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execute our strategies effectively, our expansion may not be successful and our business and prospects may be
materially and adversely affected.
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If we are unable to provide superior customer experience, our business and reputation may be materially and
adversely affected.
The success of our business hinges on our ability to provide superior customer experience, which in turn
depends on a variety of factors. These factors include our ability to continue to attract suppliers and third-party sellers
that can offer high quality products at competitive prices, source products to respond to customer demands, maintain the
quality of products and services provided on our platform, and provide timely and reliable delivery, flexible payment
options and superior after-sales service.
We rely completely on independent couriers to deliver products, particularly a logistic company that we have
minority interest in which delivered 90% of our online direct sale orders in 2017. Although we have implemented
quality control policy for selecting third party courier and for monitoring services rendered by them, we cannot assure
you that third party couriers can meet our requirement at all times and if products purchased by customers at our
platform are not delivered on time or are delivered in a damaged state, customers may refuse to accept products and have
less confidence in our services. See “—We rely on service from couriers to deliver our orders, and our third-party sellers
use couriers to deliver a significant number of orders for them. If these third-party service providers fail to provide
reliable delivery services, our business and reputation may be materially and adversely affected.” Furthermore,
employees of contracted third-party couriers act on our behalf and interact with our customers personally. We maintain
cooperation arrangements with a number of third-party couriers to deliver products to our customers and we need to
effectively manage these third-party service providers to ensure the quality of customer services. We have in the past
received customer complaints from time to time regarding our delivery and return and exchange services. Any failure to
provide high-quality delivery services to our customers may negatively impact the purchase experience of our
customers, damage our reputation and cause us to lose customers.
Our customer service center in Shanghai provides real-time assistance to our customers during working hours.
If our customer service representatives fail to provide satisfactory service, or if waiting times are too long due to the
volume of calls from customers at peak times, our brand and customer loyalty may be adversely affected. In addition,
any negative publicity or poor feedback regarding our customer service may harm our brand and reputation and in turn
cause us to lose customers and market share.
Any harm to our JMU brand or reputation may materially and adversely affect our business and results of
operations.
We believe that the recognition and reputation of our JMU brand among our customers, suppliers and third-
party sellers has contributed to the growth and success of our business. Maintaining and enhancing the recognition and
reputation of our brand is critical to our business and competitiveness. Many factors, some of which are beyond our
control, are important to maintaining and enhancing our brand. These factors include our ability to:
∂
provide a compelling online purchase experience to customers;
∂ maintain the popularity, attractiveness, diversity, quality, safety and authenticity of the products that we or
third-party sellers offer;
∂ maintain the efficiency, reliability and quality of the delivery services;
∂ maintain or improve customers’ satisfaction with our after-sale services;
∂
increase brand awareness through marketing and brand promotion activities; and
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∂
preserve our reputation and goodwill in the event of any negative publicity on customer service, internet
security, product quality, price or authenticity, or other issues affecting us or other e-commerce businesses
in China.
A public perception that low-quality or defective goods are sold on our platform or that we or third-party
service providers do not provide satisfactory customer service, even if factually incorrect or based on isolated incidents,
could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established
and have a negative impact on our ability to attract new customers or retain our current customers. If we are unable to
maintain our reputation, enhance our brand recognition or increase positive awareness of our website, products and
services, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be
materially and adversely affected.
Our quality control might not always be sufficient to review and ensure the goods and services offered to the
customers, which could affect our profits and brand.
We create, promote and help operate online storefronts in our JMU Mall in collaboration with our suppliers in
our direct sales business. Once customers purchase goods from our website, we rely on our suppliers to provide goods to
customers. Any customer dissatisfaction resulting from poor quality of goods provided by our suppliers could have an
adverse effect on our reputation or revenue. Our business depends on our ability to ensure that high quality goods are
provided to customers on a consistent basis. This has placed, and will continue to place, substantial demands on our
operational, technological and other resources.
In particular, the food service industry is susceptible to the risk of food-borne illnesses. As with any food
service operation we cannot guarantee that our internal controls will be fully effective in preventing all food-borne
illnesses, food contamination or food tampering, which may be caused by the products of the third-party food suppliers
and distributors or the supply chain of goods such as the food storage or the delivery. Reports in the media or on social
media of one or more instances of food-borne illness from the products offered at our platform could negatively affect
our sales. This risk exists even if it were later determined that the illness had been wrongly attributed to us.
We cannot assure you that such measures will always be sufficient in discovering and remedying problems with
merchandise, some of which are out of our control. Any losses that we may suffer from customers’ request for a large
amount of refunds or replacement of goods or future liability claims, including the successful assertion against us of one
or a series of large claims, could adversely affect our cash flows, financial conditions and results of operations. In
addition, as we expand the types of goods and services for which we offer, the operational cost of quality control will
also likely increase, which will have a negative effect on our profits.
If we are unable to offer products that attract new customers and new purchases from existing customers, our
business, financial condition and results of operations may be materially and adversely affected.
Our future growth depends on our ability to continue to attract new customers as well as new purchases from
existing customers. Our website makes recommendations to customers based on our understanding of the market as well
as the popularity of products on our platform, and we also send product recommendations regularly to our customers
through various means, such as emails, social network media and hardcopy catalogues. Our customers choose to
purchase products on our website due in part to the attractive prices that we offer, and they may choose to shop
elsewhere if we cannot match the prices offered by other websites or by offline suppliers. If our customers cannot find
their desired products on our website at attractive prices, they may lose interest in us and visit our website less frequently
or even stop visiting our website altogether, which in turn may materially and adversely affect our business, financial
condition and results of operations.
We face intense competition. We may lose market share and customers if we fail to compete effectively.
The e-commerce industry in China is intensely competitive. We compete for customers, orders, suppliers and
third-party sellers. Our current or potential competitors include traditional offline food service suppliers and other
internet companies who develop their business and tap into the market we are operating in. In addition, new and
enhanced technologies may increase the competition in the e-commerce industry and new competitive business models
may appear.
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Increased competition may reduce our margins, market share and brand recognition, or result in significant
losses. When we set prices, we have to consider how competitors have set prices for the same or similar products. When
they cut prices or offer additional benefits to compete with us, we may have to lower our own prices or offer additional
benefits or risk losing market share, either of which could harm our financial condition and results of operations.
Some of our current or future competitors have or may have longer operating histories, greater brand
recognition, better supplier relationships, larger customer bases or greater financial, technical or marketing resources
than we do. Those smaller companies or new entrants may be acquired by, receive investment from or enter into
strategic relationships with well-established and well-financed companies or investors which would help enhance their
competitive positions. Some of our competitors may be able to secure more favorable terms from suppliers, devote
greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and
devote substantially more resources to their website, mobile application and systems development than us. We cannot
assure you that we will be able to compete successfully against current or future competitors, and competitive pressures
may have a material and adverse effect on our business, financial condition and results of operations.
If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be
materially and adversely affected.
Although our inventory was relatively small as of December 31, 2017, our business model may require us to
increase our inventory as our business expands and we will need to manage our inventory effectively. We depend on our
understanding of the food service industry as well as demand forecasts for various kinds of products to make purchase
decisions and to manage our inventory. Demand for products, however, can change significantly between the time
inventory is ordered and the date by which we hope to sell it. Demand may be affected by seasonality, new product
launches, changes in product cycles, pricing, product defects, changes in customer spending patterns, and other factors,
and our customers may not order products in the quantities that we expect. Customers are extremely strict about the
expiration date of food products, and poor inventory management might lead to products expiring and becoming
unacceptable in the market. In addition, when we begin selling a new product, it may be difficult to establish supplier
relationships, determine appropriate product selection, and accurately forecast demand. The acquisition of certain types
of inventory may require significant lead time and prepayment and they may not be returnable.
Substantial future sales of our shares in the public market, or the perception that these sales could occur, could cause
our share price to decline.
Additional sales of our shares in the public market, or the perception that these sales could occur, could cause
the market price of our shares to decline. As of December 31, 2017, we had 1,475,307,852 ordinary shares outstanding
(excluding 900,818 ordinary shares in the form of ADSs that are reserved for issuance upon the exercise of share
awards), of which 569,783,423 ordinary shares or approximately 38.6% were held by previous shareholders of JMU HK
before our acquisition of JMU HK in 2015. Pursuant to a Registration Rights Agreement we entered into with these
former JMU HK shareholders on June 8, 2015, we agreed to provide them with certain registration rights in respect of
our ordinary shares held by them, subject to certain limitations. See “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Registration Rights Agreement.” Registration of these shares under the
Securities Act would result in these shares becoming freely tradable without restriction immediately upon the
effectiveness of the registration statement. If part or all of these shares are sold in the public market or if any existing
shareholder or shareholders sell a substantial amount of shares, the prevailing market price for our shares could be
adversely affected. Such sales also might make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.
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If we fail to manage and expand our relationships with suppliers, or otherwise fail to procure products at favorable
terms, our business and growth prospects may suffer.
We had 277 suppliers for our online direct sales business as of December 31, 2017. Our suppliers include food
producers, manufacturers, distributors and resellers. Maintaining strong relationships with these suppliers is important to
the growth of our business. In particular, we depend significantly on our ability to procure products from suppliers on
favorable pricing terms. We typically enter into framework agreements with suppliers, and these framework agreements
do not ensure the availability of products or the continuation of particular pricing practices or payment terms beyond the
end of the contractual term. In addition, our agreements with suppliers typically do not restrict the suppliers from selling
products to other buyers. We cannot assure you that our current suppliers will continue to sell products to us on
commercially acceptable terms, or at all, after the term of the current agreement expires, and we cannot assure you that
our current suppliers will honor such framework agreements within the terms of such agreements. Any breach of such
framework agreements by our suppliers may lead to the monetary damages as we may not be able to fully recover our
deposits and adversely impact our operation. Even if we maintain good relations with our suppliers, their ability to
supply products to us in sufficient quantity and at competitive prices may be adversely affected by economic conditions,
labor actions, regulatory or legal decisions, natural disasters or other causes. In the event that we are not able to attract
suppliers or third-party sellers that can provide merchandise at favorable prices, our revenues and cost of revenues may
be materially and adversely affected. In the event any distributor or reseller does not have authority from the relevant
manufacturer to sell certain products to us, such distributor or reseller may cease selling such products to us at any time.
If our suppliers cease to provide us with favorable payment terms, our requirements for working capital may increase
and our operations may be materially and adversely affected. We will also need to establish new supplier relationships to
ensure that we have access to a steady supply of products on favorable commercial terms. If we are unable to develop
and maintain good relationships with suppliers that would allow us to obtain a sufficient amount and variety of authentic
and quality merchandise on acceptable commercial terms, it may inhibit our ability to offer sufficient products sought by
our customers, or to offer these products at competitive prices. Any adverse developments in our relationships with
suppliers could materially and adversely affect our business and growth prospects. In addition, as part of our growth
strategy, we plan to further expand our product offerings. If we fail to attract new suppliers to sell their products to us
due to any reason, our business and growth prospects may be materially and adversely affected.
If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition
may be materially and adversely affected.
We have incurred a great amount of expenses on a variety of different marketing and brand promotion efforts,
and recommendation for trial use of our new products, designed to enhance our brand recognition and increase sales of
our products. Our brand promotion and marketing activities may not be well received by customers and may not result in
the levels of product sales that we anticipate. We incurred US$15.2 million of selling and marketing expenses in 2017.
Marketing of food products online to food service customers is evolving. This further requires us to enhance our
marketing approaches and experiment with new marketing methods to keep pace with customer preferences. Failure to
refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner could
reduce our market share, cause our revenues to decline and negatively impact our profitability.
We rely on service from couriers to deliver our orders, and our third-party sellers use couriers to deliver a significant
number of orders for them. If these third party service providers fail to provide reliable delivery services, our business
and reputation may be materially and adversely affected.
We rely completely on independent couriers to deliver products, particularly a logistic company that we have
minority interest in which delivered 90% of our online direct sale orders in 2017. We maintain cooperation arrangements
with a number of third-party couriers to deliver our products to our customers and sometimes suppliers in our direct
sales operation deliver products to our customers themselves. Third-party sellers on our marketplace also use their own
logistics network or other third-party couriers. Interruptions to or failures in these third parties’ delivery services could
prevent the timely or proper delivery of products offered at our platform to customers. These interruptions may be due to
events that are beyond our control or the control of these delivery companies, such as inclement weather, natural
disasters, transportation disruptions or labor unrest. In addition, if our third-party delivery service providers fail to
comply with applicable rules and regulations in China, our delivery services may be materially and adversely affected.
We may not be able to find alternative delivery companies to provide delivery services in a timely and reliable manner,
or at all. Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or
government shut-down of the delivery companies we engage to make deliveries, especially those local companies with
relatively small business scales. If products offered at our platform are not delivered in proper condition or on a timely
basis, our business and reputation could suffer.
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Our online marketplace is subject to risks associated with third-party sellers.
As of December 31, 2017, there were approximately 15,800 third-party sellers on our online marketplace. We
do not exercise control over the storage and delivery of products sold by third-party sellers on our online marketplace.
Our third-party sellers use their own or third-party storage facilities and delivery systems to store and deliver their
products, which makes it more difficult for us to ensure that our customers get the same high quality service for all
products sold on our website. If any third-party seller does not control the quality of the products that it sell on our
website, or if it does not deliver the products or delivers them late or delivers products that are materially different from
its description of them, or if it sells low quality products on our website, the reputation of our online marketplace and
our JMU brand may be materially and adversely affected and we could face claims that we should be held liable for any
losses. Moreover, despite our efforts to prevent it, some products sold on our online marketplace may compete with the
products we sell directly, which may cannibalize our online direct sales. In addition, the supplier relationships, customer
acquisition dynamics and other requirements for our online marketplace may not be the same as those for our online
direct sales operations, which may complicate the management of our business. In order for our online marketplace to be
successful, we must continue to identify and attract third-party sellers, and we may not be successful in this regard.
The successful operation of our business depends upon the performance and reliability of the internet and mobile
telecommunications infrastructures in China.
Our business depends on the performance and reliability of the internet and mobile telecommunications
infrastructures in China. Almost all access to the internet is maintained through state-owned telecommunication
operators under the administrative control and regulatory supervision of the Ministry of Industry and Information
Technology of China. In addition, the national networks in China are connected to the internet through state-owned
international gateways, which are the only channels through which a domestic user can connect to the internet outside of
China. We might not have access to alternative networks in the event of disruptions, failures or other problems with
China’s internet infrastructure. In addition, the internet infrastructure in China might not support the demands associated
with continued growth in internet usage.
The failure of telecommunications network operators to provide us with the requisite bandwidth could also
interfere with the speed and availability of our websites. We have no control over the costs of the services provided by
the national telecommunications operators. If the prices that we pay for telecommunications and internet services rise
significantly, or if the telecommunication network in China is disrupted or failed, our gross margins could be adversely
affected. Technical limitations on internet use could also be developed or implemented. For example, restrictions could
be implemented on personal internet use in the workplace in general or access to our website in particular. This could
lead to a reduction of customers’ activities or a loss of customers altogether, which in turn could have an adverse effect
on our financial position and results of operations. In addition, if internet access fees or other charges to internet users
increase, our user traffic might decrease, which in turn could significantly decrease our revenues.
The proper functioning of our technology platform is essential to our business. Any failure to maintain the
satisfactory performance of our website and systems could materially and adversely affect our business and
reputation.
The satisfactory performance, reliability and availability of our technology platform are critical to our success
and our ability to attract and retain customers and provide quality customer service. Most of our sales of products are
made online through our website and mobile applications. Any system interruptions caused by telecommunications
failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of
our website or reduced order fulfillment performance could reduce the volume of products sold and the attractiveness of
product offerings on our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-
ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays or
errors in transaction processing, loss of data or the inability to accept and fulfill customer orders. Security breaches,
computer viruses and hacking attacks have become more prevalent in our industry. We have experienced in the past, and
may experience in the future, such attacks and unexpected interruptions. We can provide no assurance that our current
security mechanisms will be sufficient to protect our IT systems from any third-party intrusions, viruses or hacker
attacks, information or data theft or other similar activities. Any such future occurrences could reduce customer
satisfaction, damage our reputation and result in a material decrease in our revenue.
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Additionally, we must continue to upgrade and improve our technology platform to support our business
growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in
executing these system upgrades and improvement strategies. In particular, our systems may experience interruptions
during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a
timely basis, or at all. If our existing or future technology platform does not function properly, it could cause system
disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our
business, financial condition and results of operations.
If we fail to adopt new technologies or adapt our website, mobile applications and systems to changing customer
requirements or emerging industry standards, our business may be materially and adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and
features of our website and mobile applications. The internet and the e-commerce industry are characterized by rapid
technological evolution, changes in customer requirements and preferences, frequent introductions of new products and
services embodying new technologies and the emergence of new industry standards and practices, any of which could
render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify,
develop, acquire or license leading technologies useful in our business, and respond to technological advances and
emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. The development
of websites, mobile applications and other proprietary technology entails significant technical and business risks. We
cannot assure you that we will be able to use new technologies effectively or adapt our website, mobile applications,
proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to
adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements,
whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of
operations may be materially and adversely affected.
If internet search engines’ ranking methodologies are modified or our search result page rankings decline, our user
traffic could decrease.
We depend in part on various internet companies in China, such as Baidu, to direct traffic to our website. Our
ability to maintain and increase the number of visitors directed to our website is not entirely within our control. Our
competitors’ search engine optimization efforts could result in their websites receiving a higher search result page
ranking than ours, or internet companies could revise their methodologies in an attempt to improve their search results,
which could adversely affect the placement of our search result page ranking. If internet companies modify their search
algorithms in ways that are detrimental to our customer growth or in ways that make it harder for customers to find our
website, or if our competitors’ search engine optimization efforts are more successful than ours, our overall growth in
user traffic could slow down or decrease, and we could lose existing customers. Our website has experienced
fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in
the number of visitors directed to our website could harm our business, financial condition and results of operations.
Failure to protect confidential information of our customers and network against security breaches could damage
our reputation and brand and substantially harm our business and results of operations.
A significant challenge to the e-commerce industry is the secure storage of confidential information and its
secure transmission over public networks. All of the orders for products we offer are made through our website and our
mobile applications. In addition, some transactions are settled through third-party online payment services. We also
share certain personal information about our customers with contracted third-party couriers, such as their names,
addresses, phone numbers and transaction records. Maintaining complete security for the storage and transmission of
confidential information on our technology platform, such as customer names, personal information and billing
addresses, is essential to maintaining customer confidence.
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We have adopted security policies and measures, including encryption technology, to protect our proprietary
data and customer information. However, advances in technology, the expertise of hackers, new discoveries in the field
of cryptography or other events or developments could result in a compromise or breach of the technology that we use to
protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or
entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a
result of our customers’ visits to our website and use of our mobile applications. Such individuals or entities obtaining
our customers’ confidential or private information may further engage in various other illegal activities using such
information. In addition, we have limited control or influence over the security policies or measures adopted by third-
party providers of online payment services through which some of our customers may elect to make payment for
purchases. The contracted third-party couriers we use may also violate their confidentiality obligations and disclose or
use information about our customers illegally. Any negative publicity on our website’s or mobile applications’ safety or
privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of
actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition
and results of operations. We have experienced breaches of our information security measures in our B2C business in
the past, and we cannot assure you that similar events will not occur in our B2B business in the future. If we give third
parties greater access to our technology platform in the future as part of providing more technology services to third-
party sellers and others, it may become more challenging for us to ensure the security of our systems. Any compromise
of our information security or the information security measures of our contracted third-party couriers or third-party
online payment service providers could have a material and adverse effect on our reputation, business, prospects,
financial condition and results of operations.
Practices regarding the collection, use, storage, transmission and security of personal information by companies
operating over the internet and mobile platforms have recently come under increased public scrutiny. As e-commerce
continues to evolve, we believe that increased regulation by the PRC government of data privacy on the internet is
likely. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of
personal or consumer information that could affect how we store, process and share data with our customers, suppliers,
third-party sellers and third-party service providers like couriers. We generally comply with industry standards and are
subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may
place restrictions on the conduct of our business and the manner in which we interact with our customers. Any failure to
comply with applicable regulations could also result in regulatory enforcement actions against us.
Significant capital and other resources may be required to protect against information security breaches or to
alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations.
The resources required may increase over time as the methods used by hackers and others engaged in online criminal
activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent
information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise
of security that results in the unauthorized release or transfer of personally identifiable information or other customer
data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception by the public that
online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could
inhibit the growth of e-commerce and other online services generally, which may reduce the number of orders we
receive.
We rely on third-party online payment processors, and any disruption to the provision of these services to us could
adversely affect our business and results of operations.
We rely on third party online payment processors to provide payment processing services, including the
processing of credit cards and debit cards. Customers can make purchases through all major online payment systems in
China, including Alipay and the online banking systems of most commercial banks in China. Each online payment
system provides payment processing services to us and we pay service fees pursuant to our agreements with the payment
system operators. Typically the term of each of these agreements is one year, and would be automatically renewed for a
term of one year unless otherwise requested by payment system operator or us in writing within one month prior to the
expiration date. Our business could be disrupted if any of these online payment system operators becomes unwilling or
unable to provide payment processing services to us, and we could incur additional cost as we seek alternative payment
processing service providers. Moreover, the third-party online payment processors could fail to obtain, maintain or
renew their required qualifications, which could result in a disruption in their services to us.
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For all the online payment transactions, secured transmission of confidential information, such as customers’
bank account numbers, personal information and billing addresses, over public networks is essential to maintain
customers’ confidence in us. Our current security measures and those of the third parties online payment processors
might not be adequate. We must be prepared to increase and enhance our security measures and efforts so that suppliers,
third-party sellers and customers have confidence in the reliability of the online payment systems that we use, which will
impose additional costs and expenses and might still not guarantee complete security. In addition, we do not have
control over the security measures implemented by our third-party payment processors. Security breaches of the online
payment systems that we use could expose us to litigation and possible liability for failing to secure confidential
customer information and could, among other things, damage our reputation and the perceived security of the online
payment systems that we use.
In addition, we may in the future increase the variety of payment methods accepted on our website. As we offer
new payment options to customers, we could be subject to additional regulations and compliance requirements. We pay
payment processing fees and other fees to third-party payment channels, which would increase over time and raise our
operating costs and lower profitability.
If our senior management is unable to work together effectively or efficiently or if we lose their services, our business
may be severely disrupted.
Our success heavily depends upon the continued services of our management. In particular, we rely on the
expertise and experience of Ms. Xiaoxia Zhu, our co-chairperson and chief executive officer, and our other executive
officers. The majority of our senior management joined us in 2015. If they cannot work together effectively or
efficiently, our business may be severely disrupted. If one or more of our senior management were unable or unwilling
to continue in their present positions, we might not be able to replace them easily or at all, and our business, financial
condition and results of operations may be materially and adversely affected. If any of our senior management joins a
competitor or forms a competing business, we may lose customers, suppliers, know-how and key professionals and staff
members. Our senior management has entered into employment agreements and confidentiality and non-competition
agreements with us. However, if any dispute arises between our officers and us, we may have to incur substantial costs
and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
In addition, while we formulate the overall business strategy at our headquarters in Shanghai, we also give
latitude to our regional supply chain subsidiaries to manage the daily operations in their respective cities. We cannot
assure you that communications between the senior management team and the local management teams will always be
effective, or the executions at the local levels will always have the results that the senior management team expects.
We have limited insurance coverage and could incur losses resulting from liability claims or business interruptions.
As the insurance industry in China is still developing, insurance companies in China currently offer limited
business insurance products. We do not have any product liability insurance or business interruption insurance. As we
continue to expand the offerings by our suppliers and third-party sellers, we could be increasingly exposed to various
liability claims related to the products provided by our suppliers and third-party sellers. Any liability claims, business
disruption, or natural disaster could result in substantial costs and the diversion of resources, which would have an
adverse effect on our business and results of operations.
We might not be able to adequately protect our intellectual property rights.
We believe our domain names, trademarks, technology know-how and other intellectual properties enhance our
competitive advantages and are important to our success to date and our future prospects. We have been investing
resources to develop our own intellectual properties and we take prudent steps to protect our intellectual properties and
know-how. But we cannot assure you such steps would be sufficient to prevent the infringement of our intellectual
properties. If we fail to adequately protect our intellectual property rights, including our rights in know-how or our
trademark, it could have an adverse effect on our operations.
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The validity, enforceability and scope of protection available under intellectual property laws with respect to
the internet industry in China are uncertain and still evolving. Implementation and enforcement of PRC intellectual
property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property
rights in China might not be as effective as in the United States or other western countries. Furthermore, policing
unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce
or defend our intellectual property rights or to determine the enforceability, scope and validity of our proprietary rights
or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial
costs and the diversion of resources and management’s attention.
Companies in the internet and technology industries are frequently involved in litigation based on allegations of
infringement of intellectual property rights, unfair competition and other violations of third parties’ rights. From time to
time, we could face allegations of trademark, copyright, patent and other intellectual property rights infringement of
third parties. Such allegations of intellectual property rights infringements could come from our competitors and there
could also be allegations that we are involved in unfair trade practices.
We may be subject to product liability claims if people or properties are harmed by the products we sell.
We sell products manufactured by third parties, some of which may be defective. As a result, sales of such
products could expose us to product liability claims relating to personal injury or property damage and may require
product recalls or other actions. Third parties subject to such injury or damage may bring claims or legal proceedings
against us as the retailer of the product. Although we would have legal recourse against the manufacturer of such
products under PRC law, attempting to enforce our rights against the manufacturer may be expensive, time-consuming
and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability
insurance in relation to products we sell. As a result, any material product liability claim or litigation could have a
material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims
could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on
our reputation.
We depend on regulatory approvals and licenses to operate in our existing markets and to gain access to new services.
The internet, telecommunication and food service industries in China are highly regulated by the PRC
government and numerous regulatory authorities of the central PRC government are empowered to issue and implement
regulations governing various aspects of the internet and food service industries including foreign ownership of and
licensing and permit requirements pertaining to companies in the internet and food service industries.
The relevant laws and regulations are relatively new or evolving, and their interpretation and enforcement
involve significant uncertainty. As a result, in certain circumstances, it could be difficult to determine what actions or
omissions could be deemed to be in violation of applicable laws and regulations. Our VIE is required to obtain and
maintain the applicable ICP license for value-added Internet services and the applicable license or permit for selling
food, liquor and nutritional supplements through our website. Furthermore, Our VIE could be required to obtain
additional licenses. If Our VIE fails to obtain or maintain any of the required licenses or approvals, its continued
business operations on the internet and the food service industries could subject it to various penalties, such as
confiscation of illegal net sales, fines and the discontinuation or restriction of its operations. Any such disruption in the
business operations of Our VIE will materially and adversely affect our business, financial condition and results of
operations.
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The audit reports included in this annual report are prepared by auditors who are not inspected by the Public
Company Accounting Oversight Board, and consequently you are deprived of the benefits of such inspection.
Our independent registered public accounting firms that issue the audit reports included in our annual report
filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United
States and firms registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, are required by
the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of
the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the
PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not
currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those
firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to
improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating
our auditor’s audits and its quality control procedures. As a result, investors are deprived of the benefits of PCAOB
inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the
effectiveness of our auditors’ audit procedures or quality control procedures as compared to auditors outside of China
that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and
procedures and the quality of our consolidated financial statements.
If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our
independent registered public accounting firms, in administrative proceedings brought by the SEC alleging the firms’
failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be
unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act
of 1934.
Starting in 2011 the Chinese affiliates of the “big four” accounting firms, (including our independent registered
public accounting firm) were affected by a conflict between US and Chinese law. Specifically, for certain US listed
companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms
access to their audit work papers and related documents. The firms were, however, advised and directed that under
China law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators
for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the
CSRC.
In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules
of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, (including our
independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s
internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed
penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed
penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by
the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts
that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will
receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such
requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the
SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the
failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single
firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the
resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed
companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in
respect of their operations in the PRC, which could result in financial statements being determined to not be in
compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United
States-listed companies and the market price of our ADSs may be adversely affected.
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If our independent registered public accounting firm were denied, even temporarily, the ability to practice
before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an
opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in
compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead
to the delisting of our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which
would substantially reduce or effectively terminate the trading of our ADSs in the United States.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our
operations.
Our business could be materially and adversely affected by natural disasters or the outbreak of avian influenza,
severe acute respiratory syndrome, or SARS, influenza A (H1N1), Ebola or another epidemic. Any such occurrences
could cause severe disruption to our daily operations, including our fulfillment infrastructure and our customer service
center, and may even require a temporary closure of our facilities. Earthquakes or other similar disasters affecting cities
where we have major operations in China could materially and adversely affect our operations due to loss of personnel
and damages to property, including our inventory and our technology systems. Our operation could also be severely
disrupted if our suppliers, customers or business partners were affected by health epidemics or other natural disasters.
Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates
If the PRC government finds that the agreements that establish the structure for operating our businesses in China
do not comply with PRC governmental restrictions on foreign investment in internet business, or if these regulations
or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced
to relinquish our interests in those operations.
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in
internet businesses, including the provision of internet content distribution services. Foreign investors are limited to
services sections opened up in China's WTO commitments and are not allowed to own more than 50% of the equity
interests in any entity conducting internet content distribution business or other value-added telecom businesses, except
e-commerce business, for which there is no upper limit to the shareholding percentage for foreign investors.
Additionally, any such foreign investor must have experience in providing value-added telecommunications services
overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment
promulgated in 2017, as amended, and other applicable laws and regulations. We conduct our operations in China
principally through contractual arrangements between our wholly-owned PRC subsidiary, Shanghai Zhongming Supply
Chain Management Co., Ltd., or Our WFOE, and our consolidated affiliated entity in China, Shanghai Zhongmin
Supply Chain Management Co., Ltd., or Our VIE, and its shareholder. Our VIE has twenty subsidiaries within China as
of December 31, 2017. Our contractual arrangements with Our VIE and its shareholder enable us to exercise effective
control over it and hence treat it as our consolidated affiliated entity and consolidate their results. For a detailed
discussion of these contractual arrangements, see “Item 4. Information on the Company—A. History and Development
of the Company”.
In the opinion of our PRC counsel, Beijing Dentons Law Offices, LLP, our current ownership structure, the
ownership structure of Our WFOE and Our VIE, and the contractual arrangements between Our WFOE, Our VIE, and
its shareholder are in compliance with existing PRC laws, rules and regulations. There are, however, substantial
uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, we cannot
assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with
current PRC regulations, we cannot assure you that the PRC government would agree that these contractual
arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with
requirements or policies that might be adopted in the future. PRC laws and regulations governing the validity of these
contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting
these laws and regulations. If the PRC government determines that we are not in compliance with applicable laws and
regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations,
restrict our right to collect revenues, restrict or prohibit us to finance our business and operations in China, shut down
our servers or block our website, require us to restructure our operations, impose additional conditions or requirements
with which we might not be able to comply, levy fines, confiscate our income or the income of our PRC subsidiary or
affiliated PRC entities, or take other regulatory or enforcement actions against us that could be harmful to our business.
The imposition of any of these penalties would result in an adverse effect on our ability to conduct our business.
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Substantial uncertainties exist with respect to the enactment timetable and final content of draft PRC Foreign
Investment Law and how it may impact the viability of our current corporate structure, corporate governance and
business operations.
The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January
2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the
Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the
Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The
proposed Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal
requirements for both foreign and domestic investments. The Ministry of Commerce is currently soliciting comments on
this draft and substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and
implementation.
Among other things, the proposed Foreign Investment Law expands the definition of foreign investment and
introduces the principle of “actual control” in determining whether a company is considered a foreign-invested
enterprise, or an FIE. The proposed Foreign Investment Law specifically provides that entities established in China but
“controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would
nonetheless be, upon market entry clearance, treated as a PRC domestic investor provided that the entity is “controlled”
by PRC entities and/or citizens. Once an entity is determined to be an FIE, it will be subject to the foreign investment
restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Council later. Unless the
underlying business of the FIE falls within the negative list, which calls for market entry clearance, prior approval from
the government authorities as mandated by the existing foreign investment legal regime would no longer be required for
establishment of the FIE. Under the proposed Foreign Investment Law, VIEs that are controlled via contractual
arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any
companies with a VIE structure in an industry category that is on the “negative list” the VIE structure may be deemed
legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens).
Conversely, if the actual controlling person(s) is/are of foreign nationalities, the VIEs will be treated as FIEs and any
operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
The provision of value-added telecommunication services, which we conduct through Our VIE, is currently
subject to foreign investment restrictions set forth in the Catalogue of Industries for Guiding Foreign Investment, or the
Catalogue, issued by the National Development and Reform Commission and the Ministry of Commerce, as amended in
June 2017. The draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the
existing companies with a VIE structure, although a few possible options were proffered in the draft. Under these
options, a company with VIE structures and in the business on the “negative list” at the time of enactment of the new
Foreign Investment Law has either the option or obligation to disclose its corporate structure to the authorities, while the
authorities, after reviewing the ultimate control structure of the company, may either permit the company to continue its
business by maintaining the VIE structure, or require the company to dispose of its businesses and/or VIE structure.
Moreover, it is uncertain whether the industries in which Our VIE operates, such as the industry of providing value-
added telecommunication services, will be subject to the foreign investment restrictions or prohibitions set forth in the
“negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate
further actions, such as market entry clearance, to be completed by companies with existing VIE structure like us, we
will face uncertainties as to whether such clearance can be timely obtained, or at all. As PRC residents ultimately control
more than 50% of the total share capital of our Company, we believe the impact of the Foreign Investment Act, if
enacted as currently proposed, on our business and operation will be limited, but there is no assurance that the Chinese
government will not interpret the rules differently from us.
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We rely on contractual arrangements with Our VIE in China and its shareholder for our operations, which might not
be as effective as direct ownership in providing operational control.
Since PRC laws restrict foreign equity ownership in companies engaged in internet businesses in China, we rely
on contractual arrangements with our consolidated affiliated entity, in which we do not hold shares, and its shareholder
to operate our business in China. If we held the shares of Our VIE, we would be able to exercise our rights as a
shareholder to effect changes in their respective board of directors, which in turn could effectuate changes at the
management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements,
we rely on Our VIE and its shareholder’s performance of their contractual obligations to exercise effective control. In
addition, our contractual arrangements are generally effective for the complete period Our VIE exists. In general, neither
Our VIE nor its shareholder could terminate the contracts prior to the expiration date. However, the shareholder of Our
VIE might not act in the best interests of our company or might 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 consolidated affiliated entity. We can replace the shareholders of Our VIE at any time pursuant to our contractual
arrangements with them and their shareholders. However, if any dispute relating to these contracts remains unresolved,
we will have to enforce our rights under these contracts through the operation of PRC law and courts and therefore will
be subject to uncertainties in the PRC legal system. See “—Any failure by our VIE or its shareholder to perform their
obligations under our contractual arrangements with them could have an adverse effect on our business”. Therefore,
these contractual arrangements might not be as effective as the direct holding of shares.
Any failure by Our VIE or its shareholder to perform their obligations under our contractual arrangements with
them could have an adverse effect on our business.
Our VIE and its shareholder could fail to take certain actions required for our business or follow our
instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective
agreements with us, we might have to rely on legal remedies under PRC law, including seeking specific performance or
injunctive relief, which might not be effective.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes
through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any
disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as
developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements, which could make it difficult to exert effective control
over our consolidated affiliated entity, and our ability to conduct our business could be adversely affected. Additionally,
under PRC law, rulings by arbitrators are final. Parties cannot appeal the arbitration results in courts. If the losing parties
fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may enforce the arbitration
awards only in PRC courts through arbitration award recognition proceedings, which could require additional expenses
and delay.
Contractual arrangements with Our VIE might result in adverse tax consequences to us.
Under applicable PRC tax laws and regulations, arrangements and transactions among related parties could be
subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or
transactions are conducted. We could face adverse tax consequences if the PRC tax authorities were to determine that
the contractual arrangements between Our WFOE, Our VIE and its shareholder were not entered into on an arms-length
basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements
could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities could impose
late payment fees and other penalties on our consolidated affiliated entity for the adjusted but unpaid taxes. Our results
of operations could be adversely affected if our consolidated affiliated entity’ tax liabilities increase significantly or if
they are required to pay late payment fees or other penalties.
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The ultimate beneficial owners of Our VIE, Ms. Xiaoxia Zhu and Ms. Huimin Wang, could have potential conflicts
of interest with us, and if any such conflicts of interest are not resolved in our favor, our business could be adversely
affected.
Our co-chairperson and chief executive officer, Ms. Xiaoxia Zhu, and our director, Ms. Huimin Wang, each
hold 48.75% of the equity interests in Shanghai Zhongmin Investment and Development Group Co., Ltd., or Zhongmin
Investment, which in turn holds 100% of equity interests in Our VIE. The interests of Ms. Zhu and Ms. Wang as the
ultimate beneficial owner of Our VIE could differ from the interests of our company as a whole, notwithstanding both
Ms. Zhu and Ms. Wang are our principal shareholders. We cannot assure you that when conflicts of interest arise, Ms.
Zhu and Ms. Wang will act in the best interests of our company or that conflicts of interests will always be resolved in
our favor. In addition, Ms. Zhu and Ms. Wang could cause Zhongmin Investment and Our VIE to breach or refuse to
renew the existing contractual arrangements with us. Currently, we do not have existing arrangements to address
potential conflicts of interest Ms. Zhu and Ms. Wang could encounter in their capacity as beneficial owners of Our VIE.
We rely on Ms. Zhu and Ms. Wang to comply with the laws of China, which protect contracts, including the contractual
arrangements that Our VIE and its shareholder have entered into with us, provide that directors and executive officers
owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their
positions for personal gains. We also rely on Ms. Zhu and Ms. Wang to abide by the laws of the Cayman Islands, which
provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our best
interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving
conflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of
interest or disputes between us and Ms. Zhu and Ms. Wang, we would have to rely on legal proceedings, which could
result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal
proceedings.
We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to
fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong
subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.
We are a holding company, and we rely principally on dividends and other distributions on equity paid by Our
WFOE, and our wholly-owned Hong Kong subsidiary, JMU HK, which is the direct holding company of Our WFOE,
for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to
our shareholders and service any debt we might incur. If Our WFOE or JMU HK, as the case may be, incurs debt on
their own behalf in the future, the instruments governing the debt could restrict their ability to pay dividends or make
other distributions to us. In addition, the PRC tax authorities could require us to adjust our taxable income under the
contractual arrangements Our WFOE currently has in place with our consolidated affiliated entity in a manner that
would adversely affect its ability to pay dividends and other distributions to us.
Under PRC laws and regulations, Our WFOE, as a wholly foreign-owned enterprise in China, can pay
dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and
regulations. In addition, a wholly foreign-owned enterprise such as Our WFOE is required to set aside at least 10% of its
accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such
a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on
PRC accounting standards to other funds. These statutory reserve funds and other funds are not distributable as cash
dividends. As of December 31, 2017, the paid-in registered capital of Our WFOE was US$26.6 million. Any limitation
on the ability of Our WFOE or JMU HK to pay dividends or make other distributions to us could adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise
fund and conduct our business.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental
control of currency conversion could limit our use of the proceeds we receive from our initial public offering to fund
our expansion or operations.
In utilizing the proceeds we receive from financing activities, we could (i) make additional capital contributions
to our PRC subsidiary, (ii) establish new PRC subsidiaries and make capital contributions to these new PRC
subsidiaries, (iii) make loans to our PRC subsidiary or consolidated affiliated entity, or (iv) acquire offshore entities with
business operations in China in an offshore transaction. However, most of these uses are subject to PRC regulations and
approvals. For example:
∂
capital contributions to Our WFOE or to any newly established PRC subsidiaries, must be approved by the
PRC Ministry of Commerce or its local counterparts;
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∂
loans by us to Our WFOE, which is a foreign-invested enterprise, to finance its activities cannot exceed
statutory limits and must be registered with the PRC State Administration of Foreign Exchange, or SAFE,
or its local branches; and
∂ medium and long-term loans by us to Our VIE, 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.
On August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement
of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or
SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into
Renminbi by restricting how the converted Renminbi may be used. In addition, SAFE promulgated Circular 45 on
November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45,
the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be
used for purposes within the business scope approved by the applicable government authority and may not be used for
equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi
capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such Renminbi
capital cannot be changed without SAFE’s approval, and such Renminbi capital cannot in any case be used to repay
Renminbi loans if the proceeds of such loans have not been used. Furthermore, SAFE promulgated Circular 59 in
November 2010, which tightens the regulation over settlement of net proceeds from overseas offerings, such as our
initial public offering, and requires, among other things, the authenticity of settlement of net proceeds from offshore
offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents or
otherwise approved by our board. Violations of these SAFE regulations could result in severe monetary or other
penalties, including confiscation of earnings derived from such violation activities, a fine of up to 30% of the Renminbi
funds converted from the foreign-invested funds or in the case of a severe violation, a fine ranging from 30% to 100% of
the Renminbi funds converted from the foreign-invested funds.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC
entities by offshore holding companies, we cannot assure you that we will be able to obtain these government
registrations or approvals on a timely basis, if at all, with respect to our future plans to use the U.S. dollar proceeds we
receive from our initial public offering for our expansion and operations in China. If we fail to receive such registrations
or approvals, our ability to use the proceeds we receive from financing activities and to capitalize our PRC operations
could be negatively affected, which could adversely affect our liquidity and ability to fund and expand our business.
We could lose the ability to use and enjoy assets held by Our VIE that are important to the operation of our business
if such entities go bankrupt or become subject to dissolution or liquidation proceedings.
As part of our contractual arrangements with Our VIE, such entity holds certain assets that are important to the
operation of our business. If Our VIE goes bankrupt and all or part of its assets become subject to liens or rights of third-
party creditors, we might not be able to continue some or all of our business activities, which could adversely affect our
business, financial condition and results of operations. If Our VIE undergoes voluntary or involuntary liquidation
proceedings, the unrelated third-party creditors could claim rights to some or all of these assets, thereby hindering our
ability to operate our business, which could adversely affect our business, financial condition and results of operations.
Risks Relating to Doing Business in China
We could be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet businesses
and companies.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the
licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and
regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties.
As a result, in certain circumstances it could be difficult to determine what actions or omissions could be deemed to be
in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of internet
businesses include, but are not limited to, the following:
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∂
∂
there are uncertainties relating to the regulation of internet businesses in China, including evolving
licensing practices. This means that permits, licenses or operations at some of our companies could be
subject to challenge, or we could fail to obtain permits or licenses that would be deemed necessary for our
operations, or we might not be able to obtain or renew certain permits or licenses or the government might
revoke the certain permits or licenses of us. The major permits and licenses that could be involved include,
without limitation, the ICP license. If we fail to maintain any of these required licenses or approvals, we
could be subject to various penalties, including fines and the discontinuation of or restrictions on our
operations. Any such disruption in our business operations could have an adverse effect on our results of
operations;
new laws and regulations could be promulgated that will regulate internet activities, including online
services. If these new laws and regulations are promulgated, additional licenses could be required for our
operations. If our operations do not comply with these new regulations after they become effective, or if
we fail to obtain any licenses required under these new laws and regulations, we could be subject to
penalties; and
∂ we only have contractual control over our operating website, www.ccjoin.com. We do not own the website
due to the restriction of foreign investment in businesses providing value-added telecom services in China,
including internet content distribution services. This could significantly disrupt our business, subject us to
sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on
us.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws,
regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including
our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our
business in China or will be able to maintain our existing licenses or obtain any new licenses required under any new
laws or regulations. There are also risks that we could be found to violate the existing or future laws and regulations
given the uncertainty and complexity of China’s regulation of internet businesses.
On July 13, 2006, the Ministry of Industry and Information Technology, or the MIIT, the successor of the
Ministry of Information Industry, issued the Notice of the Ministry of Information Industry on Intensifying the
Administration of Foreign Investment in Value-added Telecom Services. This notice prohibits domestic telecom
services providers from leasing, transferring or selling telecom business operating licenses to any foreign investor in any
form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecom
business in China. According to this notice, either the holder of a value-added telecom business operating license or its
shareholders must directly own the domain names and trademarks used by such license holders in their provision of
value-added telecom services. The notice also requires each license holder to have the necessary facilities, including
servers, for its approved business operations and to maintain such facilities in the regions covered by its license.
Currently, Our VIE owns the related domain names, holds the ICP licenses necessary for the operation of our
www.ccjoin.com website, and has applied for related trademarks with the Trademark Office of the State Administration
for Industry and Commerce. Pursuant to the Administrative Measures on Internet Information Services effective since
January 2011, as amended, commercial internet information services are subject to the licensing system. In case the
operator provides commercial internet information services without obtaining an operation license or the services
provided by the operator exceed the scope of the services as permitted by the operation license, the relevant telecom
administrative agency could order to have such act corrected within a specified period. Where there is illegal income, the
illegal income could be confiscated and a fine of no less than three times but no more than five times the value of the
illegal income would be imposed; where there is no illegal income or the illegal income does not exceed RMB50,000, a
fine of no less than RMB100,000 but no more than RMB1,000,000 could be imposed; in the event of a serious case, the
operator shall be ordered to close down its website.
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Uncertainties with respect to the PRC legal system could have an adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior
court decisions in a civil law system may be cited for reference but have limited precedential value. Since 1979, PRC
legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always consistent, and enforcement of these laws,
regulations and rules involves uncertainties, which could limit the available legal protections.
In addition, the PRC administrative and court authorities have significant discretion in interpreting and
implementing or enforcing statutory rules and contractual terms, and it could be more difficult to predict the outcome of
administrative and court proceedings and the level of legal protection we could enjoy in the PRC than under some more
developed legal systems. These uncertainties could affect our judgment on the relevance of legal requirements and our
decisions on the measures and actions to be taken to fully comply therewith, and could affect our ability to enforce our
contractual or tort rights. Such uncertainties could therefore increase our operating costs and expenses as well as
adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which
are not published on a timely basis or at all, and could have a retroactive effect. As a result, we might not be aware of
our violation of any of these policies and rules until sometime after the violation. Such uncertainties, including
uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights,
and any failure to respond to changes in the regulatory environment in China could adversely affect our business and
impede our ability to continue our operations.
Regulation and censorship of information distribution over the internet in China could adversely affect our business,
and we could be liable for information displayed on, retrieved from or linked to our website.
China has enacted laws and regulations governing internet access and the distribution of products, services,
news, information and other content through the internet. In the past, the PRC government has prohibited the distribution
of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet
content was deemed by the PRC government to violate any content restrictions, we would not be able to continue to
display such content and could become subject to penalties, including confiscation of income, fines, suspension of
business and revocation of required licenses, which could adversely affect our business, financial condition and results
of operations. We could also be subject to potential liability for any unlawful actions of users of our website or for
content we distribute that is deemed inappropriate. It could be difficult to determine the type of content that could result
in liability to us, and if we are found to be liable, we could be prevented from operating our website in China.
Regulation of food services in China could adversely affect our business, and we could be liable for food business
operations.
China has enacted laws and regulations governing the sale of food. In accordance with the Food Safety Law of
the People’s Republic of China, the Administrative Measures for the Licensing of Food Business Operations, the
Implementing Regulations for the Food Safety Law of the People’s Republic of China and other relevant laws and
regulations, business operators of food services shall carry out production and operation in accordance with the laws,
regulations and food safety standards, ensure food safety, uphold integrity and self-discipline, be accountable to the
public and society at large, accept public supervision and assume social responsibility. We have already obtained a Food
Circulation License, a Retailing License for Liquor and a Wholesale License for Liquor. We believe we now possess all
necessary licenses and permits to sell all categories of food products on our website. However, it is possible that the
PRC government will require us to apply for additional licenses for certain specific categories of products. We cannot
assure you that we can obtain any such additional permits from the PRC government at reasonable cost, or at all.
Additionally, if any food product we sold is found unsafe by the PRC government, we will be punished under the
relevant laws and regulations, and we may have to cease the sale of the whole category that contains the unsafe food
product.
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Pursuant to Measures for Investigation and Handling of Illegal Acts Involving Online Food Safety, which
became effective in October 2016, an online food trading third-party platform shall file a record with the Food and Drug
Administration and obtain a filing number. As an online food trading third-party platform, we shall meet the technical
requirements for data backup and failure recovery to ensure the reliability and safety of our online food trading data and
materials, and we must take the responsibilities of supervising transactions, including establishing the systems for
review and registration of the food producers and traders that have joined the network, self-inspection of food safety,
stopping and reporting of illegal acts involving food safety, suspension of the platform services against serious illegal
acts and handling of food safety complaints and report and making them public on the online platform and shall review
the food production/trading license of the food producers or traders that have joined our website. Violating the
provisions of this regulation, we might be required to make a correction, have any illegal income be confiscated, pay a
fine ranging from RMB50,000 to RMB200,000, and where the legitimate rights and interests of consumers are harmed,
we may have to bear joint and several liabilities with the food business operator.
Governmental control of currency conversion could affect the value of your investment.
The PRC government imposes controls on the convertibility between the Renminbi and foreign currencies
despite the significant reduction over the years by the PRC government of control over routine foreign exchange
transactions under current accounts. Substantially all of our revenues are denominated in Renminbi. Under our current
holding company corporate structure, our income is primarily derived from dividend payments from our PRC
subsidiary. Shortages in the availability of foreign currency or other restrictions could restrict the ability of our PRC
subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency- denominated obligations. Under existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments and expenditures from trade related transactions, can be
made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.
However, approval from SAFE or its local branch is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the
future. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we might not be able to pay dividends in foreign currencies to our shareholders, including holders of
our ADSs.
Fluctuations in exchange rates of the Renminbi could affect our reported results of operations.
Substantially all of our revenues and expenses are denominated in RMB. The value of the RMB against the
U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s
foreign exchange policies, among other things. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times
significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may
impact the exchange rate between the RMB and the U.S. dollar in the future.
As we rely on dividends and other fees paid to us by our subsidiary and affiliated consolidated entities in China,
any significant revaluation of the Renminbi could adversely affect our cash flows, revenues, earnings and financial
position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert
U.S. dollars we received from our initial public offering into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on
our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would
have a negative effect on the U.S. dollar amount available to us. In addition, since our functional and reporting currency
is the U.S. dollar while the functional currency of our subsidiary and consolidated affiliated entities in China is
Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or
negative effect on our reported financial results, which might not reflect any underlying change in our business, financial
condition or results of operations.
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Our operations could be adversely affected by changes in China’s political, economic and social conditions.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial
condition, results of operations and prospects could be influenced to a significant degree by political, economic and
social conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the
level of government involvement, level of development, growth rate, control of foreign exchange and allocation of
resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for
economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets in China is still owned by the government.
In addition, the PRC government continues to play a significant role in regulating industry development by imposing
industrial policies. The PRC government also exercises significant control over China’s economic growth through
allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and
providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven,
both geographically and among various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources. Some of these measures might benefit
the overall Chinese economy, but could have a negative effect on us. For example, our financial condition and results of
operations could be adversely affected by government control over capital investments or changes in tax regulations. In
the past the PRC government has implemented certain measures, including interest rate increases, to control the pace of
economic growth. These measures could cause decreased economic activity in China, which could adversely affect our
business and operating results. Any significant increase in China’s inflation rate could increase our costs and have an
adverse effect on our operating margins. In addition, any sudden changes to China’s political system or the occurrence
of widespread social unrest could have negative effects on our business and results of operations.
Under the PRC enterprise income tax law, we could be classified as a “resident enterprise” of China. Such
classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income Tax Law and the Implementation Rules, both of which became effective on
January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is
considered a resident enterprise and is subject to PRC enterprise income tax at the rate of 25% on its global income. The
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 only detailed guidance currently available regarding the definition of “de facto management body”
as well as the determination of the tax residence of offshore incorporated enterprises whose primary controlling
shareholder is a PRC company or a PRC corporate group, and such enterprises’ tax administrations are set forth in two
notices, the Notice On Issues Relating to Determination of Chinese-Controlled Offshore Enterprise as PRC Resident
Enterprises by applying the “De Facto Management Body”, or Circular 82, and the Administrative Measures of
Enterprise Income of Chinese Controlled Offshore Incorporated Resident Enterprise (Trial), or Circular 45, issued by the
PRC State Administration of Taxation, or the Circulars. The Circulars provide that a foreign enterprise controlled by a
PRC enterprise or a PRC enterprise group would be classified as a “resident enterprise” with its “de facto management
body” located within China if all of the following requirements are satisfied: (i) the enterprise’s day-to-day operations
management is primarily exercised in China, (ii) decisions relating to the enterprise’s financial and human resource
matters are made or subject to approval by organizations or personnel in China, (iii) the enterprise’s primary assets,
accounting books and records, company seals, board and shareholders’ meeting minutes are located or maintained in
China, and (iv) 50% or more of voting board members or senior executives of the enterprise habitually reside in China.
If all of these criteria are met, the relevant offshore enterprise controlled by PRC enterprises or PRC enterprise groups
would be deemed to have its “de facto management body” in China and therefore be deemed a PRC resident enterprise.
The Circulars made a clarification in the areas of resident status determination, post-determination administration, as
well as the exercise of competent tax authorities’ procedures. The Circulars also specify that when provided with a copy
of PRC tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, a
payer of PRC-sourced dividends, interest, royalties, etc. should not withhold 10% income tax on such payments to such
Chinese controlled offshore incorporated enterprise. Although the Circulars apply only to offshore enterprises controlled
by PRC enterprises and not those controlled by PRC individuals such as us, the determination criteria and administration
clarification made in the Circulars reflect the PRC State Administration of Taxation’s general position on how the “de
facto management body” test should be applied in determining the tax residency status of offshore enterprises and how
the administration measures should be implemented. There is no assurance that the PRC State Administration of
Taxation will not apply the same or similar criteria as stated in the Circulars to determine whether the “de facto
management body” of an offshore incorporated enterprise controlled by PRC individuals (like us) is located within the
PRC in the future. If the PRC authorities were to determine that we should be treated as a PRC resident enterprise for the
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purpose of PRC enterprise income tax, a 25% enterprise income tax on our global income could significantly increase
our tax burden and adversely affect our financial condition and results of operations.
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Pursuant to the Enterprise Income Tax Law and the Implementation Rules, dividends generated after January 1,
2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors will be subject to a 10%
withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides
for a reduced withholding arrangement. We are a Cayman Islands holding company and substantially all of our income
comes from dividends from our PRC subsidiary through our Hong Kong holding company. To the extent these
dividends are subject to withholding tax, the amount of funds available to us to meet our cash requirements, including
the payment of dividends to our shareholders and ADS holders, will be reduced.
The Implementation Rules provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC,
or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or
capital gains are treated as PRC-sourced income. It is not clear how “domicile” might be interpreted under the Enterprise
Income Tax Law, and it could be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we
are considered to be a PRC resident enterprise for tax purposes, any dividends we pay to our overseas corporate
shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the transfer of our
shares or ADSs could be regarded as PRC-sourced income and as a result subject to PRC withholding tax at a rate of up
to 10%, subject to the provisions of any applicable tax treaty. If dividends we pay to our overseas individual
shareholders or ADS holders, or gains realized by such holders from the transfer of our shares or ADSs, are treated as
China-sourced income, the withholding rate would be 20%, subject to the provisions of any applicable tax treaty.
If we are required under the Enterprise Income Tax Law to withhold PRC income tax on any dividends paid to
our non-PRC shareholders and ADS holders or if gains from dispositions of our shares or ADSs are subject to PRC tax,
your investment in our ADSs or ordinary shares could be adversely affected.
Furthermore, the State Administration of Taxation promulgated the Notice on How to Understand and
Determine the Beneficial Owners in Tax Treaties in October 2009, or Circular 601, which provides guidance for
determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax
treaties and tax arrangements. According to Circular 601, a beneficial owner generally must be engaged in substantive
business activities. An agent or conduit company cannot be regarded as a beneficial owner and, therefore, cannot qualify
for treaty benefits. The conduit company normally refers to a company that is set up for the purpose of avoiding or
reducing taxes or transferring or accumulating profits. We cannot assure you that any dividends distributed by us to our
non-PRC shareholders and ADS holders whose jurisdiction of incorporation has a tax treaty with China providing for
the avoidance of double taxation will be entitled to the benefits under the relevant withholding arrangement.
A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain
PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-
border investment activities or subject us to liability under PRC laws, which could adversely affect our business and
financial condition.
The State Administration of Foreign Exchange, or SAFE, issued the Circular Relating to Foreign Exchange
Administration of Offshore Investment, Financing and Return Investment by Domestic Residents Utilizing Special
Purpose Vehicles, or SAFE Circular 37, that was promulgated and become effective on July 14, 2014. It requires a PRC
natural person or a PRC company, or a PRC Resident, to file a “Registration Form of Overseas Investments Contributed
by PRC Resident” and register with the local SAFE branch before it contributes assets or equity interests in an overseas
special purpose vehicle, or SPV, that is directly established and controlled by PRC Resident for the purpose of
conducting investment or financing. Following the initial registration, the PRC resident is also required to register with
the local SAFE branch timely for any major change in respect of SPV, including, among other things, any major change
of SPV’s PRC Resident shareholder, name of the SPV, term of operation or any increase or reduction of the SPV’s
registered capital, share transfer or swap, and merger or division. Failure to comply with the registration procedures of
Circular 37 could result in the penalties including the imposition of restrictions on the ability of SPV’s PRC subsidiaries
to dividends to its overseas parent company.
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It remains unclear how this regulation and any future related legislation will be interpreted, amended and
implemented by the relevant PRC government authorities. As of December 31, 2017, to the best of our knowledge, most
of our PRC Resident shareholders with offshore investments had not registered their offshore investments with SAFE
according to the predecessor regulation of Circular 37, namely the Notice on Relevant Issues Concerning Foreign
Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special
Purpose Vehicles, or SAFE Circular 75, which was replaced by the SAFE Circular 37 but still effective when the
relevant PRC shareholders made their investments. If PRC government determined that our PRC Resident shareholders
are required to make the registration regarding their offshore investment under Circular 37, both they and us may be
subject to fines by PRC government.
We are committed to complying, and to ensuring that our shareholders and beneficial owners who are PRC
citizens or residents comply with SAFE Circular 37 requirements. The rest of our PRC citizen or resident beneficial
owners are also applying for registrations under SAFE Circular 37 with the relevant local counterpart of SAFE.
However, we might not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents,
and we cannot compel our beneficial owners to comply with SAFE Circular 37 requirements. As a result, we cannot
assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, or
will in the future make or obtain the necessary any applicable registrations or approvals as required by, SAFE Circular
37 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or
failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions
or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. Failure by
us to amend the foreign exchange registrations in compliance with SAFE Circular 37 could subject us to fines or legal
sanctions restrict our overseas or cross-border ownership structure, which could adversely affect our business and
prospects. See “—We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong
subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and
Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business”.
A failure to comply with PRC regulations regarding the registration of shares and share options held by our
employees who are PRC citizens could subject such employees or us to fines and legal or administrative sanctions.
Pursuant to the Implementation Rules of the Administrative Measures on Individual Foreign Exchange, or the
Individual Foreign Exchange Rules, promulgated by SAFE on January 5, 2007, a relevant guidance issued by SAFE in
March 2007 and Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Option Rules, on February 15,
2012 that replaces the guidance issued in March 2007, PRC citizens who are granted shares or share options by an
overseas-listed company according to its employee share option or share incentive plan are required, through the PRC
subsidiary of such overseas-listed company or other qualified PRC agents selected by such PRC subsidiary, to register
with SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition,
the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material
change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. For
participants who had already participated in an employee share option or share incentive plan before the date of the
guidance, the guidance requires their PRC employers or PRC agents to complete the relevant formalities within three
months of the date of the guidance. We and our PRC citizen employees who have been granted share options, or PRC
option holders, are subject to these rules. If we or our PRC option holders fail to comply with these rules, we or our PRC
option holders could be subject to fines and legal or administrative sanctions.
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The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our
business operations, our acquisition or restructuring strategy or the value of your investment in us.
The State Administration of Taxation has issued several rules and notices to tighten the scrutiny over
acquisition transactions in recent years, including the Notice on Strengthening Administration of Enterprise Income Tax
for Share Transfers by Non-PRC Resident Enterprises issued in December 2009, or SAT Circular 698, and the Notice on
Certain Corporate Income Tax Matters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises
issued in February 2015, or SAT Circular 7. Pursuant to these rules and notices, except for a few circumstances falling
into the scope of the safe harbor provided by SAT Circular 7, such as open market trading of stocks in public companies
listed overseas, if a non-PRC resident enterprise indirectly transfers PRC taxable properties (i.e. properties of an
establishment or a place in the PRC, real estate properties in the PRC or equity investments in a PRC tax resident
enterprise) by disposing of equity interest or other similar rights in an overseas holding company, without a reasonable
commercial purpose and resulting in the avoidance of PRC enterprise income tax, such indirect transfer should be
deemed as a direct transfer of PRC taxable properties and gains derived from such indirect transfer may be subject to the
PRC withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to be taken into consideration by tax
authorities in determining whether an indirect transfer has a reasonable commercial purpose, such as whether the main
value of equity interest in an overseas holding company is derived directly or indirectly from PRC taxable properties. An
indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial purpose and be
taxable under PRC law without considering other factors set out by SAT Circular 7: (i) 75% or more of the equity value
of the intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at
any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary
enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income
is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary
enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties are limited and are
insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect
transfer of the PRC taxable properties is lower than the potential PRC income tax on the direct transfer of such assets.
SAT Circular 7 also introduces an interest regime by providing that where a transferor fails to file and pay tax on time,
and where a withholding agent fails to withhold the tax, interest will be charged on a daily basis. If the transferor has
provided the required documents and information or has filed and paid the tax within 30 days from the date that the
share transfer contract or agreement is signed, then interest shall be calculated based on the benchmark interest rate;
otherwise, the benchmark interest rate plus 5% will apply. Further, SAT Circular 7 replaces the compulsory reporting
requirement in SAT Circular 698 with a voluntary reporting regime, and the criteria set forth in Circular 698 for indirect
transfer reporting have been abolished. Both the foreign transferor and the transferee, and the PRC tax resident
enterprise whose equity interests are being transferred may voluntarily report the transfer by submitting the documents
required in SAT Circular 7.
Although SAT Circular 7 provides clarity in many important areas, such as reasonable commercial purpose,
there are still uncertainties on the tax reporting and payment obligations with respect to future private equity financing
transactions, share exchange or other transactions involving the transfer of shares in non-PRC resident companies. Our
company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our
company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to
withholding obligations if our company and other non-resident enterprises in our group are transferees in such
transactions. For the transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC
subsidiaries may be requested to assist in the filing under the rules and notices. As a result, we may be required to
expend valuable resources to comply with these rules and notices or to request the relevant transferors from whom we
purchase taxable assets to comply, or to establish that our company and other non-resident enterprises in our group
should not be taxed under these rules and notices, which may have a material adverse effect on our financial condition
and results of operations.
We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and
impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities
with respect thereto. We acquired JMU HK in June 2015 and divested our B2C business in September 2015, and we
may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident
enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable
income of these transactions under Circular 698 and SAT Circular 7, our income tax expenses associated with such
potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of
operations.
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PRC laws and regulations establish complex procedures for some acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China.
PRC laws and regulations, such as the 2006 M&A Rules, the Anti-Monopoly Law promulgated by the PRC
National People’s Congress in 2007 and the Notice on the Establishment of the Security Review System in Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the State Council, or the Security Review
Rule, establish procedures and requirements that could make some acquisitions of Chinese companies by foreign
investors and companies more time-consuming and complex, including requirements in some instances that various
governmental authorities be notified in advance of any change-of-control transaction in which a foreign investor takes
control of a PRC domestic enterprise. For example, on February 3, 2011, the State Council promulgated the Security
Review Rule, which provides, among other things, that merger and acquisition transactions by foreign investors of PRC
enterprises in sensitive sectors or industries, such as internet information service industry, which our operations fall
within, could be subject to security review. Consequently, any such transaction could be blocked due to their effect on
the national defense security, national economic stability, basic social life order, or capacity of indigenous research and
development of key technologies. On August 25, 2011, the Ministry of Commerce promulgated the Regulations on
Implementing the Security Review System in Mergers and Acquisition of Domestic Enterprises by Foreign Investors,
which, among other things, set forth detailed provisions on how the security review of relevant transactions would be
conducted, and provide for that foreign investors could not for any reason evade the security review process through
entrustment, phased-in investment, leasing, loans and control agreement, and overseas transactions. We could expand
our business in part by acquiring complementary businesses. Complying with the requirements of the relevant PRC laws
and regulations to complete such transactions could be time-consuming, and any required approval processes could
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or
maintain our market share.
Increases in labor costs in the PRC may adversely affect our business and results of operations.
The economy of China has been experiencing increases in inflation and labor costs in recent years. As a result,
the average wages in the PRC are expected to continue to grow. In addition, we are required by PRC laws and
regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-
related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the
benefit of our employees. The relevant government agencies may examine whether an employer has made adequate
payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments could
be subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we should
make supplemental social insurance and housing fund contributions and that we are subject to fines and legal sanctions,
our business, financial condition and results of operations could be adversely affected. We expect that our labor costs,
including wages and employee benefits, would continue to increase. Unless we are able to pass on these increased labor
costs to our customers by increasing the prices of our products and services, our financial condition and results of
operations could be adversely affected.
We are subject to consumer protection laws that could require us to modify our current business practices and incur
increased costs.
We are subject to numerous PRC laws and regulations that govern e-commerce business, such as the Consumer
Protection Law. If these regulations were to change or if we or our merchant clients were to violate them, the costs of
certain products or services could increase, or we could be subject to fines or penalties or suffer reputational harm,
which could reduce demand for the products or services offered on our website and adversely affect our business and
results of operations. For example, the amended Consumer Protection Law, which became effective in March 2014,
further strengthens the protection of consumers and imposes more stringent requirements and obligations on business
operators, especially for businesses that operate on the internet. We do not maintain product liability insurance for
products and services transacted on our platform, and our rights of indemnity from the vendors and service providers
might not adequately cover us for any liability we incur. Even unsuccessful claims could result in the expenditure of
funds and management time and resources and could reduce our net income and profitability. Legal requirements are
frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these
requirements or their effect on our operations. We could be required to make significant expenditures or modify our
business practices to comply with existing or future laws and regulations, which could increase our costs and limit our
ability to operate our business.
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Risks Relating to Our ADSs
The trading price of our ADSs could be volatile, which would result in substantial losses to investors.
Since our ADSs began trading on the Nasdaq Global Market on April 8, 2015, through April 23, 2018, the
closing price as reported by Nasdaq has ranged from a high of $13.00 to a low of $0.66 per ADSs. The trading price of
our ADSs could be volatile and could fluctuate widely in response to factors relating to our business as well as external
factors beyond our control. Factors such as variations in our financial results, announcements of new business initiatives
by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results
or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our
competitors could cause the market price for our ADSs to change substantially. At the same time, securities markets
could from time to time experience significant price and volume fluctuations that are not related to the operating
performance of particular companies, as they did for example in late 2008 and early 2009. These market fluctuations
could also have an adverse effect on the market price of our ordinary shares.
The performance and fluctuation of the market prices of other companies with business operations located
mainly in China that have listed their securities in the United States could affect the volatility in the price of and trading
volumes for our ADSs. In recent years, a number of PRC companies have listed their securities, or are in the process of
preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant
volatility, including significant price declines in connection with their initial public offerings. The trading performances
of these PRC companies’ securities at the time of or after their offerings could affect the overall investor sentiment
towards PRC companies listed in the United States and consequently could affect the trading performance of our ADSs.
These broad market and industry factors could significantly affect the market price and volatility of our ADSs,
regardless of our actual operating performance. Any of these factors could result in large and sudden changes in the
trading volume and price for our ADSs.
If we fail to maintain Nasdaq minimum bid requirements, our ADSs could be delisted.
According to the Nasdaq listing standards if the trading price of a listed company’s listed securities falls below
US$1.00 per share for a period of 10 consecutive business days, such company’s securities may be subject to delisting
unless such failure is cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to
the listed company of such failure. On March 14, 2018 we received a letter from Nasdaq advising us that our ADS has
been trading at a price that would subject our ADSs to delisting if we fail to regain compliance with the Nasdaq
minimum bid price requirements. We have been granted a grace period of 180 calendar days, expiring on September 10,
2018, in which to regain compliance. We will regain compliance if, at any time during this 180-day period, the closing
bid price of the Company’s ADSs are at least US$1.00 for a minimum of ten consecutive business days. In the event we
do not regain compliance with the Rule within 180 calendar days, we may be eligible for additional time.
We intend to monitor the closing bid price of our ADSs between now and September 10, 2018 and consider
available options to cure the deficiency and regain compliance with the minimum bid price requirement within the
prescribed grace period, including adjustment of ADS to ordinary shares ratio. If we fail to regain compliance, our ADSs
could be subject to delisting. There can be no assurance that we will meet the requirements for continued listing.
We are an emerging growth company and cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our ADSs less attractive to investors.
We are an “emerging growth company” under the JOBS Act, and may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act. The JOBS Act also provides that an emerging growth company does not need to
comply with any new or revised financial accounting standards until such date that a private company is otherwise
required to comply with such new or revised accounting standards.
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We have not yet opted out of these exemptions available to the emerging growth companies. This decision
would allow us to delay the adoption of new or revised accounting standards that have different effective dates for public
and private companies until those standards apply to private companies or otherwise become applicable to us. As a
result, our consolidated financial statements might not be comparable to public companies or other emerging growth
companies that have opted out of this provision. We cannot predict if investors will find our ADSs less attractive
because we will rely on these exemptions. If some investors find our ADSs less attractive as a result, our stock price
could be lower than it otherwise would be, there could be a less active trading market for our ADSs and our stock price
could be more volatile.
We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which
we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year ending after the fifth
anniversary of the completion of our initial public offering; (iii) the date on which we have, during the previous three-
year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a
“large accelerated filer” under the Exchange Act.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt
from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions
of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
∂
∂
∂
∂
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or
current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in
respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and
trading activities and liability for insiders who profit from trades made in a short period of time; and
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In
addition, press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K.
However, the information we are required to file with or furnish to the SEC will be less extensive and less timely
compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the
same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
As a foreign private issuer, we are permitted to, and we plan to, rely on exemptions from certain Nasdaq corporate
governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors
consist of independent directors. This might afford less protection to holders of our ordinary shares and ADSs.
Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a
majority of its board members to be independent, and Section 5605(d) and 5605(e) require listed companies to have
independent director oversight of executive compensation and nomination of directors. As a foreign private issuer,
however, we are permitted to, and we plan to follow home country practice in lieu of the above requirements. The
corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to
consist of independent directors or the implementation of a nominating and corporate governance committee. We have
informed Nasdaq that we will follow home country practice in place of all of the requirements of Rule 5600 other than
those rules which we are required to follow pursuant to the provisions of Rule 5615(a)(3).
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∂ Rule 5605(b), pursuant to which (i) a majority of the board of directors must be comprised of Independent
Directors, and (ii) the Independent Directors must have regularly scheduled meetings at which only
Independent Directors are present.
∂ Rule 5605(c) (other than those parts as to which the home country exemption is not applicable), pursuant to
which each company must have, and certify that it has and will continue to have, an audit committee of at
least three members, each of whom must meet criteria set forth in Rule 5605(c)(2) (A).
∂ Rule 5605(d), pursuant to which each company must (i) certify that it has adopted a formal written
compensation committee charter and that the compensation committee will review and reassess the
adequacy of the formal written charter on an annual basis, and (ii) have a compensation committee of at
least two members, each of whom must be an Independent Director.
∂ Rule 5605(e), pursuant to which director nominees must be selected, or recommended for the Board’s
selection, either by Independent Directors constituting a majority of the Board’s Independent Directors in a
vote in which only Independent Directors participate, or a nominations committee comprised solely of
Independent Directors.
∂ Rule 5610, pursuant to which each company shall adopt a code of conduct applicable to all directors,
officers and employees.
∂ Rule 5620(a), pursuant to which each company listing common stock or voting preferred stock, or their
equivalents, shall hold an annual meeting of shareholders no later than one year after the end of the issuer’s
fiscal year-end.
∂ Rule 5620(b), pursuant to which each company shall solicit proxies and provide proxy statements for all
meetings of shareholders and shall provide copies of such proxy solicitation to Nasdaq.
∂ Rule 5620(c), pursuant to which each company that is not a limited partnership shall provide for a quorum
as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no
case shall such quorum be less than 331/3% of the outstanding shares of the company’s common voting
stock.
∂ Rule 5630, pursuant to which each company that is not a limited partnership shall conduct an appropriate
review and oversight of all related party transactions for potential conflict of interest situations on an
ongoing basis by the company’s audit committee or another independent body of the board of directors.
∂ Rule 5635(a), pursuant to which shareholder approval is required in certain circumstances prior to an
issuance of securities in connection with the acquisition of the stock or assets of another company.
∂ Rule 5635(b), pursuant to which shareholder approval is required prior to the issuance of securities when
the issuance or potential issuance will result in a change of control of the company.
∂ Rule 5635(c), pursuant to which shareholder approval is required prior to the issuance of securities when a
stock option or purchase plan is to be established or materially amended or other equity compensation
arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors,
employees, or consultants, subject to certain exceptions.
∂ Rule 5635(d), pursuant to which shareholder approval is required prior to the issuance of securities in
connection with a transaction other than a public offering involving:
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o
o
the sale, issuance or potential issuance by the company of common stock (or securities convertible
into or exercisable for common stock) at a price less than the greater of book or market value
which together with sales by officers, directors or Substantial Shareholders of the company equals
20% or more of common stock or 20% or more of the voting power outstanding before the
issuance; or
the sale, issuance or potential issuance by the company of common stock (or securities convertible
into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of
the voting power outstanding before the issuance for less than the greater of book or market value
of the stock.
Our corporate actions are substantially influenced by Mr. Maodong Xu, our founder and co-chairperson, Ms.
Xiaoxia Zhu, our chief executive officer and co-chairperson and Ms. Huimin Wang, our director, whose interests
might differ from yours and our company as a whole.
As of March 31, 2018, Mr. Maodong Xu, Ms. Xiaoxia Zhu and Ms. Huimin Wang beneficially owned 10.3%,
16.6% and 19.7% of our total outstanding shares, respectively. If these shareholders choose to act in concert, they will
have significant influence in determining the outcome of any corporate transaction or other matter submitted to the
shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. This concentration of ownership could also discourage, delay or
prevent a change of control transactions involving our company, which would deprive our shareholders of an
opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our
ADSs. These actions could be taken even if they are opposed by our other shareholders, including those who purchased
ADSs in our initial public offering or on the open market.
Anti-takeover provisions in our charter documents could discourage a third party from acquiring us, which could
limit our shareholders’ opportunities to sell their shares at a premium.
Our third amended and restated memorandum and articles of association include provisions that could limit the
ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions.
For example, our board of directors will have the authority, without further action by our shareholders, to issue preferred
shares in one or more series and to fix the designations, powers, preferences and relative, participating, optional and
other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including, without limitation, the
number of shares constituting each such class or series, dividend rights, conversion rights, redemption privileges, voting
powers, full or limited or no voting powers, and liquidation preferences, any or all of which could be greater than the
rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay
or prevent a change in control or make removal of management more difficult. In addition, if our board of directors
issues preferred shares, the market price of our ordinary shares could fall and the voting and other rights of the holders
of our ordinary shares could be adversely affected. These provisions could have the effect of depriving our shareholders
of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from
seeking to obtain control of us in a tender offer or similar transaction.
You might not receive certain distributions we make on our ordinary shares or other deposited securities if the
depositary decides not to make such distributions to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the
custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary
may, at its discretion, decide that it is not lawful or reasonably practicable to make a distribution available to any holders
of ADSs. For example, the depositary could determine that it is not practicable to distribute certain property through the
mail, or that the value of certain distributions could be less than the cost of mailing them. In these cases, the depositary
could decide not to distribute such property and you will not receive such distribution.
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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more
limited under Cayman Islands law than under U.S. law, you could have less protection of your shareholder rights
than you would under U.S. law.
Our corporate affairs are governed by our third amended and restated memorandum and articles of association,
the Cayman Islands Companies Law (2018 Revision), as amended, and the common law of the Cayman Islands. The
rights of shareholders to take action against the directors, actions by noncontrolling shareholders and the fiduciary
responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial
precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under
Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the
United States and provides significantly less protection to investors. In addition, some U.S. states, such as Delaware,
have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.
There is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S.
courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as
penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or
enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands
have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability
provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands.
Maples and Calder (Hong Kong) LLP has advised us that although there is no statutory enforcement in the Cayman
Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction
will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the
merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the
Cayman Islands, provided such judgment:
∂
∂
∂
∂
is given by a foreign court of competent jurisdiction;
imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;
is final;
is not in respect of taxes, a fine or a penalty; and
∂ 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.
You should also read “Item 10. Additional Information—A. Share Capital—Ordinary Shares—Differences in
Corporate Law” for some of the differences between the corporate and securities laws in the Cayman Islands and the
United States.
Your ability to protect your rights as shareholders through the U.S. federal courts could be limited because we are
incorporated under Cayman Islands law.
Cayman Islands companies might not have the standing to initiate a derivative action in a federal court of the
United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise
enable you to sue in a United States federal court could be limited to direct shareholder lawsuits.
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You will have limited ability to bring an action against us or against our directors and officers, or to enforce a
judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct a majority of
our operations in China and because all of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands and conduct our operations exclusively in China. All of our assets
are located outside the United States. All of our officers and directors reside outside the United States and a substantial
portion of the assets of those persons are located outside of the United States. As a result, it could be difficult or
impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the
event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you
are successful in bringing an action of this kind, the laws of the Cayman Islands and of China could render you unable to
enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty as to
whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or
such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is
uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the
Cayman Islands or China against us or such persons predicated upon the securities laws of the United States or any state.
Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman
Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our
directors have discretion under Cayman Islands law to determine whether or not, and under what conditions, our
corporate records could be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This could make it more difficult for you to obtain the information needed to establish any facts necessary
for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, public shareholders might have more difficulty in protecting their interests in the
face of actions taken by management, members of the board of directors or controlling shareholders than they would as
public shareholders of a U.S. company.
The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.
Holders of our ADSs will only be able to exercise their voting rights with respect to the underlying ordinary
shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by
giving voting instructions to the depositary. Upon receipt of voting instructions from a holder of ADSs in the manner set
forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with
these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless
you cancel your ADSs and withdraw the underlying shares and follow the requisite steps to be recognized as a holder of
shares entitled to vote such shares. Under our third amended and restated memorandum and articles of association and
Cayman Islands law, the minimum notice period required for convening a general meeting is 10 clear days. When a
general meeting is convened, you might not receive sufficient notice of a shareholders’ meeting to permit you to
withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In
addition, the depositary might not be able to send voting instructions to you or carry out your voting instructions in a
timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely
manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the
depositary to vote the shares representing your ADSs. Furthermore, the depositary will not be responsible for any failure
to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a
result, you might not be able to exercise your right to vote and you could lack recourse if your ordinary shares are not
voted as you requested.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to
exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual basis. Holders of our
ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the
ordinary shares represented by the ADSs. You might not receive voting materials in time to instruct the depositary to
vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not
have the opportunity to exercise a right to vote. The deposit agreement provides that if the depositary does not timely
receive valid voting instructions from the ADS holders, then the depositary must, with certain limited exceptions, give a
discretionary proxy to a person designated by us to vote such shares. Furthermore, as a party to the deposit agreement,
you waive your right to trial by jury in any legal proceedings arising out of the deposit agreement or the ADRs against
us and/or the depositary.
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You might not receive distributions on our ordinary shares or any value for them if it is unlawful or impractical for
us to make them available to you.
The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian
for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You
will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the
depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For
example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require
registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable
exemption from registration. The depositary is not responsible for making a distribution available to any holders of
ADSs, if any government approval or registration is required for such distribution. We have no obligation to take any
other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This
means that you might not receive the distributions we make on our ordinary shares or any value for them if it is unlawful
or impractical for us to make them available to you. These restrictions could have an adverse effect on the value of your
ADSs.
You might be subject to limitations on the transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary could close its books at
any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary
could close its books from time to time for a number of reasons, including in connection with corporate events such as a
rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a
specified period. The depositary could also close its books in emergencies, and on weekends and public holidays. The
depositary could refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of
the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do so in
connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any
government or governmental body, or under any provision of the deposit agreement.
Compliance with rules and requirements applicable to public companies could cause us to incur increased costs,
which could negatively affect our results of operations.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a
private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and
Nasdaq Global Market, has required changes in corporate governance practices of public companies. We expect these
rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate
activities more time-consuming and costly. Complying with these rules and requirements could be especially difficult
and costly for us because we might have difficulty locating sufficient personnel in China with experience and expertise
relating to U.S. GAAP and U.S. public company reporting requirements, and such personnel could command higher
salaries relative to what similarly experienced personnel would command in the United States. If we cannot employ
sufficient personnel to ensure compliance with these rules and regulations, we might need to rely more on outside legal,
accounting and financial experts, which could be very costly. In addition, we will incur additional costs associated with
our public company reporting requirements. We are evaluating and monitoring developments with respect to these rules,
and we cannot predict or estimate the amount of additional costs we might incur or the timing of such costs.
We could be a passive foreign investment company, or PFIC, which would result in adverse United States tax
consequences to United States investors.
We will be classified as a “passive foreign investment company,” or “PFIC” if, in the case of any particular
taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or
(b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during
such year produce or are held for the production of passive income. Passive income generally includes dividends,
interest, royalties, rents, annuities, net gains from the sale or exchange of passive assets (including property producing
passive income) and net foreign currency gains. For this purpose, cash is categorized as a passive asset and the
company’s unbooked intangibles associated with active business activity are taken into account as a non-passive asset.
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of
any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
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Based on our current income and assets and the value of our ADSs and outstanding ordinary shares, we do not
believe that we were a PFIC for our taxable year ended December 31, 2017 and we do not expect to be classified as a
PFIC for our taxable year ending December 31, 2018 or in the foreseeable future.
With respect to our 2018 taxable year and foreseeable future taxable years, we presently do not anticipate that
we will be a PFIC based upon the expected value of our assets, including goodwill (determined, in part, based on the
price of our ADSs), and the expected future composition of our income and assets. However, we might be a PFIC for
our 2018 taxable year or any future taxable years due to changes in our asset or income composition, or the value of our
assets, including if our market capitalization is less than anticipated or subsequently declines.
Although the law in this regard is not entirely clear, we treat Our VIE as being owned by us for United States
federal income tax purposes because we control its management decisions and we are entitled to substantially all of its
economic benefits and, as a result, we consolidate its results of operations in our consolidated U.S. GAAP financial
statements. If it were determined, however, that we are not the owner of Our VIE for United States federal income tax
purposes, we could be treated as a PFIC for our taxable year ended December 31, 2017 and for subsequent taxable years.
If we were or are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, we generally
will continue to be treated as a PFIC as to you for all succeeding taxable years during which you hold our ADSs or
ordinary shares, except if you have made a mark-to-market election. Because there are uncertainties in the application of
the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given
that we will not be or have not been a PFIC for any year. If we were or are a PFIC, U.S. holders of our ADSs or ordinary
shares could be subject to increased tax liabilities under United States federal income tax laws and could be subject to
burdensome reporting requirements. See “Item 10. Additional Information—E. Taxation—Material United States
Federal Income Tax Considerations—Passive Foreign Investment Company”.
Item 4.
Information on the Company
A.
History and Development of the Company.
We commenced business in March 2010, operating a group buying and B2C e-commerce platform through
Beijing Wowo Tuan Information Technology Co., Ltd. In order to facilitate investment in our company, we incorporated
our holding company Wowo Limited in July 2011.
In April 2015, we completed our initial public offering and listed our ADSs on the Nasdaq Global Market under
the symbol “WOWO.” We raised approximately US$37.3 million in net proceeds from our initial public offering after
deducting underwriting commissions and the offering expenses payable by us.
In June 2015, we acquired Join Me Group (HK) Investment Company Limited to establish our food services
industry B2B business. We issued 741,422,780 ordinary shares and paid US$30.0 million as consideration for the
acquisition.
In September 2015, we divested our group buying and B2C e-commerce businesses to focus our efforts on our
food services industry B2B business.
In September 2015, we raised US$15.0 million in a private placement transaction with our co-chairperson Mr.
Maodong Xu.
In June 2016, we changed the trading symbol for our ADSs listed on the Nasdaq Global Market to “JMU”. In
December 2016, we also changed our company name to “JMU Limited.”
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In August 2016, TANSH Global Food Group Co., Ltd, which formerly known as Xiao Nan Guo Restaurants
Holdings Limited, a Hong Kong Stock Exchange listed company (Stock Code: 3666), through its wholly-owned
subsidiary, acquired a 9.82% stake in our company via secondary transfers for a total consideration of HK$368 million
(approximately US$47.5 million).
We currently conduct our operations in China through contractual arrangements between our wholly-owned
PRC subsidiary, Shanghai Zhongming Supply Chain Management Co. Ltd., on the one hand and our consolidated
affiliated entity in China, Shanghai Zhongmin Supply Chain Management Co. Ltd., and its shareholder on the other.
Because the names of the two entities in English differ by only one letter, we refer to our wholly-owned PRC subsidiary
as Our WFOE and to our consolidated affiliated entity and its subsidiaries as Our VIE in this annual report to avoid
confusion.
Our principal executive offices are located at North Guoquan Road 1688 Long, No. 75, Building A8, 6F,
Yangpu District, Shanghai 200438, People’s Republic of China and the telephone number at this address is +86 21 6015
1166. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O.
Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
B.
Business overview.
We currently operate an online platform for providing B2B services to food-industry suppliers and customers in
China. We acquired this business in a merger with Join Me Group (HK) Investment Company Limited, or JMU HK, in
June 2015. Our B2B online platform recorded gross billing of RMB16 billion (US$2.5 billion) in 2017, measured in
terms of gross merchandise value.
We connect suppliers and customers in the food service industry through our online platform. Our customers
include restaurants, restaurant chains, hotels, food product manufacturers and others. We offer a wide selection of
products at competitive prices through our website www.ccjoin.com and our mobile applications. We also offer
convenient payment options and customer services. Our customers are focused on the quality of raw materials that they
source for their businesses, and we provide more comfort and confidence to our customers by verifying the qualification
of suppliers. In addition to our online services, we also host offline auction events to afford suppliers and customers the
opportunity to meet in person and establish connections and in the meantime give traditional food service businesses the
chances to adopt the online purchase process in a gradual manner.
We started with the mission to transform the connection between suppliers and customers in the food service
industry into a more transparent and efficient form, and we also leverage our supplier and customer base to further
provide value-added services such as logistics and trade financing.
We are a technology-driven company and we have made investments in developing our own scalable
proprietary technology platform that supports our growth and enables us to provide technology services. In 2015, we
developed our cloud procuring system, which can be both integrated into our customers’ existing enterprise resource
systems or be used independently as procurement management software.
Previously, we had operated a B2C e-commerce platform for local entertainment and lifestyle services.
Although we disposed of this business in September 2015, we are still utilizing the experience we gained in operating an
e-commerce platform as well as our capacity to leverage the big data from online purchases in our current B2B services
business. We have classified our B2C business as discontinued operations in our consolidated financial statements.
We had revenues of US$88.7 million and a net loss of US$161.9 million in 2017.
Our Business Model
Since the acquisition of our current B2B business, we have focused on developing an online marketplace that
can connect suppliers and customers in the food service industry in China, while in the meantime developing our own
online direct sales business. Leveraging our platform and the scale of our business, we have also begun to offer other
services that are complementary to our core business and create significant value to our business partners, including
third-party sellers and suppliers, and ultimately benefit our business and customers.
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Currently substantially all of our business is carried out within China and Hong Kong. The total revenue of the
food service industry in China was approximately RMB3,964.4 billion (US$609.3 billion) in 2017, of which raw
material procurement constituted approximately 30%. Most of this spending has been in the traditional offline form. Our
B2B platform was started with the vision of reshaping industrial rules and building a more transparent and more efficient
business ecosystem for food service businesses in China. Through cooperation with industry associations and hundreds
of leading restaurants across China, we believe that we can create significant network effects with our B2B platform. We
work closely with various reputable buyers and suppliers in the food service industry, providing one-stop procurement
services, as well as product development, marketing and other value-added services, for a variety of food service
businesses via the B2B platform www.ccjoin.com.
Online Direct Sales
In our online direct sales business, we acquire products from suppliers and sell them directly to customers. We
have been continually expanding our offering in direct sales since the acquisition of our B2B business in June 2015. As
of December 31, 2017, we offered approximately 501 kinds products of ten product categories through our online direct
sales business model. We will focus on the sale of standard new ingredients by conducting research and developments of
new products and organizing the manufacture by factories to ensure the standardized process of operation to guarantee
the food safety production.
Online Marketplace
In our online marketplace business, third-party sellers offer products to customers over our online marketplace.
We acquired our B2B online marketplace in June 2015, and have been bringing new products and services to our online
marketplace since then. As of December 31, 2017, there were approximately 15,800 third-party sellers in our online
marketplace. Our B2B online platform recorded gross billing of RMB16 billion (US$2.5 billion) in 2017, measured in
terms of the gross merchandise value. In order to attract more third-party sellers, we currently do not charge commission
on transactions on our online marketplace. We provide transaction processing and billing services on all orders on our
online marketplace. We require third-party sellers to meet our standards of quality. We aim to offer customers the same
high quality customer experience regardless of the source of the products they choose.
Customer Experience
We are committed to optimizing customer experience and achieving customer satisfaction. This commitment
drives every aspect of our operations, which are focused on four core components: product offerings, pricing, online
experience and customer services.
Products
We continually seek to add more products that appeal to our target customers. Our offerings (including both
online direct sales and online marketplace offerings) are organized into ten product categories on our website:
∂
∂
∂
∂
∂
food ingredients;
seasonings;
alcoholic and non-alcoholic drinks;
hotel appliances;
tableware;
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∂
∂
∂
∂
∂
kitchen appliances;
office appliances;
furniture;
hotel and restaurant information systems; and
hotel and restaurant decoration.
Each of these categories is further divided into numerous subcategories to facilitate browsing.
Pricing
We offer competitive pricing to attract and retain customers. We make continual efforts to maintain and
improve an efficient cost structure and create incentives for our suppliers to provide us with competitive prices.
Pricing policy. For some of our products, we set our prices to be competitive with those on other major
e-commerce websites and in physical stores in China. We typically negotiate with our suppliers for prices that are
comparable to or lower than those offered to retailers in other sales channels. Currently, third-party sellers are free to set
their own prices on our online marketplace.
Special promotions. For top-selling products, we will make it the key point of our marketing campaign and
make the promoting and marketing plans accordingly.
Online Experience
We believe that online experience is important to attracting and retaining customers and increasing orders. Our
website offers site navigation, search functions and product information. These features address customers’ desire to
view, understand and compare products before purchasing. With the increasing popularity of mobile internet-enabled
devices, we have also developed applications and features adapted to mobile internet users, and we currently offer
mobile access through our mobile website and our mobile applications.
Our website contains the following information and features:
Product information. Each product page contains pictures of the product, price and applicable delivery
expenses. Depending on the type of product, there will be additional information to help the customer make a purchase
decision or recommendations to steer the customer towards additional products.
Product recommendations. Our website makes recommendations to customers based on our understanding of
the market and popular products on our platform. We also provide product recommendations to our customers through
various means, including emails, social network and hardcopy catalogues. Our sales volume gives us marketing data
about customer preferences that we believe will enable us to make recommendations to our customers.
Online purchase system. We also provide an online purchase system that can be easily integrated into each
customer’s own enterprise resource planning, or ERP, system for them to more efficiently manage their purchase plans.
Those small and medium size businesses that do not have their own ERP system can use our online purchase system to
directly manage their enterprise resources.
Online order tracking. Customers can log into their accounts to check the status of their orders.
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Customer Service
Providing satisfactory customer services is a high priority. Our commitment to customers is reflected in the
high level of service provided by our customer service staff as well as in our product return and exchange policies.
Customer service center. Our sales representative will provide customer service directly to our customers. As of
December 31, 2017, we have 85 sales representatives. Meanwhile, we have set up our "400 hotline" for customer service
purpose, and we have a "400 hotline" call center service team of 5 employees. Customers can call our telephone hotline,
ask questions and leave complaints in writing through our website, or send us e-mails.
Returns and exchanges. We generally allow customers to return defective products within 7 days or exchange
within 15 days, counting from the date when the customer receives the product. We will generally arrange our third-
party courier partners to pick up defective items for return or exchange at the customer’s address. The policies apply to
products sold by ourselves while third-parties sellers apply their own policies on returns and exchanges for transactions
on our online marketplace.
Membership program. We have established a membership program to cultivate customer loyalty and encourage
our customers to make additional purchases. There are three levels of members, and promotion to higher levels is based
on the amount that the customer has spent with us. Members get a variety of benefits that increase with level, and
generally higher level members can enjoy a lower purchase price even for the same item.
Third-party Seller Experience
We are also endeavoring to make the transactions by third-party sellers on our platform convenient. For
example, we link third-party sellers on our online marketplace to third-party service providers that offer either delivery
services or a combination of warehousing plus delivery services as well as trade financing. Moreover, we also provide
offline exhibition marketing services to sellers ourselves, in addition to the basic transaction processing and billing
services that we provide them at no extra cost.
We also provide certain premium customers, suppliers and third-party sellers with reports on a regular basis as
to recent procurement data and trends in the food services industry, to assist them to better develop their products and
manage their inventory.
Our finance business unit is in the process of developing various financial products and services in addition to
trade financing as additional services we provide to our business partners, including third-party sellers. We will continue
to develop innovative financial products that can further leverage our strengths in e-commerce and our technology
platform.
Currently some of the services mentioned above have been provided to third-party sellers, free of charge as part
of our strategy to grow the scale of our business.
Merchandise Sourcing
In our online direct sales business, we sourced products from 277 suppliers as of December 31, 2017. Procuring
products for the food services industry requires considerable specialized expertise, which is provided by our seller team.
We negotiate with the higher-level distributor where possible in order to obtain the most favorable terms. In addition, we
had approximately 15,800 third-party sellers on our online marketplace as of December 31, 2017.
We have created a vendor interface on our website where our third-party sellers can access reports regarding
inventory status, purchase history and customer reviews of their products. Third-party sellers can use this information in
their marketing and product development efforts and also in managing their own inventory, which helps them manage
costs.
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We select suppliers and third-party sellers on the basis of brand, reliability, volume and price. They must be
able to meet our demands for timely supply of high quality products and also provide high standard post-sale customer
service. We perform background checks on each supplier and third-party seller and the products they provide before we
enter into any agreement. We examine their business licenses and the qualification certificates for their products, and
check their brand recognition and make inquiries about the market acceptance of their products among players in the
same industry. We also conduct on-site visits to assess certain suppliers and third-party sellers and verify their location,
scale of business, production capacity, property and equipment, human resources, research and development capability,
quality control system and fulfillment capability. We also require all vendors to upload their business license, tax
registration certificate and organization code certificate for our verification. Our standard form contract requires
suppliers and third-party sellers to represent that their goods are from lawful sources and do not infringe upon lawful
rights of third parties and to pay us liquidated damages for any breach. We normally enter into framework agreements
with our suppliers and third-party sellers and renew them after expiration. We have also put stringent rules in place
governing the operations of third-party sellers on our online marketplace. Third-party sellers will be subject to penalties
or be asked to end their operations on our online marketplace if they violate the marketplace rules, for example by
selling food beyond its expiration date.
Technology Platform
We have built our technology platform relying primarily on software and systems that we have developed in-
house and to a lesser extent on third-party software that we have modified and incorporated. Our platform is based on
cloud-computing and cloud-storing technology to fully support our needs for industry big-data analysis. Equipped with
the advanced technology and designed with scalability, our platform is capable of supporting our business and providing
seamless access for any third-party platforms. Our server fleet consisted of approximately 25 servers, fire-wall and
network switches as of December 31, 2017, and we employed 43 IT professionals to design, develop, maintain, and
operate our technology platform as of the same date.
Our proprietary technology platform supports our growing processing capacity requirements, provides us
accurate information throughout our operation value chain, and enables harnessing of insightful data analytics.
Our strong technology platform is vital in supporting our pursuit of a continually improving customer
experience, including the customer experience of our mobile users. From our website, the primary customer interface, to
the back end management systems, our technology platform supports accurate operational execution as well as
information flow, data consistency and analytics. We are also working with our key customers to integrate our platform
into their own ERP system to facilitate their management of food supplies.
The principal components of our technology platform include:
∂ Website and mobile applications. Our website, together with our mobile applications, is our primary
customer interface. It provides a user-friendly customer interface, including a powerful search engine to
enhance our customers’ shopping experience.
∂
Vendor interfaces. Our vendor interfaces support key functions such as order tracking and inventory
checking and provide data analytics to help our third-party sellers better understand consumer needs.
∂ Customer relationship management system. Our customer relationship management system tracks
customer information, including customers’ outstanding orders, order and payment history, and settings
and preferences, as well as all interaction between our customer service representatives and our customers,
to ensure consistent and high quality customer service.
∂
Transaction processing system. Our transaction processing system handles transaction processing, online
receipts and disbursements, remote reimbursement and other prerequisites for conducting an online
business.
We have adopted security policies and measures, including encryption technology, to protect our proprietary
data and customer information, and we back up our database, including customer data, every day with both on-site and
off-site storage.
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Marketing
We engage various marketing channels to expand our business to more suppliers and customers. We provide
various incentives to our customers to increase their spending and loyalty, and we send e-mails to our customers
periodically with product recommendations or promotions. To enhance our brand awareness, we also have engaged in
brand promotion activities.
In addition to the online marketing activities, we also utilize offline activities to attract more users and promote
our brand recognition. For example, we organize offline auction events for food service businesses to purchase their
supplies in bulk.
We also utilize industrial associations to extend our services to an ever increasing number of food service
business. Our services are recommended by the China Hotel Association, the China Cuisine Association and the China
Tourist Hotel Association.
Competition
The e-commerce industry in China is intensely competitive. Our current or potential competitors include
traditional offline food service suppliers and other internet companies tipping in the online food service industry.
We anticipate that the e-commerce market will continually evolve and will continue to experience rapid
technological change, evolving industry standards, shifting customer requirements, and frequent innovation. We must
continually innovate to remain competitive. We believe that the principal competitive factors in our industry are:
∂
∂
∂
∂
∂
brand recognition and reputation;
product quality and selection;
pricing;
fulfillment capabilities; and
customer service.
In addition, new and enhanced technologies may increase the competition in the online retail industry. New
competitive business models may appear, for example based on new forms of social media or social commerce.
We believe that we are well-positioned to effectively compete on the basis of the factors listed above. However,
some of our current or future competitors have or may have longer operating histories, greater brand recognition, better
supplier relationships, larger customer bases or greater financial, technical or marketing resources than we do.
Seasonality
We believe that we experience seasonality in our business that reflects seasonal fluctuations in purchase
patterns for food service business. In general, the fourth quarter is the high season for the food service industry in China,
and consequently we expect the purchases on our B2B platform to be higher in the fourth quarter of each year compared
to the first three. However, due to our limited operating history, the seasonal trends that we experience in the future may
not match our expectations.
Intellectual Property
We regard our trademarks, copyrights, domain names, know-how, proprietary technologies, and similar
intellectual property as critical to our success, and we rely on copyright and trademark law and confidentiality, invention
assignment and non-compete agreements with our employees and others to protect our proprietary rights. As of
December 31, 2017, we owned eight computer software copyrights in China relating to various aspects of our
operations. We had 98 trademark applications inside China and 19 outside China. As of December 31, 2017, we had
registered four generic top-level domain names. Our registered domain names include www.ccjoin.com and
www.ccjmu.com, among others.
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Regulation
This section sets forth a summary of the most significant rules and regulations that affect our business activities
in China.
Regulations Relating to Foreign Investment
Industry Catalogue Relating to Foreign Investment. Investment activities in the PRC by foreign investors are
principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was
promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform
Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited.
Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted” category. Establishment
of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted
industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold
the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level
government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not
listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
Through Our WFOE and Our VIE, we are engaged in certain industries that are classified as “restricted” under
the Catalogue. Pursuant to the latest Catalogue amended in June 2017, the provision of value-added telecommunications
services falls in the restricted category and the percentage of foreign ownership cannot exceed 50% (excluding
e-commerce), the purchase of grains, wholesale of grains and cotton fall in the restricted category. We engage in the
online wholesale and retail of products (except the grains and cotton), the development of computer network technology,
technical consultancy and technical services, which are in the permitted category. Under PRC law, the establishment of a
wholly foreign owned enterprise is subject to the approval of, or the requirement for record filing with, the Ministry of
Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry
and commerce bureau. We have duly obtained the approvals from the Ministry of Commerce or its local counterparts for
our interest in our wholly owned PRC subsidiaries and completed the registration of these PRC subsidiaries with the
competent industry and commerce bureau.
The Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment
and Change of Foreign-invested Enterprises, as amended in July 2017, or FIE Record-filing Interim Measures, effective
on the same day. Pursuant to FIE Record-filing Interim Measures, the establishment and change of foreign-invested
enterprises are subject to record-filing procedures, instead of prior approval requirements, provided that the
establishment or change does not involve special entry administration measures. If the establishment or change of FIE
matters involves the special entry administration measures, the approval of the Ministry of Commerce or its local
counterparts is still required. Pursuant to the Announcement [2016] No. 22 of the National Development and Reform
Commission and the Ministry of Commerce dated October 8, 2016, the special entry administration measures for foreign
investment apply to restricted and prohibited categories specified in the Catalogue, and the encouraged categories are
subject to certain requirements relating to equity ownership and senior management under the special entry
administration measures.
Foreign Investment in Value-Added Telecommunications Businesses. The Regulations for Administration of
Foreign-invested Telecommunications Enterprises promulgated by the PRC State Council in December 2001 and
subsequently amended in September 2008 and February 2016 set forth detailed requirements with respect to
capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-
invested telecommunications enterprise. These regulations prohibit a foreign entity from owning more than 50% of the
total equity interest in any value-added telecommunications service business in China and require the major foreign
investor in any value-added telecommunications service business in China have a good and profitable record and
operating experience in this industry. Due to these regulations, we operate our website www.ccjoin.com through Our
VIE.
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In July 2006, the Ministry of Information Industry, the predecessor of the Ministry of Industry and Information
Technology, or the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in the
Operation of Value-added Telecommunications Business, pursuant to which a domestic PRC company that holds an
operating license for value-added telecommunications business, which we refer to as an ICP License, is prohibited from
leasing, transferring or selling the ICP License to foreign investors in any form and from providing any assistance,
including resources, sites or facilities, to foreign investors that conduct a value-added telecommunications business
illegally in China. Further, the domain names and registered trademarks used by an operating company providing value-
added telecommunications services must be legally owned by that company or its shareholders. In addition, the
company’s operational premises and equipment must comply with the approved coverage region on its ICP License, and
the company must establish and improve its internal internet and information security policies and standards and
emergency management procedures. If an ICP License holder fails to comply with the requirements and also fails to
remedy such non-compliance within a specified period of time, the MIIT or its local counterparts have the discretion to
take administrative measures against the license holder, including revoking its ICP license. Our VIE, the operator of our
website, owns the relevant domain names and registered trademarks and has the necessary personnel to operate the
website.
Licenses and Permits
We are required to hold a variety of licenses and permits in connection with various aspects of our business,
including the following:
Value-added Telecommunication License. The Telecommunications Regulations promulgated by the State
Council and its related implementation rules, including the Catalogue of Classification of Telecommunications Business
issued by the MIIT, categorize various types of telecommunications and telecommunications-related activities into basic
or value-added telecommunications services, and internet information services, or ICP services, are classified as value-
added telecommunications businesses. Under the Telecommunications Regulations, commercial operators of value-
added telecommunications services must first obtain an ICP License from the MIIT or its provincial level counterparts.
In 2000, the State Council also issued the Administrative Measures on Internet Information Services, which was
amended in 2011. According to these measures, a commercial ICP service operator must obtain an ICP License from the
relevant government authorities before engaging in any commercial ICP service in China. When the ICP service
involves areas of news, publication, education, medical treatment, health, pharmaceuticals and medical equipment, and
if required by law or relevant regulations, specific approval from the respective regulatory authorities must be obtained
prior to applying for the ICP License from the MIIT or its provincial level counterpart. In 2009, the MIIT promulgated
the Administrative Measures on Telecommunications Business Operating Licenses, which set forth more specific
provisions regarding the types of licenses required to operate value-added telecommunications services, the
qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. Our
VIE, as our ICP operator, holds an ICP License issued by the Shanghai Telecommunications Administration for the
provision of information services through the internet and also a value-added telecommunication license issued by the
MIIT for the provision of information services through a mobile network, the provision of internet data center services,
internet access services, and online data processing and transaction processing services.
Food Distribution Permit. China has adopted a licensing system for food supply operations under the Food
Safety Law and its implementation rules. Entities or individuals that intend to engage in food production, food
distribution or food service businesses must obtain licenses or permits for such businesses. Pursuant to the
Administrative Measures on Food Operation Licensing issued by the SFDA in August 2015, an enterprise needs to
obtain a Food Operation Permit from the local food and drug administration, and the permits already obtained by food
business operators prior to the effective date of these new measures will remain valid for their originally approved
validity period. We sell food and nutritional supplements through our website. Our WFOE engaging in food distribution
business have obtained Food Distribution Permits.
License or Registration for Wholesale and Retail of Liquor. The Measures for the Administration of Liquor
Circulation, issued by the Ministry of Commerce in November 2005, require any entity engaged in the wholesale or
retail of liquor to file and register, within 60 days of acquiring a business license, with the local branch of the Ministry of
Commerce at the same level as the local branch of the State Administration of Industry and Commerce where the entity
is registered. In addition, certain provinces in the PRC have adopted a licensing system for the wholesale or retail of
liquor. We sell liquor through our website. Our WFOE or its branches engaging in the wholesale or retail of liquor have
obtained the license or completed the required registration with the local branches of the Ministry of Commerce for such
business.
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Regulations Relating to E-Commerce
China’s e-commerce industry is at a relatively early stage of development and there are few PRC laws or
regulations specifically regulating the e-commerce industry. In May 2010, the State Administration of Industry and
Commerce adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services,
which took effect in July 2010. Under these measures, enterprises or other operators which engage in online
commodities trading and other services and have been registered with the State Administration of Industry and
Commerce or its local branches must make the information stated in their business license available to the public or
provide a link to their business license on their website. Online distributors must adopt measures to ensure safe online
transactions, protect online shoppers’ rights and prevent the sale of counterfeit goods. Information on products and
transactions released by online distributors must be authentic, accurate, complete and sufficient.
In January 2014, the State Administration of Industry and Commerce promulgated the Administrative Measures
for Online Trading, which terminated the above interim measures and became effective in March 2014. The
Administrative Measures for Online Trading further strengthen the protection of consumers and impose more stringent
requirements and obligations on online business operators and third-party online marketplace operators. For example,
online business operators are required to issue invoices to consumers for online products and services. Consumers are
generally entitled to return products purchased from online business operators within seven days upon receipt, without
giving any reason. Online business operators and third-party online marketplace operators are prohibited from collecting
any information on consumers and business operators, or disclosing, selling or providing any such information to any
third party, or sending commercial electronic messages to consumers, without their consent. Fictitious transactions,
deletion of adverse comments and technical attacks on competitors’ websites are prohibited as well. In addition, third-
party online marketplace operators are required to examine and verify the identifications of the online business operators
and set up and keep relevant records for at least two years. Moreover, any third-party online marketplace operator that
simultaneously engages in online trading for products and services should clearly distinguish itself from other online
business operators on the marketplace platform. We are subject to these measures as a result of our online direct sales
and online marketplace.
Regulations Relating to Internet Content and Information Security
The Administrative Measures on Internet Information Services specify that internet information services
regarding news, publications, education, medical and health care, pharmacy and medical appliances, among other things,
are to be examined, approved and regulated by the relevant authorities. Internet information providers are prohibited
from providing services beyond those included in the scope of their ICP licenses or filings. Furthermore, these measures
clearly specify a list of prohibited content. Internet information providers are prohibited from producing, copying,
publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights and
interests of others. Internet information providers that violate the prohibition may face criminal charges or administrative
sanctions by the PRC authorities. Internet information providers must monitor and control the information posted on
their websites. If any prohibited content is found, they must remove the offending content immediately, keep a record of
it and report to the relevant authorities.
Internet information in China is also regulated and restricted from a national security standpoint. The National
People’s Congress, China’s national legislative body, has enacted the Decisions on Maintaining Internet Security, which
may subject violators to criminal punishment in China for any effort to: (1) gain improper entry into a computer or
system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets; (4) spread false
commercial information; or (5) infringe intellectual property rights. The Ministry of Public Security has promulgated
measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a
spread of socially destabilizing content.
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Regulations Relating to Internet Privacy
In recent years, PRC government authorities have enacted laws and regulations on internet use to protect
personal information from any unauthorized disclosure. The Administrative Measures on Internet Information Services
prohibit ICP service operators from insulting or slandering a third party or infringing upon the lawful rights and interests
of a third party. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued
by the MIIT in 2011, an ICP operator may not collect any user personal information or provide any such information to
third parties without the consent of a user. An ICP service operator must expressly inform the users of the method,
content and purpose of the collection and processing of such user personal information and may only collect such
information necessary for the provision of its services. An ICP service operator is also required to properly keep the user
personal information, and in case of any leak or likely leak of the user personal information, the ICP service operator
must take immediate remedial measures and, in severe circumstances, to make an immediate report to the
telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online
Information issued by the Standing Committee of the National People’s Congress in December 2012 and the Order for
the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any
collection and use of user personal information must be subject to the consent of the user, abide by the principles of
legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator
must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying
of any such information, or selling or proving such information to other parties. Any violation of the above decision or
order may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses,
cancellation of filings, closedown of websites or even criminal liabilities. Furthermore, in June 2016, the State Internet
Information Office issued the Administrative Provisions on Mobile Internet Applications Information Services, which
became effective on August 1, 2016, to further strengthen the regulation of the mobile application information services.
Pursuant to these provisions, owners or operators of mobile internet applications that provide information services are
required to be responsible for information security management, establish and improve the protective mechanism for
user information, observe the principles of legality, rightfulness and necessity, and expressly state the purpose, method
and scope of, and obtain user consent to, the collection and use of users’ personal information. In addition, the new
Cyber Security Law, which became effective on June 1, 2017, also requires network operators to strictly keep
confidential users’ personal information that they have collected and to establish and improve user information
protective mechanism. We have required our users to consent to our collecting and using their personal information, and
established information security systems to protect user’s privacy.
Regulations Relating to Product Quality and Consumer Protection
The Product Quality Law applies to all production and sale activities in China. Pursuant to this law, products
offered for sale must satisfy relevant quality and safety standards. Enterprises may not produce or sell counterfeit
products in any fashion, including forging brand labels or giving false information regarding a product’s manufacturer.
Violations of state or industrial standards for health and safety and any other related violations may result in civil
liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as
well as confiscation of products illegally produced and sold and the proceeds from such sales. Severe violations may
subject the responsible individual or enterprise to criminal liabilities. Where a defective product causes physical injury to
a person or damage to another person’s property, the victim may claim compensation from the manufacturer or from the
seller of the product. If the seller pays compensation and it is the manufacturer that should bear the liability, the seller
has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that
should bear the liability, the manufacturer has a right of recourse against the seller.
The Consumer Protection Law sets out the obligations of business operators and the rights and interests of the
consumers in China. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the
requirements for personal or property safety, provide consumers with authentic information about the commodities, and
guarantee the quality, function, usage and term of validity of the commodities. Failure to comply with the Consumer
Protection Law may subject business operators to civil liabilities such as refunding purchase prices, replacement of
commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business
operators or the responsible individuals to criminal penalties when personal damages are involved or if the
circumstances are severe. The Consumer Protection Law was further amended in October 2013 and became effective in
March 2014. The amended Consumer Protection Law further strengthen the protection of consumers and impose more
stringent requirements and obligations on business operators, especially on the business operators through the internet.
For example, the consumers are entitled to return the goods (except for certain specific goods) within seven days upon
receipt without any reasons when they purchase the goods from business operators on the internet. The consumers
whose interests have been damaged due to their purchase of goods or acceptance of services on online marketplace
platforms may claim damages from sellers or service providers. Where the providers of the online marketplace platforms
are unable to provide the real names, addresses and valid contact details of the sellers or service providers, the
consumers may also claim damages from the providers of the online marketplace platforms. Providers of online
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marketplace platforms that know or should have known that sellers or service providers use their platforms to infringe
upon the legitimate rights and interests of consumers but fail to take necessary measures must bear joint and several
liabilities with the sellers or service providers. Moreover, if business operators deceive consumers or knowingly sell
substandard or defective products, they should not only compensate consumers for their losses, but also pay additional
damages equal to three times the price of the goods or services.
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The Provisional Measures for 7-day Unconditional Return of Online Purchased Goods came effective on May
15, 2017, which provides detailed regulations on and ensures the implementation of the rules of "7-day Unconditional
Return of Purchased Goods" provided for in the Consumer Protection Law to protect the legitimate rights and interests
of consumers. Pursuant to this regulation, online goods sellers shall lawfully perform their duties of "7-day
Unconditional Return of Purchased Goods", and the online trading platforms shall guide and urge the online goods
sellers who use the platform to perform the duties of "7-day Unconditional Return of Purchased Goods", conduct
supervisions and inspections, and provide technical support. This measure also encourages online goods sellers to make
a commitment of "unconditional return policy" that are more favorable to consumers than the Measures' requirements.
Fresh or perishable goods are inapplicable to the return policy. The online goods sellers who refuse the returning of
goods in violation of the provisions, shall, in addition to bearing the corresponding civil liability, be ordered by the
administration for industry and commerce or other relevant administrative authorities to make correction, and may be
subject to warning and/or confiscation of illegal income, a fine ranging from one to 10 times the amount of illegal
income based on the circumstances, where there is no illegal income, a fine of not more than RMB500,000; in serious
cases, the business operator shall be ordered to suspend business operation for correction and its business license shall
be revoked.
We are subject to the Product Quality Law, the Consumer Protection Law and the Provisional Measures for
7-day Unconditional Return of Online Purchased Goods as an online supplier of commodities and a provider of online
marketplace platform and believe that we are currently in compliance with these regulations in all material aspects.
Regulations Relating to Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government.
According to the Pricing Law, business operators must, as required by the government departments in charge of pricing,
mark the prices explicitly and indicate the name, origin of production, specifications, and other related particulars
clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated.
Business operators must not commit the specified unlawful pricing activities, such as colluding with others to
manipulate the market price, using false or misleading prices to deceive consumers to transact, or conducting price
discrimination against other business operators. Failure to comply with the Pricing Law may subject business operators
to administrative sanctions such as warning, ceasing unlawful activities, compensation, confiscating illegal gains, fines.
The business operators may be ordered to suspend business for rectification, or have their business licenses revoked if
the circumstances are severe. We are subject to the Pricing Law as an online retailer and believe that our pricing
activities are currently in compliance with the law in all material aspects.
Regulations Relating to Leasing
Pursuant to the Law on Administration of Urban Real Estate, when leasing premises, the lessor and lessee are
required to enter into a written lease contract, containing such provisions as the leasing term, use of the premises, rental
and repair liabilities, and other rights and obligations of both parties. Both lessor and lessee are also required to register
the lease with the real estate administration department. If the lessor and lessee fail to go through the registration
procedures, both lessor and lessee may be subject to fines.
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According to the PRC Contract Law, the lessee may sublease the leased premises to a third party, subject to the
consent of the lessor. Where the lessee subleases the premises, the lease contract between the lessee and the lessor
remains valid. The lessor is entitled to terminate the lease contract if the lessee subleases the premises without the
consent of the lessor. In addition, if the lessor transfers the premises, the lease contract between the lessee and the lessor
will still remain valid.
Pursuant to the PRC Property Law, if a mortgagor leases the mortgaged property before the mortgage contract
is executed, the previously established leasehold interest will not be affected by the subsequent mortgage; and where a
mortgagor leases the mortgaged property after the creation and registration of the mortgage interest, the leasehold
interest will be subordinated to the registered mortgage.
Regulations Relating to Intellectual Property Rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights,
patents, trademarks and domain names.
Copyright. Pursuant to the Copyright Law and its implementation rules, creators of protected works enjoy
personal and property rights, including, among others, the right of disseminating the works through information
networks. Pursuant to the relevant PRC regulations, rules and interpretations, internet service providers will be jointly
liable with the infringer if they (a) participate in, assist in or abet infringing activities committed by any other person
through the internet, (b) are or should be aware of the infringing activities committed by their website users through the
internet, or (c) fail to remove infringing content or take other action to eliminate infringing consequences after receiving
a warning with evidence of such infringing activities from the copyright holder. In addition, where an ICP service
operator is clearly aware of the infringement of certain content against another’s copyright through the internet, or fails
to take measures to remove relevant contents upon receipt of the copyright owner’s notice, and as a result, it damages
the public interest, the ICP service operator could be ordered to stop the tortious act and be subject to other
administrative penalties such as confiscation of illegal income and fines. To comply with these laws and regulations, we
have implemented internal procedures to monitor and review the content we have licensed from content providers before
they are released on our website and remove any infringing content promptly after we receive notice of infringement
from the legitimate rights holder.
Trademark. The Trademark Law and its implementation rules protect registered trademarks. The PRC
Trademark Office of State Administration of Industry and Commerce is responsible for the registration and
administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with
respect to trademark registration. As of December 31, 2017, we had approximately 72 trademark applications in China.
Domain Name. Domain names are protected under the Administrative Measures on the Internet Domain
Names promulgated by the MIIT on November 1, 2017. The MIIT is the major regulatory body responsible for the
administration of the PRC internet domain names, under supervision of which the CNNIC is responsible for the daily
administration of .cn domain names and Chinese domain names. CNNIC adopts the “first to file” principle with respect
to the registration of domain names. We have registered www.ccjoin.com and other domain names.
On November 27, 2017, the MITT issued the Notice of the Ministry of Industry and Information Technology
on Regulating the Use of Domain Names in Providing Internet-based Information Services. Pursuant to this notice,
internet access service providers shall, via the Record-filing System, regularly check the use of domain names by
Internet-based information service providers, and shall, in the case that a domain name does not exist or is expired or has
no real identity information, cease the provision of access services for the Internet-based information service provider
concerned. Therefore, we have to extend the expiration of the www.ccjoin.com and other domain names to avoid to be
ceased to the access services,
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Regulations Relating to Employment
The Labor Contract Law and its implementation rules provide requirements concerning employment contracts
between an employer and its employees. If an employer fails to enter into a written employment contract with an
employee within one year from the date on which the employment relationship is established, the employer must rectify
the situation by entering into a written employment contract with the employee and pay the employee twice the
employee’s salary for the period from the day following the lapse of one month from the date of establishment of the
employment relationship to the day prior to the execution of the written employment contract. The Labor Contract Law
and its implementation rules also require compensation to be paid upon certain terminations, which significantly affects
the cost of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision
with an employee in an employment contract or non-competition agreement, it has to compensate the employee on a
monthly basis during the term of the restriction period after the termination or ending of the labor contract. Employers in
most cases are also required to provide a severance payment to their employees after their employment relationships are
terminated.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans,
including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a
work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the
plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees
as specified by the local government from time to time at locations where they operate their businesses or where they are
located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be
ordered to pay the required contributions within a stipulated deadline and be subject to a late fee. If the employer still
fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine
ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an
enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the
required contributions within a stipulated deadline; otherwise, an application may be made to a local court for
compulsory enforcement. We have not made adequate contributions to employee benefit plans, as required by applicable
PRC laws and regulations.
Regulations Relating to Dividend Withholding Tax
Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set
up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived
has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-
sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special
Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in
respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard
rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the
State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements,
or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the
reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC
resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12
months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to
Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective in October 2009, require that
non-resident enterprises must obtain approval from the relevant tax authority in order to enjoy the reduced withholding
tax rate. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax
rules and regulations. In November 2015, the Administrative Measures for Non-Resident Enterprises to Enjoy
Treatments under Tax Treaties became effective and repealed the Trial Implementation. Pursuant to the new Measures,
non-resident taxpayers who satisfy the criteria for entitlement to tax treaty benefits may, at the time of tax declaration or
withholding declaration through a withholding agent, enjoy the tax treaty benefits, instead of being subject to approvals,
and be subject to follow-up administration by the tax authorities.
Pursuant to the Notice on Issues Relating to the Temporary Waiver for Withholding Income Tax for Overseas
Investors Using Distributed Profits for Direct Investments, or Circular 60, which became effective in January 2017,
where an overseas investor uses profits distributed by a resident enterprise in China for direct investment in an
encouraged investment project, deferred tax payment policy shall apply if the stipulated criteria is satisfied, and
withholding of income tax shall be waived in the interim.
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Accordingly, Join Me Group (HK) Investment Company Limited may be able to enjoy the 5% withholding tax
rate for the dividends it receives from Our WFOE, if it satisfies the conditions prescribed under Circular 81 and other
relevant tax rules and regulations, and the approvals are no longer needed. Furthermore, if it satisfies the criteria of
Circular 60, the withholding of income tax may be waived in the interim. However, according to Circular 81, if the
relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a
favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
Regulations Relating to Foreign Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange
Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations,
payments of current account items, such as profit distributions and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of
foreign currency-denominated loans.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of
the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or
SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital
into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital
converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable government authority and may not be used for equity investments within
the PRC. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s
approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not
been used. In March 2015, SAFE issued SAFE Circular No.19, which took effect and replaced SAFE Circular No. 142
from June 1, 2015. Although SAFE Circular No.19 allows for the use of RMB converted from the foreign currency-
denominated capital for equity investments in the PRC, the restrictions continue to apply as to foreign-invested
enterprises’ use of the converted RMB for purposes beyond the business scope, for entrusted loans or for inter-company
RMB loans.
In November 2012, SAFE promulgated the Circular on Further Improving and Adjusting Foreign Exchange
Administration Policies on Foreign Direct Investment, and amended it in May 2015, which substantially amends and
simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose
foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee
account), the reinvestment of lawful incomes derived by foreign investors in the PRC (e.g. profit, proceeds of equity
transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign
exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise
no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different
provinces, which was not possible before. In addition, SAFE promulgated the Circular on Printing and Distributing the
Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the
Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE
and its branches.
In February 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies
Concerning Foreign Exchange Control on Direct Investment, or SAFE Circular No. 13, which took effect on June 1,
2015. SAFE Circular No. 13 delegates the authority to enforce the foreign exchange registration in connection with the
inbound and outbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the
foreign exchange registration procedures for inbound and outbound direct investment.
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C.
Organizational Structure.
The following diagram illustrates our corporate structure as of the date of this annual report.
(1) The shareholder of Our VIE is Shanghai Zhongmin Investment and Development Group Co., Ltd. (formerly known
as Shanghai Zhongmin Investment and Development Co., Ltd.), the shareholders of which in turn are Ms. Xiaoxia
Zhu, our co-chairperson and chief executive officer, and Ms. Huimin Wang, our director, holding 48.75% equity
interests each.
Contractual Arrangements with Our Consolidated Affiliated Entity
Agreements that Transfers Economic Benefits and Risks to the Us
Master Exclusive Service Agreement and Business Cooperation Agreement. Pursuant to the Master Exclusive
Service Agreement and Business Cooperation Agreement, Our VIE, including its subsidiaries or any companies or
entities under its control, agrees to engage Our WFOE as its provider for technical and business support services. Our
VIE will pay Our WFOE service fees determined based on the audited consolidated net profit of Our VIE. Our WFOE
will exclusively own any intellectual property arising from the performance of the services set forth in the agreement.
Our WFOE will provide financial support to Our VIE in the form of bank loans or others forms as permitted under the
PRC laws. The service agreements will remain effective upon the written confirmation issued by Our WFOE to Our VIE
and/or its shareholder 30 days before the termination. Neither Our VIE nor its shareholder has the right to unilaterally
terminate the agreement.
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In connection with the master service agreement, we also entered into financial support undertaking letter with
Our VIE and agrees to provide unlimited financial support to the Our VIE, to the extent permissible under the applicable
PRC laws and regulations, whether or not any such operational loss is actually incurred. We will not request repayment
of the loans or borrowings if the Our VIE or its shareholder do not have sufficient funds or are otherwise unable to
repay.
Agreements that Provide Us with Effective Control over Our VIE
Foreign investment in internet companies is currently subject to significant restrictions under PRC laws and
regulations. As a Cayman Islands holding company, we do not qualify to conduct these businesses under PRC
regulations. In addition, foreign investment in the online service industry requires the foreign investor to possess certain
qualifications, which we do not have, and our PRC subsidiary, Our WFOE, is considered a foreign-invested enterprise
which is restricted from holding the licenses that are essential to the operation of our business, such as licenses for
operating our website. As a result, Our WFOE has entered into a series of contractual arrangements with Our VIE and its
shareholder described below, through which we exercise effective control over the operations of Our VIE and its
subsidiaries. We conduct our operations in China principally through Our VIE and its subsidiaries, which we treated as
our consolidated affiliated entities in China. Each of the contractual arrangements between Our WFOE, Our VIE and its
shareholder was executed in May 2015. These contractual arrangements enable us to exercise effective control over
these entities and receive substantially all of the economic benefits from them.
Equity Interest Pledge Agreement. Our VIE’s shareholder has entered into an equity pledge agreement with the
Our WFOE, under which the shareholder pledged all of the equity interests in Our VIE to Our WFOE as collateral to
secure performance of all obligations under the Master Exclusive Service Agreement, Business Cooperation Agreement,
Proxy Agreement and Power of Attorney and the Exclusive Option Agreement (collectively, the "Principal
Agreement"). Pursuant to this Equity Interest Pledge Agreement, dividends generated by the pledged equity interests
shall be deposited into the account designated by the Our WFOE and shall be used to pay the secured indebtedness prior
and in preference to any other payment during the term of the pledge. If any event of default incurred under the Principal
Agreement, Our WFOE, as the pledgee, will be entitled to dispose of the pledged equity interests and shall be paid in
priority with the proceeds recovered from the disposal.
Proxy and Power of Attorney Agreement. Our VIE’s shareholder has signed an Irrevocable Proxy and Power Of
Attorney Agreement to appoint Our WFOE, or its designee, as the attorney-in-fact to act on Our VIE’s shareholder's
behalf on all rights that the shareholder has in respect of such shareholder's equity interest in Our VIE conferred by
relevant laws and regulations and the articles of association of Our VIE. The rights include but not limited to attending
shareholders meeting, exercising voting rights and transferring all or a part of the equity interests of Our VIE held by the
shareholder. The proxy and power of attorney will remain effective upon written confirmation issued by Our WFOE to
Our VIE and its shareholder 30 days before the termination. Neither Our VIE nor its Shareholder has the right to
unilaterally terminate the agreement.
Exclusive Option Agreement. Our VIE’s shareholder has entered into an Exclusive Option Agreement with Our
WFOE, pursuant to which Our WFOE has an exclusive option to purchase, or to designate other persons to purchase, to
the extent permitted by applicable PRC laws, rules and regulations, all of the equity interest in Our VIE from the
shareholder. The purchase price for the entire equity interest is to be the minimum price permitted by applicable PRC
laws and administrative regulations. If there is no minimum price under PRC laws or administrative regulations, the
price shall be determined by the Our WFOE or on a basis of the registered capital of Our VIE. The term of the exclusive
option agreement will remain effective upon written confirmation issued by the Our WFOE to Our VIE and its
shareholder 30 days before the termination. Neither Our VIE nor its shareholder has the right to unilaterally terminate
the agreement.
We have been advised by our PRC legal counsel, Beijing Dentons Law Offices, LLP, that the ownership
structure and the contractual arrangements among Our WFOE, Our VIE and its shareholder will not result in any
violation of PRC laws or regulations currently in effect. However, we have been further advised by our PRC legal
counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC
laws, rules and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not take a
view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. Our PRC legal counsel
has further advised that if the PRC government authority finds that our corporate structure, the contractual arrangements
or the reorganization to establish our current corporate structure do not comply with any applicable PRC laws, rules or
regulations, the contractual arrangements will become invalid or unenforceable, and we could be subject to severe
penalties including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Corporate Structure— If the PRC government finds that the agreements that establish the structure
for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in
internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be
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subject to severe penalties or be forced to relinquish our interests in those operations” and “Item 3. Key Information—D.
Risk Factors—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could
have an adverse effect on us”.
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D.
Property, plants and equipment.
Our executive offices are located at North Guoquan Road 1688 Long, No. 75, Building A8, 6F, Yangpu
District, Shanghai 200438, China and occupy a total of 9,104 square meters. The lease of our headquarter office has a
term of 15 years.
The servers that we use to provide our products and services are primarily maintained at China Telecom and
China Unicom branches in cities across China, including Shanghai and Kunshan.
Item 4A.
Unresolved Staff Comments
Not applicable.
Item 5.
Operating and Financial Review and Prospects
A.
Operating results.
Overview
We currently operate an online platform for providing B2B services to food-industry suppliers and customers in
China. We acquired this business in a merger with JMU HK, in June 2015. Our B2B online platform recorded gross
billing of RMB16 billion (US$2.5 billion) in 2017, measured in terms of the gross merchandise value.
We incurred losses from operations of US$105.9 million, US$27.6 million and US$168.4 million for the years
ended December 31, 2015, 2016 and 2017, respectively. Our loss from operations for the year ended December 31, 2015
was mainly due to goodwill impairment of US$85.9 million as well as the incurrence of general and administrative
expenses of US$12.9 million related to our current B2B business. Our loss from operations for the year ended December
2016 was mainly due to the incurrence of selling and marketing expenses of US$20.4 million related to our current B2B
business. Our loss from operations for the year ended December 2017 was mainly due to impairment for goodwill and
long-lived assets of US$127.3 million and US$19.8 million, respectively, as well as the incurrence of selling and
marketing expenses of US$15.2 million related to our current B2B business.
Factors Affecting Our Results of Operations
Besides the operating metrics that directly affect our revenues, there are a number of factors that affect our
results of operations, including:
Continued growth of China’s economy and food service industry in general. Our results of operations and
financial condition are affected by the general factors driving China’s food industry, including levels of procurement
spending by restaurants in China. In addition, they are also affected by factors driving online B2B business in China,
such as the adoption of online procurement strategies by restaurants or adoption of online sales strategies by suppliers,
the availability of improved delivery services and the increasing variety of payment options. Our results of operations
are also affected by general economic conditions in China. In particular, we have experienced and expect to continue to
experience upward pressure on our operating expenses.
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Competitive pressure. We operate in a highly competitive market. We compete with a number of other
e-commerce service providers that have significant capital and human resources, some of which have also launched
initiatives in direct competition with our business. The terms and conditions we offer our suppliers and customers are
affected by our competitors’ strategies, which, as a result, affect our cost of operation. The competition also has a direct
effect on our ability to retain existing customers and attract new customers.
Marketing expense. We engage in a variety of different online marketing efforts tailored to our targeted
customers and suppliers to expand our customer and supplier base. Expenses incurred for marketing and other
promotional efforts may have a negative impact on our profitability, if they prove to be ineffective and do not expand
our customer base as intended.
Seasonality. We believe that we experience seasonality in our business that reflects seasonal fluctuations in
purchase patterns for food services businesses. In general, the fourth quarter is the high season for the food service
industry in China, and consequently we expect the purchases on our B2B platform to be higher in the fourth quarter of
each year compared to the first three. However, due to our limited operating history, the seasonal trends that we
experience in the future may not match our expectations.
While our business is influenced by general factors affecting our industry, our operating results are more
directly affected by company specific factors, including the following major factors:
∂
∂
∂
our ability to increase customer accounts and orders from customers;
our ability to manage our mix of product and service offerings;
our ability to further increase and leverage our scale of business.
Our Ability to Increase Customer Accounts and Orders from Customers
Growth in the number of our customer accounts and orders are key drivers of our revenue growth. The B2B
business for food service industry that we are currently operating was only started in late 2014, and in 2017 we had more
than 33,020 customer accounts. Gross billing on our online B2B platform reached RMB16 billion (US$2.5 billion) in
2017, measured in terms of the gross merchandise value.
Our ability to attract new customer accounts and new orders from existing customer accounts depends on our
ability to provide superior customer experience. To this end, we offer a wide selection of products at competitive prices
on our website and mobile applications and provide speedy and reliable delivery, convenient payment options and
comprehensive customer services. We have benefited from word-of-mouth viral marketing in winning new customers,
and we also conduct online and offline marketing and brand promotion activities to attract new customers. In addition,
we encourage existing customers to place more orders with us through a variety of means, including loyalty points.
Our Ability to Manage Our Mix of Product Offerings
Our results of operations are also affected by the mix of products we offer. We commenced our B2B business
for food service industry with sales to restaurants. We are gradually expanding our offerings to hotel-related products.
The extent and mix of products we provided will influence our users’ willingness to utilize our online platform for more
of their needs. In addition, our mix of products also affects our gross margin, as different products have different gross
margins.
Our Ability to Further Increase and Leverage our Scale of Business
Our results of operations are directly affected by our ability to further increase and leverage our scale of
business. As our business further grows in scale, we expect to obtain more favorable terms from our suppliers, including
pricing terms and volume-based rebates. In addition, we aim to create value for our suppliers by providing an effective
channel for selling large volumes of their products online and by offering them comprehensive information on customer
preferences and market demand and ensuring the high quality of storage and delivery services. We believe this value
proposition also helps us obtain favorable terms from suppliers.
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Currently we are selling products in our direct sales business at low margin, and we are not charging any
commission or service fees for third-party sellers to use our platform. There is no assurance that we can keep the
expansion of our B2B business at the current pace after we start to apply higher margins to transactions in our direct sale
business and charge commission or service fees to third-party sellers. Our ability to leverage our scale of business to
induce our platform users to continue using our services with margins and service charges is one key factor affecting our
future operational and financial performance.
Revenues
We derive our revenues from direct sales and online platform services. We record revenue from online direct
sales on a gross basis and revenue from the online platform services that we provide to third-party sellers and purchasers
for their transactions on a net basis. Revenue is recorded net of surcharges and value-added tax, or VAT, and related
surcharges.
Our revenues were US$11.5, US$73.2 and US$88.7 million for the years ended December 31, 2015, 2016 and
2017, respectively.
Cost of Revenues
Our cost of revenues are direct and indirect costs incurred to generate revenues, and acquiring the products that
we sell directly and the overhead expenses incurred for IT personnel, as well as inventory write-downs. The rebates and
subsidies we receive from suppliers are accounted as a reduction to the purchase price and will be recorded as a
reduction of cost of revenues when the product is sold.
Our cost of revenues was US$13.2, US$72.9 and US$88.2 million for the years ended December 31, 2015,
2016 and 2017, respectively.
Operating Expenses
The following table sets forth our operating expenses by the amount and as a percentage of total operating
expenses for the periods indicated:
Operating Expenses
Selling and marketing
General and administrative
Impairment loss
Total operating expenses
2015
For the year ended December 31
2016
2017
US$
%
US$
%
US$
%
5,360,044
12,911,773
85,934,770
104,206,587
5.1% 20,405,602
12.4% 7,530,851
82.5%
—
100% 27,936,453
73.0% 15,206,658
27.0% 6,696,601
0.0% 147,018,425
100% 168,921,684
9.0%
4.0%
87.0%
100%
Our operating expenses consist of selling and marketing expenses and general and administrative expenses as
well as impairment loss. Our total operating expenses were US$104.2 million, US$27.9 and US$168.9 million for the
years ended December 31, 2015, 2016 and 2017, respectively.
Selling and marketing expenses
Our selling and marketing expenses primarily consist of expenses incurred in connection with advertisements
and market promotion events, loyalty program, as well as other overhead expenses incurred for our sales and marketing
personnel.
Our selling and marketing expenses were US$5.4, US$20.4 and US$15.2 million for the years ended December
31, 2015, 2016 and 2017, respectively.
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General and administrative expenses
Our general and administrative expenses primarily consist of:
∂
∂
∂
salaries and benefits for employees, which are the salaries and benefits for our management, merchant
service representatives and general administrative staff;
share-based compensation to employees, which is the expense incurred in connection with the grant of
share options and RSUs to our directors, officers and other employees pursuant to our share incentive plan;
and
office expenses, which consist primarily of office rental, maintenance and utilities expenses, depreciation
of office equipment and other office expenses.
Our general and administrative expenses were US$12.9, US$7.5 and US$6.7 million, for the years ended December 31,
2015, 2016 and 2017, respectively.
Taxation
We are incorporated in the Cayman Islands. Under Cayman Islands law, we are not subject to income or capital
gains tax.
Our subsidiary incorporated in the Cayman Islands is not subject to income or capital gains tax in the Cayman
Islands, and dividend payments by this subsidiary to us are not subject to withholding tax in the Cayman Islands.
Our subsidiary in Hong Kong is subject to a profit tax at the rate of 16.5% on assessable profit determined
under relevant Hong Kong tax regulations. Dividend payments by this subsidiary to us are not subject to withholding tax
in Hong Kong.
Our subsidiary and our consolidated variable interest entities in China are subject to value-added tax, or VAT,
at rates of either 17% or 13%. In addition, they are generally subject to the standard enterprise income tax in China at a
rate of 25%.
Under the Enterprise Income Tax Law and its implementation regulations, a 10% PRC income tax is applicable
to dividends payable to investors that are “non-resident enterprises,” enterprises that do not have an establishment or
place of business in the PRC, to the extent such dividends have their sources within the PRC. Such dividends are also
subject to the 10% tax even if the recipient has an establishment or place of business in the PRC if the relevant income is
not effectively connected with the establishment or place of business. Under a special arrangement between China and
Hong Kong, dividends from our PRC subsidiary paid to our Hong Kong subsidiary, which would otherwise be subject to
a 10% withholding tax, may be subject to a 5% preferential withholding tax if our Hong Kong subsidiary can be
considered as a “beneficial owner” of our PRC subsidiary and is otherwise entitled to the benefits under the special
arrangement. The State Administration for Taxation promulgated the Notice Regarding Interpretation and Recognition
of Beneficial Owners under Tax Treaties on October 27, 2009, which provides guidance on the determination of
“beneficial owner”. If our Hong Kong subsidiary is not considered to be the “beneficial owner” of our PRC subsidiary
under this notice, any dividends paid by our PRC subsidiary to our Hong Kong subsidiary would be subject to
withholding tax at a rate of 10%.
If our Cayman Islands holding company or our Hong Kong subsidiary is deemed to be a “resident enterprise”
under the Enterprise Income Tax Law, then it is not clear whether or how the PRC tax authorities would apply the PRC
tax on dividends payable by our PRC subsidiary to our Hong Kong subsidiary or by our Hong Kong subsidiary to us.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Under the PRC
enterprise income tax law, we could be classified as a ‘resident enterprise’ of China. Such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders.”
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Provision for Income Tax Benefit
We are subject to PRC Enterprise Income Tax Law on taxable income in accordance with the relevant PRC income tax
laws. We incurred net losses of US$93.6 million, US$25.3 million and US$161.9 million for the years ended December
31, 2015, 2016 and 2017, respectively. Our provision for income tax benefit were US$1.2 million, US$2.2 and US$6.9
million for the years ended December 31, 2015, 2016 and 2017, respectively.
Critical Accounting Policies
The preparation of our consolidated financial statements and related notes requires us to make judgments,
estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related
disclosure of contingent assets and liabilities. We have based our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our
management has discussed the development, selection and disclosure of these estimates with our board of directors.
Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is
considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or
changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements.
We believe that the following critical accounting policies are the most sensitive and require more significant
estimates and assumptions used in the preparation of our consolidated financial statements.
You should read the following descriptions of critical accounting policies, judgments and estimates in
conjunction with our consolidated financial statements and other disclosures included in this annual report.
Revenue Recognition
We recognize revenue from the sales of rice, flavoring, oil, seafood, wine and other types of generic food and
beverage products through our online platform www.ccjoin.com. The website also serves as an online platform to
connect third party vendors and customers. We recognize revenue when the following four revenue recognition criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii)
the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
We recognize revenue when the customers confirm the acceptance of the goods once they receive the delivered
goods. The sales returns are considered and estimated when the related revenue is recognized.
Revenue is recorded net of surcharges and value-added tax ("VAT") and related surcharges.
We primarily generate revenue from online direct sales and online platform services.
Online direct sales
We primarily sell rice, flavoring, oil, seafood, wine and other products relating to catering and hotel industries
through online direct sales. There is a separate channel on our online platform designated for our online direct sales, and
we record revenue from online direct sales on a gross basis as we act as the principal in these arrangements: we are the
primary obligor in the sales arrangements, have latitude in establishing prices and have discretion in suppliers' selection.
On certain transactions, we also retain some of general inventory risk and physical inventory loss risk.
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Online platform services
We also provide the online platform services to connect third-party sellers and purchasers for their transactions
via our online marketplace. Online platform sales are made from the online stores under the third-party sellers’ names,
and we record the related revenue on a net basis as we act as the agent in these arrangements: we are not the primary
obligor, do not bear inventory risk, and do not have the ability to establish the price or discretion in supplier selection.
For the years ended December 31, 2016 and 2017, revenues related to the online platform services were nil, as we did
not charge any service fees to the third-party sellers and purchasers.
Impairment of Goodwill and Long-lived Assets
Goodwill represents the cost of an acquired business in excess of the fair value of tangible and identifiable
intangible net assets purchased. We seek the assistance of an independent valuation firm in determining the fair value of
the identifiable intangible net assets of the acquired business. We assign all the assets and liabilities of an acquired
business, including goodwill, to reporting units.
Some of the significant estimates and assumptions inherent in the discounted cash flow, or DCF method or
other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the
risks inherent in the future cash flows and the assessment of the asset’s economic life cycle and the competitive trends
impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have
different useful lives.
Specifically, the income approach involves applying appropriate discount rates to estimated cash flows that are
based on earnings forecasts developed by us. The financial projections used in deriving the fair values of intangible
assets were consistent with our business plan. However, these assumptions were inherently uncertain and highly
subjective. These assumptions include: no material changes in the existing political, legal and economic conditions in
China; no major changes in the tax rates applicable to our subsidiaries and consolidated affiliated entities in China; our
ability to retain competent management, key personnel and staff to support our ongoing operations; and no material
deviation in market conditions from economic forecasts.
Goodwill is tested for impairment at least once annually or more frequently if we believe indications of
impairment exist. Impairment is tested using a two-step process. The first step compares the fair value of each reporting
unit to its carrying amount, including goodwill. We currently have one reporting unit, which recorded goodwill in
relation to the acquisition of JMU HK in June 2015.
If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired
and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value
of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair
value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An
impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
Estimating the fair value of reporting unit is performed by the DCF method.
For the years ended 2013 and 2014 and through the date of completion of the merger with JMU, we had one
reporting unit, the group buying business. We estimated that there was no impairment of goodwill as of December 31,
2013 and 2014 as the fair value of the reporting unit exceeded the carrying amount.
After the divestiture of the group buying business, we had one reporting unit, our B2B business for the food
service industry. We performed the annual impairment test on December 31, 2015, 2016 and 2017 by applying the DCF
method. The fair value was determined using models with significant unobservable inputs (Level 3 inputs), which
primarily included management projections on the discounted future cash flow analysis including the discount rate using
a weighted average cost of capital of 18.0% (2016: 17.5%, 2015:17.0%) and expected revenue growth rates. The
estimated fair value of the reporting unit was below the carrying amount of our net assets. We recognized an impairment
loss of US$85.9 million, nil and US$127.3 million for the years ended December 31, 2015, 2016 and 2017, respectively.
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We estimated the fair values of the intangible assets with the assistance from an independent third-party
appraiser. We are ultimately responsible for the determination of all amounts related to the intangible assets recorded in
the financial statements.
Acquired intangible assets are amortized over their useful lives. Useful lives are based on our management’s
estimates of the period that the assets will generate revenue. We amortize intangible assets with determinable useful
lives on a straight-line basis. We evaluate intangible assets with determinable useful lives for recoverability whenever
events or changes in circumstances indicate that their carrying amounts may not be recoverable. We measure
recoverability of long-lived assets to be held and used as part of an asset group by comparing the carrying amount of an
asset to the future undiscounted net cash flows expected to be generated by the asset. If we believe the assets are
impaired, the impairment will equal the amount by which the carrying value of the assets exceeds the fair value of the
assets.
Considering that we have incurred operating losses, we have determined to perform the annual impairment tests
on acquired intangible assets on December 31 of each year. As a result of the annual impairment test, impairment loss of
nil, nil and US$19.8 million for acquired intangible assets was recognized during the year ended December 31, 2015,
2016 and 2017, respectively. Estimates of fair value involve a complex series of judgments about future events and
uncertainties and rely heavily on estimates and assumptions. Our judgments in determining an estimate of fair value can
materially impact our results of operations. We base these valuations on information available as of the impairment
review date and on expectations and assumptions that management deems reasonable. Any changes in key assumptions,
including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could
potentially result in impairment charges.
Income Taxes
We follow the liability method in accounting for income taxes in accordance with ASC topic 740 (“ASC 740”),
Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. We record a valuation allowance against deferred tax assets if, based on
the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be
realized.
We apply the provision of ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet
before being recognized in the consolidated financial statements.
We have elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as
part of income tax expense in the consolidated statements of operations.
Share-based payments
Share-based payment awards with employees are measured based on the grant date fair value of the equity
instrument issued, and recognized as compensation costs using the straight-line method over the requisite service period,
which is generally the vesting period of the options, with a corresponding impact reflected in additional paid-in capital.
For share-based payment awards with market conditions, such market conditions are included in the determination of the
estimated grant-date fair value. In the second quarter of 2017, we elected to early adopt ASU No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting, to
account for forfeitures as they occur. The cumulative-effect adjustment to accumulated deficits was nil as a result of the
adoption of ASU 2016-09.
A change in any of the terms or conditions of share-based payment awards is accounted for as a modification of
awards. The Company measures the incremental compensation cost of a modification as the excess of the fair value of
the modified awards over the fair value of the original awards immediately before its terms are modified, based on the
share price and other pertinent factors at the modification date. For vested awards, the Company recognizes incremental
compensation cost in the period the modification occurred. For unvested awards, the Company recognizes, over the
remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized
compensation cost for the original award on the modification date.
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Fair Value of Our Ordinary Shares and Share-Based Compensation
Since our initial public offering in April 2015, the determination of the fair value of the ordinary shares has
been based on the market price of our ADSs, each representing 18 ordinary shares, traded on the Nasdaq Global Market.
The following table sets forth certain information regarding the share options granted to our employees at
different dates in the past three fiscal years prior to December 31, 2017:
Grant/Re-
measurement
date
Type of award
July 27, 2015 Employee restricted
share units
July 1, 2016 Share option granted to
executives
July 1, 2016 Share option granted to
staffs
July 1, 2016 Employee restricted
Number of
awards Exercise price
Fair value of
ordinary
share
Intrinsic value Type of valuation
Contemporaneous
28,841,700
N/A US$ 0.2650 US$ 7,643,050
11,633,400 US$
0.20 US$ 0.1196 US$
20,395,300 US$
0.20 US$ 0.0945 US$
-
-
Contemporaneous
Contemporaneous
Contemporaneous
share units
10,430,000
N/A US$ 0.1328 US$ 1,385,202
In determining the value of share options to employees, we have used the binomial option-pricing model, with
assistance from the independent third-party appraiser. Under this option pricing model, certain assumptions, including
risk-free interest rate, the contractual life of the options, the expected dividends on the underlying ordinary shares, the
expected volatility of the price of the underlying shares for the contractual life of the options, the post-vesting forfeiture
rate and the expected exercise multiple are required in order to determine the fair value of our options. Changes in these
assumptions could significantly affect the fair value of share options and hence the amount of compensation expense we
recognize in our consolidated financial statements.
In determining the value of ordinary shares to directors and executives, we have considered the fair value of the
ordinary share and the expected dividend paid-out ratio. Because we have no plan to pay dividend, the fair value of the
share granted to directors and executives is the fair value of the ordinary share.
The key assumptions used in the valuation of the employee share options are summarized in the following
table:
Risk-free rate of return(1)
Contractual life of the options(2)
Volatility(3)
Expected dividend yield(4)
Post-vesting forfeiture rate(5)
Exercise multiple(6)
Modification on
September 1,
2015
Grants on
July 1,
2016
Modification on
June 20, 2017
0.47% - 0.88%
5.0 years
60% - 65%
0%
N/A
3x / 2x
1.46%
10 years
54.78%
0%
36.1%
3x / 2x
1.25%
5.0 years
41%
0%
N/A
3x / 2x
(1) The risk-free rate of return is based on the yield curve of USD China Sovereign Bonds as of the valuation dates as
extracted from Bloomberg.
(2) The contractual life of the options is based on the option grant letter.
(3) The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical
stock price volatility of listed guideline companies over a period comparable to the contractual life of the options.
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(4) We estimate the dividend yield based on our expected dividend policy over the expected term of the options.
(5) The post-vesting forfeiture rate applied to options granted to general staff was based on our historical statistical
data. 0% was applied to options granted to executive management with expectation that the executive management
will not quit from the company over the contractual life of the options.
(6) Exercise multiple is the ratio of the fair value of a share over the exercise price at the time which the option will be
exercised, estimated based on a consideration of research study regarding exercise pattern from historical statistical
data. A multiple of three was used for the executive management and a multiple of two was used for general staff.
Loyalty program
In 2016, we launched a customer loyalty program to certain qualified customers, who can earn customer credits
from purchases if their annual spending with us exceeds RMB10 million. In 2017, we announced our revised customer
loyalty program to certain qualified customers for granting customer credits only if their annual spending with the Group
exceeds RMB100 million. The customers can redeem the earned credits for gift merchandise, and we account for such
credits by recording a liability and corresponding selling expenses for the estimated incremental cost of outstanding
credits earned that are expected to be redeemed.
During 2016, we negotiated a settlement of earned loyalty credits with 13 of our customers in our ordinary
shares. As part of the settlement, we agreed to issue 4.42 million of our ordinary shares, and recognized US$1,377,503
in paid-in capital and selling expenses based on the grant date fair value of the ordinary shares. We are not legally
obligated or expect to continue the redemption of the credits for the ordinary shares in the future.
Recent Accounting Pronouncements
Please see Note 3 to our consolidated financial statements included elsewhere in this annual report.
Results of Operations
The following table presents selected financial data from our consolidated statements of operations for the
periods indicated.
2015
For the year ended December 31,
2016
(US$ in thousands)
2017
Consolidated statements of operations data
Revenues
Related parties
Third parties
Cost of revenues
Gross (loss) / profit
Operating expenses:
Selling and marketing
General and administrative
Impairment loss
Total operating expenses
Loss from operations
Interest income/(expense), net
Other income, net
Loss before provision for income tax
Income tax benefits
Loss from continuing operations
Discontinued operations:
Income from discontinued operations
Provision for income tax benefits
Income from discontinued operations, net of tax
542
10,935
(13,220)
(1,743)
(5,360)
(12,911)
(85,935)
(104,206)
(105,949)
7
46
(105,896)
1,250
(104,646)
11,076
—
11,076
10,078
63,123
(72,857)
344
(20,405)
(7,531)
—
(27,936)
(27,592)
26
39
(27,527)
2,234
(25,293)
—
—
—
17,485
71,251
(88,187)
549
(15,207)
(6,697)
(147,018)
(168,922)
(168,373)
(411)
28
(168,756)
6,857
(161,899)
—
—
—
Net loss
(93,570)
(25,293)
(161,899)
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Year ended December 31, 2017 compared to Year ended December 31, 2016
Revenues
Our revenues increased by 21% from US$73.2 million for the year ended December 31, 2016 to US$88.7
million for the year ended December 31, 2017. This increase was primarily due to the growing orders placed on our
platform, which was in turn as a result of the increase in the average number of orders placed by our customers.
Cost of revenues
Our cost of revenues increased by 21% from US$72.9 million for the year ended December 31, 2016 to
US$88.2 million for the year ended December 31, 2017, which was generally in line with the increase in revenue.
Total operating expenses
Our total operating expenses increased significantly by 505% from US$27.9 million for the year ended
December 31, 2016 to US$168.9 million for the year ended December 31, 2017. This change was primarily because we
incurred impairment of US$127.3 million and US$19.8 million for goodwill and long-lived assets in 2017, respectively.
Selling and marketing expenses
Our selling and marketing expenses decreased by 25% from US$20.4 million for the year ended December 31,
2016 to US$15.2 million for the year ended December 31, 2017. This decrease was mainly due to (i) a decrease of
US$4.2 million expense related to loyalty program and (ii) a decrease of US$0.6 million in the cost of advertisement
campaigns and promotions.
General and administrative expenses
Our general and administrative expenses decreased by 11% from US$7.5 million for the year ended December
31, 2016 to US$6.7 million for the year ended December 31, 2017, primarily due to the decrease of our consulting,
meeting and other administrative expenses by US$0.8 million.
Impairment
During the year ended December 31, 2017, we provided impairment loss of US$19.8 million for our long-lived
assets to write down their carrying amounts to their fair value, which was determined using models with significant
unobservable inputs and the cash flow projections based on past experience, actual results of operations and
management best estimates about future developments as well as certain market assumptions. No impairment loss was
provided for long-lived assets during the year ended December 31, 2016 based on our recoverability test.
We performed our annual impairment test for goodwill as of December 31, 2017 and accordingly, impairment
loss of US$127.3 million was recognized based on the excess in the carrying value of goodwill over the implied fair
value of goodwill. No impairment loss was recognized for goodwill during the year ended December 31, 2016 based on
our annual impairment test.
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Loss
As a result of the foregoing, our loss from continuing operations increased by 540% from US$25.3 million for
the year ended December 31, 2016 to US$161.9 million for the year ended December 31, 2017.
Year ended December 31, 2016 compared to Year ended December 31, 2015
Revenues
Our revenues increased by 538% from US$11.5 million for the year ended December 31, 2015 to US$73.2
million for the year ended December 31, 2016. This increase was primarily due to our rapid growth of business in 2016
as well as the fact that our revenue number for the fiscal year 2015 only contains the financial results since June 2015
when we acquired JMU HK.
Cost of revenues
Our cost of revenues increased by 451% from US$13.2 million for the year ended December 31, 2015 to
US$72.9 million for the year ended December 31, 2016. This increase was primarily due to our rapid growth of business
and generally in line with the increase in revenue. The increase rate of cost of revenues was lower than the increase rate
of revenues because we started to charge margins in our direct sales business in 2016 while we maintained zero margin
to attract customers in 2015.
Total operating expenses
Our total operating expenses decreased by 73% from US$104.2 million for the year ended December 31, 2015
to US$27.9 million for the year ended December 31, 2016. This change was primarily because we did not incur
impairment of goodwill in 2016 as compared to a charge of US$85.9 million in 2015.
Selling and marketing expenses
Our selling and marketing expenses increased by 278% from US$5.4 million for the year ended December 31,
2015 to US$20.4 million for the year ended December 31, 2016. This increase was due to (i) a US$4.3 million expense
related to the loyalty program, which we started in 2016, (ii) share-based compensation increased by US$0.7 million,
and (iii) an increase of US$8.6 million of amortization of intangible assets in 2016 compared to 2015. Our salaries to
sales personnel also increased US$1.5 million mainly because the salary expense for the fiscal year 2015 only contains
the expense incurred since June 2015 when we acquired JMU HK while the number for the fiscal year 2016 covers the
whole year 2016.
General and administrative expenses
Our general and administrative expenses decreased by 42% from US$12.9 million for the year ended December
31, 2015 to US$7.5 million for the year ended December 31, 2016, primarily because the fee paid to professional service
providers decreased US$4.1 million compared to 2015 when we had our initial public offering and several major
corporate transactions.
Loss
As a result of the foregoing, our loss from continuing operations decreased by 76% from US$104.6 million for
the year ended December 31, 2015 to US$25.3 million for the year ended December 31, 2016.
B.
Liquidity and Capital Resources.
We had US$11.2, US$2.6 and US$4.9 million in cash and cash equivalents as of December 31, 2015, 2016 and
2017, respectively.
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The following table sets forth a summary of our cash and cash equivalents inside and outside of the PRC as of
December 31, 2017:
Our VIE
PRC entities other than Our VIE
Entities inside of the PRC
Entities outside of the PRC
Total
Total cash and cash equivalents
(US$ in thousands)
4,785
24
4,809
103
4,912
We have incurred net losses and experienced negative cash flow from operating activities since our inception.
Our net losses were US$93.6, US$25.3 and US$161.9 million for the years ended December 31, 2015, 2016 and 2017,
respectively, and our net cash used in operating activities in these three years were US$33.5, US$5.8 and US$9.9
million, respectively. We believe that our current cash balance, anticipated cash flows from operations, and the financial
support obtained from Ms. Xiaoxia Zhu and Ms. Huimin Wang, two of our principal shareholders, will be sufficient to
meet our anticipated capital needs for the next 12 months from the date of this annual report. These commitments are
guaranteed by certain assets from Ms. Zhu and Ms. Wang. The funds, if and when called, shall be provided in cash as an
equity investment in our Company. This commitment is for an amount subject to our actual deficiency without any
limitation. In May 2017, we received a loan of RMB35.0 million (US$5.4 million) from Ms. Xiaoxia Zhu. In April
2018, we received additional loans of RMB50.0 million (US$7.9 million) and RMB20.0 million (US$3.2 million) from
Ms. Huimin Wang and Ms. Xiaoxia Zhu, respectively, to enable us to meet the working capital requirements to fund our
daily operations.
If there is any change in business conditions or other future developments, including any investments we may
decide to pursue, and if our existing cash balance and commitment from Ms. Xiaoxia Zhu and Ms. Huimin Wang are
insufficient to meet our requirements, we may also seek to sell additional equity securities or debt securities or borrow
from lending institutions. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all.
The sale of additional equity securities, including convertible debt securities, would dilute our earnings per share. The
incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could
result in operating and financial covenants that restrict our operations and our ability to pay dividends to our
shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and
prospects may suffer.
In the future, we may rely on dividends and other distributions on equity paid by our wholly-owned PRC
subsidiary for our cash and financing requirements. There are potential restrictions on the dividends and other
distributions by our PRC subsidiary. For instance, if our wholly-owned PRC subsidiary incurs debt on its own behalf in
the future, the instruments governing the debt could restrict its ability to pay dividends or make other distributions to us.
The PRC tax authorities may require us to adjust our taxable income under the contractual arrangements that Our WFOE
currently has in place with Our VIE in a way that could adversely affect the latter’s ability to pay dividends and other
distributions to us. In addition, under PRC laws and regulations, our wholly-owned PRC subsidiary, as a wholly foreign-
owned enterprise in the PRC, may only pay dividends out of its accumulated profits. Wholly foreign-owned enterprises
such as our wholly-owned PRC subsidiary are required to set aside at least 10% of their accumulated after-tax profits
each year, if any, to fund a statutory reserve fund, until the aggregate amount of such fund reaches 50% of their
respective registered capital. At their discretion, wholly foreign-owned enterprises may allocate a portion of their after-
tax profits to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable
as cash dividends. See “Item 3. Key Information—D. Risk factors—Risks Related to Our Corporate Structure and
Dependence on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other
distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we
might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an
adverse effect on our ability to conduct our business”. In addition, our investment made as registered capital and
additional paid-in capital of Our WFOE and Our VIE are also subject to restrictions in their distribution and transfer
according to the laws and regulations in China. Owing to the above, Our WFOE and Our VIE in China are restricted in
their ability to transfer their net assets to us in terms of cash dividends, loans or advances. As of December 31, 2017, the
restricted net assets of Our WFOE and Our VIE, which represents registered capital and additional paid-in capital, was
US$28.2 million. Any limitation on the ability of Our WFOE or our Hong Kong subsidiary, JMU HK, to pay dividends
or make other distributions to us could adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
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We are an offshore holding company conducting our operations in China through Our WFOE and Our VIE.
The functional and reporting currency of our company is US Dollars. The financial records of Our WFOE and Our VIE
located in the PRC are maintained in Renminbi. Fluctuation in the exchange rate between the Renminbi and other
foreign currency may affect our ability to inject capital in Our WFOE and Our VIE. We could lend to Our WFOE and
Our VIE, or we could make additional capital contributions to Our WFOE, or we could establish new PRC subsidiary
and make capital contributions to these new PRC subsidiary, or we could acquire offshore entities with business
operations in China in an offshore transaction. Most of these uses are subject to PRC regulations and approvals. For
example, loans by us to Our WFOE to finance its activities cannot exceed statutory limits and must be registered with
the local counterpart of SAFE. If we decide to finance Our WFOE by means of capital contributions, these capital
contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions imposed on
loans in foreign currencies extended to any PRC domestic companies, we are unlikely to lend money to Our VIE and its
subsidiaries which are PRC domestic companies. See “Item 3. Key Information—D. Risk factors—Risks Related to Our
Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—PRC regulation of loans to,
and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion
could limit our use of the proceeds we receive from our initial public offering to fund our expansion or operations”.
The following table sets forth a summary of our cash flows for the periods indicated:
2015
For the year ended December 31,
2016
(US$ in thousands)
2017
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes
Increase/(decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
Net cash used in operating activities
(33,531)
(11,896)
54,883
50
9,506
1,646
11,152
(5,826)
(2,581)
—
(140)
(8,547)
11,152
2,605
(9,874)
(741)
12,643
280
2,307
2,605
4,912
Net cash used in operating activities was US$9.9 million for the year ended December 31, 2017. We had a net
loss of US$161.9 million. The principal items accounting for the difference between our net loss and our net cash used
in operating activities were impairment loss of US$147.0 million, depreciation and amortization of US$8.6 million and a
decrease of prepaid expenses and other current assets of US$6.2 million, partially offset by a decrease of accrued
expenses and other current liabilities of US$0.9 million, income tax benefits of US$6.9 million and an increase of
amount due from related parties of US$2.7 million.
Net cash used in operating activities was US$5.8 million for the year ended December 31, 2016. We had a net
loss of US$25.3 million. The principal items accounting for the difference between our net loss and our net cash used in
operating activities were a decrease of prepaid expenses and other current assets of US$15.8 million, depreciation and
amortization of US$8.9 million and a decrease of accounts receivable of US$1.9 million, partially offset by a decrease of
accrued expenses and other current liabilities of US$8.6 million, income tax benefits of US$2.2 million and a decrease
of accounts and notes payable of US$1.4 million.
Net cash used in operating activities for the year ended December 31, 2015 was US$33.5 million, of which
US$10.7 million was used in continuing operations and US$22.8 million in discontinued operations. The principal items
accounting for the difference between our net loss from continuing operations of US$104.6 million and our net cash
used in continuing operations of US$10.7 million were impairment of goodwill of US$85.9 million, an increase of
accrued expenses and other current liabilities of US$16.7 million, an increase of amount due from related parties of
US$8.5 million and depreciation and amortization of US$4.9 million, partially offset by a decrease of prepaid expenses
and other current assets of US$18.5 million, an increase in accounts receivable of US$3.0 million and an increase of
amounts due to related parties of US$2.7 million.
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Net cash used in investing activities
Net cash used in investing activities was US$0.74 million for the year ended December 31, 2017, representing
US0.74 million for purchase of property and equipment.
Net cash used in investing activities was US$2.6 million for the year ended December 31, 2016, including
US$1.9 million for purchase of property and equipment and US$0.7 million payment for investment.
Net cash used in investing activities was US$11.9 million for the year ended December 31, 2015, including
US$9.9 million used in connection with continuing operations and US$2.0 million used in connection with discontinued
operations, consisting primarily of payment for acquisition of business of $9.8 million.
Net cash provided by financing activities
Net cash provided by financing activities was US$12.6 million for the year ended December 31, 2017 including
cash received from loan borrowed from Ms. Xiaoxia Zhu of US$5.1 million and proceeds from short-term bank
borrowings of US$7.6 million.
Financing activities did not provide us with any cash for the year ended December 31, 2016.
Net cash provided by financing activities was US$54.9 million for the year ended December 31, 2015 including
US$52.9 million provided in connection with continuing operations and US$2.0 million provided in connection with
discontinued operations. We received net proceeds of approximately US$37.3 million from our initial public offering,
including the exercise of the over-allotment option by the underwriters, after deducting underwriting discounts and
commissions and other expenses. We also received US$15.0 million in a private placement transaction with our co-
chairperson Mr. Maodong Xu.
Capital Expenditures
We made capital expenditures of US$0.74 million for the year ended December 31, 2017, consisting of the
purchase of property and equipment.
We made capital expenditures of US$1.9 million for the year ended December 31, 2016, consisting of the
purchase of property and equipment.
We made capital expenditures of US$0.1 million for the year ended December 31, 2015, consisting of the
purchase of property and equipment.
Going forward, as more third-party sellers utilize our online markets and more customers and third-party
sellers download and utilize our app, our server demand will increase and we intend to purchase additional servers to
service our expanded networking.
Inflation
Since our inception, inflation in China has not materially affected our results of operations. According to the
National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December
2015, 2016 and 2017 were increases of 1.6%, 2.1% and 1.6%, respectively. Although we have not been materially
affected by inflation in the past, we have experienced and expect to continue to experience upward pressure on our
operating expenses.
Withholding Tax Obligation
Pursuant to PRC individual income tax laws, when a corporation purchases equity interest from individuals, the
individuals are obligated to pay individual income tax based on 20% of the capital gain from the transaction with the
corporation as the withholding agent. We have purchased equity interests of certain entities from individual sellers.
There is a possibility that if individual sellers fail to meet their income tax obligations, the tax authority may require us,
as the withholding agent, to pay the taxes for the sellers. Based on the information currently available, we are unable to
make a reasonable estimate of the related liability due to the uncertainty related to the outcome and amount of payment
and relating penalty and interest.
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C.
Research and development, patents and licenses, etc.
Please refer to Item 4B “Information on the Company—Business Overview—Technology” and “—Intellectual
Property.”
D.
Trend information.
Other than as described elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events that are reasonably likely to have a material adverse effect on our revenue, income from
continuing operations, profitability, liquidity or capital resources, or that would cause our reported financial information
not necessarily to be indicative of future operating results or financial condition.
E.
Off-balance sheet arrangements.
Save for the contingent withholding tax obligation disclosed above and commitments disclosed below, we do
not currently have any outstanding off-balance sheet arrangements or commitments. We have no plans to enter into
transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships established
for the purpose of facilitating off-balance sheet arrangements or commitments.
F.
Tabular Disclosure of Contractual Obligations.
The following table sets forth our contractual obligations as of December 31, 2017:
Operating Lease Commitments
Investment Commitments*
Total
Payment Due by Period
Total Less than 1 year 1–3 years 3–5 years More than 5 years
(US$ in thousands)
2,933
-
2,933
22,097
2,305
24,402
14,330
2,305
16,635
1,622
-
1,622
3,212
-
3,212
*
In May 2016, Our VIE entered into a share purchase agreement with Cold Chain Link (Shanghai) Internet of Things
Co., Ltd., formerly known as Cold Chain Link Global (Shanghai) Logistic Co., Ltd., and its original shareholders
for acquiring 10% equity interest. The contractual investment amount is RMB20.0 million (US$3.1 million). As of
December 31, 2017, Our VIE has paid RMB5.0 million (US$0.7 million). The remaining payment obligation is due
no later than March 9, 2045.
Item 6.
Directors, Senior Management and Employees
A.
Directors and senior management.
The following table sets forth certain information relating to our directors and executive officers as of the date
of this annual report.
Directors and Executive Officers
Xiaoxia Zhu
Maodong Xu
Huimin Wang
Feng Pan
Liyun Cao
Shayla Suen
Tianruo (Robert) Pu
Tony C. Luh
Min Zhou
Gang Yu
Frank Zhigang Zhao
Age
47
49
61
39
47
33
49
53
53
58
53
Position/Title
Co-Chairperson of the Board of Directors, Chief Executive Officer
Co-Chairperson of the Board of Directors
Director
Director
Director
Director
Independent Director
Independent Director
Independent Director
Independent Director
Chief Financial Officer
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Ms. Xiaoxia Zhu has served as the co-chairperson of our board of directors since June 2015. She was our co-
chief executive officer from June 2015 to September 2015, and has served as our chief executive officer since then. Ms.
Zhu has over 21 years of experiences on Chinese hotels and restaurant management and the internet startups. In 2013,
Ms. Zhu, Ms. Huimin Wang and over 40 leading catering and hotel brands across China, jointly founded JMU. Ms. Zhu
is also the vice chairwoman of China Hotel Association. From 1998 to current, Ms. Zhu founded and served as chief
executive officer and chairwoman of Zhejiang Sunward Fishery Restaurant Group Co., Ltd. where she successfully
expanded its business operations across multiple regions and brands to become what is now among China’s top 100
catering enterprises.
Mr. Maodong Xu has served as the co-chairperson of our board of directors since June 2015 and the chairman
of our board of directors from December 2010 to June 2015. Mr. Xu also served as our chief executive officer from
December 2010 to June 2015. Mr. Xu is the founder of Welink Information Technology Co., Ltd., a leading wireless
advertising service company in China. Between 2006 and 2008, Mr. Xu served as a senior vice president of Focus Media
Limited after Focus Media acquired Dotad Media Limited, a China-based wireless advertising service provider founded
by Mr. Xu in 2005. Mr. Xu was also the founder and CEO of Qilu Supermarket, one of the largest chain supermarkets in
Shandong province in late 1990s. Mr. Xu received a bachelor’s degree from Wuhan University of Technology in 1990.
Ms. Huimin Wang has served as our director since June 2015. Ms. Wang is a co-founder of JMU HK, and she is
also the founder of “Xiao Nan Guo” or the “Shanghai Min” brand. Besides her directorship in our Company, at present,
Ms. Wang is also the chairperson of Xiao Nan Guo Holdings Limited and chairperson of the board of directors of
TANSH Global Food Group Co., Ltd., which formerly known as Xiao Nan Guo Restaurants Holdings Limited, a
company listed on the Stock Exchange of Hong Kong (code: 3666.HK). Ms. Huimin Wang is also the Vice Chairman of
China Cuisine Association, China Hotel Association and World Association of Chinese Cuisine.
Mr. Feng Pan has served as our director and chief strategic officer since June 2015. Mr. Pan has worked in the
field of supply chain management, the internet, and strategy consulting over the past 14 years. Mr. Pan joined JMU as
executive vice president in 2013, and he participated in the design of JMU’s business model and its strategic investment.
From 2005 to 2013, he served as the president of Influence Education Training Group and Influence Education
Technology Company where he provided strategic planning for various leading corporations and several public
companies. Mr. Pan worked at Midea Group from 2003 to 2005 and Hisense Kelon Group from 2001 to 2003.
Ms. Liyun Cao has served as our director since June 2015. Ms. Cao has served as vice president of JMU HK
and president of JMU HK’s Supply Unit since 2014, and was responsible for the operation and management of its B2B
business. From 2001 to 2014, Ms. Cao worked at Zhejiang Sunward Fishery Restaurant Group Co., Ltd. in various roles
including Operations Manager of the Jiangsu and Shanghai Districts. In 2012, she was promoted and has served as a
director and vice president of Zhejiang Sunward Fishery Restaurant Group Co., Ltd. for two years.
Ms. Shayla Suen has been our director since June 2017. Ms. Suen served as our invest relations director from
2011 to 2015. Prior to joining us, she was a partner at Galaxy RongKuai, an online investment platform. Before 2011,
Ms. Suen worked as IR Manager at Changyou and as an analyst at DC Capital Management Inc. Ms. Suen holds a
bachelor's degree in English from Beijing Foreign Studies University.
Mr. Tianruo (Robert) Pu has served as our independent director since April 2015. Mr. Pu has also served as the
chief financial officer of Zhaopin Limited, an NYSE listed company, since January 2016 and a director of Renren Inc.,
an NYSE listed company since December 2016. Previously, Mr. Pu served as a director of UTStarcom Holdings
Corporation, a Nasdaq listed company, from November 2011 to August 2014 and its Chief Financial Officer from
October 2012 to August 2014. Mr. Pu served as the Chief Financial Officer of China Nuokang Biopharmaceutical Inc., a
Nasdaq listed company, from September 2008 to June 2012. Prior to Nuokang Biopharmaceutical Inc., Mr. Pu was
Chief Financial Officer of Global Data Solutions, a Chinese information technology services company, from June 2006
to August 2008. Prior to Global Data Solutions, Mr. Pu had gained various accounting and finance experiences in both
China and the United States. Mr. Pu received an MBA degree from Northwestern University’s Kellogg School of
Management, a Master of Science degree in accounting from the University of Illinois and a Bachelor of Arts degree in
English from China Foreign Affairs College.
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Mr. Tony C. Luh has served as our independent director since April 2015. At present, Tony is a venture partner
for DFJ DragonFund and Yifang Ventures. Mr. Luh was an independent board director for Pansoft Inc. between 2008
and 2012. Mr. Luh served as a General Partner and Greater China President for the Westly Group between 2011 and
2014. Before joining the Westly Group, Mr. Luh was a Founding Partner and Managing Director at DFJ DragonFund
from 2006 to 2011. Mr. Luh is also one of the Founder and Managing Director at DragonVenture, which he co-founded
in 1999. Before DragonVenture, Mr. Luh was a senior executive at InfoWave Communications from 1997 to 1999. Mr.
Luh has over 20 years of experience in capital markets, sales, strategic alliances and business development and has
accumulated public investment expertise in sectors ranging from information technology to high volume manufacturing
in Asia.
Mr. Min Zhou has served as our independent director since April 2015. At present, Mr. Zhou is the executive
director and executive president of Beijing Enterprises Water Group Limited serving since 2013. Between 2008 and
2012, Mr. Zhou served as an executive director and vice president of Beijing Enterprises Water Group Limited. Mr.
Zhou served as the director and chief financial officer of Beijing Zhongkecheng Environment Protection Group Limited
from 2004 to 2008. Previously, Mr. Zhou served as a director and chief financial officer of Sichuan Zhongkecheng
Environment Protection Stock Co., Ltd. from 2001 to 2004. Mr. Zhou served as the Chairman of Beijing Jingsheng
Investment Co., Ltd. from 1989 to 2001. Prior to that, Mr. Zhou worked at Industrial and Commercial Bank of
China—Zhejiang Yongkang Branch from 1985 to 1989 and worked at the People’s Bank of China—Zhejiang Yongkang
Branch from 1980 to 1985. Mr. Zhou received an EMBA degree from Tsinghua University.
Dr. Gang Yu has served as our director since October 2016. Dr. Yu is the co-founder and executive chairman of
New Peak Group, and has served as the co-chairman of Zall Group Limited, a company listed on the Hong Kong Stock
Exchange, since August 2015. During August 2008 to July 2015 prior to founding New Peak Group, he was the co-
founder and chairman of Yihaodian, a leading e-commerce company in China. Prior to this role, Dr. Yu served as vice
president, worldwide procurement at Dell Inc. between September 2006 and August 2007 and vice president, worldwide
supply chain at Amazon.com between July 2004 and August 2006. Dr. Yu received Bachelor of Science degree from
Wuhan University, Master of Science degree from Cornell University and Ph. D. from the Wharton School of the
University of Pennsylvania.
Mr. Frank Zhigang Zhao has served as our chief financial officer since June 2015. Mr. Zhao has over two
decades of experience in financial and accounting management with auditing firms and public companies. Prior to
joining us, Mr. Zhao was the chief financial officer of Borqs International Limited, from 2013 to 2015. Mr. Zhao worked
as the chief financial officer of KingMed Medical Diagnostics from 2011 to 2013. Mr. Zhao was the chief financial
officer of Simcere Pharmaceutical Group, from 2006 to 2011. From 2005 to 2006, Mr. Zhao worked as the chief
financial officer of Sun New Media Inc. From 2003 to 2005, Mr. Zhao worked at FARO Technologies, Inc. as a
financial controller. Mr. Zhao received his bachelor’s degree in economics from Peking University and MBA degree
from University of Hartford.
B.
Compensation.
Compensation of Directors and Executive Officers
In 2017, we paid an aggregate of approximately RMB3.8 million (US$0.6 million) in cash as salaries and fees
to our senior executives, officers and directors named in this annual report. Other than salaries, fees and share incentives,
we do not otherwise provide pension, retirement or similar benefits to our officers and directors.
Share Incentive Plan
We adopted our share incentive plan in 2011 and amended it in 2015 to attract and retain the best available
personnel, provide additional incentives to our employees, directors and consultants, and promote the success of our
business. The amended and restated 2011 share incentive plan provides for the grant of options, restricted shares and
other share-based awards, collectively referred to as “awards.” Our board of directors has authorized the issuance of
ordinary shares of up to 15% of the issued and outstanding share capital of our company from time to time.
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Plan Administration. Our compensation committee will administer the amended and restated 2011 share
incentive plan. The committee determines the participants to receive awards, the type and number of awards to be
granted, and the terms and conditions of each award grant.
Award Agreements. Awards granted under our amended and restated 2011 share incentive plan are evidenced
by an award agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of
the award, the provisions applicable in the event that the grantee’s employment or service terminates, and our authority
to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award. Unless specifically approved by our
board of directors, the purchase price per share of an option shall not be less than 100% of the fair market value of the
shares on the date of grant.
Transfer Restrictions. The right of a grantee in an award granted under our amended and restated 2011 share
incentive plan may not be transferred in any manner by the grantee other than by will or the laws of descent and, with
limited exceptions, may be exercised during the lifetime of the grantee only by the grantee.
Option Exercise. The term of options granted under the amended and restated 2011 share incentive plan may
not exceed ten years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an
option or purchase of ordinary shares underlying the option may include cash, check or other cash-equivalent, ordinary
shares, consideration received by us in a cashless exercise, or any combination of the foregoing methods of payment.
Acceleration upon a Change of Control. If a change of control of our company occurs, (i) the compensation
committee may determine that any outstanding unexercisable, unvested or lapsable awards shall automatically be
deemed exercisable, vested and not subject to lapse immediately prior to the event triggering the change of control and
(ii) the compensation committee may cancel such awards for fair value, provide for the issuance of substitute awards or
provide that for a period of at least 15 days prior to the event triggering the change of control, such options shall be
exercisable and that upon the occurrence of the change of control, such options shall terminate and be of no further force
and effect.
Termination and Amendment. Unless terminated earlier, our share incentive plan will expire on February 1,
2021. Our board of directors has the authority to amend or terminate our share incentive plan subject to shareholder
approval to the extent necessary to comply with applicable laws. Shareholders’ approval is required for any amendment
to the amended and restated 2011 share incentive plan that increases the number of ordinary shares available under the
amended and restated 2011 share incentive plan or changes the maximum number of shares for which awards may be
granted to any participant. Additionally, a participant’s consent is required to diminish any of the rights of the participant
under any award previously granted to such participant.
The following table summarizes, as of March 31, 2018, the outstanding options granted to our executive
officers, directors, and other individuals as a group under our amended and restated 2011 share incentive plan.
Common shares
underlying options
awarded/Restricted
Share Units
Name
Feng Pan
Liyun Cao
Other Individuals as a Group
46,251,820
Total
61,498,520
Less than one percent of our total outstanding share capital.
*
(1) restricted share units
70
*
*(1)
*
*(1)
*(1)
0.2
—
0.2
—
Exercise price
(US$/share) Date of grant Date of expiration
2016/7/1
2016/7/1
2016/7/1
2016/7/1
2016/7/1
2016/7/1
2016/7/1
2016/7/1
from
2011/2/1
to 2016/7/1
2016/7/1
from 2018/9/1
to 2016/7/1
2016/7/1
from 0 to 0.2
—
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C.
Board Practices.
Duties of Directors
Under Cayman Islands law, our directors owe certain fiduciary duties to our company, including duties of
loyalty, to act honestly, and to act in what they consider in good faith to be in our best interests. Our directors also have
a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our third amended and
restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is
breached.
The powers of our board of directors include, among others:
∂
∂
∂
∂
∂
∂
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
issuing authorized but unissued shares;
declaring dividends and distributions;
exercising the borrowing powers of our company and mortgaging the property of our company;
approving the transfer of shares of our company, including the registering of such shares; and
exercising any other powers conferred by the shareholders’ meetings or under our third amended and
restated memorandum and articles of association.
Terms of Directors and Executive Officers
We have ten directors on our board of directors, four of whom are independent directors. Any director on our
board may be removed by way of an ordinary resolution of shareholders. Any vacancies on our board of directors or
additions to the existing board of directors can be filled by the affirmative vote of a majority of the remaining directors.
The shareholders may also by ordinary resolution elect any person to be a director either to fill a casual vacancy or as an
addition to the existing board of directors. The directors are divided into three different classes, namely Class I
Directors, Class II Directors and Class III Directors.
Any director appointed to fill a casual vacancy shall hold office for the remaining term of the director in whose
place he is appointed and shall be eligible for re-election at the expiry of the said term. Any director appointed as an
addition to the existing board of directors shall be designated a class in accordance with the third amended and restated
articles of association, shall hold office until the expiry of the term of the class for which said director is designated and
shall then be eligible for re-election.
At the first annual general meeting after the adoption of the third amended and restated articles of association,
all Class II Directors shall retire from office and be eligible for re-election. At the second annual general meeting after
the adoption of the third amended and restated articles of association, all Class III Directors shall retire from office and
be eligible for re-election. At the third annual general meeting after the adoption of the third amended and restated
articles of association, all Class I Directors shall retire from office and be eligible for re-election. Currently Class I
includes Mr. Maodong Xu, Mr. Tianruo (Robert) Pu and Ms. Xiaoxia Zhu; Class II includes Ms. Shayla Suen, Mr, Feng
Pan and Mr. Gang Yu; and Class III includes Mr. Tony C. Luh, Mr. Min Zhou, Ms. Huimin Wang and Ms. Liyun Cao.
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At each subsequent annual general meeting after the third annual general meeting after the adoption of the third
amended and restated articles of association, one-third of the directors for the time being (or, if their number is not a
multiple of three (3), the number nearest to but not greater than one third) shall retire from office by rotation. A retiring
director shall be eligible for re-election. The directors to retire by rotation shall include (so far as necessary to ascertain
the number of directors to retire by rotation) any director who wishes to retire and not to offer himself for re-election.
Any further directors so to retire shall be those of the other directors subject to retirement by rotation who have been
longest in office since their last re-election or appointment and so that as between persons who became or were last re-
elected directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by
lot.
For the avoidance of doubt, every director shall be subject to retirement in accordance with the third amended
and restated articles of association at least once every three years.
If the number of directors is changed, any increase or decrease shall be apportioned among the classes of
directors so as to maintain the size of the three classes as nearly equal as possible, and any director added to a class as a
result of an increase in the board size shall hold office for a term that shall coincide with the remaining term of that
class.
Grounds for Vacating a Director
The office of a director shall be vacated if the director:
∂
∂
resigns his office by notice in writing delivered to us or tendered at a meeting of the board of directors;
becomes of unsound mind or dies;
∂ without special leave of absence from the board of directors, is absent from meetings of the board of
directors for six consecutive months and the board of directors resolves that his office be vacated;
∂
∂
∂
becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his
creditors;
is prohibited by law from being a director; or
ceases to be a director by virtue of any provisions of Cayman Islands law or is removed from office
pursuant to the third amended and restated articles of association.
All of our executive officers are appointed by and serve at the discretion of our board of directors. Our
executive officers are elected by and may be removed by a majority vote of our board of directors.
Board Committees
Our board of directors has established an audit committee and a compensation committee.
Audit Committee
Our audit committee consists of Tianruo (Robert) Pu, Tony C. Luh and Min Zhou. We have determined that all
the members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under the Exchange Act
and Nasdaq Marketplace Rule 5605(c)(2)(A) and that Tianruo (Robert) Pu is an audit committee financial expert as
defined in the instructions to Item 16A of the Form 20-F. Tianruo (Robert) Pu serves as the chairperson of the audit
committee.
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The audit committee oversees our accounting and financial reporting processes and the audits of our
consolidated financial statements. Our audit committee is responsible for, among other things:
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
∂
selecting the independent auditor;
pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;
annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control
procedures, any material issues raised by the most recent internal quality control review, or peer review, of
the independent auditors and all relationships between the independent auditor and our company;
setting clear hiring policies for employees and former employees of the independent auditors;
reviewing with the independent auditor any audit problems or difficulties and management’s response;
reviewing and approving all related party transactions on an ongoing basis;
reviewing and discussing the annual audited consolidated financial statements with management and the
independent auditor;
reviewing and discussing with management and the independent auditors major issues regarding
accounting principles and financial statement presentations;
reviewing reports prepared by management or the independent auditors relating to significant financial
reporting issues and judgments;
discussing earnings press releases with management, as well as financial information and earnings
guidance provided to analysts and rating agencies;
reviewing with management and the independent auditors the effect of regulatory and accounting
initiatives, as well as off-balance sheet structures, on our consolidated financial statements;
discussing policies with respect to risk assessment and risk management with management, internal
auditors and the independent auditor;
timely reviewing reports from the independent auditor regarding all critical accounting policies and
practices to be used by our company, all alternative treatments of financial information within U.S. GAAP
that have been discussed with management and all other material written communications between the
independent auditor and management;
establishing procedures for the receipt, retention and treatment of complaints received from our employees
regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing matters;
annually reviewing and reassessing the adequacy of our audit committee charter;
such other matters that are specifically delegated to our audit committee by our board of directors from
time to time;
∂ meeting separately, periodically, with management, internal auditors and the independent auditor; and
∂
reporting regularly to the full board of directors.
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Compensation Committee
Our compensation committee consists of Min Zhou, Tianruo (Robert) Pu and Tony C. Luh. We have
determined that all the members of our compensation committee satisfy the “independence” requirements of Rule 5605
(d) of Nasdaq Stock Market Marketplace Rules. Min Zhou serves as the chairperson of the compensation committee.
Our compensation committee is responsible for, among other things:
∂
∂
∂
reviewing and approving our overall compensation policies;
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief
Executive Officer, evaluating our Chief Executive Officer’s performance in light of those goals and
objectives, reporting the results of such evaluation to the board of directors, and determining our Chief
Executive Officer’s compensation level based on this evaluation;
determining the compensation level of our other executive officers;
∂ making recommendations to the board of directors with respect to our incentive-compensation plan and
equity-based compensation plans;
∂
∂
administering our equity-based compensation plans in accordance with the terms thereof; and
such other matters that are specifically delegated to the compensation committee by our board of directors
from time to time.
Corporate Governance
Our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our
directors, officers and employees. We have made our code of business conduct and ethics publicly available on our
website.
In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect
certain guiding principles with respect to our board’s structure, procedures and committees. The guidelines are not
intended to change or interpret any law, or our third amended and restated memorandum and articles of association.
Remuneration and Borrowing
The directors may determine the remuneration to be paid to the directors. The compensation committee will
assist the directors in reviewing and approving the compensation structure for the directors. The directors may exercise
all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled
capital, and to issue debentures or other securities whether outright or as security for any debt obligations of our
company or of any third party.
Qualification
There is no requirement for our directors to own any shares in our company in order for them to qualify as a
director.
Employment Agreements
We have entered into employment agreements with each of our executive officers. We may terminate an
executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts of the officer,
including, but not limited to, a conviction or plea of guilty to a felony, willful misconduct to our detriment or a failure to
perform agreed duties. We may also terminate an executive officer’s employment under certain conditions, including,
but not limited to, incapacity or disability of the officer, by a one-month prior written notice. An executive officer may
terminate his or her employment with us for cause, at any time for certain reasons, or by a one-month prior written
notice.
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Our executive officers have also agreed not to engage in any activities that compete with us, or to directly or
indirectly solicit the services of our employees, during employment or for a period of two years after termination of
employment. Each executive officer has agreed to hold in strict confidence any confidential information or trade secrets
of our company. Each executive officer also agrees to comply with all material applicable laws and regulations related to
his or her responsibilities at our company as well as all material corporate and business policies and procedures of our
company.
D.
Employees.
The number of our employees decreased significantly after we acquired our B2B business and disposed of our
group buy and B2C businesses, and few of our employees as of December 31, 2014, were still working for our company
as of December 31, 2015.
As of December 31, 2017, we had a total of 252 employees, consisting of 85 in sales, 44 in marketing, 43 in
research and development, and 80 staff members in administrative and management departments. We had a total of 291
employees as of December 31, 2016 and 285 employees as of December 31, 2015.
The remuneration package for our employees includes salary, sales commissions and employee share option
programs. In accordance with applicable regulations in China, we participate in a number of social insurance schemes,
namely, a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury
insurance plan, a maternity insurance and a housing reserve fund for the benefit of all of our employees. We have not
experienced any material labor disputes or disputes with the labor department of the PRC government since our
inception.
E.
Share Ownership.
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule
13d-3 under the Exchange Act, of our ordinary shares as of March 31, 2018 (unless otherwise indicated) by:
∂
∂
each of our directors and executive officers; and
each person known to us to own beneficially more than 5% of our ordinary shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally. includes voting
power or investment power with respect to securities. The number of ordinary shares beneficially owned including
ordinary shares such person has the right to acquire within 60 days after March 31, 2018. Such shares, however, are not
deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other
shareholder. Percentage of ordinary shares is based on 1,475,515,824, the total number of ordinary shares outstanding as
of March 31, 2018 (excluding 692,846 ordinary shares in the form of ADSs that are reserved for issuance upon the
exercise of share awards).
Ordinary Shares Beneficially Owned
Number
Percentage (%)
Directors and Executive Officers:
Maodong Xu(1)
Xiaoxia Zhu(2)
Huimin Wang(3)
Feng Pan(4)
Liyun Cao
Shayla Suen
Tianruo (Robert) Pu(5)
Tony C. Luh(6)
Min Zhou(7)
Gang Yu(8)
Frank Zhigang Zhao
Directors and executive officers as a group
Principal Shareholders:
Zhejiang Sunward Fishery Restaurant Group Share Co., Ltd.(9)
Extensive Power Limited(10)
Moonlight Vista Limited(11)
151,555,246
245,485,086
291,015,012
111,213,418
—
—
—
—
—
—
*
809,641,302
158,219,624
149,100,132
141,914,880
123,623,381
10.27%
16.64%
19.72%
7.54%
—
—
—
—
—
—
*
54.87%
10.72%
10.10%
9.62%
8.38%
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New Field Worldwide Limited(12)
Shanghai Zhongju Investment Management Center (limited Partnership)(13)
Markland (Hong Kong) Investment Limited(14)
111,213,418
87,265,462
7.54%
5.91%
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Less than 1% of our total outstanding shares.
*
** The address of our directors (except Mr. Tianruo (Robert) Pu, Mr. Tony C. Luh, Mr. Min Zhou and Mr. Guang Yu)
and executive officers is North Guoquan Road 1688 Long, No. 75, Building A8, 6F, Yangpu District, Shanghai
200438, People’s Republic of China.
(1) representing (i) 123,623,381 ordinary shares owned by New Field Worldwide Limited, a BVI company wholly
owned by Maodong Xu, the registered address of which is Trinity Chambers, P.O. Box 4301, Road Town, Tortola,
British Virgin Islands, (ii) 931,865 ordinary shares owned by Link Crossing Limited, a BVI company wholly owned
by Maodong Xu, the registered address of which is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British
Virgin Islands, and (iii) 27,000,000 ordinary shares owned by Estate Spring Limited, a Cayman Islands company
controlled by Maodong Xu, the registered address of which is Floor 4, Willow House, Cricket Square, P.O. Box
2804, Grand Cayman KY1-1112, Cayman Islands.
(2) representing (i) 158,219,624 ordinary shares owned by Zhejiang Sunward Fishery Restaurant Group Share Co.,
Ltd., a PRC company controlled by Xiaoxia Zhu, the principal business address of which is No. 236, Caihong South
Road, Jiangdong, Ningbo, People’s Republic of China, and (ii) 87,265,462 ordinary shares owned by Markland
(Hong Kong) Investment Limited, a Hong Kong company wholly owned by Xiaoxia Zhu, the principal business
address of which is Flat B4, 6/F., Block B, Hankow Centre, 4A Ashley Road, Tsim Sha Tsui, Kowloon, Hong
Kong.
(3) representing (i) 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled
by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson
Street, Causeway Bay, Hong Kong, and (ii) 141,914,880 ordinary shares owned by Moonlight Vista Limited, a BVI
company controlled by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times
Square, 1 Matheson Street, Causeway Bay, Hong Kong.
(4) representing 111,213,418 ordinary shares owned by Shanghai Zhong Ju Investment Management Center, a PRC
limited liability partnership, whose general partner has irrevocably appointed Feng Pan to act on behalf of the
general partner for all matters relating to Shanghai Zhong Ju Investment Management Center and has irrevocably
waived the right to replace Feng Pan. The principal business address of Shanghai Zhong Ju Investment Management
Center is Room 304-22, 3/Fl, Building 2, No. 38 Debao Road, China (Shanghai) Pilot Free Trade Zone, People’s
Republic of China.
(5) The business address of Mr. Pu is 5th Floor Shoukai Plaza, 10 Fu Rong Street, Wang Jing, Beijing, People’s
Republic of China.
(6) The business address of Mr. Luh is c/o Dragon Venture, Inc., 55 East 3rd Avenue, San Mateo, CA 94401.
(7) The business address of Mr. Zhou is c/o Beijing Enterprises Water Group Limited. Tower 3 Poly International
Plaza, Zone 7 Wangjing East Park, Chaoyang District, Beijing, People’s Republic of China.
(8) The business address of Mr. Yu is Building 10, No. 115 Lane 572, Bibo Road, Pudong District, Shanghai 201203,
People’s Republic of China.
(9) representing 158,219,624 ordinary shares owned by Zhejiang Sunward Fishery Restaurant Group Share Co., Ltd., a
PRC company controlled by Xiaoxia Zhu, the principal business address of which is No. 236, Caihong South Road,
Jiangdong, Ningbo, People’s Republic of China.
(10) representing 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled by
Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson
Street, Causeway Bay, Hong Kong.
(11) representing 141,914,880 ordinary shares owned by Moonlight Vista Limited, a BVI company controlled by
Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson
Street, Causeway Bay, Hong Kong.
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(12) representing 123,623,381 ordinary shares owned by New Field Worldwide Limited, a BVI company wholly owned
by Maodong Xu, the registered address of which is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British
Virgin Islands.
(13) representing 111,213,418 ordinary shares owned by Shanghai Zhong Ju Investment Management Center, a PRC
limited liability partnership. The principal business address of Shanghai Zhong Ju Investment Management Center
is Room 304-22, 3/Fl, Building 2, No. 38 Debao Road, China (Shanghai) Pilot Free Trade Zone, People’s Republic
of China.
(14) representing 87,265,462 ordinary shares owned by Markland (Hong Kong) Investment Limited, a Hong Kong
company wholly owned by Xiaoxia Zhu, the principal business address of which is Flat B4, 6/F., Block B, Hankow
Centre, 4A Ashley Road, Tsim Sha Tsui, Kowloon, Hong Kong.
As of March 31, 2018, we had 1,475,515,824 ordinary shares outstanding (excluding 692,846 ordinary shares
in the form of ADSs that are reserved for issuance upon the exercise of share awards). To our knowledge, we had only
one record shareholder in the United States. Citibank, N.A., the depositary of our ADS program, held 330,096,510
ordinary shares as of that date, representing 22.3% of our outstanding ordinary shares. The number of beneficial owners
of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in
the United States.
None of our existing shareholders has voting rights that will differ from the voting rights of other shareholders.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Item 7.
Major Shareholders and Related Party Transactions
A.
Major Shareholders.
Please refer to “Item 6. Directors, Senior Management and Employees—E. Directors, Senior Management and
Employees—Share Ownership.”
B.
Related Party Transactions.
Contractual Arrangements with Our Consolidated Affiliated Entities and Their Shareholders
Due to certain restrictions under PRC law on foreign ownership of businesses engaged in internet businesses,
we conduct our operations in China principally through contractual arrangements between our wholly-owned PRC
subsidiary, Shanghai Zhongming Supply Chain Management Co., Ltd., on the one hand and our consolidated affiliated
entity in China, Shanghai Zhongmin Supply Chain Management Co., Ltd., and its subsidiaries and shareholders on the
other. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure”.
Agreements with our Directors and Officers
Share Issuance to Mr. Maodong Xu
We and Mr. Maodong Xu, the co-chairperson of our board, entered into a subscription agreement in June 2015
and an amendment to this agreement in September 2015. Pursuant to this subscription agreement, as amended, we issued
27,000,000 ordinary shares to Estate Spring Limited, a Cayman Islands company beneficially owned by Mr. Xu, in
September 2015 for a total subscription price of US$15.0 million.
Lock-up Agreement with Mr. Maodong Xu, Ms. Xiaoxia Zhu and Ms. Huimin Wang
In connection with the share issuance to Mr. Maodong Xu in 2015 and the acquisition of JMU HK, we entered
into a lock-up agreement in June 2015 with each of Mr. Xu, Ms. Xiaoxia Zhu and Ms. Huimin Wang, pursuant to which
each of Mr. Xu, Ms. Zhu and Ms. Wang agreed not to directly or indirectly dispose of the number of the ordinary shares
beneficially owned by them on June 8, 2015, the closing date of the acquisition of JMU, without the prior written
consent of our board of directors. Additionally, Mr. Xu also agreed not to directly or indirectly dispose of the ordinary
shares he acquired under the subscription agreement described above. The restrictions on one-third of the total ordinary
shares under the lock-up agreement will be removed on each anniversary of June 8, 2015.
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Registration Rights Agreement
In connection with the acquisition of JMU HK, we entered into a registration rights agreement with former
shareholders of JMU HK and entities beneficially owned by Mr. Maodong Xu, pursuant to which we agreed to provide
these former shareholders and Mr. Xu with certain registration rights in respect of our ordinary shares held by them.
Upon receipt of a written request from the holders of 10% of the registrable securities then outstanding
requesting us to effect a registration under the Securities Act covering all of part of the shares held by them, we shall, as
soon as is practicable, but in no event not later than ninety days after receipt of such written request, file with the SEC,
and use our reasonable best efforts to cause to be declared effective, a registration statement, or a shelf registration
statement. However, that we shall not be obligated to effect any such registration if the aggregate price (net of any
underwriters’ discounts or commissions) of the sale of shares relating to such registration is less than $10,000,000.
If, at any time, we file a registration statement with the SEC, holders of registration rights under this agreement
will be entitled, subject to certain exceptions, to exercise “piggyback” registration rights requiring us to include in any
such registration that number of shares held by them, subject to certain prescribed limitations provided in the registration
rights agreement.
We may, on a limited number of occasions, and in certain prescribed circumstances, delay the filing or
effectiveness of any registration statement required to be filed pursuant to the registration rights agreement.
Related Party Loans and Other Payments
In April 2016, Ms. Huimin Wang, our director, provided us an interest free loan of RMB40 million through
Xiao Nan Guo (Group) Co., Ltd., an entity controlled by her. We had repaid such loan in 2016.
In May 2017, Ms. Xiaoxia Zhu, our Chief Executive Officer and Co-Chairperson of the Board, provided us a
loan of RMB35 million (US$5.4 million).
In April 2018, we received loans of RMB50 million (US$7.9 million) and RMB20 million (US$3.2 million)
from Ms. Huimin Wang and Ms. Xiaoxia Zhu, respectively.
Please see Note 21 to our consolidated financial statements included elsewhere in this annual report for the
details of other related party transactions.
Employment Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements”.
Share Options
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Compensation of Directors
and Executive Officers—Share Incentive Plan”.
C.
Interests of experts and counsel.
Not applicable.
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Item 8.
Financial Information
A.
Consolidated Statements and Other Financial Information.
Please refer to Item 18 “Financial Statements” for our audited consolidated financial statements filed as part of
this annual report.
Legal Proceedings
We are currently not a party to any material legal or administrative proceedings and are not aware of any
pending or threatened material legal or administrative proceedings against us. We may from time to time become a party
to various legal or administrative proceedings arising in the ordinary course of our business.
Dividend Policy
Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present
plan to pay any dividends on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our
available funds and any future earnings to operate and expand our business.
Any future determination to pay dividends will be made at the discretion of our board of directors subject to
certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share
premium, and provided always that in no circumstances may a dividend be paid if this would result in our company
being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may
declare a dividend at a general meeting of our company. Our board of directors’ decision to declare and pay dividends
may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, the
amount of distributions, if any, received by us from our PRC subsidiary, our general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our
ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S.
dollars.
We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to
our shareholders and ADS holders, we will rely on dividends distributed by Our WFOE. Certain payments from our
PRC subsidiary to us are subject to PRC taxes, such as withholding income tax. In addition, regulations in China
currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as
determined in accordance with its articles of association and the accounting standards and regulations in China. Our
PRC subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year
to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered
capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends. Our PRC
subsidiary may set aside a certain amount of its after-tax profits to other funds at its discretion. These reserve funds can
only be used for specific purposes and are not transferable to the company’s parent in the form of loans, advances or
dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure and Dependence
on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other distributions on
equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any
limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on
our ability to conduct our business”.
B.
Significant Changes.
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the
date of our audited consolidated financial statements included in this annual report.
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Item 9.
The Offer and Listing.
A.
Offer and listing details.
Our ADSs, each representing 18 of our ordinary shares, are listed on the Nasdaq Global Market under the
symbol “JMU”. Trading in our ADSs commenced on April 8, 2015.
The following table provides the high and low trading prices for our ADSs on the Nasdaq Global Market for the
period indicated.
Annual Highs and Lows
2015 (from April 8, 2015)
2016
2017
Quarterly Highs and Lows
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
First Quarter 2018
Monthly Highs and Lows
November 2017
December 2017
January 2018
February 2018
March 2018
April 2018 (through April 23, 2018)
B.
Plan of distribution.
Not applicable.
C.
Markets.
Price per ADS (US$)
Low
High
US$
US$
13.00
6.20
3.83
4.58
6.00
4.00
3.83
2.80
2.55
1.64
1.58
1.16
1.59
1.04
0.99
0.89
4.11
2.90
0.92
3.11
3.02
2.90
2.64
1.53
1.36
0.92
0.96
0.92
0.98
0.80
0.82
0.66
Our ADSs are listed on The Nasdaq Global Market under the symbol “JMU”. Each ADS represents 18 ordinary
shares.
D.
Selling shareholders.
Not applicable.
E.
Dilution.
Not applicable.
F.
Expenses of the issue.
Not applicable.
Item 10.
Additional Information.
A.
Share capital.
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Not applicable.
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B.
Memorandum and articles of association.
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our
memorandum and articles of association, and the Companies Law (2018 Revision), as amended, of the Cayman Islands,
which is referred to as the Companies Law below. The following are summaries of material provisions of our third
amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the
material terms of our ordinary shares.
Registered Office and Objects
Our registered office in the Cayman Islands is at Maples Corporate Services Limited, P.O. Box 309, Ugland
House, Grand Cayman KY1-1104, Cayman Islands. The objects for which our company is established are unrestricted
and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from
time to time, or any other law of the Cayman Islands.
Board of Directors
A director is not required to hold any shares in our company by way of qualification. A director may vote with
respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise
all the powers of our company to borrow money, mortgage its undertaking, property and uncalled capital, and issue
debentures or other securities whenever money is borrowed or as security for any obligation of our company or of any
third party. The directors may receive such remuneration as our board may from time to time determine. There is no age
limit requirement with respect to the retirement or non-retirement of a director. See also “Item 6. Directors, Senior
Management and Employees — C. Board Practices.”
Ordinary Shares
General
All of our outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in
registered form and are issued when registered in our register of members. Our shareholders who are non-residents of
the Cayman Islands may freely hold and vote their ordinary shares. Our third amended and restated memorandum and
articles of association do not permit us to issue bearer shares.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our shareholders or
board of directors subject to the Companies Law and to the third amended and restated articles of association. Under
Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of
either profit or our share premium account, and provided further that a dividend may not be paid if this would result in
our company being unable to pay its debts as they fall due in the ordinary course of business.
Voting Rights
Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote.
Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the
chairman of such meeting or any one shareholder present in person or by proxy.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of
votes attached to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of
at least two-thirds of votes cast attached to the ordinary shares in a meeting. A special resolution will be required for
important matters such as a change of name or making changes to our memorandum and articles of association.
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General Meetings of Shareholders
Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Cayman
Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide
shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a
company’s articles of association. Our third amended and restated articles of association allow our shareholders holding
shares representing in aggregate not less than 30% of our voting share capital in issue, to requisition an extraordinary
general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the
resolutions so requisitioned to a vote at such meeting; however, our third amended and restated articles of association do
not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general
meetings not called by such shareholders. Advance notice of at least ten clear days is required for the convening of our
annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a
meeting of shareholders consists of at least two shareholders present or by proxy, representing not less than one-third in
nominal value of the total issued voting shares in our company.
Transfer of Ordinary Shares
Subject to the restrictions contained in our third amended and restated articles of association, as applicable, any
of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or
common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share
which is not fully paid up to a person of whom it does not approve, or any share issued under any share incentive
scheme for employees upon which a restriction on transfer imposed thereby still subsists. Our board of directors may
also decline to register any transfer of any ordinary share unless (a) the instrument of transfer is lodged with us or such
other place at which the register of members is kept in accordance with Cayman Islands law, accompanied by the
certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably
require to show the right of the transferor to make the transfer; (b) the instrument of transfer is in respect of only one
class of shares; (c) the instrument of transfer is properly stamped, if required; (d) the ordinary shares transferred are fully
paid and free of any lien in favor of us; (e) a fee of such maximum sum as the Nasdaq Global Market may determine to
be payable or such lesser sum as the board may from time to time require is paid to us in respect thereof; and (f) the
transfer is not to more than four joint holders.
If our directors refuse to register a transfer they are required, within three months after the date on which the
instrument of transfer was lodged, to send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice requirement of the Nasdaq Global Market,
be suspended and the register closed at such times and for such periods as our directors may from time to time
determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more
than 30 days in any year as our directors may determine.
Liquidation
On a return of capital on winding up or otherwise (other than on redemption or purchase of ordinary shares),
assets available for distribution among the holders of ordinary shares will be distributed among the holders of the
ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up
capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their
ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The
ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
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Share Repurchases
We are empowered under our third amended and restated memorandum of association to purchase our shares
subject to the Companies Law and our third amended and restated articles of association. Our third amended and restated
articles of association provide that this power is exercisable by our board of directors in such manner, upon such terms
and subject to such conditions as it in its absolute discretion thinks fit subject to the Companies Law and, where
applicable, the rules of the Nasdaq Global Market and the applicable regulatory authority.
Variations of Rights of Shares
If at any time our share capital is divided into different classes of shares, all or any of the special rights attached
to any class of shares may, subject to the provisions of the Companies Law, be varied with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares of that class. Consequently, the rights of any
class of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all of the shares in that
class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not,
unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu with such existing class of shares.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies
of our list of shareholders or our corporate records. However, our third amended and restated articles of association
provide our shareholders with the right to inspect our list of shareholders and to receive annual audited financial
statements.
Changes in Capital
We may from time to time by ordinary resolution: (a) increase the share capital by such sum, to be divided into
shares of such classes and amount, as the resolution shall prescribe; (b) consolidate and divide all or any of our share
capital into shares of a larger amount than our existing shares; (c) sub-divide our existing shares, or any of them into
shares of a smaller amount; or (d) cancel any shares which, at the date of the passing of the resolution, have not been
taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so
cancelled. We may by special resolution reduce our share capital or any capital redemption reserve in any manner
permitted by law.
Register of Members
Under Cayman Islands law, we must keep a register of members and there should be entered therein: (a) the
names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed
to be considered as paid, on the shares of each member; (b) the date on which the name of any person was entered on the
register as a member; and (c) the date on which any person ceased to be a member.
Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set
out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted)
and a member registered in the register of members should be deemed as a matter of Cayman Islands law to have legal
title to the shares as set against its name in the register of members. Upon the closing of this offering, the register of
members should be immediately updated to record and give effect to the issue of shares by us to the Depositary (or its
nominee) as the depositary. Once our register of members has been updated, the shareholders recorded in the register of
members will be deemed to have legal title to the shares set against their name.
If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any
default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our
company, the person or member aggrieved (or any member of our company or our company itself) may apply to the
Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application
or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
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Differences in Corporate Law
The Companies Law is derived, to a large extent, from the older Companies Acts of England but does not
follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United
States corporations and their shareholders. Set forth below is a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United
States.
Mergers and Similar Arrangements
The Companies Law permits mergers and consolidations between Cayman Islands companies and between
Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of
two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such
companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent
companies into a combined company and the vesting of the undertaking, property and liabilities of such companies to
the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company
must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the
shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such
constituent company’s articles of association.
The written plan of merger or consolidation must be filed with the Registrar of Companies together with a
declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each
constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the
members and creditors of each constituent company and that notification of the merger or consolidation will be
published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares
(which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required
procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected
in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies,
provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with
whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of
shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or
meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the
court the view that the transaction ought not to be approved, the Grand Court of the Cayman Islands can be expected to
approve the arrangement if it determines that (a) the statutory provisions as to the required majority vote have been met;
(b) the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona
fide without coercion of the minority to promote interests adverse to those of the class; (c) the arrangement is such that
may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and (d) the
arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights
comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware
corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
When a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the
offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of
the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of
the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is
evidence of fraud, bad faith or collusion.
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Shareholders’ Suits
In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be
brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of
persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when (a) a
company acts or proposes to act illegally or ultra vires; (b) the act complained of, although not ultra vires, could only be
effected duly if authorized by more than a simple majority vote that has not been obtained; and (c) those who control the
company are perpetrating a “fraud on the minority”.
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for
indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands
courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of
committing a crime. Our third amended and restated memorandum and articles of association permit indemnification of
officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or
damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct is
generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition,
we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such
persons with additional indemnification beyond that provided in our third amended and restated memorandum and
articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors,
officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association
Some provisions of our third amended and restated memorandum and articles of association may discourage,
delay or prevent a change in control of our company or management that shareholders may consider favorable, including
provisions that authorize our board of directors to issue preference shares in one or more series and to designate the
price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our
shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them
under our memorandum and articles of association, as amended and restated from time to time, for what they believe in
good faith to be in the best interests of our company.
Directors’ Fiduciary Duties
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary
with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to
act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director
(unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company
conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company
owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the
performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her
knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard
with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
In addition, directors of a Cayman Islands company must not place themselves in a position in which there is a
conflict between their duty to the company and their personal interests. However, this obligation may be varied by the
company’s articles of association, which may permit a director to vote on a matter in which he has a personal interest
provided that he has disclosed that nature of his interest to the board. Our third amended and restated memorandum and
articles of association provides that a director with an interest (direct or indirect) in a contract or arrangement or
proposed contract or arrangement with the company must declare the nature of his interest at the meeting of the board of
directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest
then exists, or in any other case at the first meeting of the board of directors after he is or has become so interested.
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A general notice may be given at a meeting of the board of directors to the effect that (i) the director is a
member/officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which
may after the date of the notice in writing be made with that company or firm; or (ii) he is to be regarded as interested in
any contract or arrangement which may after the date of the notice in writing to the board of directors be made with a
specified person who is connected with him, will be deemed sufficient declaration of interest. Following the disclosure
being made pursuant to our third amended and restated memorandum and articles of association and subject to any
separate requirement for Audit Committee approval under applicable law or the listing rules of Nasdaq, and unless
disqualified by the chairman of the relevant board meeting, a director may vote in respect of any contract or arrangement
in which such director is interested and may be counted in the quorum at such meeting. However, even if a director
discloses his interest and is therefore permitted to vote, he must still comply with his duty to act bona fide in the best
interest of our company.
In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the
corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of
care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under
similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material
information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a
manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her
corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the
best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to
have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests
of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties.
Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness
of the transaction, and that the transaction was of fair value to the corporation.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual
meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware
General Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting
of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity
to make proposals and nominations provided that they comply with the notice provisions in the certificate of
incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do
so in the governing documents, but shareholders may be precluded from calling special meetings.
There are no statutory requirements under Cayman Islands law allowing our shareholders to requisition a
shareholders’ meeting. However, under our third amended and restated articles of association, on the requisition of
shareholders representing not less than 30% of the voting rights entitled to vote at general meetings, the board shall
convene an extraordinary general meeting. As an exempted Cayman Islands company, we are not obliged by law to call
shareholders’ annual general meetings. However, our third amended and restated articles of association require us to call
such meetings every year.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted
unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates
the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all
the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with
respect to electing such director. As permitted under Cayman Islands law, our third amended and restated articles of
association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or
rights on this issue than shareholders of a Delaware corporation.
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Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be
removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of
incorporation provides otherwise. Under our third amended and restated articles of association, directors may be
removed by an ordinary resolution of shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware public
corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment
to its certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited from engaging in certain
business combinations with an “interested shareholder” for three years following the date that such person becomes an
interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or
more of the target’s outstanding voting stock or who or which is an affiliate or associate of the corporation and owned
15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of limiting the
ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated
equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an
interested shareholder, the board of directors approves either the business combination or the transaction which resulted
in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to
negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of
protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not
regulate transactions between a company and its significant shareholders, it does provide that such transactions must be
entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of
constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve,
dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the
dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding
shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be
wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the
company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to
order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and
equitable to do so.
Under the Companies Law of the Cayman Islands and our third amended and restated articles of association,
our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the
approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise.
Under Cayman Islands law and our third amended and restated articles of association, if our share capital is divided into
more than one class of shares, we may vary the rights attached to any class only with the sanction of a special resolution
passed at a separate meeting of the holders of the shares of that class.
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Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended
only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares
entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to
vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under
Cayman Islands law, our third amended and restated memorandum and articles of association may only be amended by a
special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our third amended and restated memorandum and articles of association on
the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no
provisions in our third amended and restated memorandum and articles of association governing the ownership threshold
above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and
warrants with or without preferred, deferred, qualified or other special rights or restrictions.
C.
Material contracts.
We have not entered into any material contracts other than in the ordinary course of business and other than
those described in Item 4 “Information on the Company”, elsewhere in this annual report or below.
D.
Exchange controls.
Regulations on Foreign Exchange
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Foreign Exchange
Administration Regulations. Under the PRC foreign exchange regulations, payments of current account items, such as
profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies
without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or
registration with appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign
currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our
PRC subsidiary.
SAFE has promulgated the Circular on Further Improving and Adjusting Foreign Exchange Administration
Policies on Foreign Direct Investment, as amended in May 2015, which substantially amends and simplifies the current
foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts,
such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the
reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and
dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of
SAFE, and multiple capital accounts for the same entity could be opened in different provinces, which was not possible
previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign
Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May
2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors
in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the
direct investment in the PRC based on the registration information provided by SAFE and its branches.
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SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37, which supersedes SAFE Circular 75, and requires that PRC
citizens or residents must register with the relevant local SAFE branch before making capital contribution to any
offshore entity directly established or indirectly controlled by that PRC citizen or resident for the purpose of investment
or financing and with onshore or offshore assets or equity interests legally owned by that PRC citizen or resident. In
addition, the SAFE registrations are required to be updated with local SAFE branch with respect to that offshore special
purpose company in connection with the change of its basic information, such as its company name, business term,
shareholding by individual PRC citizens or residents, merger, or division and, with respect to the individual PRC
citizens or residents in case of any increases or decreases of capital in that offshore special purpose company, or share
transfers or swaps by the individual PRC citizens or residents.
Our PRC citizen or resident beneficial owners are applying for registrations under SAFE Circular 37 with the
relevant local counterpart of SAFE in Beijing. However, we might not be fully informed of the identities of all our
beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE
Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are
PRC citizens or residents have complied with and will in the future make or obtain any applicable registrations or
approvals required by SAFE Circular 37 or other related regulations. Failure to comply with the required SAFE
registration and updating requirements described above could subject us to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and prospects. See “Item 3. Key Information—D. Risk
Factors—Risks Relating to Doing Business in China—A failure by our shareholders or beneficial owners who are PRC
citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to
distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws,
which could adversely affect our business and financial condition”.
Employee Stock Option Plans
In February 2012, SAFE promulgated the Notices on Issues concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier
rules promulgated in March 2007, to regulate the foreign exchange administration of PRC citizens and non-PRC citizens
who reside in the PRC for a continuous period of not less than one year, with a few exceptions, who participate in stock
incentive plans of overseas publicly-listed companies. Pursuant to these rules, these individuals who participate in any
stock incentive plan of an overseas publicly-listed company, are required to register with SAFE through a domestic
qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other
procedures. We and our executive officers and other employees who are PRC citizens or non-PRC citizens who reside in
the PRC for a continuous period of not less than one year and have been granted options are subject to these regulations.
Failure to complete such SAFE registrations could subject us and these employees to fines and other legal sanctions. The
State Administration of Taxation has issued certain circulars concerning employee share options or restricted shares.
Under these circulars, our employees working in the PRC who exercise share options or are granted restricted shares
would be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to
employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of
those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes
according to relevant laws and regulations, we could face sanctions imposed by the tax authorities or other PRC
government authorities. In addition, under the SAFE Circular 37 effective from July 2014, the individual PRC citizens
or residents who are directors, supervisors, senior management or other employees of an enterprise in the PRC that is
directly or indirectly controlled by an overseas non-listed special purpose company and participate in any stock incentive
plan of such non-listed special purpose company, can submit relevant materials to the relevant local SAFE branch for the
foreign exchange registration before the exercise of the share option. However, as a newly implemented regulation,
specific terms of SAFE Circular 37 remain subject to interpretation and application by SAFE.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—A failure to
comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC
citizens could subject such employees or us to fines and legal or administrative sanctions”.
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Foreign Exchange Administration Applicable to Direct Investment
In February 2015, SAFE further simplified and improved the policies of Foreign Exchange Administration
Applicable to Direct Investment, two administrative examination and approval items, i.e. verification and approval of
foreign exchange registration under domestic direct investment, and verification and approval of foreign exchange
registration under overseas direct investment, shall be abolished. Instead, banks shall, in accordance with this Notice and
the Operating Guidelines for Foreign Exchange Services under Direct Investment, directly examine and handle foreign
exchange registration under domestic direct investment and foreign exchange registration under overseas direct
investment. The SAFE and its branches will then conduct indirect regulation of Foreign Exchange Registration of Direct
Investment via banks. Pursuant to these rules, foreign investors can directly invest into PRC entities without prior
verification and approval of foreign exchange registration from SAFE.
Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises
In March 2015, SAFE reformed the administrative approach regarding the settlement of the foreign exchange
capitals of foreign-invested enterprises. Foreign-invested enterprises will be allowed to settle their foreign exchange
capitals on a discretionary basis. It means a foreign-invested enterprise may, based on its actual business needs, settle
with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange
bureau has confirmed monetary contribution rights and interests (or for which the bank has registered the account-
crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle 100% of their
foreign exchange capitals on a discretionary basis. However, a foreign-invested enterprise shall not use its capital and
the RMB funds obtained from foreign exchange settlement for any of the following purposes: (1) directly or indirectly,
using the foregoing funds for expenditure beyond its business scope or expenditure prohibited by State laws and
regulations; (2) directly or indirectly, using the foregoing funds for investment in securities, unless otherwise prescribed
by laws and regulations; (3) directly or indirectly, using the foregoing funds for disbursing RMB entrusted loans(unless
permitted under its business scope), repaying inter-corporate borrowings (including third-party advances) and repaying
RMB bank loans that have been sub-lent to third parties; or (4) using the foregoing funds to pay for the expenses related
to the purchase of real estate not for self-use, unless it is a foreign-invested real estate enterprise.
Regulations on Dividend Distribution
Wholly foreign-owned companies in China, such as Our WFOE, may pay dividends only out of their
accumulated profits after tax as determined in accordance with PRC accounting standards. Remittance of dividends by a
wholly foreign-owned enterprise out of China is subject to examination by the commercial banks. Wholly foreign-
owned companies are not permitted to pay dividends unless they set aside at least 10% of their respective accumulated
profits after-tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund
reaches 50% of the wholly foreign-owned company’s registered capital. In addition, these companies also may allocate a
portion of their after-tax profits based on PRC accounting standards to other funds at their discretion. These statutory
reserve funds and other funds are not distributable as cash dividends.
E.
Taxation.
The following is a general summary of the material Cayman Islands, People’s Republic of China and U.S.
federal income tax consequences relevant to an investment in our ADSs and ordinary shares. The discussion is not
intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion
is based on laws and relevant interpretations thereof as of the date of this annual report, all of which are subject to
change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local
tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United
States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and
disposition of our ADSs and ordinary shares.
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Cayman Islands Taxation
The Cayman Islands does not impose any withholding taxes on dividends paid to shareholders by a Cayman
Islands corporation, nor does the Cayman Islands impose any other taxes on shareholders of a Cayman Islands
corporation who are not themselves residents of the Cayman Islands. The Cayman Islands is not a party to any tax
treaties that are applicable to any payments made to or by our company.
People’s Republic of China Taxation
Under the Enterprise Income Tax Law and the Regulations on the Implementation of the Enterprise Income
Tax Law of the People’s Republic of China, enterprises established outside of China but whose “de facto management
body” is located in China are considered “resident enterprises” for PRC tax purposes. Under the applicable
implementation regulations, “de facto management body” is defined as the organizational body that effectively exercises
overall management and control over production and business operations, personnel, finance and accounting, and
properties of the enterprise. Substantially all of our management is currently based in China, and may remain in China in
the future. If we are treated as a “resident enterprise” for PRC tax purposes, foreign enterprise holders of our ADSs or
ordinary shares may be subject to a 10% PRC income tax upon dividends payable by us and on gains realized on their
sales or other dispositions of our ADSs or ordinary shares. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Doing Business in China—Under the PRC enterprise income tax law, we could be classified as a ‘resident
enterprise’ of China. Such classification could result in unfavorable tax consequences to us and our non-PRC
shareholders.” In addition, gains derived by our non-PRC individual shareholders from the sale of our shares and ADSs
may be subject to a 20% PRC withholding tax. It is unclear whether our non-PRC individual shareholders (including our
ADS holders) would be subject to any PRC tax on dividends obtained by such non-PRC individual shareholders in the
event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to dividends realized by non-PRC
individuals, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty.
However, it is unclear either whether our non-PRC shareholders would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.
Material United States Federal Income Tax Considerations
The following summary describes the material United States federal income tax consequences to United States
Holders (as defined below) of the ownership of our ordinary shares and ADSs as of the date hereof. Except where noted,
this summary deals only with ordinary shares and ADSs held as capital assets. As used herein, the term “United States
Holder” means a beneficial owner of an ordinary share or ADS that is for United States federal income tax purposes:
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an individual citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes)
created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more
United States persons have the authority to control all substantial decisions of the trust or (2) has a valid
election in effect under applicable United States Treasury regulations to be treated as a United States
person.
This summary does not represent a detailed description of all of the United States federal income tax
consequences that may be applicable to you if you are subject to special treatment under the United States federal
income tax laws, including if you are:
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a dealer in securities or currencies;
a financial institution of certain types;
a regulated investment company;
a real estate investment trust;
an insurance company;
a tax-exempt organization;
a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a
constructive sale or a straddle;
a trader in securities that has elected the mark-to-market method of accounting for your securities;
a person who owns or is deemed to own 10% or more of the voting power or value of our stock;
a partnership or other pass-through entity for United States federal income tax purposes; or
a person whose “functional currency” is not the United States dollar.
In addition, this discussion does not address any state, local, alternative minimum tax, or non-United States tax
considerations, or the Medicare contribution tax on net investment income. Each potential investor is urged to consult its
tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of
an investment in our ADSs or ordinary shares.
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the
Code, final and proposed regulations thereunder, rulings and judicial decisions as of the date hereof, and such authorities
may be replaced, revoked or modified so as to result in United States federal income tax consequences different from
those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and
assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will generally depend upon
the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding
our ordinary shares or ADSs, you should consult your tax advisors.
This summary does not contain a detailed description of all the United States federal income tax consequences
that may be applicable to you in light of your particular circumstances and, except as set forth below with respect
to PRC tax considerations, does not address the effects of any state, local or non-United States tax laws. If you are
considering the purchase, ownership or disposition of our ordinary shares or ADSs, you should consult your own
tax advisors concerning the United States federal income tax consequences to you in light of your particular
situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of
the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary
shares for ADSs will not be subject to United States federal income tax.
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Taxation of Dividends and Other Distributions on the ADSs
Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of any
distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be
taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under
United States federal income tax principles. Such income (including withheld taxes) will be includable in your gross
income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares, or
by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed
to corporations under the Code.
Dividends paid to certain non-corporate United States Holders may be taxable at preferential rates applicable to
long-term capital gain if we are treated as a “qualified foreign corporation”. A foreign corporation is treated as a
qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs
backed by such shares) that are readily tradable on an established securities market in the United States. Our ADSs are
listed on the Nasdaq Global Market, and thus, pursuant to the United States Treasury Department guidance, our ADSs
are treated as readily tradable on an established securities market in the United States. Thus, we believe that dividends
we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our ordinary
shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary
shares that do not back ADSs currently meet the conditions required for these reduced tax rates. There can be no
assurance that our ADSs will continue to be considered readily tradable on an established securities market in later
years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain
income tax treaties with the United States. In the event that we are deemed to be a PRC resident enterprise under the
PRC tax law, we believe we would be eligible for the benefits of the income tax treaty between the United States and the
PRC (including any protocol thereunder), or the Treaty, and if we are eligible for such benefits, dividends we pay on our
ordinary shares, regardless of whether such shares are represented by ADSs or are readily tradable on an established
securities market in the United States, would be eligible for the reduced rates of taxation. For discussion regarding
whether we may be classified as a PRC resident enterprise, see “Item 10. Additional Information—E. Taxation—People’
s Republic of China Taxation”. Even if dividends would be treated as paid by a qualified foreign corporation, non-
corporate United States Holders will not be eligible for reduced rates of taxation if they do not hold our ADSs or
ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or to the
extent that such United States Holders elect to treat the dividend income as “investment income” under the Code. In
addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related
payments with respect to positions in substantially similar or related property. This disallowance applies even if the
minimum holding period has been met. You should consult your own tax advisors regarding the application of these
rules given your particular circumstances.
Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends
received from us if we are a passive foreign investment company, or PFIC, for United States federal income tax purpose
for the taxable year in which such dividends are paid or for the preceding taxable year.
In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, you may be subject to
PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. See “Item 10. Additional
Information—E. Taxation—People’s Republic of China Taxation”. In that case, PRC withholding taxes on dividends
(limited, in the case of a U.S. holder who qualifies for the benefits of the Treaty, to the extent not exceeding the
applicable dividend withholding rate under the Treaty), generally will be treated as foreign taxes eligible for credit
against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid
on the ADSs or ordinary shares will be treated as foreign-source income and generally will constitute passive category
income. Furthermore, if you have not held the ADSs or ordinary shares for more than 15 days during the 31-day period
beginning 15 days before the ex-dividend date (during which you are not protected from risk of loss), or are obligated to
make payments related to the dividends, you generally will not be allowed a foreign tax credit for any PRC withholding
taxes imposed on dividends paid on the ADSs or ordinary shares. The rules governing the foreign tax credit are
complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your
particular circumstances.
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To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a
taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a
tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or ordinary shares (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or
ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or
exchange. However, we do not expect to calculate our earnings and profits in accordance with United States federal
income tax principles. Therefore, you should expect that a distribution generally will be treated as a dividend (as
discussed above).
Passive Foreign Investment Company
In general, we will be a PFIC for any taxable year in which:
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at least 75% of our gross income is passive income, or
at least 50% of the average value (determined on a quarterly basis) of our assets produce or are held for the
production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents. Furthermore, cash is
categorized as a passive asset and our unbooked intangibles associated with active business activities (including
goodwill) may generally be taken into account and classified as active assets. In estimating the value of our goodwill, we
generally take into account our market capitalization. If we own at least 25% (by value) of the stock of another
corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other
corporation’s assets and receiving our proportionate share of the other corporation’s income.
Based on our current income and assets and the value of our ADSs and ordinary shares, we do not believe that
we were a PFIC for our taxable year ended December 31, 2017. With respect to our 2018 taxable year and foreseeable
future taxable years, and subject to the uncertainty regarding the treatment of our contractual arrangements with our
consolidated affiliated entities (discussed below), we presently do not anticipate that we will be a PFIC based upon the
expected composition of our income and assets and the expected value of our assets, including goodwill (determined, in
part, based on the price of our ADSs and ordinary shares). The determination of whether we are a PFIC is made
annually. Accordingly, it is possible that we may be a PFIC for our 2018 taxable year or any future taxable year due to
changes in our asset or income composition or the value of our assets. Because the value of our assets may be
determined by reference to our market capitalization, and because the market price of our ADSs and ordinary shares may
be volatile, a decrease in the price of our ADSs may also result in our becoming a PFIC. Under circumstances where the
cash is not deployed for active purposes, our risk of becoming a PFIC may increase. In addition, although the law in this
regard is not entirely clear, we treat Our VIE as being owned by us for United States federal income tax purposes
because we control its management decisions and we are entitled to substantially all of its economic benefits and, as a
result, we consolidate its results of operations in our consolidated U.S. GAAP financial statements. If it were
determined, however, that we are not the owner of Our VIE for United States federal income tax purposes, we could be
treated as a PFIC for taxable years ending after the date of our initial public offering.
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, we generally will
continue to be treated as a PFIC as to you for all succeeding taxable years during which you hold our ADSs or ordinary
shares, and you will be subject to the special tax rules discussed below, except if you have made a mark-to-market
election as discussed below. However, if we are a PFIC for any taxable year and subsequently cease to be a PFIC, you
can avoid the continuing impact of the PFIC rules by making a special election, or a Purging Election, to recognize gain
(but not loss) in the manner described below as if your ADSs or ordinary shares had been sold on the last day of the last
taxable year during which we were a PFIC. After the Purging Election, your ADSs or ordinary shares will not be treated
as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your own tax advisors about the
availability of this election, and whether making the election would be advisable in your particular circumstances.
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject
to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other
disposition, including a Purging Election or pledge, of ADSs or ordinary shares. Distributions received in a taxable year
that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable
years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special
tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary
shares,
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in
which we were a PFIC with respect to you, will be treated as ordinary income, and
the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year
and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year.
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-
United States subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by
value) of the shares of the lower-tier PFIC for purposes of the application of these rules. A disposition of shares in, or a
distribution by, any of our subsidiaries that is a PFIC will trigger the excess distributions rules described above. You are
urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In lieu of being subject to the excess distribution rules discussed above, you may make an election to include
gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly
traded on a qualified exchange. Under current law, the mark-to-market election will be available to holders of ADSs as
long as the ADSs are listed on the Nasdaq Global Market, which constitutes a qualified exchange, and are “regularly
traded” for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that
only the ADSs and not the ordinary shares, are listed on the Nasdaq Global Market. Consequently, if you are a holder of
ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if
we are or were to become a PFIC.
If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary
income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs.
You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs
over their fair market value at the end of the year, but only to the extent of the net amount previously included in income
as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize
upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be treated as
ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market
election.
Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by
the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective
for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer
regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You
are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the
election would be advisable in your particular circumstances.
A U.S. investor in a PFIC generally can mitigate the adverse consequences of the excess distribution rules
described above by electing to treat the PFIC as a “qualified electing fund” under the Code. However, this option is not
available to you because we do not intend to comply with the requirements necessary to permit you to make this
election.
We expect to file annual reports on Form 20-F with the U.S. Securities and Exchange Commission in which we
will indicate whether or not we believe we were a PFIC for the relevant taxable year. We do not intend to make any
other annual determination or otherwise notify you regarding our status as a PFIC for any taxable year. You are urged to
consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary
shares if we are considered a PFIC in any taxable year.
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A United States Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of
the United States Holder may have to file an IRS Form 8621 (whether or not a mark-to-market election is or has been
made) with such United States Holder’s U.S. federal income tax return and provide such other information as may be
required by the U.S. Treasury Department.
The rules dealing with PFICs and the mark-to-market election are complex and are affected by various factors
in addition to those described above. Accordingly, United States Holders of our ordinary shares and ADSs should
consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares and ADSs under their
particular circumstances.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange
of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary
shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment
Company” above, such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with
respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital
losses is subject to limitations.
Any gain or loss recognized by you generally will be treated as United States source gain or loss. However, if
we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are
eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty and,
accordingly, you may be able to credit the PRC tax against your United States federal income tax liability. If you are not
eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you generally
would not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or
ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income
treated as derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty,
you are a resident of the United States, and you meet other factual requirements specified in the Treaty. Because
qualification for the benefits of the Treaty is a fact-intensive inquiry which depends upon the particular circumstances of
each investor, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the
Treaty. You are also urged to consult your tax advisor regarding the tax consequences if PRC tax is imposed on the gain
on a disposition of our ordinary shares or ADSs, including the availability of the foreign tax credit and the election to
treat any gain as PRC source under your particular circumstances.
Foreign Asset Reporting
Certain United States Holders who are individuals (and under proposed regulations, certain entities) may be
required to report information relating to an interest in our ordinary shares or ADSs, subject to certain exceptions
(including an exception for shares held in accounts maintained by U.S. financial institutions) on IRS Form 8938. United
States Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with
respect to their ownership and disposition of our ordinary shares or ADSs.
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F.
Dividends and paying agents.
Not applicable.
G.
Statement by experts.
Not applicable.
H.
Documents on display.
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to
foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other
information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders, and our executive officers, directors and principal
shareholders are not subject to the insider short-swing profit disclosure and recovery provisions of Section 16 of the
Exchange Act.
All information that we have filed with the SEC can be accessed through the SEC’s website at www.sec.gov.
This information can also be inspected and copied at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee,
by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms.
We intend to furnish the depositary with our annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of
shareholders’ meeting and other reports and communications that are made generally available to our shareholders. The
depositary will make such notices, reports and communications available to holders of ADSs and, upon our written
request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting
received by the depositary from us.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our
website at ir.ccjmu.com. In addition, we will provide hard copies of our annual report free of charge to shareholders and
ADS holders upon request.
I.
Subsidiary Information.
Not applicable.
Item 11.
Quantitative and Qualitative Disclosures about Market Risk.
Foreign Exchange Risk
Substantially all of our revenues and expenses are denominated in RMB. We do not believe that we currently
have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our
exposure to such risk. Although in general, our exposure to foreign exchange risks should be limited, the value of your
investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of
our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political
and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC
government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB
appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010,
this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult
to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and
the U.S. dollar in the future. To the extent that we need to convert U.S. dollars we receive from our initial public
offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on
the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation
of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.
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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$7.4 thousand and US$26.1 thousand
for the years ended December 31, 2015 and 2016, respectively, and had interest expense of US$411 thousand for the
year ended December 31, 2017. We had cash and cash equivalents of US$4.9 million as of December 31, 2017.
Assuming such amount of cash and cash equivalents are held entirely in interest-bearing bank deposits, a hypothetical
one percentage point (100 basis-point) decrease in interest rates would decrease our interest income from these interest-
bearing bank deposits for one year by approximately US$49.1 thousand. Interest-earning instruments carry a degree of
interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in
market interest rates. However, our future interest income may fall short of expectations due to changes in market
interest rates.
Item 12.
Description of Securities Other than Equity Securities.
A.
Debt Securities.
Not applicable.
B.
Warrants and Rights
Not applicable.
C.
Other Securities.
Not applicable.
D.
American Depositary Shares.
Fees and Charges Our ADS Holders May Have to Pay
Citibank, N.A. is our depositary. The depositary collects its fees for delivery and surrender of ADSs directly
from investors depositing ordinary shares or surrendering ADSs for the purpose of withdrawal or from intermediaries
acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the
amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its
annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the
book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-
attracting services until its fees for those services are paid.
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An ADS holder will be required to pay the following fees under the terms of the deposit agreement:
Services:
Issuance of ADSs upon deposit of shares (excluding
issuances as a result of distributions of shares)
Fees:
Up to US$0.05 per ADS issued
Cancellation of ADSs
Up to US$0.05 per ADS cancelled
Distribution of cash dividends or other cash
distributions (i.e., sale of rights and other
entitlements)
Up to US$0.05 per ADS held
Distribution of ADSs pursuant to (i) stock dividends
or other fee stock distributions, or (ii) exercise of
rights to purchase additional ADSs
Up to US$0.05 per ADS held
Distribution of securities other than ADSs or rights to
purchase additional ADSs (i.e., spin-off shares)
Up to US$0.05 per ADS held
ADS Services
Up to US$0.05 per ADS held on the applicable record
date(s) established by the depositary
∂
∂
∂
∂
∂
∂
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us for expenses we incur that are related to the establishment and
maintenance of the ADR program, including investor relations expenses. There are limits on the amount of expenses for
which the depositary will reimburse us, but the amount of reimbursement available to us is not linked to the amounts of
fees the depositary collects from investors. We have received US$0.06 million from the depositary until the date of this
annual report.
Item 13.
Defaults, Dividend Arrearages and Delinquencies.
PART II
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
None.
Item 14E
Use of Proceeds.
The following “Use of Proceeds” information relates to the registration statement on Form F-1 (File No. 333-
201413) for our initial public offering of 4,000,000 ADSs, which became effective on March 31, 2015. We received net
proceeds of approximately US$37.3 million from our initial public offering.
For the period from March 31, 2015 to December 31, 2017, we used US$30 million from our initial public
offering for our acquisition of JMU in June 2015.
Item 15.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed
an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, our disclosure controls and procedures were
effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the
Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms, and that the information required to be disclosed by us in the reports that we file or submit under the
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Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed under the supervision of our chief executive
officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of our consolidated financial statements for external reporting purposes in accordance with the U.S.
generally accepted accounting principles.
After our acquisition of JMU HK, the scope of our internal controls over financial reporting was also enlarged
significantly. We also performed a related assessment based on this new control environment and change in scope.
Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2017. In making this assessment, management used the framework set forth in the report Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The
COSO framework summarizes each of the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.
Based on that evaluation, our management concluded that these controls were effective on December 31, 2017.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our registered public accounting firm pursuant to the
transition periods established by rules of the SEC for an Emerging Growth Company.
Changes in Internal Control over Financial Reporting
There was one material weaknesses in internal control over financial reporting during our preparation of the
financial statements for the year ended December 31, 2015 but had not been remediated as of December 31, 2016. A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness identified related to the lack of accounting personnel
with appropriate knowledge of accounting principles generally accepted in the United States of America, or U.S. GAAP.
In 2017, we implemented measures designed to improve our internal control over financial reporting to
remediate this material weakness, including the following:
∂
∂
∂
increasing the number of qualified financial reporting personnel;
improving the capabilities of existing financial reporting personnel through training and education in
accounting and reporting requirements under GAAP and SEC rules and regulations;
developing, communicating and implementing an accounting policy manual for our financial reporting
personnel for recurring transactions and period-end closing processes; and
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∂
establishing effective monitoring and oversight controls for non-recurring and complex transactions to
ensure the accuracy and completeness of our condensed consolidated financial statements and related
disclosures.
We believe that the measures taken above enhanced our internal control over financial reporting and were
sufficient to remediate the material weakness identified. There is no guarantee that our remediation efforts will result in
the attestation from our independent registered public accounting firm, if required, that our internal control over
financial reporting is effective as of December 31, 2017.
Item 16.
Item 16A. Audit Committee Financial Expert.
Our board of directors has determined that Mr. Tianruo (Robert) Pu, chairman of our audit committee, meets
the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC and meets the criteria
for independence set forth in Section 10A(m)(3) of the Exchange Act.
Item 16B. Code of Ethics.
Our board of directors has adopted a code of business conduct and ethics which is applicable to our directors,
officers and employees. Our code of business conduct and ethics has been filed as an exhibit to our registration
statement on Form F-1 (File No. 333-201413) initially filed with the SEC on January 9, 2015.
Item 16C. Principal Accountant Fees and Services.
The following table sets forth the aggregate fees by categories specified below in connection with certain
professional services rendered by our principal external accounting firms.
Audit fees (1)
Total
Year Ended December 31,
2016
USD
2017
USD
(in thousands)
266
266
623
623
(1) “Audit fees” means the aggregate fees billed in each of the fiscal years for professional services rendered by our
principal external auditors for the audit of our annual consolidated financial statements and assistance with review
of documents filed with the SEC and other statutory and regulatory filings.
The policy of our audit committee is to pre-approve all auditing and non-auditing services permitted to be
performed by our independent registered public accounting firm.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item 16F. Change in Registrant’s Certifying Accountant.
None.
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Item 16G. Corporate Governance.
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable
Cayman Islands law. In addition, because our ADSs are listed on The Nasdaq Global Market, we are subject to Nasdaq’s
corporate governance requirements. Nasdaq Stock Market Rule 5615(a)(3) permits a foreign private issuer like us to
follow home country practices in lieu of certain requirements of Rule 5600, provided that such foreign private issuer
discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the
home country practice followed in lieu of such requirement.
Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices
in lieu of certain requirements of Rule 5600, provided that such foreign private issuer discloses in its annual report filed
with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in
lieu of such requirement.
We have informed Nasdaq that we will follow home country practice in place of all of the requirements of
Rule 5600 other than those rules which we are required to follow pursuant to the provisions of Rule 5615(a)(3).
∂ Rule 5605(b), pursuant to which (i) a majority of the board of directors must be comprised of Independent
Directors, and (ii) the Independent Directors must have regularly scheduled meetings at which only
Independent Directors are present.
∂ Rule 5605(c) (other than those parts as to which the home country exemption is not applicable), pursuant to
which each company must have, and certify that it has and will continue to have, an audit committee of at
least three members, each of whom must meet criteria set forth in Rule 5605(c)(2) (A).
∂ Rule 5605(d), pursuant to which each company must (i) certify that it has adopted a formal written
compensation committee charter and that the compensation committee will review and reassess the
adequacy of the formal written charter on an annual basis, and (ii) have a compensation committee of at
least two members, each of whom must be an Independent Director.
∂ Rule 5605(e), pursuant to which director nominees must be selected, or recommended for the Board’s
selection, either by Independent Directors constituting a majority of the Board’s Independent Directors in a
vote in which only Independent Directors participate, or a nominations committee comprised solely of
Independent Directors.
∂ Rule 5610, pursuant to which each company shall adopt a code of conduct applicable to all directors,
officers and employees.
∂ Rule 5620(a), pursuant to which each company listing common stock or voting preferred stock, or their
equivalents, shall hold an annual meeting of shareholders no later than one year after the end of the issuer’s
fiscal year-end.
∂ Rule 5620(b), pursuant to which each company shall solicit proxies and provide proxy statements for all
meetings of shareholders and shall provide copies of such proxy solicitation to Nasdaq.
∂ Rule 5620(c), pursuant to which each company that is not a limited partnership shall provide for a quorum
as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no
case shall such quorum be less than 331/3% of the outstanding shares of the company’s common voting
stock.
∂ Rule 5630, pursuant to which each company that is not a limited partnership shall conduct an appropriate
review and oversight of all related party transactions for potential conflict of interest situations on an
ongoing basis by the company’s audit committee or another independent body of the board of directors.
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∂ Rule 5635(a), pursuant to which shareholder approval is required in certain circumstances prior to an
issuance of securities in connection with the acquisition of the stock or assets of another company.
∂ Rule 5635(b), pursuant to which shareholder approval is required prior to the issuance of securities when
the issuance or potential issuance will result in a change of control of the company.
∂ Rule 5635(c), pursuant to which shareholder approval is required prior to the issuance of securities when a
stock option or purchase plan is to be established or materially amended or other equity compensation
arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors,
employees, or consultants, subject to certain exceptions.
∂ Rule 5635(d), pursuant to which shareholder approval is required prior to the issuance of securities in
connection with a transaction other than a public offering involving:
o
o
the sale, issuance or potential issuance by the company of common stock (or securities convertible into
or exercisable for common stock) at a price less than the greater of book or market value which
together with sales by officers, directors or Substantial Shareholders of the company equals 20% or
more of common stock or 20% or more of the voting power outstanding before the issuance; or
the sale, issuance or potential issuance by the company of common stock (or securities convertible into
or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the
voting power outstanding before the issuance for less than the greater of book or market value of the
stock.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17.
Financial Statements.
PART III
We have elected to provide financial statements pursuant to Item 18.
Item 18.
Financial Statements.
Our consolidated financial statements are included at the end of this annual report.
Item 19.
Exhibits.
Exhibit
No.
1.1
2.1
2.2
3.3
4.1
Description of Exhibit
Third Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by
reference to exhibit 3.1 to our F-1 registration statement (File No. 333-201413) initially filed with the
SEC on January 9, 2015)
Deposit Agreement by and among the Registrant and Citibank, N.A., as Depositary, and the Holders and
Beneficial Owners of the American Depositary Shares issued thereunder, dated as of April 13, 2015
(incorporated by reference to exhibit 4.3 to our S-8 registration statement (File No. 333-206466) filed
with the SEC on August 19, 2015)
Specimen American Depositary Receipt (included in Exhibit 2.1)
Specimen Certificate for Ordinary Shares (incorporated by reference to exhibit 4.2 to our F-1 registration
statement (File No. 333-201413) initially filed with the SEC on January 9, 2015)
Amended and Restated 2011 Share Incentive Plan (incorporated by reference to exhibit 10.1 to our S-8
registration statement (File No. 333-206466) filed with the SEC on August 19, 2015)
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4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15*
Master Exclusive Service Agreement, dated as of May 13, 2015, by and among Shanghai Zhongming
Supply Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and the
shareholder of Shanghai Zhongmin Supply Chain Management Co., Ltd.(incorporated by reference to
exhibit 4.10 to our annual report on Form 20-F filed with the SEC on April 29, 2016)
Business Cooperation Agreement, dated as of May 13, 2015, by and among Shanghai Zhongming Supply
Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and the
shareholder of Shanghai Zhongmin Supply Chain Management Co., Ltd. (incorporated by reference to
exhibit 4.11 to our annual report on Form 20-F filed with the SEC on April 29, 2016)
Exclusive Option Agreement, dated as of May 13, 2015, by and among Shanghai Zhongming Supply
Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and the
shareholder of Shanghai Zhongmin Supply Chain Management Co., Ltd. (incorporated by reference to
exhibit 4.12 to our annual report on Form 20-F filed with the SEC on April 29, 2016)
Equity Interest Pledge Agreement, dated as of May 13, 2015, by and among Shanghai Zhongming Supply
Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and the
shareholder of Shanghai Zhongmin Supply Chain Management Co., Ltd. (incorporated by reference to
exhibit 4.13 to our annual report on Form 20-F filed with the SEC on April 29, 2016)
Proxy Agreement and Power of Attorney, dated as of May 13, 2015, by and among Shanghai Zhongming
Supply Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and the
shareholder of Shanghai Zhongmin Supply Chain Management Co., Ltd. (incorporated by reference to
exhibit 4.14 to our annual report on Form 20-F filed with the SEC on April 29, 2016)
Registration Rights Agreement, dated as of June 8, 2015, by and among the Registrant, New Admiral
Limited, Zhejiang Sunward Fishery Restaurant Group Share Co., Ltd., Junhe Investment Pte. Ltd.,
Shanghai Zhong Ju Investment Management Center, Extensive Power Limited, Global Oriental
Development Limited, Asia Global Develop Limited, Markland (Hong Kong) Investment Limited,
Markland (Hong Kong) Planning Limited, Youlong Huang, Ning Lin, Wai Poon, Gang Wang, Guoping
Wu, New Field Worldwide Ltd., Link Crossing Limited, Blue Ivy Holdings Limited and Maodong Xu
(incorporated by reference to exhibit 99.8 to the Schedule 13D (File No. 005-88838) filed with the SEC
on September 21, 2015)
Lock-Up Agreement, dated as of June 8, 2015, by and between the Registrant and Maodong Xu
(incorporated by reference to exhibit 99.9 to the Schedule 13D (File No. 005-88838) filed with the SEC
on September 21, 2015)
Lock-Up Agreement, dated as of June 8, 2015, by and between the Registrant and Xiaoxia Zhu
(incorporated by reference to exhibit 99.5 to the Schedule 13D (File No. 005-88838) filed with the SEC
on June 18, 2015)
Lock-Up Agreement, dated as of June 8, 2015, by and between the Registrant and Huimin Wang
(incorporated by reference to exhibit 99.5 to the Schedule 13D (File No. 005-88838) filed with the SEC
on June 19, 2015)
Working Capital Provision Agreement, dated as of April 20, 2015, by and between the Registrant,
Xiaoxia Zhu and Huimin Wang (incorporated by reference to exhibit 4.23 of our annual report on Form
20-F filed with the SEC on April 29, 2016)
Working Capital Provision Agreement, dated as of May 25, 2017, by and between the Registrant, Xiaoxia
Zhu and Huimin Wang. (incorporated by reference to exhibit 4.16 of our annual report on Form 20-F filed
with the SEC on May 26, 2017)
Supplemental Agreement, dated as of December 28, 2016, by and among Shanghai Zhongming Supply
Chain Management Co., Ltd., Shanghai Zhongmin Supply Chain Management Co., Ltd. and Shanghai
Zhongmin Investment and Development Group Co., Ltd. (formerly known as Shanghai Zhongmin
Investment and Development Group Co., Ltd.) (incorporated by reference to exhibit 4.18 of our annual
report on Form 20-F filed with the SEC on May 26, 2017)
Financial Support Letter, dated as of May 18, 2017, from the Registrant to Shanghai Zhongmin Supply
Chain Management Co., Ltd.(incorporated by reference to exhibit 4.19 of our annual report on Form 20-F
filed with the SEC on May 26, 2017)
Working Capital Provision Agreement, dated as of April 23, 2018, by and between the Registrant,
Xiaoxia Zhu and Huimin Wang
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8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
15.4*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
List of Subsidiaries of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to exhibit 99.1 to our
F-1 registration statement (File No. 333-201413) initially filed with the SEC on January 9, 2015)
Certification of Chief Executive Officer Required by Rule 13a-14(a)
Certification of Chief Financial Officer Required by Rule 13a-14(a)
Certification of Chief Executive Officer Required by Rule 13a-14(b)
Certification of Chief Financial Officer Required by Rule 13a-14(b)
Consent of Ernst & Young Hua Ming LLP
Consent of Beijing Dentons Law Offices, LLP
Consent of Maples and Calder (Hong Kong) LLP
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Labels Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Filed herewith
** Furnished herewith
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly
caused and authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Date: April 24, 2018
JMU LIMITED
By:
/s/Xiaoxia Zhu
Name: Xiaoxia Zhu
Title: Chief Executive Officer
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2017
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 2015, 2016 AND 2017
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED
DECEMBER 31, 2015, 2016 AND 2017
CONSOLIDATED STATEMETNS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 2015, 2016 AND 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2015, 2016 AND 2017
PAGE(S)
F-2
F-3
F-4 – F-5
F-6 – F-7
F-8
F-9 – F-11
F-12 – F-13
F-14 – F-62
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of JMU Limited (formerly known as Wowo Limited):
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of JMU Limited (formerly known as Wowo Limited)
(the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive
loss, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2017,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period
ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ Ernst & Young Hua Ming LLP
We have served as the Company’s auditor since 2016.
Shanghai, the People’s Republic of China
April 24, 2018
F-2
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of JMU Limited:
We have audited the accompanying consolidated statements of operations, comprehensive loss, changes in shareholders’
equity, and cash flows of JMU Limited (formerly known as "Wowo Limited"), its subsidiaries, its variable interest entity
("VIE"), and its VIE’s subsidiaries (collectively, the "Group") for the year ended December 31, 2015. These
consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Group is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Group's
operations and cash flows for the year ended December 31, 2015, in conformity with the accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a
going concern. As discussed in Note 2 to the consolidated financial statements, the Group’s recurring losses from
operations and shareholders’ equity raise substantial doubt about its ability to continue as a going concern. Management’
s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People’s Republic of China
April 29, 2016
F-3
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars, except for number of shares and per share (or ADS) data)
ASSETS:
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $nil as of December 31, 2016 and
2017
Inventories
Prepaid expenses and other current assets, net
Amounts due from related parties
Total current assets
Non-current assets:
Property and equipment, net
Acquired intangible assets, net
Investment
Goodwill
Deferred tax assets
Other non-current assets
Total non-current assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDER’S EQUITY :
Current liabilities:
Short-term bank borrowings (including short-term bank borrowings of VIE
without recourse to the Company of $nil and $7,684,859 as of December
31, 2016 and 2017, respectively)
Accounts and notes payable (including accounts and notes payable of VIE
without recourse to the Company of $2,200,292 and $3,980,560 as of
December 31, 2016 and 2017, respectively)
Accrued expenses and other current liabilities (including accrued expenses
and other current liabilities of VIE without recourse to the Company of
$8,198,754 and $8,345,461 as of December 31, 2016 and 2017,
respectively)
Advance from customers (including advance from customers of VIE
without recourse to the Company of $2,282,353 and $1,243,739 as of
December 31, 2016 and 2017, respectively)
Amounts due to related parties (including amounts due to related parties of
VIE without recourse to the Company of $1,650,168 and $87,385 as of
December 31, 2016 and 2017, respectively)
Total current liabilities
F-4
Note
As of December 31,
2017
2016
7
8
21
9
10
11
12
15
2,604,886
4,912,170
1,645,237
224,148
8,677,630
212,805
13,364,706
3,295,818
538,660
2,245,788
3,062,797
14,055,233
1,977,659
36,274,238
720,150
221,337,157
219,602
151,552
260,680,358
1,795,233
10,263,941
768,486
108,940,433
156,782
161,723
122,086,598
274,045,064
136,141,831
13
-
7,684,859
2,200,451
3,980,826
14
9,033,258
9,292,260
2,282,353
1,243,739
21
1,711,028
15,227,090
603,883
22,805,567
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In U.S. dollars, except for number of shares and per share (or ADS) data)
LIABILITIES AND SHAREHOLDER’S EQUITY (CONTINUED):
Non-current liabilities:
Other non-current liabilities (including other non-current liabilities of VIE
without recourse to the Company of $1,086,342 and $1,386,749 as of
December 31, 2016 and 2017, respectively)
Deferred tax liabilities (including deferred tax liabilities of the VIE without
recourse to the Company of $nil and $nil as of December 31, 2016 and
2017, respectively)
Amount due to related parties (including amount due to related parties of
the VIE without recourse to the Company of $nil and 5,685,971 as of
December 31, 2016 and 2017, respectively)
Total non-current liabilities
TOTAL LIABILITIES
Commitments and contingencies
Shareholders’ equity:
Ordinary shares ($0.00001 par value; 1,827,462,652 shares authorized,
1,476,208,670 shares issued and outstanding as of December 31, 2016
and 2017)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders’ equity
Note
As of December 31,
2017
2016
15
21
22
16
1,352,202
1,534,449
9,068,560
2,565,985
-
10,420,762
5,685,971
9,786,405
25,647,852
32,591,972
14,756
632,994,514
(352,004,277)
(32,607,781)
248,397,212
14,766
634,070,842
(513,903,256)
(16,632,493)
103,549,859
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
274,045,064
136,141,831
The accompanying notes are an integral part of these consolidated financial statements.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Revenues
Related parties
Third parties
Total revenues
Cost of revenues
Gross (loss)/profit
Note
21
For the years ended December 31,
2017
2016
2015
541,758
10,935,794
11,477,552
10,078,276
63,122,885
73,201,161
17,485,226
71,251,323
88,736,549
(13,220,386)
(1,742,834)
(72,856,808)
344,353
(88,187,781)
548,768
Operating expenses:
Selling and marketing (including share-based compensation
of $nil, $680,124 and $538,897 for the years ended
December 31, 2015, 2016 and 2017, respectively)
General and administrative (including share-based
compensation of $nil, $417,419 and $528,889 for the
years ended December 31, 2015, 2016 and 2017,
respectively)
Impairment loss
Total operating expenses
Loss from operations
Interest income/(expense), net
Other income, net
Loss before provision for income taxes
Income tax benefits
Loss from continuing operations
Discontinued operations:
Income from discontinued operations (including gain of
$47,390,421 upon disposal in the year ended December
31, 2015), net of tax of $nil
Net loss
15
6
F-6
(5,360,044)
(20,405,602)
(15,206,658)
(12,911,773)
(85,934,770)
(104,206,587)
(105,949,421)
(7,530,851)
-
(27,936,453)
(27,592,100)
(6,696,601)
(147,018,425)
(168,921,684)
(168,372,916)
7,392
46,210
(105,895,819)
1,249,696
(104,646,123)
26,147
39,351
(27,526,602)
2,233,457
(25,293,145)
(411,164)
27,921
(168,756,159)
6,857,180
(161,898,979)
11,075,935
(93,570,188)
-
(25,293,145)
-
(161,898,979)
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Note
For the years ended December 31,
2017
2016
2015
Accretion for Series A-1 convertible redeemable preferred
shares
Accretion for Series A-2 convertible redeemable preferred
shares
Accretion for Series B convertible redeemable preferred
shares
Net loss attributable to holders of ordinary shares of
JMU Limited
Net loss per ordinary share
Basic
Diluted
Net loss per ordinary share from continuing operations
Basic
Diluted
Net income per ordinary share from discontinued
operations
Basic
Diluted
Net income per Series A-1 preferred share-Basic
Net income per Series A-2 preferred share-Basic
Net income per Series B preferred share-Basic
Weighted average shares used in calculating net loss
per ordinary share
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Weighted average shares used in calculating net loss
per share
Series A-1 preferred share
Series A-2 preferred share
Series B preferred share
17
17
17
20
20
20
20
20
20
20
20
442,409
1,202,748
720,194
-
-
-
-
-
-
(95,935,539)
(25,293,145)
(161,898,979)
(0.09)
(0.09)
(0.1)
(0.1)
0.01
0.01
0.14
0.04
0.09
(0.02)
(0.02)
(0.02)
(0.02)
-
-
-
-
-
(0.11)
(0.11)
(0.11)
(0.11)
-
-
-
-
-
1,001,754,524 1,474,087,060 1,476,144,194
-
1,001,754,524
-
1,001,754,524 1,474,087,060 1,476,144,194
-
1,043,473,265
-
3,242,986
32,429,858
8,107,465
-
-
-
-
-
-
The accompanying notes are an integral part of these consolidated financial statements
F-7
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Net loss
Other comprehensive income/(loss), net of tax of $nil:
Change in cumulative foreign currency translation
adjustment
Comprehensive loss
Note
For the years ended December 31,
2017
2016
2015
(93,570,188)
(25,293,145)
(161,898,979)
1,589,686
(91,980,502)
(33,515,974)
(58,809,119)
15,975,288
(145,923,691)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Additional
paid-in
capital
Subscription
receivable
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total JMU
Limited
shareholders’
(deficit)/equity
Non
controlling
interests
Total
shareholders’
(deficit)/equity
Ordinary shares
Number of
Shares
Amount
303,886,640
3,039
-
-
(233,140,944)
(681,493)
(233,819,398)
43,244
(233,776,154)
75,960,000
760
37,293,840
31,496,832
-
-
6,866,280
69
105,839
124,835,802
1,248
69,351,975
164,740,336
1,647 127,017,632
741,422,780
7,414 376,957,523
27,000,000
270
14,999,730
-
-
-
-
-
-
-
-
-
-
7,176,600
(68,006)
(2,365,351)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
37,294,600
-
37,294,600
-
-
-
105,908
-
-
-
105,908
-
69,353,223
-
69,353,223
-
-
-
-
-
127,019,279
376,964,937
15,000,000
7,176,600
-
-
-
-
127,019,279
376,964,937
15,000,000
7,176,600
(68,006)
(43,244)
(111,250)
-
(93,570,188)
-
-
-
1,589,686
(2,365,351)
(93,570,188)
1,589,686
-
-
-
(2,365,351)
(93,570,188)
1,589,686
Balance as of
January 1,
2015
Issuance of
ordinary
shares upon
initial public
offering
(“IPO”)
Ordinary shares
converted to
ADS shares
for future
exercise of
share options
(Note 16)
Share options
exercised
(Note 16)
Conversion of
Mr. Maodong
Xu (“Mr.
Xu”)'s
indebtness
into ordinary
shares (Note
16)
Conversion of
Series A-1,
Series A-2
and Series B
convertible
redeemable
preferred
shares into
ordinary
shares (Note
17)
Issuance of
shares as a
consideration
for acquisition
of JMU
Issuance of
ordinary
shares to Mr.
Xu (Note 16)
Share-based
compensation
(Note 19)
Purchase the
noncontrolling
interests of
subsidiaries
Accretion for
Series A-1,
Series A-2
and Series B
convertible
redeemable
preferred
shares (Note
17)
Net loss
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Other
comprehensive
income
Balance as of
December 31,
2015
1,476,208,670
14,447 630,469,782
-
(326,711,132)
908,193
304,681,290
-
304,681,290
F-9
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Additional
paid-in
capital
Subscription
receivable
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total JMU
Limited
shareholders’
equity
Non
controlling
interests
Total
shareholders’
equity
Ordinary shares
Number of
Shares
Amount
2,294,208
Balance as of
January 1, 2016 1,476,208,670
Share options
exercised (Note
16)
Restricted share
units vested
(Note 16)
Share-based
compensation
(Note 19)
Obligation to
28,639,900
-
issue ordinary
shares (Note 3)
Net loss
Other
comprehensive
loss
Settlement of
share options
exercised with
shares held by
depository
bank (Note 16)
Balance as of
December 31,
2016
-
-
-
(30,934,108)
14,447 630,469,782
23
49,972
286
(286)
-
-
-
-
-
1,097,543
1,377,503
-
-
-
1,476,208,670
14,756 632,994,514
-
-
-
-
-
-
-
-
-
(326,711,132)
908,193
304,681,290
-
-
-
-
(25,293,145)
-
-
-
-
-
-
-
49,995
-
1,097,543
1,377,503
(25,293,145)
(33,515,974)
(33,515,974)
-
-
(352,004,277)
(32,607,781)
248,397,212
F-10
-
-
-
-
-
-
-
-
-
304,681,290
49,995
-
1,097,543
1,377,503
(25,293,145)
(33,515,974)
-
248,397,212
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Additional
paid-in
capital
Subscription
receivable
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total JMU
Limited
shareholders’
equity
Non
controlling
interests
Total
shareholders’
equity
Ordinary shares
Number of
Shares
Amount
1,042,002
Balance as of
January 1, 2017 1,476,208,670
Share options
exercised (Note
16)
Share-based
compensation
(Note 19)
Net loss
Other
comprehensive
income
Settlement of
share options
exercised with
shares held by
depository
bank (Note 16)
-
-
-
(1,042,002)
14,756 632,994,514
10
8,542
-
-
-
-
1,067,786
-
-
-
Balance as of
December 31,
2017
1,476,208,670
14,766 634,070,842
-
-
-
-
-
-
-
(352,004,277)
(32,607,781)
248,397,212
-
-
(161,898,979)
-
-
-
8,552
1,067,786
(161,898,979)
-
-
15,975,288
15,975,288
-
-
(513,903,256)
(16,632,493)
103,549,859
-
-
-
-
-
-
-
248,397,212
8,552
1,067,786
(161,898,979)
15,975,288
-
103,549,859
The accompanying notes are an integral part of these consolidated financial statements.
F-11
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Cash flows from operating activities:
Net loss
Less: Net income from discontinued operations
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation
Depreciation and amortization
Provision for other receivables
Impairment loss
Income tax benefits
Customer credits earned under the loyalty program to be settled in
shares
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Amounts due from related parties
Other non-current assets
Accounts and notes payable
Accrued expenses and other current liabilities
Amounts due to related parties
Other non-current liabilities
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in operating activities
Cash flows from investing activities:
Purchase of property and equipment
Payment for investment
Payments for acquisition of business (net of cash acquired of
$20,196,362, $nil and $nil for the years ended December 31, 2015,
2016 and 2017, respectively)
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in investing activities
F-12
For the years ended December 31,
2017
2016
2015
(93,570,188)
11,075,935
(104,646,123)
(25,293,145)
-
(25,293,145)
(161,898,979)
-
(161,898,979)
-
4,949,036
-
85,934,770
(1,249,696)
1,097,543
8,900,192
-
-
(2,233,457)
1,067,786
8,626,844
584,956
147,018,425
(6,857,180)
-
1,377,503
-
(3,008,932)
957,133
(18,524,604)
8,512,188
-
1,873,123
16,708,637
(2,739,467)
502,180
(10,731,755)
(22,799,544)
(33,531,299)
1,936,461
(142,273)
15,797,204
567,545
(158,469)
(1,436,785)
(8,612,603)
1,474,304
899,594
(5,826,386)
-
(5,826,386)
(1,482,984)
(288,361)
6,167,381
(2,730,537)
-
1,572,143
(906,516)
(847,621)
100,895
(9,873,748)
-
(9,873,748)
(93,317)
-
(1,860,321)
(720,150)
(741,079)
-
(9,803,638)
(9,896,955)
(1,999,364)
(11,896,319)
-
(2,580,471)
-
(2,580,471)
-
(741,079)
-
(741,079)
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In U.S. dollars, except for number of shares and per share (or ADS) data)
Cash flows from financing activities:
Proceeds from issuance of ordinary shares upon IPO
Payments for IPO costs
Proceeds from issuance of ordinary shares to Mr. Xu
(Payment to) /cash received from related parties
Proceeds from short-term bank borrowings
Net cash provided by continuing operations
Net cash provided by discontinued operations
Net cash provided by financing activities
Effect of exchange rate changes
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplement disclosure of cash flow information:
Interest paid
For the years ended December 31,
2017
2016
2015
40,294,600
(2,125,372)
15,000,000
(250,000)
-
52,919,228
1,963,650
54,882,878
50,468
9,505,728
-
-
-
-
-
-
-
-
(140,157)
(8,547,014)
-
-
-
5,089,207
7,553,366
12,642,573
-
12,642,573
279,538
2,307,284
1,646,172
11,151,900
11,151,900
2,604,886
2,604,886
4,912,170
-
-
154,295
The accompanying notes are an integral part of these consolidated financial statements.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
JMU Limited, formerly known as “Wowo Limited”, (the “Company”), was incorporated in Cayman Islands on July
13, 2011. The Company and its subsidiaries, variable interest entities (“VIEs”) and VIEs’ subsidiaries are primarily
engaged in providing the e-commerce platform networking services, focusing on local entertainment and lifestyle
services such as restaurants, movie theaters and beauty salons and also allow local merchants to create online stores
and make direct sales to their target customers for consumption at their brick and mortar stores in the People’s
Republic of China ("PRC").
On April 8, 2015, the Company completed its IPO in National Association of Securities Dealers Automated
Quotation (“NASDAQ”) by offering 4 million American Depositary Shares (“ADSs”), representing 72 million
ordinary shares, and received net proceeds of $35.2 million. On April 27, 2015, the Company issued an additional
220,000 ADSs, representing 3.96 million of ordinary shares to the underwriter for exercising the over-allotment
option at price of $10 per ADS and received net proceeds of $2.1 million.
On June 5, 2015, the Company and its wholly owned subsidiary, New Admiral Limited (“New Admiral”) entered
into an agreement to acquire Join Me Group (HK) Investment Company Limited and its subsidiaries, variable
interest entity (“VIE”) and VIE’s subsidiaries (Collectively, “JMU Group”) with a consideration of 741,422,780
ordinary shares of the Company and $30 million in cash. On that date, JMU Group, which operates a business-to-
business ("B2B") online e-commerce platform that provides integrated services to suppliers and consumers in the
catering industry, became a wholly owned subsidiary of the Company. JMU Group engages primarily in the sale of
rice, flavor, bean oil, seafood, wine and some other types of generic food and beverage products through its website
www.ccjoin.com.
On September 9, 2015, the Company sold all of its equity interests in Wowo Group Limited, a subsidiary of the
Company, together with all of its subsidiaries and consolidated VIEs and their respective subsidiaries (collectively,
the “Group Buying Entities”), which were engaged in the Company’s group buying business and other non-food
service-related businesses. The sale was pursuant to a definitive agreement entered into between the Company and
Century Winning Limited, an exempted company with limited liability incorporated under the laws of the British
Virgin Islands (the “Buyer”), in exchange for the Buyer’s payment of $1 and the assumption of $47,390,420 of net
liabilities of the Group Buying Entities.
This disposal represents a strategic shift and has a major effect on the Company’s results of operations.
Accordingly, assets and liabilities, revenues and expenses, and cash flows related to the Group Buying Entities
have been reclassified in the accompanying consolidated financial statements as discontinued operations for all
periods presented.
On December 28, 2016, the Company changed its name from Wowo Limited to JMU Limited.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
As of December 31, 2017, the Company’s major subsidiaries, VIE and VIE’s subsidiaries (collectively, the
“Group”) are as follows:
Date of
acquisition/
incorporation
Place of
establishment/
incorporation
Percentage of
legal ownership
Subsidiaries:
New Admiral
Join Me Group (HK) Investment Company Limited (“JMU
Investment”)
Join Me Group Supply Chain Management Company Limited
(“JMU Supply Chain”)
Shanghai Zhongming Supply Chain Management Co., Ltd.
April 27, 2015 Cayman Islands
June 8, 2015
October 15,
2015
Hong Kong
Hong Kong
(“Shanghai Zhongming” or “WFOE” )
June 8, 2015
PRC
100%
100%
100%
100%
VIE:
Shanghai Zhongmin Supply Chain Management Co., Ltd.
(“Shanghai Zhongmin” or “VIE”)
The VIE arrangements
June 8, 2015
PRC
N/A
The PRC laws and regulations currently place certain restrictions on foreign ownership of companies that engage in
internet content and other restricted businesses. Specifically, foreign investors are not allowed to own more than
50% of the equity interests in any entity conducting internet content and other restricted businesses. To comply with
these PRC laws and regulations, the Company conducts substantially its businesses through the VIE and VIE’s
subsidiaries. To provide the Company’s control over the VIE and the rights to the expected residual returns of the
VIE and VIE’s subsidiaries, Shanghai Zhongming, a wholly foreign-invested enterprise in China, or WFOE entered
into a series of contractual arrangements as described below with VIE and its shareholder.
Prior to the acquisition of JMU Group, JMU Group formed contractual arrangements through its wholly owned
subsidiary Shanghai Zhongming with the VIE. As a result of the Company's acquisition of JMU Group, the
Company through JMU's wholly owned subsidiary, Shanghai Zhongming, has (1) power to direct the activities of
the VIE that most significantly affect the entity’s economic performance and (2) the right to receive economic
benefits of the VIE that could be significant to the VIE. Accordingly, the Company is considered the primary
beneficiary of the VIE and has consolidated the VIE’s financial results of operations, assets, and liabilities in the
Company’s consolidated financial statements. The Company also believes that this ability to exercise control
ensures that the VIE will continue to execute and renew the exclusive consulting and services agreements and pay
service fees to the Company. The ability to charge service fees in amounts determined at the Company’s sole
discretion, and by ensuring that the exclusive services agreements are executed and renewed indefinitely, the
Company has the right to receive substantially all of the economic benefits from the VIE.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The VIE arrangements (continued)
Additionally, the previous VIE agreements entered into between Beijing Wowo Shijie Information Technology Co.,
Ltd. and Beijing Wowo Tuan Information Technology Co., Ltd. and Beijing Kai Yi Shi Dai Network Technology
Co., Ltd are no longer in force as result of the disposal of Group Buying Entities.
The following is a summary of the various VIE agreements:
∂ Agreements that Transfers Economic Benefits and Risks to the Company
Master Exclusive Service Agreement and Business Cooperation Agreement
Pursuant to the master exclusive service agreement and business cooperation agreement, VIE, including its
subsidiaries or any companies or entities under its control, agrees to engage WFOE as its provider for technical and
business support services. VIE shall pay to WFOE service fees determined based on the audited consolidated net
profit of VIE. WFOE shall exclusively own any intellectual property arising from the performance of the services
set forth in the agreement. WFOE shall provide financial support to VIE in the form of bank loans or others forms
as permitted under the PRC laws. The service agreements shall remain effective upon the written confirmation
issued by WFOE to VIE and/or its shareholder 30 days before the termination. VIE or its shareholder has no right to
unilaterally terminate the agreement.
Subsequently, the Company entered into financial support undertaking letter with VIE and pursuant to the financial
support undertaking letter, the Company is obligated and hereby undertakes to provide unlimited financial support
to the VIE, to the extent permissible under the applicable PRC laws and regulations, whether or not any such
operational loss is actually incurred. The Company will not request repayment of the loans or borrowings if the VIE
or its shareholder do not have sufficient funds or are unable to repay.
∂ Agreements that Provide the Company with Effective Control over VIE
Exclusive Option Agreement
The VIE’s shareholder has entered into an exclusive option agreement with WFOE, pursuant to which WFOE has
an exclusive option to purchase, or to designate other persons to purchase, to the extent permitted by applicable
PRC laws, rules and regulations, all of the equity interest in VIE from the shareholder. The purchase price for the
entire equity interest is to be the minimum price permitted by applicable PRC laws and administrative regulations. If
there is no minimum price under PRC laws or administrative regulations, the price shall be determined by the
WFOE or on a basis of the registration capital of VIE. The term of the exclusive option agreement shall remain
effective upon written confirmation issued by the WFOE to VIE and its shareholder 30 days before the termination.
VIE and its shareholder have no right to unilaterally terminate the agreement.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The VIE arrangements (continued)
∂ Agreements that Provide the Company with Effective Control over VIE (continued)
Proxy and Power of Attorney Agreement
The VIE’s shareholder has signed an irrevocable proxy and power of attorney agreement to appoint WFOE, or its
designee, as the attorney-in-fact to act on VIE’s shareholder's behalf on all rights that the shareholder has in respect
of such shareholder's equity interest in VIE conferred by relevant laws and regulations and the articles of association
of VIE. The rights include but not limited to attending shareholders meeting, exercising voting rights and
transferring all or a part of the equity interests of VIE held by the shareholder. The proxy and power of attorney
shall remain effective upon written confirmation issued by WFOE to VIE and its shareholder 30 days before the
termination. VIE and its Shareholder have no right to unilaterally terminate the agreement.
Equity Interest Pledge Agreement
The VIE’s shareholder has entered into an equity pledge agreement with the WFOE, under which the shareholder
pledged all of the equity interests in VIE to WFOE as collateral to secure performance of all obligations under the
Master Exclusive Service Agreement, Business Cooperation Agreement, Proxy and Power of Attorney Agreement
and the Exclusive Option Agreement (collectively, the "Principal Agreement"). The dividends generated by the
pledged equity interests shall be deposited into the account designated by the WFOE and shall be used to pay the
secured indebtedness prior and in preference to any other payment during the term of the pledge. If any event of
default incurred under the Principal Agreement, WFOE, as the pledgee, will be entitled to dispose of the pledged
equity interests and shall be paid in priority with the proceeds recovered from the disposal.
Risks in relation to the VIE structure
Assessing the legal validity and compliance of these above noted arrangements are a precursor to the Company’s
ability to consolidate the results of operations and financial condition of the VIE and VIE’s subsidiaries. The
Company, in consultation with its PRC legal counsel, believes that:(1) the ownership structure of the Group,
including its PRC subsidiary, VIE and VIE’s subsidiaries is in compliance with all existing PRC laws and
regulations; (2) each of the VIE agreements amongst the WFOE, the VIE and VIE’s shareholder governed by PRC
laws, are legal, valid and binding, enforceable against such parties, and will not result in any violations of PRC laws
or regulations currently in effects; and (3) the Group’s PRC subsidiary, VIE and VIE’s subsidiaries have the
necessary corporate power and authority to conduct its business as described in its business scope under its business
licenses, which is in full force and effect, and the Group’s business operations in the PRC are in compliance with
existing PRC laws and regulations. The shareholder of the VIE are also shareholders of the Company and therefore
have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in the
PRC legal system could limit the Company’s ability to enforce these contractual arrangements and if the
shareholders were to reduce their interest in the Company, their interests may diverge from that of the Company and
that may potentially increase the risk that they would seek to act contrary to the contractual terms.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Risks in relation to the VIE structure (continued)
The Company’s ability to control the VIE also depends on the power of attorney. The Company, through WFOE,
has to vote on all matters requiring shareholder approval in the VIE entities. As noted above, the Company believes
this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC
laws and regulations, the PRC regulatory authorities could:
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
revoke the Group’s business and operating licenses;
require the Group to discontinue or restrict its operations;
restrict the Group’s right to collect revenues;
restrict or prohibit the Group to finance its business and operations in China;
shut down the Group’s servers or block the Group’s website;
require the Group to restructure its operations;
impose additional conditions or requirements with which the Group might not be able to comply, levy fines,
confiscate the Group’s income or the income of its PRC subsidiary or affiliated PRC entities; or
take other regulatory or enforcement actions against the Group that could be harmful to its business.
The imposition of any of these penalties could result in a material adverse effect on the Group’s ability to conduct
the Group’s business. In addition, if the imposition of any of these penalties causes the Group to lose the rights to
direct the activities of the VIE, VIE’s subsidiaries, or the right to receive their economic benefits, the Group would
no longer be able to consolidate the VIE and VIE’s subsidiaries. The Group does not believe that any penalties
imposed or actions taken by the PRC government would result in the liquidation or dissolution of the Company,
WFOE, the VIE and their respective subsidiaries.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Risks in relation to the VIE structure (continued)
The following financial statement balances and amounts of the VIE and VIE’s subsidiaries were included in the
accompanying consolidated financial statements as follows after the elimination of intercompany balances and
transactions among VIE and VIE’s subsidiaries within the Group:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets, net
Amounts due from related parties
Total current assets
Property and equipment, net
Investment
Other non-current assets
Total non-current assets
TOTAL ASSETS
Short-term bank borrowings
Accounts and notes payable
Accrued expenses and other current liabilities
Advance from customers
Amounts due to related parties
Total current liabilities
Other non-current liabilities
Amounts due to related parties
Total non-current liabilities
TOTAL LIABILITIES
F-19
As of December 31,
2017
2016
US$
US$
1,923,903
1,645,237
224,148
7,812,462
212,805
11,818,555
1,864,660
720,150
151,553
2,736,363
14,554,918
-
2,200,292
8,198,754
2,282,353
1,650,168
14,331,567
1,086,342
-
1,086,342
15,417,909
4,802,420
3,295,818
538,660
1,881,988
3,062,797
13,581,683
1,715,795
768,486
161,723
2,646,004
16,227,687
7,684,859
3,980,560
8,345,461
1,243,739
87,385
21,342,004
1,386,749
5,685,971
7,072,720
28,414,724
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Risks in relation to the VIE structure (continued)
Revenues
Net loss
Net cash provided by/(used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
For the years ended December 31,
2017
2016
2015
US$
US$
US$
11,477,552
(8,052,187)
66,288,019
(17,022,631)
80,668,230
(12,419,220)
For the years ended December 31,
2017
2016
2015
US$
US$
US$
238,302
(44,228)
-
2,657,916
(2,578,472)
-
(9,152,256)
(741,079)
12,642,573
The VIE contributed an aggregate of 100%, 90.6% and 90.9% of the consolidated revenues for the years ended
December 31, 2015, 2016 and 2017, respectively. As of December 31, 2016 and 2017, the VIE accounted for an
aggregate of 5.3% and 11.9%, respectively, of the consolidated total assets, and 60.1% and 87.2%, respectively, of
the consolidated total liabilities. The assets not associated with the VIE primarily consist of certain cash and cash
equivalents, certain prepaid expenses and other current assets and certain property and equipment. The recognized
and unrecognized revenue-producing assets that are held by the VIE are primarily property and equipment and
online platform.
There are no consolidated VIE’s assets that are collateral for the VIE’s obligations and can only be used to settle the
VIE’s obligations. There are no creditors (or beneficial interest holders) of the VIE that have recourse to the general
credit of the Company or any of its consolidated subsidiaries. There are no terms in any arrangements, considering
both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide
financial support to the VIE. However, if the VIE ever need financial support, the Company’ PRC subsidiary,
WOFE, shall provide financial support to VIE in the form of bank loans or other forms as permitted under PRC law.
Relevant PRC laws and regulations restrict the VIE from transferring a portion of their net assets, equivalent to the
balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash
dividends. Please refer to Note 24 for disclosure of restricted net assets.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
2. GOING CONCERN
The Group experienced a net loss of approximately $93.6 million, $25.3 million and $161.9 million for the years
ended December 31, 2015, 2016 and 2017, respectively, and negative cash flows from operations of approximately
$33.5 million, $5.8 million and $9.9 million for the years ended December 31, 2015, 2016 and 2017, respectively.
These conditions raise substantial doubt about the Group’s ability to continue as a going concern. However,
management believes the Group has the ability to fulfill its financial obligations and will continue as a going
concern because its primary shareholders, Ms. Xiaoxia Zhu (“Ms. Zhu”) and Ms. Huimin Wang (“Mr. Wang”) have
agreed in writing to provide adequate funds to enable the Group to meet in full its financial obligations as they fall
due through April 30, 2019. In April 2018, Ms. Wang and Ms. Zhu provided loans to fund the Group’s daily
operations with total amounts of RMB 70.0 million ($11.1 million), which are due in July 2019.
The Group believes that it can realize its assets and satisfy its liabilities in the normal course of business with the
financial support from Ms. Zhu and Ms. Wang. As a result, the consolidated financial statements have been
prepared assuming the Group will continue as a going concern. The accompanying consolidated financial
statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities
as that might be necessary if the Group is unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the U.S. generally
accepted accounting principles (‘‘US GAAP’’).
Principle of consolidation
The consolidated financial statements of the Group include the financial statements of the Company, its
consolidated subsidiaries, VIE and VIE’s subsidiaries for which the Company is the primary beneficiary. All
significant inter-company transactions and balances have been eliminated upon consolidation.
Business combinations
Business combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities
assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair
values as of that date. Goodwill is recognized and measured as the excess of the total consideration transferred plus
the fair value of any noncontrolling interests of the acquiree, if any, at the acquisition date over the fair values of the
identifiable net assets acquired.
Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Discontinued operations
A disposal of a component of an entity or a group of components of an entity shall be reported in discontinued
operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations.
Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be
classified as held for sale, if earlier. Where an operation is classified as discontinued, a single amount is presented
on the face of the consolidated statements of operations. The amount of total current assets, total non-current assets,
total current liabilities and total non-current liabilities are presented separately on the consolidated balance sheets.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the period. Areas where management uses subjective judgment include, but are not limited to, provision for
other receivables, estimating useful lives and impairment for property and equipment and acquired intangible assets,
impairment of goodwill, valuation allowance for deferred tax assets, share-based compensation and purchase price
allocation. Changes in facts and circumstances may result in revised estimates. Actual results could differ from
those estimates, and as such, differences may be material to the consolidated financial statements.
Foreign currency
The functional and reporting currency of the Company is the United States dollar (“U.S. dollars”, “US$” or“$”).
The functional currency of the Company's subsidiary, New Admiral, is U.S. dollars. The functional currency of the
Company’s HK subsidiaries, JMU Investment and JMU Supply Chain, is Hong Kong dollars (“HK dollars”). The
financial records of the Group’s subsidiaries, VIE and VIE’s subsidiaries located in the PRC are maintained in their
local currencies, the Renminbi (“RMB”), respectively, which are also the functional currencies of these entities.
Transactions denominated in currencies other than the respective entities’ functional currencies are re-measured into
the functional currencies, in accordance with Accounting Standards Codification (“ASC”) 830 (“ASC 830”)
Foreign Currency Matters, at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities
denominated in foreign currencies are re-measured into the functional currencies at the exchange rates prevailing at
the balance sheet date. All foreign exchange gains or losses are included in the consolidated statements of
operations.
Assets and liabilities are translated to the reporting currency at the exchange rates at the balance sheet date, equity
accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the
average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown
as a separate component of consolidated statements of comprehensive loss.
Cash and cash equivalents
Cash and cash equivalents consists of cash on hand and demand deposits placed with banks or other financial
institutions which are unrestricted as to withdrawal and use and have original maturities less than three months.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable, net of allowance
Accounts receivable represents those receivables derived in the ordinary course of business, carried at net realizable
value.
The Group maintains an allowance for doubtful accounts for estimated losses on uncollected accounts receivable.
Management considers the following factors when determining the collectability of specific accounts:
creditworthiness of customers, aging of the receivables, past transaction history with customers and their current
condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate
in the industries the Group serves. No allowance for doubtful accounts was recognized for each of the three years
ended December 31, 2017.
Inventories
Inventory is stated at the lower of cost or market. Cost of inventory is determined using the weighted average cost
method. Adjustments are recorded to write down the cost of inventory to the estimated market value for slow-
moving merchandise and damaged goods. The amount of written-down depends upon factors such as whether the
goods are returnable to vendors, historical and forecasted consumer demand, market condition and the promotional
environment.
Written-down amounts are recorded in cost of goods sold in the consolidated statements of operations. No inventory
provision was recognized for each of the three years ended December 31, 2017.
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated
useful lives of the assets, as follows:
Computer equipment
Office equipment
Vehicles
Leasehold improvement
3 years
5 years
4 years
Over the shorter of lease term or the estimated useful lives of the assets
Repair and maintenance costs are charged to expense when incurred, whereas the cost of betterments that extend the
useful life of property and equipment are capitalized as additions to the related assets. Retirement, sale and disposals
of assets are recorded by removing the cost and related accumulated depreciation with any resulting gain or loss
reflected in the consolidated statements of operations.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Acquired intangible assets
Acquired intangible assets with finite lives are carried at cost less accumulated amortization and impairment.
Amortization of finite lived intangible assets is calculated on a straight-line basis over the shorter of the contractual
terms or the expected useful lives of the acquired assets. The amortization period by major intangible asset classes is
as follows:
Trade name/domain name
Non-compete agreement
Online platform
Customer relationship
Impairment of long-lived assets other than goodwill
10 years
4.5 years
5 years
5-10 years
The Group evaluates the recoverability of its long-lived assets, including intangible assets with finite lives,
whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the
assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the
assets, the Group would recognize an impairment loss based on the excess of carrying amount over the fair value of
the assets.
An impairment loss of $nil, $nil and $19,765,615 were recognized for the years ended December 31, 2015, 2016
and 2017, respectively.
Impairment of goodwill
The Group annually, or more frequently if the Group believes indicators of impairment exist, reviews the carrying
value of goodwill to determine whether impairment may exist.
Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of
each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its
carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying
amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected
reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in
a manner similar to accounting for a business combination with the allocation of the assessed fair value determined
in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit
over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is
recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair
value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash
flow.
The Group has determined to perform the annual impairment tests on December 31 of each year. Prior to the
acquisition of JMU Group, goodwill was attributable to the group buying business which is classified as
discontinued operations in the year ended December 31, 2015. The goodwill as of December 31, 2016 and 2017 was
attributable solely to the JMU business on which an impairment loss of $85,934,770, $nil and $127,252,810 were
recognized for the years ended December 31, 2015, 2016 and 2017, respectively.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment
Cost Method Investment
In accordance with ASC subtopic 325-20 (“ASC 325-20”), Investments-Other: Cost Method Investments, for
investments in an investee over which the Group does not have significant influence and which do not have readily
determinable fair value, the Group carries the investment at cost and only adjusts for other-than-temporary declines
in fair value and distributions of earnings that exceed the Group’s share of earnings since its investment. The Group
regularly evaluate the impairment of the investment based on performance and financial position of the investee as
well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash
position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs.
An impairment loss recognized in earnings is equal to the excess of the investment’s cost over its fair value at the
balance sheet date of the reporting period for which the assessment is made. The fair value would then become the
new cost basis of investment.
Cost method accounting is also applied to investment that are not considered as “in-substance” common stock
investment, and do not have readily determinable fair value.
No impairment was recognized for each of the three years ended December 31, 2017.
Revenue recognition
The Group recognizes revenue from the sales of rice, flavoring, oil, seafood, wine and other types of generic food
and beverage products through its online platform www.ccjoin.com. The website also serves as an online platform to
connect third party vendors and customers. The Group recognizes revenue when the following four revenue
recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services
have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
The Group recognizes revenue when the customers confirm the acceptance of the goods once they receive the
delivered goods. The sales returns are considered and estimated when the related revenue was recognized.
Revenue is recorded net of surcharges and value-added tax ("VAT") and related surcharges.
The Group primarily generates revenue from online direct sales and online platform services.
Online direct sales
The Group primarily sells rice, flavoring, oil, seafood, wine and other products relating to catering and hotel
industries through online direct sales. There is a separate channel on the Group’s online platform designated for the
Group’s online direct sales and the Group records revenue from online direct sales on a gross basis as the Group
acts as the principal in these arrangements: it is the primary obligor in the sales arrangements, has latitude in
establishing prices and has discretion in suppliers' selection. On certain transactions, the Group also retains some of
general inventory risk and physical inventory loss risk.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued)
Online platform services
The Group also provides the online platform services to connect third-party sellers and purchasers for their
transactions via its online marketplace. Online platform sales are made from the online stores under the third-party
sellers’ names, and the Group records the related revenue on a net basis as the Group acts as the agent in these
arrangements: it is not the primary obligor, does not bear inventory risk, and does not have the ability to establish
the price or discretion in supplier selection. For the years ended December 31, 2015, 2016 and 2017, revenues
related to the online platform services were $nil, as the Group did not charge any service fees to the third-party
sellers and purchasers.
Value-added tax
VAT is calculated at 13% on the revenue from primary agricultural products and 17% on the revenue from sales of
other products. The Group reports revenue net of VAT. WFOE, VIE and VIE's subsidiaries are VAT general tax
payers, which are allowed to offset qualified VAT paid against their output VAT liabilities.
Cost of revenue
Cost of revenues primarily consist of purchased cost of the products sold related to online direct sales and payroll of
the operating personnel.
Advertising and promotional expenses
Advertising and promotional expenses, including advertisements through various form of media and kinds of
marketing and promotional activities, are included in “Selling and marketing expense” in the consolidated
statements of operations and are expensed when incurred. Advertising and marketing expenses for the years ended
December 31, 2015, 2016 and 2017 are $131,486, $498,045 and $101,232, respectively.
Operating leases
Leases where substantially all the rewards and risks of the ownership of the assets remain with the leasing
companies are accounted for as operating leases. Payments made for the operating leases are charged to the
consolidated statements of operations on a straight-line basis over the lease term and have been included in the
operating expenses in the consolidated statements of operations. In 2016, the Group entered into a 15-year lease
arrangement for its new headquarter in Shanghai, China, which provided a seven month rent free period. As of
December 31, 2016 and 2017, the Group recognized non-current liabilities related to deferred rent holiday of
$1,086,342 and $1,386,749, respectively.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The Group follows the liability method in accounting for income taxes in accordance to ASC topic 740 (“ASC
740”), Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in
the period in which the differences are expected to reverse. The Group records a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all,
of the deferred tax assets will not be realized.
The Group applies the provision of ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to
meet before being recognized in the consolidated financial statements.
The Group has elected to classify interest and penalties related to unrecognized tax benefits, if and when required,
as part of income tax expense in the consolidated statements of operations.
Loyalty program
In 2016, the Group launched a customer loyalty program to certain qualified customers, who can earn customer
credits from purchases if their annual spending with the Group exceeds RMB10 million. In 2017, the Group
announced its revised customer loyalty program to certain qualified customers for granting customer credits only if
their annual spending with the Group exceeds RMB100 million. The customers can redeem the earned credits for
gift merchandise. During the years ended December 31, 2016 and 2017, the Group accounts for such credits by
recording a liability and corresponding selling expenses for the estimated incremental cost of outstanding credits
earned that are expected to be redeemed.
During 2016, the Group negotiated settlement of earned loyalty credits with 13 of its customers in ordinary shares
of the Company. As part of the settlement, the Group agreed to issue 4.42 million of its ordinary shares, and
recognized $1,377,503 in paid-in capital and selling expenses based on the grant date fair value of the ordinary
shares. The Group is not legally obligated or expect to continue the redemption of the credits for the ordinary shares
in the future.
Share-based payments
Share-based payment awards with employees are measured based on the grant date fair value of the equity
instrument issued, and recognized as compensation costs using the straight-line method over the requisite service
period, which is generally the vesting period of the options, with a corresponding impact reflected in additional
paid-in capital. For share-based payment awards with market conditions, such market conditions are included in the
determination of the estimated grant-date fair value. In the second quarter of 2017, the Company elected to early
adopt ASU No. 2016-09, Compensation Stock Compensation (Topic 718): Improvement to Employee Share based
Payment Accounting, to account for forfeitures as they occur. The cumulative-effect adjustment to accumulated
deficits was $nil as a result of the adoption of ASU 2016-09.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share-based payments (continued)
A change in any of the terms or conditions of share-based payment awards is accounted for as a modification of
awards. The Group measures the incremental compensation cost of a modification as the excess of the fair value of
the modified awards over the fair value of the original awards immediately before its terms are modified, based on
the share price and other pertinent factors at the modification date. For vested awards, the Group recognizes
incremental compensation cost in the period the modification occurred. For unvested awards, the Group recognizes,
over the remaining requisite service period, the sum of the incremental compensation cost and the remaining
unrecognized compensation cost for the original award on the modification date.
Net loss per share
Basic loss per ordinary share is computed by dividing net loss attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the period.
The Group’s convertible redeemable participating preferred shares are participating securities as they participate in
undistributed earnings on an as-if-converted basis. Accordingly, the Group uses the two-class method whereby
undistributed net income is allocated on a pro rata basis to the ordinary shares and convertible redeemable
participating preferred shares to the extent that each class may share in income for the period; whereas the
undistributed net loss for the period is allocated to ordinary shares only because the convertible redeemable
participating preferred shares are not contractually obligated to share the loss.
Diluted loss per ordinary share reflects the potential dilution that could occur if securities were exercised or
converted into ordinary shares. The Group had convertible redeemable participating preferred shares, which have
been automatically converted into ordinary shares upon the IPO of the Company, stock options and restricted share
units, which could potentially dilute basic loss per share in the future. To calculate the number of shares for diluted
loss per ordinary share, the effect of the convertible redeemable participating preferred shares is computed using the
as-if-converted method; the effect of the stock options and restricted share units is computed using the treasury
stock method. Potential ordinary shares in the diluted net loss per share computation are excluded in periods of
losses from continuing operations, as their effect would be anti-dilutive.
Comprehensive loss
Comprehensive loss is defined as the decrease in equity of the Company during a period from transactions and other
events and circumstances excluding transactions resulting from investments by owners and distributions to owners.
Comprehensive loss is reported in the consolidated statements of comprehensive loss, including net loss and foreign
currency translation adjustments, presented net of tax.
Segment reporting
The Group follows ASC 280, Segment Reporting. The Company’s Chief Executive Officer or chief operating
decision-maker reviews the consolidated financial results when making decisions about allocating resources and
assessing the performance of the Group as a whole and hence, the Group has only one reportable segment. The
Group operates and manages its business as a single segment through the provision of integrated services to
suppliers and consumers in the catering and hotel industries. As the Group’s long-lived assets are substantially all
located in the PRC and substantially all the Group’s revenues are derived from within the PRC, no geographical
segments are presented.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most
advantageous market in which it would transact and it considers assumptions that market participants would use
when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its
entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1-inputs are based upon quoted prices for instruments traded in active markets.
Level 2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based calculation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3-inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, cash flow models, and similar techniques.
Fair value of financial instruments
Financial instruments include cash and cash equivalents, short-term bank borrowings, amounts due from/to related
parties, accounts receivable, accounts payable and investment. The carrying values of cash, short-term bank
borrowings, amounts due from/to related parties, accounts receivable and accounts payable approximate their fair
values reported in the consolidated balance sheets due to the short-term maturities. The Group determined that it is
not practicable to estimate the fair value of its cost method investment as of December 31, 2017 and measures the
cost method investment at fair value on a nonrecurring basis only if an impairment charge were to be recognized.
Financial assets and liabilities measured at fair value on a non-recurring basis include acquired assets and liabilities
and goodwill based on Level 3 inputs in connection with business acquisition set out in Note 5.
Comparative information
Certain of the prior year comparative figures have been reclassified to conform to the current year’s presentation.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements
As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth
company” pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth
company may take advantage of specified reduced reporting and other requirements that are otherwise applicable
generally to public companies. These provisions include a provision that an emerging growth company does not
need to comply with any new or revised financial accounting standards until such date that a private company is
otherwise required to comply with such new or revised accounting standards. We will take advantage of the
extended transition period.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC
605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or
services. ASU 2015-14, Revenue from Contracts with Customers, defers the effective date of ASU 2014-09 by one
year. As a result, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018, and
interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted.
In March 2016, the FASB issued ASU No. 2016-08 (“ASU 2016-08”), Revenue from Contracts with
Customers—Principal versus Agent Considerations, which clarifies the implementation guidance on principal
versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”), Revenue from
Contracts with Customers—Identifying Performance Obligations and Licensing, which clarify guidance related to
identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May
2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), Revenue from Contracts with Customers— Narrow-
Scope Improvements and Practical Expedients, which addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for
contract modifications at transition and an accounting policy election related to the presentation of sales taxes and
other similar taxes collected from customers. The effective date for the amendment in ASU 2016-08, ASU 2016-10
and ASU 2016-12 are the same as the effective date of ASU No 2014-09.
The Company is in the process of developing a plan for evaluating the impact of adoption of these guidance on its
consolidated financial statement, including the selection of the adoption method, the identification of differences, if
any, from the application of the standard, and the impact of such differences, if any, on its consolidated financial
statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, (“ASU 2015-11”).
The guidance simplifies the subsequent measurement of inventory by requiring inventory to be measured at the
lower of cost and net realizable value. Entities will continue to apply their existing impairment models to
inventories that are accounted for using last-in first-out (LIFO) and the retail inventory method (RIM). The
amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods
within fiscal years beginning after December 15, 2017. Early adoption is permitted, and the guidance must be
applied prospectively after the date of adoption. The Company will adopt ASU 2015-11 in the first quarter of 2018
and the Company evaluated that there was no significant impact on its consolidated financial statements as a result
of the adoption of ASU 2015-11.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (continued)
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by
eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent
amounts in the consolidated balance sheet statement of financial position. The amendments in the update require
that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The
amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods
therein and may be applied either prospectively or retrospectively to all periods presented for public entities; and,
annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning
after December 15, 2018 for all other entities. Early adoption is permitted. In the second quarter of 2017, the
Company early adopted ASU 2015-17 on a retrospective basis. The adoption of ASU 2015-17 resulted in a decrease
of $63,286 to current deferred tax assets and a corresponding increase to noncurrent deferred tax assets on the
consolidated balance sheet as of December 31, 2016.
In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments. ASU 2016-01
requires equity investments (except those accounted for under the equity method of accounting or those that result
in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of
equity investments without readily determinable fair values by requiring a qualitative assessment to identify
impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the
investment at fair value. For public business entities, the amendments are effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years; and for all other entities, are effective for
annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting
this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”). ASU 2016-02 specifies the
accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a
lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also
requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease
term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods
and interim periods within those years beginning after December 15, 2018, and, annual reporting periods beginning
after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020 for all other
entities. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on
its consolidated financial statements.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (continued)
In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), Financial Instruments — Credit Losses (Topic
326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for
most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an
“expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities
will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-
temporary impairment model. The standard is effective for annual reporting periods beginning after December 15,
2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted.
The Company is evaluating the effect that this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments which addresses eight specific cash flow issues: Debt prepayment or
debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration
payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the
settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies
(BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions;
and separately identifiable cash flows and application of the predominance principle. The standard is effective for
annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019, and early adoption is permitted. The Company is evaluating the effect that this guidance
will have on its consolidated financial statements.
In January 2017, FASB has issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business. The ASU affects all companies and other reporting organizations that must determine whether they
have acquired or sold a business. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The ASU is effective for annual reporting periods beginning
after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The
Company is evaluating the effect that this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), Intangibles —
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the
requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead,
entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair
value. This standard is effective for annual and interim impairment tests performed in periods beginning after
December 15, 2021. Early adoption is permitted. The Group is currently evaluating the impact of adopting this
standard on its consolidated financial statements. Early adoption is permitted. The Company is evaluating the effect
that this guidance will have on its consolidated financial statements.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (continued)
In February 2017, the FASB issued ASU 2017-05 (“ASU 2017-05”), Other Income-Gains and Losses from the
Derecognition of Nonfinancial Assets. ASU 2017-05 defines an in-substance nonfinancial asset and clarifies
guidance related to partial sales of nonfinancial assets. The update is effective for annual reporting periods
beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019
with early adoption permitted. The Company is evaluating the effect that this guidance will have on its consolidated
financial statements.
In May 2017, the FASB issued ASU 2017-09 (“ASU 2017-09”), Compensation—Stock Compensation (Topic 718):
Scope of Modification Accounting. This standard provides clarity and reduces both (1) diversity in practice and (2)
cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to
the terms or conditions of a share-based payment award. The updated guidance is effective for interim and annual
periods beginning after December 15, 2017, and early adoption is permitted. The Company is evaluating the effect
that this guidance will have on its consolidated financial statements.
4. CONCENTRATION OF RISK
Credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and
cash equivalents. The Group places its cash and cash equivalents with financial institutions with high-credit ratings
and quality.
Customers accounting for 10% or more of total revenue are:
Customer
A
B
C
Customers accounting for 10% or more of accounts receivable are:
Customer
A
B
C
D
E
*
Less than 10%
F-33
For the years ended December 31,
2017
2016
2015
28.4%
*
*
*
20.4%
*
*
*
22.6%
As of December 31,
2017
2016
37.3%
19.0%
17.2%
11.9%
*
*
*
12.7%
*
59.4%
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
4. CONCENTRATION OF RISK (CONTINUED)
Currency convertibility risk
Substantially all of the Group’s businesses are transacted in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either through Bank of China or other banks authorized to
buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign
currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment
application form together with suppliers’ invoices, shipping documents and signed contracts.
Foreign currency exchange rate risk
From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. For RMB against U.S. dollar, there was depreciation of approximately 6.1% and 6.8% in
the year ended December 31, 2015 and 2016, respectively and appreciation 5.8% in the year end December 31,
2017. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate
between the RMB and the U.S. dollar in the future.
To the extent that the Company needs to convert U.S. dollar into RMB for capital expenditures and working capital
and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB
amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into
U.S. dollar for the purpose of making payments for dividends on ordinary shares, strategic acquisitions or
investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on
the U.S. dollar amount available to the Company. In addition, a significant depreciation of the RMB against the U.S.
dollar may significantly reduce the U.S. dollar equivalent of the Company’s earnings or losses.
5. BUSINESS ACQUISTION
On June 5, 2015, the Company entered into an agreement to acquire JMU Investment with a consideration of
741,422,780 ordinary shares of the Company and $30,000,000 in cash (the “Acquisition”).
Pursuant to the share purchase agreement, 741,422,780 shares were issued as part of consideration of which
311,842,983 was subject to lock-up period. One third of the lock-up shares will be removed on each anniversary
date of the issuance date for three years. For those shares which are not subject to lock-up, the Company used the
stock price of $10.39 per ADS as of the acquisition date to determine the fair value. For those shares that are subject
to lock-up, an average of 28% discount rate to the stock price has been used to determine the value of the
consideration so as to reflect the impact of the restriction for each of the three years from the issuance date.
The transaction was considered as a business acquisition. The Company was determined as the accounting acquirer
based on the facts and circumstances of the transaction including the Company’s payment of cash consideration for
the equity interests of JMU Investment.
Accordingly, the purchase method of accounting has been applied. The acquired net assets were recorded at their
estimated fair values on the acquisition date. The acquired goodwill is not deductible for tax purposes.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
5. BUSINESS ACQUISTION (CONTINUED)
The purchase price for the acquisition was allocated as follows:
Net tangible assets
Intangible assets:
Trade name/domain name
Non-compete agreement
Online platform
Customer relationships
Total
Deferred tax liabilities
Goodwill
Total consideration
US$
Amortization Period
10 years
4.5 years
5 years
5-10 years
28,793,669
16,228,000
10,096,000
1,364,000
27,760,000
55,448,000
(13,862,000)
336,585,270
406,964,939
The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets
under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business
growth resulting from the Acquisition.
The following unaudited pro forma information summarizes the results of operations for the year ended December
31, 2015 of the Group as if the acquisition had occurred on January 1, 2015. The following pro forma financial
information is not necessarily indicative of the results that would have occurred had the acquisition been completed
at the beginning of the period indicated, nor is it indicative of future operating results:
Pro forma revenues
Pro forma net loss
Pro forma net loss per ordinary share-basic
Pro forma net loss per ordinary share-diluted
F-35
For the year ended
December 31, 2015
US$
(unaudited)
11,522,525
(115,066,695)
(0.09)
(0.09)
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
6. DISCONTINUED OPERATIONS
The disposal described in Note 1 represents a strategic shift and has a major effect on the Group’s results of
operations. The Group Buying Entities were accounted as discontinued operations in the consolidated financial
statements for the year ended December 31, 2015. A gain of $47,390,421 was recognized on the disposal.
The financial results of the Group Buying Entities are set out below:
Net revenues
Cost of revenues
Gross profit
Operating expenses
Loss from operations
Gain from disposal of Group Buying Entities
Interest income
Interest expense
Other expenses, net
Income before income tax
Provision for income tax
Income from discontinuing operations attributable to owners of the Company
7. ACCOUNTS RECEIVABLE, NET
Accounts receivable and allowance for doubtful accounts consist of the following:
Accounts receivable
Less: allowance for doubtful accounts
For the year ended
December 31, 2015
US$
16,832,352
(2,927,148)
13,905,204
(50,212,995)
(36,307,791)
47,390,421
1,904
-
(8,599)
11,075,935
-
11,075,935
As of December 31,
2017
2016
US$
US$
1,645,237
-
1,645,237
3,295,818
-
3,295,818
As of December 31, 2016 and 2017, all accounts receivable are due from third party customers for online direct
sales.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
Prepaid expenses and other current assets consist of the following:
Advance to suppliers
Other receivables, net
Prepaid rental expenses and other deposits
Advance to employees
Other current assets
Page 163 of 188
As of December 31,
2017
2016
US$
US$
(i)
7,124,222
286,333
625,726
215,574
425,775
8,677,630
1,248,701
228,436
124,863
118,052
525,736
2,245,788
(i)
In circumstances where a supplier defaults, and where the Group is asserting a breach of contract and seeking
monetary recovery of the remaining deposit from the supplier, the Group reclassifies the respective advance to
suppliers to other receivables within “Prepaid expenses and other current assets” in the consolidated balance
sheets. A provision for loss is recognized in operating expenses when the loss on such assets is determined to
be probable and amount can be reasonably estimated.
The Group provided provision of $nil, $nil and $584,956 for other receivables during the year ended December 31,
2015, 2016 and 2017, respectively.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
Leasehold improvement
Computer equipment
Office equipment
Vehicles
Total
Less: accumulated depreciation
Property and equipment, net
As of December 31,
2017
2016
US$
US$
1,583,641
566,963
162,462
-
2,313,066
(335,407)
1,977,659
1,533,673
814,870
176,160
129,907
2,654,610
(859,377)
1,795,233
For the years ended December 31, 2015, 2016 and 2017, depreciation expense was $63,981, $259,307 and
$267,458, respectively. No impairment loss was recognized for the years ended December 31, 2015, 2016 and
2017.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
10. ACQUIRED INTANGIBLE ASSETS, NET
Acquired intangible assets consist of the following:
Trade name/domain name
Non-compete agreements
Online platform
Customer relationship
Total
Less: Accumulated amortization
Less: Accumulated impairment
Acquired intangible assets, net
Page 164 of 188
As of December 31,
2017
2016
US$
US$
14,330,156
8,915,286
1,204,482
24,514,105
48,964,029
(12,689,791)
-
36,274,238
15,291,990
9,513,676
1,285,326
26,158,110
52,249,102
(22,219,546)
(19,765,615)
10,263,941
The movement of acquired intangible assets for the years ended December 31, 2016 and 2017 is as follows:
Balance as of January 1, 2016
Amortization
Foreign currency translation adjustment
Balance as of December 31, 2016
Amortization
Foreign currency translation adjustment
Impairment
Balance as of December 31, 2017
US$
50,562,945
(8,640,885)
(5,647,822)
36,274,238
(8,359,386)
2,114,704
(19,765,615)
10,263,941
The amortization expense of acquired intangible assets was $4,885,055, $8,640,885 and $8,359,386 for the years
ended December 31, 2015, 2016 and 2017, respectively. Impairment loss of $nil, $nil and $19,765,615 was
provided by the Group for the years ended December 31, 2015, 2016 and 2017, respectively.
During the year ended December 31, 2017, the Group provided impairment loss of $4,982,765, $4,100,522 and
$10,682,328 for Trade name/domain name, Non-compete agreements and Customer relationship, respectively, to
write down the carrying amount to their fair value respectively (Note 18).
The estimated annual amortization expense for each of the five succeeding fiscal years is as follows:
For the years ending December 31,
2018
2019
2020
2021
2022
F-38
US$
1,265,257
1,265,257
1,119,068
1,007,485
1,007,485
5,664,552
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
11. INVESTMENT
Cost investment:
Investment in Cold Chain Link (Shanghai) Internet of Things Co., Ltd.
Less: accumulated impairment
Page 165 of 188
As of December 31,
2017
2016
US$
US$
720,150
-
720,150
768,486
-
768,486
In May 2016, the VIE entered into a share purchase agreement with Cold Chain Link (Shanghai) Internet of Things
Co., Ltd., which formerly known as Cold Chain Link Global (Shanghai) Logistic Co., Ltd., (“CCLG”) and CCLG’s
original shareholders for acquiring its 10% equity interest with total consideration of RMB20 million ($3.0 million).
The Board of Directors of CCLG shall consist of three directors, whereby the VIE may appoint one director. As the
Group’s investment contains a substantive liquidation preference, the investment in CCLG is not considered in-
substance common stock, and the Group has accounted for the investment as a cost method investment carried at
cost.
As of December 31, 2017, the Group has paid RMB5 million ($0.7 million) and the capital commitment for this
investment is RMB 15 million ($2.3 million) as of December 31, 2017 (Note 22).
No impairment loss was recognized for each of the three years ended December 31, 2017 as there were no
indicators of impairment noted associated with the investment.
12. GOODWILL
Gross amount
Less: Accumulated impairment
As of December 31,
2017
2016
US$
US$
307,271,927
327,895,884
(85,934,770) (218,955,451)
108,940,433
221,337,157
The changes in the goodwill balance for the years ended December 31, 2016 and 2017 are as follows:
Balance as of January 1, 2016
Foreign currency translation adjustment
Balance as of December 31, 2016
Foreign currency translation adjustment
Impairment
Balance as of December 31, 2017
F-39
US$
250,650,500
(29,313,343)
221,337,157
14,856,086
(127,252,810)
108,940,433
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
12. GOODWILL (CONTINUED)
The Group has one reporting unit and applies discounted cash flows for its impairment test as of December 31 of
each year. The Group recorded an impairment loss of $85,934,770, $nil and $127,252,810 for the years ended
December 31, 2015, 2016 and 2017, respectively.
13. SHORT-TERM BANK BORROWINGS
In July 2017, the VIE, entered into a banking facility arrangement with Bank of Dalian Shanghai Branch, pursuant
to which the VIE is entitled to borrow RMB denominated loan of RMB50 million ($7.6 million, equivalently), for a
one-year period from July 25, 2017 to July 24, 2018.
The facility agreement was guaranteed by the Company’s shareholders, Ms. Zhu and Ms. Wang and Ms. Wang also
provided her own property as collateral (Note 21).
On August 10, 2017 and August 16, 2017, the Group drew down RMB27 million ($4.1 million) and RMB23
million ($3.5 million), respectively, with fixed interest rate of 5.66% per annum.
14. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
Payables to third-party sellers
Accrued payroll and welfare
Provision for loyalty program
Payables for professional fees
Other tax payable
Accrued marketing expenses
Uncertain tax positions
Payables for rental fee
Others
(i)
As of December 31,
2017
2016
899,950
1,910,519
2,752,151
1,261,405
238,377
1,555,524
146,368
164,234
104,730
9,033,258
2,991,928
2,839,109
1,549,962
784,464
352,629
329,002
258,532
37,733
148,901
9,292,260
(i) In connection with the online platform services, payable to third-party sellers represented the total amounts
received from third-party purchasers on behalf of third-party sellers through the Group’s online platform in a
period less than one week without any charges.
15. INCOME TAXES
Cayman
Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
15. INCOME TAXES (CONTINUED)
Hong Kong
Under the Hong Kong tax laws, the Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax rate
at 16.5%. No provision for Hong Kong profits tax was made for each of the three years ended December 31, 2017
on the basis that the Group’s Hong Kong subsidiaries did not have any assessable profits arising in or derived from
Hong Kong for those years.
PRC
The enterprise income tax (‘‘EIT’’) law applies a uniform 25% EIT rate to both foreign invested enterprises and
domestic enterprises. The EIT rate for the Group’s entities operating in the PRC is 25%.
No taxable income was generated for both domestic and foreign entities of the Group during each of the three years
ended December 31, 2017.
Credit for income tax consist of the following:
Income tax benefits:
Current income tax expenses
Deferred income tax benefits
Total
For the years ended December 31,
2017
2016
2015
US$
US$
US$
-
1,249,696
1,249,696
(200,040)
2,433,497
2,233,457
(292,436)
7,149,616
6,857,180
The significant components of the Group’s deferred tax assets and liabilities were as follows:
Deferred tax assets
Accruals
Net operating loss carry forwards
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Acquired intangible assets
Total deferred tax liabilities
F-41
As of December 31,
2017
2016
US$
US$
1,879,890
5,797,149
(7,457,437)
219,602
2,011,300
8,741,138
(10,595,656)
156,782
9,068,560
9,068,560
2,565,985
2,565,985
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
15. INCOME TAXES (CONTINUED)
The Group considers the following factors, among other matters, when determining whether some portion or all of
the deferred tax assets will more likely than not be realized: the nature, frequency and severity of recent losses,
forecasts of future profitability, the duration of statutory carry forward years, the Group’s experience with tax
attributes expiring unused and tax planning alternatives. The Group’s ability to realize deferred tax assets depends
on its ability to generate sufficient taxable income within the carry forward years provided for in the tax law.
The Group incurred net operating losses carry forwards of $8,064,039, $8,744,032 and $10,196,547 from the
Group’s PRC entities for the years ended December 31, 2015, 2016 and 2017, respectively, which would expire on
various dates through 2020 to 2022. The Group operates its business through its subsidiaries, its VIE and its
subsidiaries. The Group does not file consolidated tax returns, therefore, losses from individual subsidiary, the VIE
or the VIE’s subsidiaries may not be used to offset other PRC entities’ earnings within the Group. Valuation
allowance is considered on each individual subsidiary, VIE and VIE’s subsidiary basis.
As of December 31, 2016 and 2017, valuation allowance was $7,457,437 and $10,595,656, respectively, which was
provided against deferred tax assets as it is considered more likely than not that the relevant deferred tax assets will
not be realized in the foreseeable future.
Reconciliation between the income taxes benefits computed by applying the PRC tax rate to loss before income
taxes and the actual credit for income taxes is as follows:
Net loss before provision for income taxes
Statutory tax rates in the PRC
Income tax at statutory tax rate
Expenses not deductible for tax purposes:
Goodwill impairment loss
Entertainment expenses exceeded tax limit
Other expenses exceeded tax limit
Effect of income tax rate difference in other jurisdiction
Changes in unrecognized tax benefits
Changes in valuation allowance
Income tax benefits
F-42
For the year ended December 31,
2017
2016
2015
US$
US$
US$
(105,895,819)
25%
(26,473,955)
(27,526,602)
25%
(6,881,651)
(168,756,159)
25%
(42,189,040)
21,483,693
7,687
226,428
1,551,150
-
1,955,301
(1,249,696)
-
21,533
-
633,997
200,040
3,792,624
(2,233,457)
31,813,203
11,783
-
102,670
292,436
3,111,768
(6,857,180)
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
15. INCOME TAXES (CONTINUED)
The EIT Law includes a provision specifying that legal entities organized outside the PRC will be considered
residents for Chinese income tax purposes if their place of effective management or control is within the PRC. If
legal entities organized outside the PRC were considered residents for Chinese income tax purpose, they would
become subject to the EIT Law on their worldwide income. This would cause any income legal entities organized
outside the PRC earned to be subject to the PRC’s 25% EIT. The Implementation Rules to EIT Law provide that
non-resident legal entities will be considered as PRC residents if substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc. reside within the PRC.
Pursuant to the additional guidance released by the Chinese government on April 22, 2009 and issued bulletin on
August 3, 2011 which provide more guidance on the implementation, management does not believe that the legal
entities organized outside the PRC should be characterized as the PRC tax residents for EIT Law purposes.
Unrecognized Tax Benefits
Under the EIT Law and its implementation rules which became effective on January 1, 2008, dividends generated
after January 1, 2008 and payable by a foreign-invested enterprise in the PRC to its foreign investors who are non-
resident enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with the PRC that provides for a different withholding arrangement. The Cayman
Islands, where the Company are incorporated, does not have a tax treaty with the PRC.
There were no aggregate undistributed earnings of the Company’s subsidiary, VIE and VIE’s subsidiaries located in
the PRC available for dividend distribution. Therefore, no deferred tax liability has been accrued for the Chinese
dividend withholding taxes that might be payable upon the distribution of aggregate undistributed earnings as of
December 31, 2016 and 2017.
The impact of an uncertain tax position on the income tax return is recognized at the largest amount that is more-
likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be
classified as a component of the provisions for income taxes.
As of December 31, 2016 and 2017, the Group recorded an unrecognized tax benefit of $271,019 and $563,455,
respectively, of which $124,651 and $304,923, respectively, are presented on a net basis against the deferred tax
assets related to tax loss carry forward on the consolidated balance sheets (Note 14). The unrecognized tax benefits
is mainly related from under reported income. The amount of unrecognized tax benefits will change in the next 12
months, pending clarification of current tax law or audit by tax authorities, however, an estimate of the range of the
possible change cannot be made at this time.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
15. INCOME TAXES (CONTINUED)
A roll-forward of unrecognized tax benefits is as follows:
Balance at beginning of the year
Addition based on tax positions related to the current year
Balance at end of the year
For the years ended December 31,
2016
US$
70,979
200,040
271,019
2017
US$
271,019
292,436
563,455
During the years ended December 31, 2015, 2016 and 2017, the Group recorded interest accrued in relation to the
unrecognized tax benefit in income tax expense of $nil, $nil and $26,785, respectively.
Since the incorporation, the relevant tax authorities of the Group’s subsidiary, VIE and VIE’s subsidiaries located in
the PRC have not conducted a tax examination. In accordance with relevant PRC tax administration laws, tax years
from 2014 to 2017 of the Group’s PRC subsidiary, VIE and VIE’s subsidiaries, remain subject to tax audits as of
December 31, 2017, at the tax authority’s discretion.
16. ORDINARY SHARES
On April 8, 2015, the Company completed its IPO on NASDAQ by offering 4,000,000 ADSs, representing 72
million ordinary shares at price of $10 per ADS. On April 27, 2015, the Company issued an additional 220,000
ADSs, representing 3.96 million of ordinary shares to the underwriter for exercising the overallotment option at
price of $10 per ADS. The total proceeds from issuance of ordinary shares upon IPO is $37,294,600, after deducting
the IPO related cost of $3,000,000.
Upon the completion of the IPO, all of the Company's then outstanding Series A-1, Series A-2 and Series B
preferred shares were automatically converted into 12,202,988, 122,029,877 and 30,507,471 ordinary shares
respectively, and immediately after the completion of the IPO, the indebtedness owed to Mr. Maodong Xu ("Mr.
Xu"), one of the Company's shareholder, amounting to $69.4 million was converted into 124,835,802 ordinary
shares.
On June 8, 2015, the Company issued 741,422,780 ordinary shares to JMU's original shareholders for the
acquisition of JMU (see Note 5). In addition, the Company initially agreed to issue 72,000,000 ordinary shares of
the Company to Mr. Xu at a purchase price of $0.5556 per share, for a total purchase price of $40,000,000. On
September 7, 2015, the Company and Mr. Xu reduced the number of shares to be purchased through a supplemental
agreement resulting in a final subscription amount of $15,000,000 for 27,000,000 shares. On the same date, the
Company issued an additional 27,000,000 ordinary shares to Mr. Xu in relation to his additional subscription.
On September 27, 2015, the Company issued and transferred 38,363,112 ordinary shares to its depositary bank
representing 2,131,284 ADSs, to be issued to employees and former-employees upon the exercise of their vested
share options and the registration of their vested RSUs.
As of December 31, 2016 and 2017, 22,770,288 and 37,462,294 ordinary shares, respectively, out of these
38,363,112 ordinary shares had been issued to employees and former-employees upon the exercise of share options
and the registration of vested RSUs. Therefore, as of December 31, 2016 and 2017, 15,592,824 and 900,818
common shares, respectively, remained for future issuance.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
17. CONVERTIBLE REDEEMABLE PREFERRED SHARES
On April 3, 2011, Wowo Group Limited ("Wowo BVI") issued an aggregate of 5,489,604 Series A-1 Convertible
Redeemable Preferred Shares (‘‘Series A-1 Preferred Shares’’) to an investor at an issuance price of $0.9108 per
Series A-1 Preferred Share for total cash proceeds of $5,000,000 before issuance cost of $18,072.
On May 25, June 8, and July 5, 2011, Wowo BVI issued 30,803,678, 2,053,580 and 18,482,206 Series A-2
Convertible Redeemable Preferred Shares (‘‘Series A-2 Preferred Shares’’) to investors at an issuance price of
$0.9739 per Series A-2 Preferred Share for total cash proceeds of $30,000,000, $2,000,000 and $18,000,000,
respectively. The related issuance cost was $192,149 and deducted from proceeds of Series A-2 Preferred Shares.
On February 29, 2012, the Company issued an aggregate of 30,507,471 Series B Convertible Redeemable Preferred
Shares (‘‘Series B Preferred Shares’’) to its existing shareholders at an issuance price of $0.4097 per Series B
Preferred Shares for total cash proceeds of $12,500,000. The related issuance cost was $31,153 and deducted from
proceeds of Series B Preferred Shares. Meanwhile, the Company issued an aggregate of 6,713,384 Series A-1
Preferred Shares and 70,690,413 Series A-2 Preferred Shares to existing Series A-1 and Series A-2 investors for no
consideration, and the conversion price of Series A-1 Preferred Shares and Series A-2 Preferred Shares were
adjusted to $0.4097. A beneficial conversion feature of $43,234,050 was recognized as the adjusted conversion
price was lower than the fair value of the ordinary shares on respective issuance dates for Series A-1 and Series A-2
Preferred Shares.
Each Series A and Series B convertible preferred share had been automatically converted into one ordinary share
upon the qualified IPO on April 8, 2015.
The rights, preferences, privileges and restriction granted to and imposed on the Series A-1, A-2 (collectively
referred to as ‘‘Series A Preferred Shares’’) and Series B Preferred Shares (collectively, "Preferred Shares") were as
follows:
Voting rights
Each Preferred Share carried a number of votes equal to the number of Ordinary Shares then issuable upon its
conversion into Ordinary Shares. The Preferred Shares shall generally vote together with the Ordinary Shares and
not as a separate class.
According to the Third Amended Memorandum and Article of Association after above issuance of Series A-1,
Series A-2 and Series B Preferred Shares, the number of the Board of directors of the Company was four, including
one appointed by preferred shareholders and three appointed by ordinary shareholders.
Dividends
No dividends shall be declared or paid on the ordinary shares or any future series of Preferred Shares, unless and
until a dividend in like amount is declared and paid on each outstanding Preferred Share on an as-if converted basis.
Each holder of Series B Preferred Shares shall be entitled to receive, on annual basis, preferential, non-cumulative
dividends at the rate equal to the greater of (i) 8% of the Series B Preferred Share Issue Price, (ii) the dividend that
would be paid with respect to the Ordinary Shares into which the Series B Preferred Shares could be converted.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
17. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
After the full preferential dividends for Series B Preferred Shares had been paid on all outstanding Series B
Preferred Shares, each holder of Series A-2 Preferred Shares shall be entitled to receive, on an annual basis,
preferential, non-cumulative dividends at the rate equal to the greater of (i) 8% of the Series A-2 Preferred Share
Issue Price, (ii) the dividend that would be paid with respect to the Ordinary Shares into which the Series A-2
Preferred Shares could be converted.
After the full preferential dividends for Series B and Series A-2 Preferred Shares had been paid on all outstanding
Series B and Series A-2 Preferred Shares, each holder of Series A-1 Preferred Shares shall be entitled to receive, on
an annual basis, preferential, non-cumulative dividends at the rate equal to the greater of (i) 8% of the Series A-1
Preferred Share Issue Price, (ii) the dividend that would be paid with respect to the Ordinary Shares into which the
Series A-1 Preferred Shares could be converted.
In addition to any dividend pursuant to above, the holders of Preferred Shares shall be entitled to receive on a pari
passu basis, when as and if declared at the sole discretion of the Board, but only out of funds that are legally
available therefor, cash dividends at the rate or in the amount as the Board considers appropriate.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, each holder of Series B Preferred Shares
shall be entitled to receive, prior to any distribution to the holders of Series A Preferred Shares, Ordinary Shares or
any other class or series of shares then outstanding, an amount per Series B Preferred Share equal to 100% of
Series B Issue Price, plus all declared but unpaid dividends (‘‘Series A-2 Preference Amount’’).
After the full Series B Preference Amount had been paid on all outstanding Series B Preferred Shares, the each
holder of Series A-2 Preferred Shares shall be entitled to receive, prior to any distribution to the holders of Ordinary
Shares or any other class or series of shares then outstanding, an amount per Series A-2 Preferred Share equal to
100% of Series A-2 Issue Price, plus all declared but unpaid dividends (‘‘Series A-2 Preference Amount’’).
After the full Series A-2 Preference Amount had been paid on all outstanding Series A-2 Preferred Shares, the each
holder of Series A-1 Preferred Shares shall be entitled to receive, prior to any distribution to the holders of Ordinary
Shares or any other class or series of shares then outstanding, an amount per Series A-1 Preferred Share equal to
100% of Series A-1 Issue Price, plus all declared but unpaid dividends (‘‘Series A-1 Preference Amount’’).
After the full Series B and Series A Preference Amount had been paid, any remaining funds or assets of the
Company legally available for distribution to shareholders shall be distributed pro rata among the holders of
Preferred Shares (on an as-converted basis) and the holders of the Ordinary Shares.
In the event the Company proposed to distribute assets other than cash in connection with any liquidation,
dissolution or winding up of the Company, the value of the assets to be distributed to the holders of Preferred Shares
and Ordinary Shares shall be determined by the Board.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
17. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
Conversion
Optional conversion
Each holder of Preferred Shares shall have the right to convert all or any portion of the Preferred Shares into
Ordinary Shares at any time. The conversion rate for the Series B Preferred Shares and Series A Preferred Shares
shall be determined by dividing the Series B and Series A Issue Price for each of the Series B Preferred Shares and
Series A Preferred Shares by its conversion price, respectively, provided that in the event of any share splits, share
combinations, share dividends, recapitalizations and similar events, the initial Series B and Series A Conversion
Price shall be adjusted accordingly, respectively.
Automatic conversion
The Preferred Shares would automatically be converted into Ordinary Shares, at its then respective Conversion
Prices, upon a Qualified IPO, which is defined as an initial public offering of securities of the Company on a
recognized regional or national exchange or quotation system in the United States, Hong Kong, the PRC or any
other jurisdiction approved by the investors, and the aggregate proceeds to the Company in such initial public
offering shall be not less than $100,000,000, unless otherwise agreed upon by the Investors and the Company (the
“Qualified IPO”).
No adjustment in the Series B Conversion Price shall be made in respect of the issuance of additional ordinary
shares unless the consideration per share for an additional ordinary share issued or deemed to be issued by the
Company is less than the Series B Conversion Price. If the Company issues any additional ordinary shares and 0.85
times of the subscription price less than Series B Conversion Price, the Series B Conversion Price shall be reduced
to a price (to the nearest one thousandth (1/1000) of a cent) equal to 0.85 times of the consideration per share for the
additional ordinary shares issued.
No adjustment in the Series A Preferred Shares Conversion Price shall be made in respect of the issuance of
additional ordinary shares unless the consideration per share for an additional ordinary share issued or deemed to be
issued by the Company is less than the Series A Conversion Price. If the Company issues any additional ordinary
shares and 0.85 times of the subscription price less than Series A Conversion Price, the Series A Conversion Price
shall be reduced to a price (to the nearest one thousandth (1/1000) of a cent) equal to 0.85 times of the consideration
per share for the additional Ordinary Shares issued.
The conversion price will be adjusted for share dividends, subdivisions, combinations or consolidations of ordinary
shares, other distributions, reclassification, exchange and substitution.
The Company will protect the Conversion Rights of the holders of the Preferred Shares against impairment, and not
amend its Memorandum and Articles of Association or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed by the Company.
The Group had determined that there was embedded beneficial conversion feature of $43,234,050 attributable to the
Series A-1 and Series A-2 Preferred Shares because the adjusted conversion price of Series A-1 and Series A-2
Preferred Shares is lower than the fair value of the Group’s ordinary share as of respective issuance dates and there
was no embedded beneficial conversion feature attributable to the Series B Preferred Shares because the conversion
price of the Series B Preferred Shares is higher than the fair value of the Group’s ordinary share as of the issuance
date.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
17. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
The initial conversion price of Series B and Series A Preferred Shares shall be their Issue Price, therefore, the initial
conversion rate was one for one. The conversion rate for each class of preferred shares were both one for one as of
December 31, 2014.
The Group assessed the probability of redemption and accrues proper accretion over the period from the date of
issuance to the earliest redemption date of the Series A-1 Preferred Shares, Series A-2 Preferred Shares and Series B
Preferred Shares using the effective interest rate method. The Group recognized $40,814,509 and $2,365,351 as
accretion for Series A-1 Preferred Shares, Series A-2 Preferred Shares and Series B Preferred Shares for the years
ended December 31, 2014 and 2015, respectively.
On April 8, 2015, all the issued and outstanding Series A-1, Series A-2 and Series B preferred shares were
automatically converted into 12,202,988, 122,029,877, 30,507,471 ordinary shares upon the IPO of the Company,
respectively.
18. FAIR VALUE MEASUREMENT
Measured at fair value on a recurring basis
The Group had no financial assets and liabilities measured and recorded at fair value on a recurring basis as of
December 31, 2016 and 2017.
Measured at fair value on a non-recurring basis
The Group measures the acquired assets and liabilities at fair value on a nonrecurring basis as result of the business
acquisition as set forth in Note 5. The fair value was determined using models with significant unobservable inputs
(Level 3 inputs), primarily the management projection on the future cash flow and the discount rate.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
18. FAIR VALUE MEASUREMENT (CONTINUED)
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at
fair value on a non-recurring basis as of December 31, 2017, no such assets and liabilities as of December 31, 2016:
Fair value measurement at December 31, 2017 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
US$
Balance as of
December 31,
2017
US$
Significant Other
Observable
Inputs
(Level 2)
US$
Significant
Unobservable
Inputs
(Level 3)
US$
Total losses
US$
(i)
(ii)
12,059,174
108,940,433
12,059,174
19,765,615
108,940,433 127,252,810
Description
Assets:
Long-lived assets
Goodwill
(i) Long-lived assets represent the Group’s property and equipment (Note 9), and acquired intangible assets (Note
10). The Group determined that these long-lived assets were one asset group and subject to be tested for
impairment. The Group measures long-lived assets at fair value on a non-recurring basis when the carrying
amount of the asset group exceeds its recoverable amount based on future projection which is consistent with
its remained useful lives of the primary assets. The fair value was determined using models with significant
unobservable input (Level 3 inputs) and the cash flow projections were based on past experience, actual results
of operations and management best estimates about future developments as well as certain market assumptions.
Impairment loss of $nil, $nil and $19,765,615 were recognized during the years ended December 31, 2015,
2016 and 2017, respectively, and included in “Impairment loss” in the Consolidated Statements of Operations.
(ii) The Group measures goodwill at fair value on a non-recurring basis when it is annually evaluated or whenever
events or changes in circumstances indicate that carrying amount of a reporting unit exceeds its fair value. The
fair value was determined using models with significant unobservable inputs (Level 3 inputs) which primarily
included management projections on the discounted future cash flow analysis including the discount rate using
the weighted average cost of capital of 17.5% and 18% as of December 31, 2016 and 2017, respectively, and
expected revenue growth rates. Goodwill impairment loss of $85,934,770, $nil, and $127,252,810 were
recognized for the years ended December 31, 2015, 2016 and 2017, respectively, and included in “Impairment
loss” in the Consolidated Statements of Operations.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
19. SHARE BASED COMPENSATION
2011 Share Incentive Plan
On February 1, 2011, the Board of Directors approved the Company 2011 Share Incentive Plan (‘‘2011 Plan’’). The
2011 Plan provides for the grant of options, restricted shares, and other share-based awards.
The Group recognized compensation cost on the share options to employees under 2011 Plan on a straight-line basis
over the requisite service period. The options granted during 2012 and 2013 vest ratably over 48 months and the
options granted during 2014 vest on the first anniversary of the date of grant.
On July 27, 2015, the Board of Directors approved to grant 28,841,700 Restricted Share Units ("RSUs") awards
pursuant to the 2011 Plan. Each RSU represents the contingent right of the participant to receive an ordinary share.
Each RSU is an agreement to issue ordinary share at the time the award vests with zero exercise price. The issued
RSUs will vest 50%, and 50%, respectively, on the each anniversary of the grant date. The Group recognizes share-
based compensation cost on the RSUs on a straight-line basis over the 2 years from the grant date.
On September 1, 2015, the Board of Directors approved that all 3,312,618 unvested options and 28,639,900 RSUs
granted under 2011 Plan became vested and exercisable as of September 1, 2015. Meanwhile, the Board of
Directors also approved that the all vested and accelerated vested options and RSUs shall be exercised within 2
years from the acceleration date, i.e. September 1, 2017, which was subsequently extended by another 1 year
approved by the Company on June 20, 2017.
On July 1, 2016, under the 2011 Plan, the Board of Directors approved to grant 32,028,700 share options with
exercise price of $0.20 per share to its employees and managements. 40%, 30% and 30% of the share subject to the
options shall vest on the second, third and fourth anniversary of the vesting commencement date, respectively,
provided that the optionee continues to be a service provider to the Group.
On July 1, 2016, the Board of Directors also approved to grant 10,430,000 RSUs awards pursuant to the 2011 Plan.
Each RSU represents the contingent right of the participant to receive an ordinary share. Each RSU is an agreement
to issue ordinary share at the time the award vests with zero exercise price. The issued RSUs will vest 100% when
the following two conditions are both met: a) on and after the first anniversary of the grant date and b) the market
price of the Company’s ADS is not less than $7 per ADS. As the second condition was not met, nil RSU was vested
as of December 31, 2017. The Group recognizes share-based compensation cost on the RSUs over the 12 months
from the grant date.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
19. SHARE BASED COMPENSATION (CONTINUED)
(a) Restricted Shares Award Granted to Employees
The following table summarizes the Company’s restricted shares award issued under 2011 Plan for the year
ended December 31, 2017:
Unvested as of January 1, 2017
Granted
Forfeited
Unvested as of December 31, 2017
Expect to vest as of December 31, 2017
(b) Options Granted to Employees
Outstanding RSUs
Number of
RSUs
10,430,000
Weighted average
grant date
fair value (US$)
0.133
-
(1,650,000)
8,780,000
8,780,000
-
0.133
0.133
0.133
The following table summarizes the Company’s employee share options under 2011 Plan for the year ended
December 31, 2017:
Options
Number of
Share options
Outstanding as of January 1, 2017
61,038,032
Granted
Forfeited and expired
Exercised
Outstanding as of December 31,
2017
Vested and expect to vest as of
December 31, 2017
Exercisable as of December 31,
2017
-
(7,277,510)
(1,042,002)
52,718,520
52,718,520
27,725,820
Weighted
average
exercise price
US$
Weighted
average
grant date
fair value
US$
Weighted
average
remaining
contractual life
(Years)
0.15
-
0.20
0.01
0.14
0.14
0.09
0.18
-
0.10
0.08
0.20
0.20
0.28
5.62
-
-
-
4.38
4.38
0.67
Aggregate
Intrinsic value
US$
3,844,310
-
-
-
793,918
793,918
793,918
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
19. SHARE BASED COMPENSATION (CONTINUED)
(b) Options Granted to Employees (Continued)
Share-based compensation of $nil, $1,097,543 and $1,067,786 were charged to operating expenses of
continuing operations for the years ended December 31, 2015, 2016 and 2017 under 2011 Plan, respectively.
Share-based compensation of $7,176,600, $nil and $nil were charged to operating expenses of discontinued
operations for the years ended December 31, 2015, 2016 and 2017, respectively.
On September 1, 2015, the Board of Directors approved that all 3,312,618 unvested options and 28,639,900
RSUs granted under 2011 Plan became vested and exercisable (“Accelerated Awards”) as of September 1,
2015. This was accounted for as a modification. The share-based compensation of $7,503,976 from this
modification was one-time charge to operating expenses of discontinued operations for the year ended
December 31, 2015. As all batches of options and RSUs outstanding as of September 1, 2015 were immediately
vested on that date, the actual forfeiture rates were trued up, which resulted a reversal of $327,376 share-based
compensation in discontinued operations for the year ended December 31, 2015.
On June 20, 2017, the Company approved to extend the excisable date of these Accelerated Awards by another
1 year to September 1, 2018, which was accounted for as a modification. The share-based compensation of
$32,491 from this modification was a one-time charge to operating expenses of continuing operations for the
year ended December 31, 2017.
The aggregated intrinsic value of stock options outstanding and exercisable as of December 31, 2016 and 2017
was calculated based on the closing price of the Company’s ordinary shares, $3.76 per ADS (equivalent to
$0.21 per ordinary share) and $1.02 per ADS ($0.06 per ordinary share) at December 31, 2016 and 2017,
respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2015,
2016 and 2017 was $1,547,655, $618,971 and $52,536, respectively.
As of December 31, 2017, the unrecognized share-based compensation related to RSUs issued to employees
was $nil; the unrecognized share-based compensation related to share options were $2,169,647 and expected to
be recognized following the straight-line method over the remaining weighted-average period of 2.5 years as of
December 31, 2017.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
19. SHARE BASED COMPENSATION (CONTINUED)
The fair value of the options granted/modified was estimated on the date of grant/modification with the assistance of
an independent third-party appraiser, and was determined using binomial model with the following assumptions:
September 1,
2015
July 1,
2016
June 20,
2017
Expected volatility (1)
Risk-free interest rate (2)
Expected dividend yield (3)
Exercise price (4)
Fair value of the underlying ordinary shares (5)
60.3% - 65.1%
0.47% - 0.88%
nil
$0.01 -$0.20
$0.38
54.8%
1.46%
nil
$0.20
$0.20
41.0%
1.25%
nil
$0.01 -$0.20
$0.12
(1) Volatility
The volatility of the underlying ordinary shares during the life of the options was estimated based on average
historical volatility of comparable companies for the period before the valuation date with lengths equal to the
life of the options.
(2) Risk-free rate
Risk free rate is estimated based on yield to maturity of PRC international government bonds with maturity
term close to the life of the options.
(3) Dividend yield
The dividend yield was estimated by the Group based on its expected dividend policy over the life of the
options.
(4) Exercise price
The exercise price of the options was determined by the Group’s Board of Directors.
(5) Fair value of underlying ordinary shares
The estimated fair value of the ordinary shares underlying the options as of the respective valuation dates was
determined based on a contemporaneous valuation. When estimating the fair value of the ordinary shares on
the valuation dates, management has considered a number of factors, including the result of a third-party
appraisal and equity transactions of the Group, while taking into account standard valuation methods and the
achievement of certain events. The fair value of the ordinary shares in connection with the option grants on
the valuation dates was determined with the assistance of an independent third-party appraiser.
After the Company listed on NASDAQ in April 2015, the closing market price of the ordinary shares of the
Company as of the grant/modification date was used as the fair value of the ordinary shares on that date.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
20. NET LOSS PER SHARE
The calculation of the net loss per share is as follows:
Numerator:
Net loss attributable to the Company
-Continuing operations
-Discontinued operations
Accretion for Series A-1 Preferred Shares
Accretion for Series A-2 Preferred Shares
Accretion for Series B Preferred Shares
Net loss attributable to ordinary shareholders for computing basic
net loss per ordinary shares
-Continuing operations
-Discontinued operations
Accretion for Series A-1 Preferred Shares
Net income attributable to Series A-1 P referred Shareholders for
computing basic net income per Series A-1 Preferred Shares
Accretion for Series A-2 Preferred Shares
Net income attributable to Series A-2 P referred Shareholders for
computing basic net income per Series A-2 Preferred Shares
Accretion for Series B Preferred Shares
Net income attributable to Series B P referred Shareholders for
computing basic net income per Series B Preferred Shares
Denominator:
Weighted average ordinary shares outstanding used in computing
For the years ended December 31,
2017
2016
2015
(93,570,188)
(104,646,123)
11,075,935
(442,409)
(1,202,748)
(720,194)
(25,293,145)
(25,293,145)
-
-
-
-
(161,898,979)
(161,898,979)
-
-
-
-
(95,935,539)
(104,646,123)
8,710,584
442,409
(25,293,145)
(25,293,145)
-
-
(161,898,979)
(161,898,979)
-
-
442,409
1,202,748
1,202,748
720,194
720,194
-
-
-
-
-
-
-
-
-
-
basic net loss per ordinary shares
1,001,754,524 1,474,087,060 1,476,144,194
Weighted average ordinary shares outstanding used in computing
diluted net loss per ordinary shares
1,001,754,524 1,474,087,060 1,476,144,194
Weighted average shares outstanding used in computing basic net
income per Series A-1 Preferred Shares
Weighted average shares outstanding used in computing basic net
income per Series A-2 Preferred Shares
Weighted average shares outstanding used in computing basic net
income per Series B Preferred Shares
3,242,986
32,429,858
8,107,465
-
-
-
-
-
-
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
20. NET LOSS PER SHARE (CONTINUED)
Net loss per ordinary share
Basic
Diluted
Net loss per ordinary share from continuing operations
Basic
Diluted
Net income per share from discontinued operations
Basic
Diluted
Net income per Series A-1 Preferred Share-Basic
Net income per Series A-2 Preferred Share-Basic
Net income per Series B Preferred Share-Basic
Weighted average shares used in calculating net loss per
ordinary share
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Weighted average shares used in calculating net loss per
Series A-1 preferred shares
Series A-2 preferred shares
Series B preferred shares
For the years ended December 31,
2017
2016
2015
(0.09)
(0.09)
(0.10)
(0.10)
0.01
0.01
0.14
0.04
0.09
(0.02)
(0.02)
(0.02)
(0.02)
-
-
-
-
-
(0.11)
(0.11)
(0.11)
(0.11)
-
-
-
-
-
1,001,754,524 1,474,087,060 1,476,144,194
-
1,001,754,524
-
1,001,754,524 1,474,087,060 1,476,144,194
-
1,043,473,265
-
3,242,986
32,429,858
8,107,465
-
-
-
-
-
-
Series A-1, Series A-2 and Series B Preferred Shares were excluded from the computation of diluted net loss per
ordinary share for the years ended December 31, 2015 because their effects were anti-dilutive.
For the years ended December 31, 2015, 2016 and 2017, 18,224,699, nil and nil ordinary shares resulting from the
assumed exercise of share options were excluded as their effect was anti-dilutive for the discontinued operations of
the Group, respectively.
For the years ended December 31, 2015, 2016 and 2017, 59,943,440, 35,190,467 and 22,195,156 ordinary shares
resulting from the assumed exercise of share options were excluded as their effect was anti-dilutive for the
continuing operations of the Group, respectively.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
21. RELATED PARTY BALANCES AND TRANSACTIONS
Nature of the relationships with related parties:
Relationship with the Company
Name
Shareholder
Ms. Zhu
Shareholder
Ms. Wang
Controlled by Ms. Zhu
Chung So Si Fong Dessert Limited
Controlled by Ms. Zhu
Cong Shao (Macao) Star Dessert Co., Ltd.
Controlled by Ms. Zhu
Hong Kong Sunward Fishery Restaurant Management Co., Ltd.
Controlled by Ms. Zhu
Nanjing Jiangdong Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Nanjing Xinzijin Sunward Fishery Restaurant Co., Ltd.
Nanjing Yongji Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Ningbo dongqian lake tourist resort Xiyue leisure tourism Co., Ltd. Controlled by Ms. Zhu
Controlled by Ms. Zhu
Ningbo Jiangbei Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Ningbo Tianyi Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Ningbo Yinzhou Sunward Logistics Co., Ltd.
Controlled by Ms. Zhu
Shanghai Congshao Dessert Co., Ltd.
Controlled by Ms. Zhu
Shanghai Congshao Restaurant Management Co., Ltd.
Controlled by Ms. Zhu
Shanghai Putuo Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Shanghai Zhonghengkuaijian Brand Management Co., Ltd.
Controlled by Ms. Zhu
Shanghai Zhongxiao Brand Management Co., Ltd.
Controlled by Ms. Zhu
Shanghai Zhongyou Information Technology Co., Ltd.
Controlled by Ms. Zhu
Shenzhen Bangrun Commercial factoring Co., Ltd.
Controlled by Ms. Zhu
Shenzhen Congshao Restaurant Management Co., Ltd.
Controlled by Ms. Zhu
Tianjin Congshao Restaurant Management Co., Ltd.
Controlled by Ms. Zhu
Wuhan Congshao Restaurant Management Co., Ltd.
Controlled by Ms. Zhu
Zhejiang Sunward Fishery Restaurant Co., Ltd.
Controlled by Ms. Zhu
Zhejiang Zhonggangjumei Supply Chain Management Co., Ltd.
Controlled by Ms. Wang
Shanghai MIN Hongshi Trading Co., Ltd.
Shanghai MIN Zunshi Trading Co., Ltd.
Controlled by Ms. Wang
Shanghai Xiao Nan Guo Hai Zhi Yuan Restaurant Management
Co., Ltd.
Shenzhen Xiao Nan Guo Restaurant Management Co., Ltd.
WM Ming Hotel
Xiao Nan Guo (Group) Co., Ltd.
Xiao Nan Guo Holdings Limited
Controlled by Ms. Wang
Controlled by Ms. Wang
Controlled by Ms. Wang
Controlled by Ms. Wang
Controlled by Ms. Wang
A company under the significant influence of
CCLG
the Company
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
21. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
(a) As of December 31, 2016 and 2017, the following balances were due from/ to the related parties:
Current assets
Amount due from related parties
Zhejiang Sunward Fishery Restaurant Co., Ltd.
Shanghai Congshao Dessert Co., Ltd.
Shanghai Xiao Nan Guo Hai Zhi Yuan Restaurant Management Co., Ltd.
Shanghai Congshao Restaurant Management Co., Ltd.
Shanghai Zhonghengkuaijian Brand Management Co., Ltd.
Shenzhen Bangrun Commercial factoring Co., Ltd.
Shanghai Zhongxiao Brand Management Co., Ltd.
Nanjing Xinzijin Sunward Fishery Restaurant Co., Ltd.
Zhejiang Zhonggangjumei Supply Chain Management Co., Ltd.
Nanjing Jiangdong Sunward Fishery Restaurant Co., Ltd.
Shanghai Zhongyou Information Technology Co., Ltd.
Nanjing Yongji Sunward Fishery Restaurant Co., Ltd.
Shanghai Putuo Sunward Fishery Restaurant Co., Ltd.
CCLG
Tianjin Congshao Restaurant Management Co., Ltd.
Ningbo Tianyi Sunward Fishery Restaurant Co., Ltd.
Shenzhen Congshao Restaurant Management Co., Ltd.
Wuhan Congshao Restaurant Management Co., Ltd.
Shanghai MIN Hongshi Trading Co., Ltd.
WM Ming Hotel
Ningbo Yinzhou Sunward Logistics Co., Ltd.
Total
As of December 31,
2017
2016
US$
US$
-
-
-
71,031
-
-
-
54,953
14,437
22,129
-
12,018
6,235
608
-
-
-
-
23,797
6,613
984
212,805
1,589,780 (i)
373,704 (i)
261,399 (i)
154,276 (i)
136,392 (i)
117,615 (i)
113,018 (i)
110,753 (i)
59,610 (i)
32,823 (i)
32,309 (i)
32,266 (i)
24,974 (i)
17,467 (i)
3,036 (i)
1,648 (i)
1,517 (i)
210 (i)
- (i)
- (i)
- (i)
3,062,797
(i) The amounts represent the receivables due from related parties relating to the online direct sales and online
platform services.
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FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
21. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
Current liabilities
Amount due to related parties
Ms. Zhu
WM Ming Hotel
Chung So Si Fong Dessert Limited
Ningbo dongqian lake tourist resort Xiyue leisure tourism Co., Ltd.
Shanghai MIN Zunshi Trading Co., Ltd.
Ningbo Yinzhou Sunward Logistics Co., Ltd.
Cong Shao (Macao) Star Dessert Co., Ltd.
Shanghai Xiao Nan Guo Hai Zhi Yuan Restaurant Management Co., Ltd.
Shanghai Congshao Dessert Co., Ltd.
Tianjin Congshao Restaurant Management Co., Ltd.
Shenzhen Congshao Restaurant Management Co., Ltd.
Shanghai Congshao Restaurant Management Co., Ltd.
Wuhan Congshao Restaurant Management Co., Ltd.
Nanjing Jiangdong Sunward Fishery Restaurant Co., Ltd.
Nanjing Yongji Sunward Fishery Restaurant Co., Ltd.
Nanjing Xinzijin Sunward Fishery Restaurant Co., Ltd.
Hong Kong Sunward Fishery Restaurant Management Co., Ltd.
Total
Page 184 of 188
As of December 31,
2017
2016
US$
US$
-
3,306
23,332
-
-
-
-
905,260
361,356
134,703
92,369
69,935
91,845
11,271
8,426
7,811
1,414
1,711,028
385,123(iii)
89,938 (ii)
84,054 (ii)
38,424 (ii)
3,483 (ii)
1,649 (ii)
1,212 (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
- (ii)
603,883
(ii) The amounts represent the payables due to related parties relating to online direct sales and online platform
services.
(iii) The amount represent the payable due to related parties relating to the daily operations.
Non-current liabilities
Amount due to related parties
Ms. Zhu
Total
As of December 31,
2017
2016
US$
US$
-
-
5,685,971(iv)
5,685,971
(iv) The amount represents the balance due to related parties relating to the loan borrowed from Ms. Zhu, with
interest rate of 6.0% per annum and maturity date on July 1, 2019.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
21. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
(b) Details of related party transactions occurred during the years ended December 31, 2015, 2016 and 2017 were
as follows:
Revenue from
Shanghai Xiao Nan Guo Hai Zhi Yuan Restaurant Management
Co., Ltd.
Xiao Nan Guo Holdings Limited
Chung So Si Fong Dessert Limited
Hong Kong Sunward Fishery Restaurant Management Co., Ltd.
Shanghai Congshao Dessert Co., Ltd.
Shanghai Congshao Restaurant Management Co., Ltd.
Nanjing Jiangdong Sunward Fishery Restaurant Co., Ltd.
Nanjing Xinzijin Sunward Fishery Restaurant Co., Ltd.
Cong Shao (Macao) Star Dessert Co., Ltd.
Zhejiang Zhonggangjumei Supply Chain Management Co., Ltd.
Shanghai Putuo Sunward Fishery Restaurant Co., Ltd.
Tianjin Congshao Restaurant Management Co., Ltd.
Nanjing Yongji Sunward Fishery Restaurant Co., Ltd.
WM Ming Hotel
Shenzhen Congshao Restaurant Management Co., Ltd.
Ningbo Jiangbei Sunward Fishery Restaurant Co., Ltd.
Wuhan Congshao Restaurant Management Co., Ltd.
Shenzhen Xiao Nan Guo Restaurant Management Co., Ltd.
Ningbo Yinzhou Sunward Logistics Co., Ltd.
Total
For the years ended December 31,
2017
2016
2015
US$
US$
US$
393,147
-
-
-
-
-
32,726
38,179
-
-
-
-
17,573
1,573
-
-
-
-
58,560
541,758
2,296,225
6,056,439
388,618
460,132
172,521
160,701
26,149
82,155
-
296,727
21,631
676
15,692
37,631
865
-
-
5,392
56,722
10,078,276
8,571,389(v)
6,108,606(v)
1,391,080(v)
471,129(v)
357,017(v)
189,617(v)
118,413(v)
60,536(v)
58,159(v)
51,484(v)
45,468(v)
28,345(v)
15,063(v)
11,737(v)
5,135(v)
1,428(v)
620(v)
-(v)
-(v)
17,485,226
(v) The amounts represent the revenue generated from the Group’s online direct sales.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
21. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
Rental expense to
Xiao Nan Guo (Group) Co., Ltd.
Total
For the years ended December 31,
2017
2016
2015
US$
US$
US$
335,249
335,249
218,212
218,212
-(vi)
-
(vi) The amount represents the rental expense paid for the Group’s office.
Services fee charged by
CCLG
Total
For the years ended December 31,
2017
2016
2015
US$
US$
US$
-
-
169,741
169,741
164,215(vii)
164,215
(vii) The amount represents the logistics fee charged by the related party for the Group’s online direct sales.
Loan borrowed from
Ms. Zhu
Xiao Nan Guo (Group) Co., Ltd.
Total
For the years ended December 31,
2016
2015
US$
US$
2017
US$
-
-
-
-
6,024,096
6,024,096
5,685,971(viii)
- (ix)
5,685,971
(viii) The amount represents the interest-bearing loan borrowed from Ms. Zhu with interest rate of 6.0% per
annum and maturity date on July 1, 2019.
(ix) The amount represent the interest-free loan borrowed by the Group from related party, which has been
repaid by the Group in 2016.
(c)
In July 2017, the VIE, entered into a banking facility agreement with Bank of Dalian Shanghai Branch,
pursuant to which the VIE is entitled to borrow RMB denominated loan of RMB50 million ($7.6 million). The
Company’s shareholders, Ms. Zhu and Ms. Wang provided guarantee for the VIE’s facility and Ms. Wang also
provided her own property as collateral. (Note 13)
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
22. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Group’s capital commitments primarily relate to commitments in connection with the investment in CCLG.
Total capital commitments contracted but not yet reflected in the financial statements amounted to $2.2 million and
$2.3 million as of December 31, 2016 and 2017, respectively.
Operating lease commitments
The Group leases certain office premises under non-cancellable leases. Rental expenses under operating leases for
the years ended December 31, 2015, 2016 and 2017 were $985,214, $2,243,907 and $1,223,390, respectively.
The future aggregate minimum lease payments under non-cancelable operating lease agreements were as follows:
Years ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
US$
1,622,226
1,441,236
1,492,308
1,566,186
1,645,521
14,329,743
22,097,220
23. MAINLAND CHINA CONTRIBUTION PLAN
Full time PRC employees of the Group are eligible to participate in a government-mandated multi- employer
defined contribution plan under which certain pension benefits, medical care, unemployment insurance, employee
housing fund and other welfare benefits are provided to these employees. The PRC labor regulations require the
Group to accrue for these benefits based on a percentage of each employee’s income. Total provisions for employee
benefits were $902,418, $1,297,485 and $1,656,561 for the years ended December 31, 2015, 2016 and 2017,
respectively, reported as a component of operating expenses when incurred.
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JMU LIMITED
FORMERLY KNOWN AS WOWO LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
24. STATUTORY RESERVES AND RESTRICTED NET ASSETS
In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of
association, the Group’s subsidiaries, VIE and VIE’s subsidiaries located in the PRC, being foreign invested
enterprises established in the PRC, are required to provide for certain statutory reserves. These statutory reserve
funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund or discretionary
reserve fund, and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund
requires a minimum annual appropriation of 10% of after-tax profit (as determined under accounting principles
generally accepted in China at each year-end); the other fund appropriations are at the subsidiaries’ or the affiliated
PRC entities’ discretion. These statutory reserve funds can only be used for specific purposes of enterprise
expansion, staff bonus and welfare, and are not distributable as cash dividends except in the event of liquidation of
our subsidiaries, our affiliated PRC entities and their respective subsidiaries. The Group’s subsidiary, VIE and VIE’
s subsidiaries are required to allocate at least 10% of their after-tax profits to the general reserve until such reserve
has reached 50% of their respective registered capital. As of December 31, 2016 and 2017, none of the Group’s
PRC subsidiary, VIE and VIE’s subsidiaries has a general reserve that reached 50% of their registered capital
threshold and therefore they will continue to allocate at least 10% of their after tax profits to the general reserve
fund.
Appropriations to the enterprise expansion reserve and the staff welfare and bonus reserve are to be made at the
discretion of the Board of Directors of each of the Group’s subsidiaries.
The appropriation to these reserves by the Group’s PRC subsidiary, VIE and VIE’s subsidiaries were all $nil for the
years ended December 31, 2015, 2016 and 2017.
As a result of these PRC laws and regulations and the requirement that distributions by the PRC entities can only be
paid out of distributable profits computed in accordance with the PRC GAAP, the PRC entities are restricted from
transferring a portion of their net assets to the Group. Amounts restricted include paid-in capital and the statutory
reserves of the Group’s PRC subsidiary, VIE and VIE’s subsidiaries.
The aggregate amounts of capital and statutory reserves restricted which represented the amount of net assets of the
relevant subsidiary, VIE and VIE’s subsidiaries in the Group not available for distribution were $28,213,892 and
$28,213,892 as of December 31, 2016 and 2017, respectively, including $1,614,140 and $1,614,140 of net restricted
assets recorded under VIE and VIE’s subsidiaries in the Group.
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