Vipshop
Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 20-F (Mark One) ooREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIESEXCHANGE ACT OF 1934 OR xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2012. OR ooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 OR ooSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . . For the transition period from to Commission file number: 001-35454 Vipshop Holdings 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) No. 20 Huahai Street,Liwan District, Guangzhou 510370The People’s Republic of China(Address of principal executive offices) Donghao YangVipshop Holdings LimitedNo. 20 Huahai Street,Liwan District, Guangzhou 510370Telephone: +86 (20) 2233-0000Facsimile: +86 (20) 2233-0111(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each className of exchange on which each class isto be registeredAmerican depositary shares, each representing2 ordinary shares, par value $0.0001 per shareNew York Stock ExchangeOrdinary share, par value $0.0001 per share*New York Stock Exchange * Not for trading, but only in connection with the listing of American depositary shares on the New York Stock Exchange. Securities registered or to be registered pursuant to Section 12(g) of the Act: None(Title of Class) Table of Contents Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None(Title of Class) 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:101,284,881 ordinary shares, par value US$0.0001 per share, as of December 31, 2012. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.o Yes x 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 theSecurities Exchange Act of 1934.o Yes x 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 1934during 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 filingrequirements for the past 90 days.x Yes o No Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that theregistrant was required to submit and post such files).o Yes o No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer x Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: US GAAP x International Financial Reporting Standards as issuedby the International Accounting Standards Board o Other o 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.o Item 17 x 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).o Yes x 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 ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No Table of Contents TABLE OF CONTENTS PART I.2ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS2ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE2ITEM 3.KEY INFORMATION3ITEM 4.INFORMATION ON THE COMPANY32ITEM 4A.UNRESOLVED STAFF COMMENTS53ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS53ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES71ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS82ITEM 8.FINANCIAL INFORMATION83ITEM 9.THE OFFER AND LISTING84ITEM 10.ADDITIONAL INFORMATION85ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK93ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES94 PART II.95ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES95ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS95ITEM 15.CONTROLS AND PROCEDURES96ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT97ITEM 16B.CODE OF ETHICS97ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES97ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES97ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS97ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT97ITEM 16G.CORPORATE GOVERNANCE98ITEM 16H.MINE SAFETY DISCLOSURE98 PART III.98ITEM 17.FINANCIAL STATEMENTS98ITEM 18.FINANCIAL STATEMENTS98ITEM 19.EXHIBITS98 Table of Contents INTRODUCTION Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to: · “ADSs” refers to our American depositary shares, each of which represents two ordinary shares; · “we,” “us,” “our company” and “our” refer to Vipshop Holdings Limited, its subsidiaries and consolidated affiliated entities; · “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong andMacau; · an “active customer” for a given period refers to any registered member on vipshop.com who has purchased products from us at least onceduring such period; · a “repeat customer” for a given period refers to any customer who (i) is an active customer during such period, and (ii) had purchased productsfrom us at least twice during the period from our inception on August 22, 2008 to the end of such period. Orders placed by a repeat customerduring a given period include all orders placed by the customer during such period even if the customer made the first purchase from us in thesame period; · a “registered member” refers to any consumer who has registered and created an account on our vipshop.com website; · “daily unique visitors” refers to the number of different IP addresses from which a website is visited during a given day; · “monthly unique visitors” refers to the number of different IP addresses from which a website is visited during a given month; · “cumulative customers” refers to all customers who had purchased products from us at least once during the period from our inception onAugust 22, 2008 to a specified date; · “DCM Entities” refers to, as the context may require, any or all of our shareholding entities affiliated with DCM. See “Item 6.E. Directors,Senior Management and Employees—Share Ownership.” · “Sequoia Entities” refers to, as the context may require, any or all of our shareholding entities affiliated with Sequoia Capital China. See “Item6.E. Directors, Senior Management and Employees—Share Ownership.” · “Frost & Sullivan” refers to Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., a third-party market research company that wecommissioned to provide information on the industry in which we operate; · “shares” or “ordinary shares” refers to our ordinary shares, par value US$0.0001 per share; · “Renminbi” or “RMB” refers to the legal currency of China and all references to “$”, “US$”, “dollars” or “U.S. dollars” refers to the legalcurrency of the United States. Unless otherwise noted, all translations from Renminbi to U.S. dollars in this annual report were made at RMB6.2301 to US$1.00, the noon buyingrate for December 31, 2012 as set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollaramounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or atall. The PRC government restricts the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. OnApril 5, 2013, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2005 to US$1.00. 1Table of Contents FORWARD-LOOKING STATEMENTS This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements ofhistorical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause ouractual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,”“intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely onour current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy andfinancial needs. These forward-looking statements include, but are not limited to, statements relating to: · our goals and strategies; · our future business development, results of operations and financial condition; · the expected growth of the online discount retail market in China; · our ability to attract customers and brand partners and further enhance our brand recognition; · our expectations regarding demand for and market acceptance of flash sales products and services; · competition in our industry; · fluctuations in general economic and business conditions in China; and · assumptions underlying or related to any of the foregoing. You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual futureresults may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate inan evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors anduncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements. This annual report also contains certain data and information, which we obtained from various government and private publications, including theFrost & Sullivan Report. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in thesepublications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later foundto be incorrect, actual results may differ from the projections based on these assumptions. You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual reportrelate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise. PART I. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. 2Table of Contents ITEM 3. KEY INFORMATION A Selected Financial Data Selected Consolidated Financial Data The following selected consolidated statements of income (loss) data for the three years ended December 31, 2010, 2011 and 2012 and the selectedconsolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere inthis annual report. The selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notesand “Item 5. Operating and Financial Review and Prospects” in this annual report. Our consolidated financial statements are prepared and presented inaccordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our selected consolidated statements of income (loss) data for the period from August 22 to December 31, 2008 and 2009 and our selectedconsolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements not included inthis annual report. Our historical results do not necessarily indicate results expected for any future periods. For the periodfrom August 22 toDecember 31,For the year ended December 31,20082009201020112012US$US$%US$%US$%US$%(in US$, except percentages and number of shares and per share data)Summary Consolidated Statements of Income (Loss) Data:Net revenues1,0872,804,830100.032,582,115100.0227,142,876100.0692,112,964100.0Cost of goods sold (886)(2,576,191)(91.8)(29,374,315)(90.2)(183,801,334)(80.9)(537,637,860)(77.7)Gross profit201228,6398.23,207,8009.843,341,54219.1154,475,10422.3Operating expenses:Fulfillment expenses (84,641)(611,333)(21.8)(5,809,118)(17.8)(45,478,327)(20.0)(96,523,444)(13.9)Marketing expenses—(303,509)(10.8)(2,438,066)(7.5)(15,253,325)(6.7)(32,272,629)(4.7)Technology and content expenses(8,480)(103,235)(3.7)(562,120)(1.7)(5,516,361)(2.4)(14,644,113)(2.1)General and administrative expenses(226,145)(650,786)(23.2)(2,843,583)(8.7)(84,575,539)(37.3)(25,541,812)(3.7)Total operating expenses(319,266)(1,668,863)(59.5)(11,652,887)(35.7)(150,823,552)(66.4)(168,981,998)(24.4)Other income3,59659,4702.178,6750.2564,1820.22,563,3210.4Loss from operations(315,469)(1,380,754)(49.2)(8,366,412)(25.7)(106,917,828)(47.1)(11,943,573)(1.7)Loss before income tax(315,426)(1,380,707)(49.2)(8,365,848)(25.7)(107,271,525)(47.2)(8,765,901)(1.3)Income tax expenses———————(706,173)(0.1)Net loss(315,426)(1,380,707)(49.2)(8,365,848)(25.7)(107,271,525)(47.2)(9,472,074)(1.4)Deemed dividend on issuance of Series A Preferred Shares—————(49,214,977)(21.7)——Net loss attributable to ordinary shareholders(315,426)(1,380,707)(49.2)(8,365,848)(25.7)(156,486,502)(68.9)(9,472,074)(1.4)Net loss per share:—Basic(0.01)(0.03)—(0.18)—(3.38)—(0.11)——Diluted(0.01)(0.03)—(0.18)—(3.38)—(0.11)—Weighted average number of shares used in computing netloss per share:—Basic47,775,00047,775,00047,775,00046,255,57488,849,206—Diluted47,775,00047,775,00047,775,00046,255,57488,849,206Net loss per ADS—Basic(0.01)(0.06)—(0.35)—(6.77)—(0.21)——Diluted(0.01)(0.06)—(0.35)—(6.77)—(0.21)— 3(1)(2)(3)(4)(5)Table of Contents (1) We commenced operations in August 2008 but only commenced sales of our products on our vipshop.com website in December 2008. We incurred significant operating expenses and generated limited salesin the period from August 22 to December 31, 2008. As a result, percentages for this period are not meaningful for investors to evaluate our results of operations and are not presented in this table. (2) Excluding shipping and handling expenses, and including inventory write down which amounted to nil, US$31.7 thousand, US$2.6 million, US$1.7 million and US$12.2 million in the period from August 22to December 31, 2008, and the years ended December 31, 2009, 2010, 2011 and 2012, respectively. (3) Including share-based compensation expenses as set forth below: For the periodfrom August 22 toDecember 31,For the year ended December 31,20082009201020112012Allocation of share-based compensation expenses:*Fulfillment expenses———297,095292,866Marketing expenses———184,404169,100Technology and content expenses———729,420897,133General and administrative expenses———72,716,9836,237,850Total———73,927,9027,596,949 * The share-based compensation expenses for 2011 included (a) US$63.9 million in share-based compensation expenses in connection with the unvested shares of our co-founders; (b) US$6.2 million in shared-based compensation expenses in connection with a transfer of ordinary shares between our co-founders; and (c) US$3.8 million share-based compensation expenses in connection with share options granted to executive officers andemployees. In addition, unrecognized share-based compensation expenses as of December 31, 2011 were US$19.8 million, which were related to the unvested share options granted to our executive officers and employees. Theunrecognized share-based compensation expenses were expected to be recognized over a weighted-average period of 3.06 years on a straight-line basis as of December 31, 2011. The share-based compensation expenses for 2012included US$7.6 million share-based compensation expenses in connection with share options and non-vested shares granted to our executive officers, independent directors, employees and a consultant. The unrecognized share-basedcompensation expenses related to share options and non-vested shares were US$14.5 million and US$2.1 million, and were expected to be recognized over a weighted-average period of 2.45 years and 3.62 years on a straight-linebasis as of December 31, 2012, respectively. See “Item 5.A. Operating And Financial Review and Prospects—Operating Results—Critical Accounting Policies—Share-Based Compensation” for details. (4) Including shipping and handling expenses, which amounted to US$157, US$0.3 million, US$4.3 million, US$29.4 million and US$53.9 million in the period from August 22 to December 31, 2008, and theyears ended December 31, 2009, 2010, 2011 and 2012, respectively. (5) Each ADS represents two ordinary shares. As of December 31,20082009201020112012(in US$)Summary Consolidated Balance Sheets Data:Cash and cash equivalents12,258287,7201,111,09144,954,778124,472,629Total current assets125,5742,584,04615,567,836158,278,041381,952,106Total assets229,7202,739,83517,132,690167,435,320398,917,120Total liabilities399,4044,289,79827,244,271149,146,118316,334,306Total shareholders’ (deficit) equity(169,684)(1,549,963)(10,111,581)18,289,20282,582,814 4Table of Contents B Capitalization and Indebtedness Not Applicable. C Reasons for the Offer and Use of Proceeds Not Applicable. D Risk Factors Risks Relating to Our Business and Industry Our limited operating history makes it difficult to evaluate our business and prospects. We commenced operations in August 2008 and have a limited operating history. We have experienced rapid growth in our business since ourinception. As of December 31, 2012, we had attracted 26.8 million registered members and over 4.9 million cumulative customers, and had promoted andsold products for over 5,800 domestic and international brands. Our total net revenues increased from US$32.6 million in 2010 to US$227.1 million in 2011and to US$692.1 million in 2012. However, our historical growth rate may not be indicative of our future performance. We cannot assure you that we will beable to achieve similar results or grow at the same rate as we did in the past. It is also difficult to evaluate our prospects, as we may not have sufficientexperience in addressing the risks to which companies operating in new and rapidly evolving markets such as the online discount retail market, may beexposed. You should consider our prospects in light of the risks and uncertainties fast-growing companies with a limited operating history may encounter. If we are unable to manage our rapid growth or execute our strategies effectively, our business and prospects may be materially and adverselyaffected. We have experienced a period of rapid growth and expansion that has demanded, and will continue to demand, significant financial and managerialresources. We plan to further increase our sales through enhancing our brand recognition, growing our customer base and increasing customer spending on ourwebsite. We intend to continue investing in our logistics network and warehousing capacity to support our long-term growth. To further improve ournationwide fulfillment capabilities, we plan to add more logistics centers and warehouses in strategic locations in China. However, we do not have experiencein operating our own logistics centers. As a result, we cannot assure you that we will be able to execute our expansion plan as expected. In addition, ourexpansion also requires us to continue to effectively manage our relationships with brand partners and with third-party delivery companies to ensure efficientand timely delivery of our products. To continue our business growth, we will also need to allocate significant managerial and financial resources in retaining,training, managing and motivating our workforce. We also seek to broaden our product offerings, which will require us to introduce new product categories and work with different groups of brandpartners to address the needs of different kinds of consumers. We have limited or no experience in some of our newer product offerings, such as online sales ofleisure travel packages and other lifestyle products, and our expansion into these new product categories may not achieve broad customer acceptance. Theseofferings may present new and difficult technology or operational challenges, and we may be subject to claims if customers of these offerings experienceservice disruptions or failure or other quality issues. In addition, our profitability, if any, in our newer product categories may be lower than in our oldercategories, which may adversely affect our overall profitability and results of operations. Furthermore, there is no assurance that we will be able to recoup ourinvestments in introducing these new product categories. All of these endeavors involve risks. We can provide no assurance that we will successfully execute these expansion plans and strategies. We mayfail to acquire financial or managerial resources needed for our business growth in a timely and cost-efficient manner, or at all. We cannot assure you that wewill be able to manage our growth effectively, and any failure to do so may have a material adverse effect on our business and prospects. 5Table of Contents If we are unable to offer branded products at attractive prices to meet customer needs and preferences, we may lose customers and 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 to increase the spending and repeat purchase rate of existingcustomers. Constantly changing consumer preferences have historically affected, and will continue to affect, the online retail industry. Consequently, we muststay abreast of emerging lifestyle and consumer preferences and anticipate product trends that will appeal to existing and potential customers. As we implementour strategy to offer a personalized web-interface focusing on deep curation and targeted offerings desired by our customers, we expect to face additionalchallenges in the selection of products and services. Our ability to offer individually-tailored merchandise is dependent on our IT systems, including ourbusiness intelligence system, to collect and provide accurate and reliable information on consumer interests. In addition, most of our customers are urban andeducated consumers who choose to purchase branded products on our website due to the deep price discounts that we offer. If our customers cannot finddesired products within our product portfolio at attractive prices, they may lose interest in our website and thus may visit our website less frequently or evenstop visiting our website altogether, which in turn, may materially and adversely affect our business, financial condition and results of operations. Our business and results of operations may be materially and adversely affected if we are unable to maintain our customer experience or providehigh quality customer service. The success of our business largely depends on our ability to provide superior customer experience and high quality customer service, which in turndepends on a variety of factors, such as our ability to continue to provide a reliable and user-friendly website interface for our customers to browse andpurchase our products, reliable and timely delivery of our products, and superior after sales services. Our sales may decrease if our website services areseverely interrupted or otherwise fail to meet our customer requests. Should we or our third-party delivery companies fail to provide our product delivery andreturn services in a convenient or reliable manner, or if our customers are not satisfied with our product quality, our reputation and customer loyalty could benegatively affected. In addition, we also depend on our call center and online customer service representatives to provide live assistance to our customers. If ourcall center or online customer service representatives fail to satisfy the individual needs of customers, our reputation and customer loyalty could be negativelyaffected and we may lose potential or existing customers and experience a decrease in sales. As a result, if we are unable to continue to maintain our customerexperience and provide high quality customer service, we may not be able to retain existing customers or attract new customers, which could have a materialadverse effect on our business, financial condition and results of operations. Any harm to our vipshop.com brand or failure to maintain our reputation may materially and adversely affect our business and growth prospects. We believe that the recognition and reputation of our vipshop.com brand among our customers and brand partners have significantly contributed tothe growth of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our business and competitiveness. Manyfactors, some of which are beyond our control, are important to maintaining and enhancing our brand and may negatively impact our brand and reputation ifnot properly managed. These factors include our ability to: · provide satisfactory user experience as consumer preferences evolve and as we expand into new product categories; · increase brand awareness among existing and potential customers through various marketing and promotional activities; · maintain the popularity, attractiveness and quality of the products we offer; · maintain the efficiency, reliability and quality of our fulfillment services; and · preserve our reputation and goodwill in the event of any negative media publicity on internet security or product quality or authenticity issuesaffecting us or other online retail businesses in China. A public perception that non-authentic or counterfeit goods are sold on our website, even if factually incorrect, could damage our reputation, reduceour ability to attract new customers or retain our current customers, and diminish the value of our brand. If we are unable to maintain our reputation, enhanceour brand recognition or increase positive awareness of our website, products and services, it may be difficult to maintain and grow our customer base, andour business and growth prospects may be materially and adversely affected. 6Table of Contents If we fail to manage our relationships with, or otherwise fail to procure products at favorable terms from, our existing brand partners, or if wefail to attract new brand partners, our business and growth prospects may suffer. We source our products from both domestic and international brand partners. In 2010, 2011 and 2012, we worked with 411, 1,075 and 2,759brand partners, respectively. We depend significantly on our ability to source products from brand partners at favorable pricing terms, typically at asubstantial discount to the original sales price. However, our agreements do not ensure the long-term availability of merchandise or the continuation ofparticular pricing practices. Our contracts with our brand suppliers typically do not restrict the brand partners from selling products to other buyers. Wecannot assure you that our current brand partners will continue to sell products to us on commercially acceptable terms, or at all. In the event that we are notable to purchase merchandise at favorable pricing terms, our revenues, profit margin and earnings may be materially and adversely affected. Our brandpartners primarily include brand owners, and to a lesser extent, brand distributors and resellers. In the event any brand distributor or reseller does not haveauthority from the relevant brand owner to sell certain products to us, such brand distributor or reseller may cease selling such products to us at any time,which may adversely affect our business and revenues. In addition, if our brand partners cease to provide us with favorable payment terms or return policies,our requirements for working capital may increase, resulting in a negative effect on our cash flows from operating activities, and our operations may bematerially and adversely affected. We will also need to establish new brand partner relationships to ensure that we have access to a steady supply of productson favorable commercial terms. Furthermore, our relationships with some brand partners, particularly international brand partners of apparel products inChina, may be adversely affected as a result of our sale of branded products that are directly procured from overseas markets. If we are unable to develop andmaintain good relationships with brand partners that would allow us to obtain a sufficient amount and variety of quality merchandise on acceptablecommercial terms, it may inhibit our ability to offer sufficient products sought by our customers, or to offer these products at prices acceptable to them. Anynegative developments in our relationships with brand partners could materially and adversely affect our business and growth prospects. In addition, as partof our growth strategy, we plan to further expand our brand and product offerings. If we fail to attract new brand partners to sell their branded products to usdue to any reason, our business and growth prospects may be materially and adversely affected. We primarily use third-party delivery companies to deliver our products, and if they fail to provide reliable delivery services, our business andreputation may be materially and adversely affected. We primarily deliver products through third-party delivery companies and are relying more on regional and local couriers which have a smaller scaleof operations than nation-wide delivery companies. Currently, we maintain long-term cooperation arrangements with a number of third-party deliverycompanies to deliver our products to our customers. Interruptions to or failures in these third parties’ delivery services could prevent the timely or properdelivery of our products. These interruptions may be due to events that are beyond our control or the control of these delivery companies, such as inclementweather, natural disasters, transportation interruptions or labor unrest or shortage. If our third-party delivery companies fail to comply with applicablerules and regulations in China, our delivery services may be materially and adversely affected. We may not be able to find alternative delivery companies toprovide delivery services in a timely and reliable manner, or at all. As competition intensifies in the future, we expect that we will be required to ensure fasterdelivery times, which could place increasing pressure on our delivery network. Delivery of our products could also be affected or interrupted by the merger,acquisition, insolvency or government shut-down of the couriers we engage to make deliveries, especially those local couriers with relatively small businessscales. We began to establish our own in-house delivery capabilities in Shanghai in 2011, and we may face additional challenges in managing ourrelationship with third-party delivery companies as a result of establishing our in-house delivery operations. If our products are not delivered in proper condition or on a timely basis, our business and reputation could suffer. Although we typically require thedelivery companies, especially the local couriers, to make cash deposits or guarantee payments securing their due performance of duties as part of ourengagement with them, such security may not be sufficient to recover the losses that we sustain as a result of their failure to perform. 7Table of Contents If we do not compete effectively against existing or new competitors, we may lose market share and customers. The online discount retail market is rapidly evolving and competitive. Our primary competitors include major B2C e-commerce companies in Chinathat sell a broad range of products and services online, such as Tmall, 360Buy and Dangdang, and other online discount retail companies in China. Wecompete with others based on a number of factors, including: · ability to identify products in demand among consumers and source these products on favorable terms from brand suppliers; · pricing; · breadth and quality of product offerings; · website features; · customer service and fulfillment capabilities; and · reputation among consumers and brands. Some of our current and potential competitors may have significantly greater resources, longer operating histories, larger customer bases and greaterbrand recognition. As the online discount retail market in China is expected to grow rapidly, many new competitors and some existing B2C e-commercecompanies may enter into this market. In addition, other online retailers 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 tosecure more favorable terms from brand partners, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing orinventory policies and devote substantially more resources to their website and systems development than us. In addition, new and enhanced technologies mayincrease the competition in the online retail industry. Increased competition may negatively affect our business development, online retail and brandrecognition, which may in turn affect our market share and operating margins. We can provide no assurance that we will be able to compete effectively againstour competitors, and competitive pressure may have a material adverse effect on our business, prospects, financial condition and results of operations. We have a history of net losses and may continue to incur net losses in the future. Before 2011, we had also experienced negative cash flow fromoperating activities. We have incurred net losses since our inception in August 2008. Our net losses amounted to US$8.4 million, US$107.3 million andUS$9.5 million in the years ended December 31, 2010, 2011 and 2012, respectively. As of December 31, 2012, we had accumulated losses ofUS$176.0 million. In addition, net cash used in our operating activities amounted to US$6.6 million in 2010, before we generated net cash from operatingactivities of US$1.3 million and US$111.6 million in 2011 and 2012, respectively. Although we achieved net profit for the first time in the fourth quarter of2012, we cannot assure you that we can continue to generate net profits or maintain positive cash flow from operating activities in the future. Our ability to beprofitable depends on our ability to grow our business and increase our net revenues and our ability to control our costs and operating expenses. Although wehave experienced significant revenue growth since our inception, such growth may not be sustainable and we may continue to incur net losses in future periodsor fail to maintain positive cash flow from operating activities. We have incurred in the past and expect to continue to incur in future periods share-basedcompensation expenses and we expect our costs and other operating expenses to continue to increase as we expand our business, either of which will reduce ournet income and may result in future losses. If our costs and operating expenses continue to increase without a commensurate increase in our revenue, ourbusiness, financial condition and results of operations will be negatively affected, and we may need additional capital to fund our continued operations. We may suffer losses if we are unable to effectively manage our inventory. Due to the nature of the flash sales business, we need to manage a large volume of inventory turnover. We depend on our forecasts of demand andpopularity for various kinds of products to make decisions regarding product purchases. Our customers may not order products at levels expected by us. Inaddition, any unfavorable market or industry conditions or change in consumer trends and preferences may limit our ability to accurately forecast theinventory levels to meet customer demand. We generally have the right to return unsold items for most of our products to our brand partners. In order to securemore favorable commercial terms, we may need to continue to enter into supply arrangements without unconditional return clauses or with more restrictivereturn policies. 8Table of Contents We recorded US$2.6 million, US$1.7 million and US$12.2 million in inventory write-downs in the years ended December 31, 2010, 2011 and2012, respectively. Such write-downs primarily reflected the estimated market value of damaged or obsolete inventory. In addition, in October 2010, when wewere in the process of implementing our new IT systems, improving our inventory count procedures and relocating our warehouse, some of our inventorystock items were not properly recorded in the inventory ledger, resulting in discrepancies between the inventory ledger and our actual inventory stock. Werecorded write-downs of such discrepancies. If we fail to manage our inventory effectively in the future, we may be subject to a heightened risk of inventory obsolescence, a decline in inventoryvalues and write-downs, which could have a material adverse effect upon our business, financial condition and results of operations. In addition, if we areunable to sell products or if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our brand partners in order to securethe right to return products to our brand partners, our profit margins might be negatively affected. High inventory levels may also require us to commitsubstantial capital resources, preventing us from using that capital for other important purposes. If we do not accurately predict product demand, ourbusiness, financial condition and results of operations may be materially and adversely affected. If we are subject to higher product return rates, our business, financial condition and results of operations may be materially and adverselyaffected. Purchases of apparel, fashion accessories and other items over the internet may be subject to higher return rates than merchandise sold at physicalstores. We have established a seven-day product return policy in order to accommodate our customers and to overcome any hesitance that they may have inshopping on our website. Our product return rates increased from 2010 to 2011 but decreased from 2011 to 2012. If we are unable to continue to reduce ourproduct return rates, or if our product return rates increase or are higher than expected, our revenues and costs can be negatively impacted. In addition, as wecannot return some products to our brand partners pursuant to our contracts with them, if return rates for such products increase significantly, we mayexperience an increase in our inventory balance, inventory impairment and fulfillment cost, which may materially and adversely affect our working capital.As a result, our business, financial condition and results of operations may be materially and adversely affected. We rely on online retail of apparel products for a significant portion of our net revenues. Historically, online retail sales of apparel products accounted for a significant portion of our total net revenues. We expect that sales of these productswill continue to grow and represent a significant portion of our total net revenues in the near future. We have increased our offerings to include other productcategories, including fashion items, cosmetics and home goods, as well as leisure travel packages and other lifestyle products, and expect to continue toexpand our product offerings to gradually diversify our revenue sources in the future. However, the sales of these new products and services may not increaseto a level that would reduce our dependence on our current line of products and services. Any failure in maintaining or increasing the number of our onlineretail customers or our sales volumes could result in our inability to retain or capture a sufficient share of the new markets that we are targeting. Any event thatresults in a reduction in our sales of apparel products could materially and adversely affect our ability to maintain or increase our current level of revenue, ourprofitability and business prospects. We plan to expand our logistics network. If we are not able to manage such expansion successfully, our growth potential, results of operationsand business could be materially and adversely affected. Our logistics network, currently consisting of regional logistics centers located in Guangdong Province in Southern China, Jiangsu Province inEastern China, Sichuan Province in Western China and Beijing in Northern China, is essential to our business growth. We intend to use a portion of theproceeds from the follow-on public offering that we completed in March 2013 to expand our logistics network to accommodate increasing volumes of customerorders, enhance customer services, provide better coverage across China, invest in IT system and mobile channel, and other general purposes. As part of ourexpansion plan, we expect to add more logistics centers in the future. In 2011, we started to provide our own delivery service in Shanghai and may expand ourin-house delivery service coverage to other areas. However, we do not have experience in operating our own logistics centers and delivery operations. As a result,we cannot assure you that our plans to operate our own logistics centers and delivery operations will be successful. The expansion of our logistics network willput pressure on our managerial, financial, operational and other resources. We cannot assure you that we will be able to locate suitable facilities oncommercially acceptable terms in accordance with our expansion plan. Nor can we assure you that we will be able to recruit qualified managerial andoperational personnel to support our expansion plan. If we are unable to secure new facilities for the expansion of our logistics operations, or to effectivelycontrol expansion-related expenses, our business, prospects, financial condition and results of operations could be materially and adversely affected. 9Table of Contents Uncertainties regarding the growth and sustained profitability of the online retail market in China, in particular, the development of the onlineflash sales business model, could adversely affect our business, prospects, financial condition and results of operations. All of our net revenue is generated through an online retail business model, and in particular, an online flash sales business model. While onlineretail businesses have existed in China since the 1990s, only recently have a limited number of these companies become profitable. The flash sales businessmodel originated in Europe in 2001 and then spread to the U.S. The business model was not introduced to China until recently. The long term viability andprospects of the online retail industry, particularly companies utilizing an online flash sales business model, and B2C e-commerce business generally inChina, remain untested and subject to significant uncertainty. Our business, financial condition and results of operations will depend on numerous factorsaffecting the development of the online flash sales business and, more broadly, the online retail and e-commerce businesses in China, which may be beyondour control. These factors include the general economic conditions in China, the growth of internet usage, the confidence in and level of e-commerce and onlinespending, the emergence of alternative retail channels or business models, the success of marketing and brand building efforts by e-commerce and flash salescompanies, and the development of payment, logistics, after-sale and other services associated with e-commerce and flash sales. The proper functioning of our IT systems is essential to our business. Any failure to maintain the satisfactory performance, security and integrityof our website and systems will materially and adversely affect our business, reputation, financial condition and results of operations. Our IT systems mainly include technology infrastructure supporting our vipshop.com user-interface website, as well as our customer service,enterprise resource planning, warehouse and logistics management, product information management, business intelligence and administration managementsystems. The satisfactory performance, reliability and availability of our IT systems are critical to our success, our ability to attract and retain customers andour ability to maintain a satisfactory customer experience and level of customer service. Our servers may be vulnerable to computer viruses, user traffic boom that exceeds the capacity of our servers, physical or electronic break-ins andsimilar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays in transaction processing, loss of data or theinability to accept and fulfill customer orders. We can provide no assurance that we will not experience such unexpected interruptions. We can provide noassurance 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 damage our reputation and result in a material decrease in our revenue.We have experienced one instance of system failure in January 2013 caused by unexpectedly large user traffic during a discount campaign, which wassubsequently resolved. Additionally, we expect to use a portion of the proceeds of the follow-on public offering that we completed in March 2013 to continue to upgrade andimprove our IT systems to support our business growth. However, we cannot assure you that we will be successful in executing these system upgrade andimprovement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fullyintegrated with the existing systems on a timely basis, or at all. If our existing or future IT systems do not function properly, it could cause system disruptionsand slow response times, affecting data transmission, which in turn, could materially and adversely affect our business, financial condition and results ofoperations. If we fail to successfully adopt new technologies or adapt our website and systems to changing customer requirements or emerging industrystandards, our business, financial condition and results of operations may be materially and adversely affected. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website. The online retailindustry is characterized by rapid technological evolution, changes in end user requirements and preferences, frequent introductions of new products andservices embodying new technologies and the emergence of new industry standards and practices that could render our existing proprietary technologies andsystems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, enhanceour existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospectivecustomers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development ofwebsite and other proprietary technology entails significant technical and business risks. We can provide no assurance that we will be able to use newtechnologies effectively or adapt our website, proprietary technologies and transaction-processing systems to meet customer requirements or emerging industrystandards. If we are unable to accurately project the need for such system expansion or upgrade or to adapt our systems in a cost-effective and timely mannerin 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 could be materially and adversely affected. 10Table of Contents Our wide variety of accepted payment methods subjects us to third-party payment processing-related risks. We accept payments using a variety of methods, including cash on delivery, bank transfers, online payments with credit cards and debit cardsissued by major banks in China, and payment through third-party online payment platforms, such as alipay.com and tenpay.com. For certain paymentmethods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profitmargins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment andcash on delivery options. We also rely on third parties to provide payment processing services. For example, we use third-party delivery companies for ourcash on delivery payment options. If these companies become unwilling or unable to provide these services to us, or if their services quality deteriorates, ourbusiness could be disrupted. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers,which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may besubject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic fundstransfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adverselyaffected. The security of operations of, and fees charged by, third-party online payment platforms may have material and adverse effects on our business. Currently, we accept payments through third-party online payment platforms, such as alipay.com and tenpay.com. In 2012, 38.0% of our total netrevenues were collected through online payment systems. We expect that an increasing amount of our sales will be conducted over the internet as a result of thegrowing use of online payment systems. In all these online payment transactions, secured transmission of confidential information such as customers’ creditcard numbers and personal information over public networks is essential to maintain consumer confidence. We do not have control over the security measures of our third party online payment vendors, and security breaches of the online payment systemsthat we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damageour reputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet or mobile network security breach wereto occur, users concerned about the security of their online financial transactions may become reluctant to purchase on our website even if the publicizedbreach did not involve payment systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence inthese online payment systems. If any of the above were to occur and damage our reputation or the perceived security of the online payment systems we use, wemay lose customers and customers may be discouraged from purchasing on our website, which may have an adverse effect on our business. In addition, there are currently only a limited number of third party online payment systems in China, such as alipay.com and tenpay.com. If anyof these major payment systems decides to significantly increase the percentage fee they charge us for using their payment systems, our results of operationsmay be materially and adversely affected. Our growth and profitability depend on the level of consumer confidence and spending in China. Our business, financial condition and results of operations are sensitive to changes in overall economic and political conditions that affect consumerspending in China. The retail industry, including the online retail sector in general and the flash sales business in particular, is highly sensitive to generaleconomic changes. Online purchases tend to decline significantly during recessionary periods and substantially all of our net revenue is derived from onlineretail sales in China. Many factors outside of our control, including inflation and deflation, interest rates, volatility of equity and debt securities markets,taxation rates, employment and other governmental policies can adversely affect consumer confidence and spending. The domestic and international politicalenvironments, including military conflicts and political turmoil or social instability, may also adversely affect consumer confidence and reduce spending,which could in turn materially and adversely affect our business, financial condition and results of operations. 11Table of Contents We may incur liability for counterfeit or unauthorized products sold or information posted on our website. We have been and may continue to be subject to allegations that some of the items sold on our website are counterfeited or without authorization fromthe relevant brand owner. In 2010, 2011 and 2012, we worked with 411, 1,075 and 2,759 brand partners, respectively. We can provide no assurance thatmeasures we have adopted in the course of sourcing such products to ensure their authenticity or authorization and to minimize potential liability of infringingthird parties’ rights will be effective. Any inadvertent sales of counterfeit, non-authentic or unauthorized items, or public perception of such incidents, couldharm our reputation, impair our ability to attract and retain customers and cause us to incur additional costs to respond to any incident of this nature. In theevent that counterfeit products, unauthorized products or products, images, logos or any other information on our website that otherwise infringes thirdparties’ rights are sold or posted on our website, we could also face infringement claims. We have occasionally received claim letters alleging our infringementof third-party rights. Although we have not suffered any material adverse impact due to these claims, we cannot assure you that in the future, we will not berequired to allocate significant resources and incur material expenses regarding such claims. We could be required to pay substantial damages or to refrainfrom the sale of relevant products in the event that a claimant prevails in any proceedings against us. Forms of potential liabilities under PRC law if wenegligently participated or assisted in infringement activities associated with counterfeit goods include injunctions to cease infringing activities, rectification,compensation and administrative penalties. Moreover, our reputation could be negatively affected due to the negative publicity of any infringement claimagainst us. Any third-party claims may have a material adverse effect on our business, prospects, financial condition and results of operations. Failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brandand substantially harm our business and results of operations. A significant challenge to e-commerce and communications is the secure transmission of confidential information over public networks. Currently,all product orders and, in some cases, payments for products we offer, are made through our website and systems. In such transactions, maintaining securityfor the transmission of confidential or private information on our website and systems, such as customers’ personal information, payment related informationand transaction information, is essential to maintain consumer confidence in our website and systems. We have adopted rigorous 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 acompromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or otherindividuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our customers’visits on our website. Such individuals or entities obtaining our customers’ confidential or private information may further engage in various other illegalactivities using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers ofonline payment services through which some of our customers may elect to make payment for purchases at our website. Furthermore, our third-party deliverycompanies may also violate their confidentiality obligations and disclose or use information about our customers illegally. Although we do not believe that wewill be held responsible for any such illegal activities, any negative publicity on our website’s safety or privacy protection mechanism and policy could have amaterial adverse effect on our public image and reputation. We cannot assure you that similar events out of our control will not occur in the future, whichcould negatively affect our brand and reputation. In addition, the methods used by hackers and others engaged in illegal online activities are increasingly sophisticated and constantly evolving.Significant capital, managerial and other resources may be required to ensure and enhance information security or to address the issues caused by suchsecurity failure. Any perception by the public that e-commerce and transactions, or the privacy of user information, are becoming increasingly unsafe orvulnerable to attack could inhibit the growth of online retail and other online services generally, which may also in turn reduce the number of orders we receiveand materially and adversely affect our business, financial condition and results of operations. 12Table of Contents We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position. We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies and other intellectual property as critical to ourbusiness. We rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements and license agreementswith our employees, brand partners and others, to protect our proprietary rights. As of December 31, 2012, we own 12 registered trademarks, copyrights to 17software products developed by us relating to various aspects of our operations, and 34 registered domain names, including vipshop.com, vipshop.com.cn,vipshop.cn and vipshop.net. See “Item 4.B. Information on the Company—Business Overview—Intellectual Property.” It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicialinterpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality agreements andlicense agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may notbe able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Policing any unauthorized use of our intellectualproperty is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that weresort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financialresources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, orbe independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect onour business, financial condition and results of operations. Future strategic alliances or acquisitions may have a material adverse effect on our business, financial condition and results of operations. We may pursue selected strategic alliances and potential strategic acquisitions that are complementary to our business and operations, includingopportunities that can help us promote our brand to new customers and brands, expand our product offerings and improve our technology infrastructure. Wemay also pursue strategic initiatives with brands and platforms in international markets. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance or default by counterparties, and increased expenses in establishing these new alliances, any of which may materially and adversely affect ourbusiness. We may have little ability to control or monitor the actions of our partners. To the extent a strategic partner suffers any negative publicity as a resultof its business operations, our reputation may be negatively affected by virtue of our association with such party. In addition, although we have no current acquisition plans, we may consider entering into strategic acquisition of other companies, businesses,assets or technologies that are complementary to our business and operations as part of our growth strategy. Strategic acquisitions and subsequent integrationsof newly acquired businesses would require significant managerial and financial resources and could result in a diversion of resources from our existingbusiness, which in turn could have an adverse effect on our growth and business operations. The costs of identifying and consummating acquisitions may besignificant. We may also incur significant expenses in obtaining approvals from shareholders and relevant government authorities in China and elsewhere inthe world. Our failure to consummate acquisitions could also require us to pay certain pre-negotiated fees and expenses. Acquired businesses or assets may notgenerate expected financial results and may incur losses. In addition, acquisitions could also require the use of substantial amounts of cash, issuances ofequity or debt securities, incurrence of significant goodwill and related impairment charges, amortization expenses for intangible assets and exposure topotential unknown liabilities of the acquired businesses or assets. The cost and duration of integrating newly acquired businesses could also materially exceedour expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of operations. Any interruption in the operation of our logistics centers or data centers for an extended period may have an adverse impact on our business. Our ability to process and fulfill orders accurately and provide high quality customer service depends on the efficient and uninterrupted operation ofour four regional logistics centers and our self-owned servers located in data centers operated by major PRC internet datacenter providers. Our regional logisticscenters and data centers may be vulnerable to damage caused by fire, flood, power loss, telecommunications failure, break-ins, earthquake, human error andother events. We have developed a disaster tolerant system which includes real-time data mirroring, daily off-line data back-up and redundancy and loadbalancing. However, we do not carry business interruption insurance. The occurrence of any of the foregoing risks could have a material adverse effect on ourbusiness, prospects, financial condition and results of operations. 13Table of Contents 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 defectively designed or manufactured. As a result, sales of such productscould expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Third partiessubject to such injury or damage may bring claims or legal proceedings against us as the retailer of the product. We do not currently maintain any third-partyliability insurance or product liability insurance in relation to products we sell. As a result, any material product liability claim or litigation could have amaterial and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of fundsand managerial efforts in defending them and could have a negative impact on our reputation. We have limited insurance coverage which could expose us to significant costs and business disruption. Risks associated with our business and operations include, but are not limited to, damage to properties due to fire, explosions and other accidents,business interruption due to power shortages or network failure, product liability claims, transportation damages, losses of key personnel and risks posed bynatural disasters including storms, floods and earthquakes, any of which may result in significant costs or business disruption. We have maintainedinsurance coverage we consider necessary and sufficient for our business, and customary for the industry in which we operate, including all risk propertyinsurance covering our equipment, facilities, inventories and other properties. However, as the insurance industry in China is still in an early stage ofdevelopment, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insuranceor general third-party liability insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage is sufficient to preventus from any loss to be sustained or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If weincur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financialcondition and results of operations could be materially and adversely affected. Our business depends on the continuing efforts of our management. If we lose their services, our business may be severely disrupted. Our business operations depend on the continuing efforts of our management, particularly the executive officers named in this annual report. If one ormore of our management were unable or unwilling to continue their employment with us, we might not be able to replace them in a timely manner, or at all. Wemay incur additional expenses to recruit and retain qualified replacements. Our business may be severely disrupted and our financial condition and results ofoperations may be materially and adversely affected. In addition, our management may join a competitor or form a competing company. We can provide noassurance that we will be able to successfully enforce our contractual rights included in the employment agreements we have entered into with our managementteam, in particular in China, where all these individuals reside. As a result, our business may be negatively affected due to the loss of one or more members ofour management. If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected. We intend to hire and retain additional qualified employees to support our business operations and planned expansion. Our future success depends,to a significant extent, on our ability to attract, train and retain qualified personnel, particularly management, technical, marketing and other operationalpersonnel with expertise in the online retail industry. Our experienced mid-level managers are instrumental in implementing our business strategies, executingour business plans and supporting our business operations and growth. Since our industry is characterized by high demand and intense competition fortalent, we can provide no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve ourstrategic objectives. In addition, our ability to train and integrate new employees into our operations may also be limited and may not meet the demand for ourbusiness growth on a timely fashion, or at all. If we are unable to attract, train and retain qualified personnel, our business may be materially and adverselyaffected. 14Table of Contents Failure to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business. We lease various properties for offices, logistics centers, data centers and customer service centers. We may not be able to successfully extend orrenew such leases and may therefore be forced to relocate our affected operations. This could disrupt our operations and result in significant relocationexpenses, which could adversely affect our business, financial condition and results of operations. In addition, we compete with other businesses for premisesat certain locations or of desirable sizes. As a result, even though we could extend or renew our leases, rental payments may significantly increase as a result ofthe high demand for the leased properties. In addition, we may not be able to locate desirable alternative sites for our facilities as our business continues to growand such failure in relocating our affected operations could affect our business and operations. Our use of leased properties could be challenged by third parties, which may cause interruptions to our business operations. Some of our lessors do not have proper ownership certificates for the properties we lease, or have other restrictions on their ownership of theproperties. In particular, our office in Guangzhou is located on land allocated by local government, and the lessor has not obtained the relevant governmentalapprovals for leasing these premises. Some of our leased properties were mortgaged by the owners to third parties before we entered into lease agreements withthem, and if such owners fail to perform their obligations secured by such properties and the mortgage is enforced by the third parties, we may be unable tocontinue to lease such properties and may be forced to relocate. In addition, most of our leasehold interests in leased properties have not been registered withrelevant PRC government authorities as required by the PRC law. According to PRC laws, rules and regulations, the failure to register the lease agreement willnot affect its effectiveness between the tenant and the landlord, however, the landlord and the tenant may be subject to administrative fines of up toRMB10,000 each for such failure to register the lease. As of the date of this annual report, we are not aware of any claims or actions being contemplated orinitiated by government authorities or any third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you thatour use of such leased properties will not be challenged by the governmental authorities or third parties alleging ownership of such properties. In the event thatour use of properties is successfully challenged, we may be forced to relocate the affected operations. We can provide no assurance that will be able to findsuitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected. If we fail to implement and maintain an effective system of internal controls or fail to remediate the control deficiencies in our internal control overfinancial reporting that has been identified, we may be unable to accurately report our results of operations or prevent fraud, and investorconfidence and the market price of our ADSs may be materially and adversely affected. Prior to our initial public offering in March 2012, we were a private company with limited accounting personnel and other resources with which toaddress our internal controls and procedures. During the audits of our consolidated financial statements as of December 31, 2009, 2010 and 2011, and for theperiod from August 22 to December 31, 2008 and the years ended December 31, 2009, 2010 and 2011 in connection with the initial public offering of ourADSs in March 2012, we identified one “material weakness” in our internal control over financial reporting, as defined in the standards established by thePublic Company Accounting Oversight Board of the United States, or PCAOB, and other control deficiencies. The material weakness identified related to thelack of comprehensive U.S. GAAP accounting policies, financial reporting and internal control procedures. In particular, we did not have a comprehensiveaccounting policies manual and financial reporting and closing procedure manual for our finance department, and we did not have sufficient personnel tobuild and maintain formalized accounting policies and financial policies and financial reporting procedures in accordance with U.S. GAAP. See also “Item5.A. Operating and Finacial Review and Prospects—Operating Results—Internal Control Over Financial Reporting.” During 2012, we identified one “significant deficiency” in our internal control over financial reporting as defined in the standards established byPCAOB, and other control deficiencies. The significant deficiency relates to the deficient calculation mechanism of our e-Wallet system. We plan to implementa number of measures to address these control deficiencies that have been identified. See “Item 5.A. Operating and Finacial Review and Prospects—OperatingResults—Internal Control Over Financial Reporting.” However, we cannot assure you that these and other remedial measures will remediate these controldeficiencies. 15Table of Contents We are now subject to the Sarbanes-Oxley Act of 2002 as a public company in the United States. Section 404 of the Sarbanes-Oxley Act of 2002, orSection 404, requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning withour annual report for the fiscal year ending December 31, 2013. In addition, once we cease to be an “emerging growth company” as such term is defined in theJOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Ourmanagement may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internalcontrol over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a reportthat is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if itinterprets the relevant requirements differently from us. As a public company, our reporting obligations may place a significant strain on our management,operational and financial resources and systems for the foreseeable future. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented oramended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordancewith Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financialstatements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could inturn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internalcontrol over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stockexchange on which we list, regulatory investigations and civil or criminal sanctions. As an “emerging growth company,” we will not be required to have auditor attestation of the effectiveness of our internal controls. We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various requirementsthat are applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with theauditor attestation requirements of Section 404 for so long as we are an emerging growth company, which may be for as long as five years following our initialpublic offering in March 2012. As a result of our current status as an emerging growth company, our investors may not have access to certain information thatthey may deem important. The JOBS Act also provides that an emerging growth company need not comply with any new or revised financial accounting standard until suchdate that a non-reporting company is required to comply with such new or revised accounting standard. However, we have elected to “opt out” of this provisionand, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out ofthe extended transition period under the JOBS Act is irrevocable. Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by the downturnin the global or Chinese economy. The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. Therecovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011and the slowdown of the Chinese economy in 2012. Economic conditions in China are sensitive to global economic conditions. Our business and operationsare primarily based in China and substantially all of our revenues are derived from our operations in China. Accordingly, our financial results have been, andare expected to continue to be, affected by the economy and online retail industry in China. Although the economy in China has grown significantly in the pastdecades, any severe or prolonged slowdown in the global and/or Chinese economy could reduce our customers’ expenditures for our products, which in turnmay adversely affect our results of operations and financial condition. The growth rate of China’s GDP decreased in 2012, and it is uncertain whether thiseconomic slowdown will continue into 2013 and beyond. The online retail industry is particularly sensitive to economic downturns, and the macroeconomicenvironment in China may affect our business and prospects. A prolonged slowdown in China’s economy may lead to a reduced level of online purchasingactivities, which could materially and adversely affect our business, financial condition and results of operations. Moreover, a slowdown in the global or China’s economy or the recurrence of any financial disruptions may have a material and adverse impact onfinancings available to us. The weakness in the economy could erode investors’ confidence, which constitutes the basis of the credit markets. There isconsiderable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financialauthorities of some of the world’s leading economies, including China. There have also been concerns over unrest in the Middle East and Africa, which haveresulted in volatility in oil and other markets, and over the possibility of a war involving Iran. There have also been concerns about the economic effect of theearthquake, tsunami and nuclear crisis in Japan and tensions in the relationship between China and Japan. The recent financial turmoil affecting the financialmarkets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commerciallyreasonable terms, or at all. Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations andfinancial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidityneeds. 16Table of Contents Our results of operations are subject to quarterly fluctuations due to a number of factors that could adversely affect our business and the tradingprice of our ADSs. We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retail seasonalitypatterns. For example, we generally experience less user traffic and purchase orders during national holidays in China, particularly during the Chinese NewYear holiday season in the first quarter of each year. Furthermore, sales in the traditional retail industry are significantly higher in the fourth quarter of eachcalendar year than in the preceding three quarters. Due to the foregoing factors, our financial condition and results of operations for future quarters maycontinue to fluctuate and our historical quarterly results may not be comparable to future quarters. As a result, the trading price of our ADSs may fluctuatefrom time to time due to seasonality. Risks Relating to Our Corporate Structure and Restrictions on Our Industry Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations relating to onlinecommerce and the distribution of internet content in China. If the PRC government finds that the structure we have adopted for our businessoperations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the shutting down of our website. Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC governmentregulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and othergovernment regulations. These laws and regulations also include limitations on foreign ownership in PRC companies that provide internet content distributionservices. Specifically, foreign investors are not allowed to own more than 50% of the equity interests in any entity conducting an internet content distributionbusiness. The Ministry of Industry and Information Technology, or the MIIT, issued the Circular on Strengthening the Administration of Foreign Investmentin and Operation of Value-added Telecommunications Business, or the MIIT Circular, in July 2006. The MIIT Circular reiterated the regulations on foreigninvestment in telecommunications businesses, which require foreign investors to set up foreign invested enterprises and obtain business operating licenses forinternet content provision, or ICP, to conduct any value-added telecommunications business in China. Under the MIIT Circular, a domestic company thatholds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance,including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. We are a Cayman Islands company and our PRC subsidiary, Vipshop (China) Co., Ltd., or Vipshop China, is considered a wholly foreign ownedenterprise. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into between(a) Vipshop China, (b) Guangzhou Vipshop Information Technology Co., Ltd., or Vipshop Information, our consolidated affiliated entity, and(c) shareholders of Vipshop Information. Vipshop Information holds the licenses and permits that are essential to the operation of our business. For a detaileddescription of these licenses and permits, see “Item 4.B. Information on the Company—Business Overview—Regulation.” Vipshop Information is a PRClimited liability company owned by our co-founders and directors, all of whom are PRC citizens. As a result of these contractual arrangements, we exertcontrol over Vipshop Information and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of thesecontractual arrangements, see “Item 4.C. Information on the Company—Organizational Structure.” In the opinion of our PRC counsel, Han Kun Law Offices, our current ownership structure, the ownership structure of our PRC subsidiaries andour consolidated affiliated entity, each as described in this annual report, are in compliance with existing PRC laws, rules and regulations, and the contractualarrangements between Vipshop China, our consolidated affiliated entity and its shareholders, each as described in this annual report, are not in violation ofany existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation and application of current or futurePRC laws and regulations. Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to or otherwisedifferent from that of our PRC counsel. 17Table of Contents In or around September 2011, various media sources reported that the China Securities Regulatory Commission, or CSRC, had prepared a reportproposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures,such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether CSRC officially issued or submittedsuch a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interestentity structures will be adopted or what they would provide. If our ownership structure, contractual arrangements and businesses of our company, VipshopChina or our consolidated affiliated entity are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities,including CSRC, would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of VipshopChina or our consolidated affiliated entity, revoking the business licenses or operating licenses of Vipshop China or our consolidated affiliated entity, shuttingdown our servers or blocking our website, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly anddisruptive restructuring, restricting or prohibiting our use of proceeds from our inititial and follow-on public offerings to finance our business and operationsin China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption toour business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and resultsof operations. We rely on contractual arrangements with our consolidated affiliated entity and its shareholders for the operation of our business, which may notbe as effective as direct ownership. If our consolidated affiliated entity and its shareholders fail to perform their obligations under thesecontractual arrangements, we may have to resort to arbitration or litigation to enforce our rights, which may be time-consuming, unpredictable,expensive and damaging to our operations and reputation. Because of PRC restrictions on foreign ownership of internet-based businesses in China, we depend on contractual arrangements with ourconsolidated affiliated entity, Vipshop Information, in which we have no ownership interest, to partly conduct our operations. These contractual arrangements,governed by PRC law, are intended to provide us with effective control over our consolidated affiliated entity and allow us to obtain economic benefits from it.Although we have been advised by our PRC counsel, Han Kun Law Offices, that these contractual arrangements are valid, binding and enforceable undercurrent PRC laws, these contractual arrangements may not be as effective in providing control as direct ownership. For example, our consolidated affiliatedentity and its shareholders could breach their contractual arrangements with us by, among other things, failing to operate our online retail business in anacceptable manner or taking other actions that are detrimental to our interests. If we hold controlling equity interest in our consolidated affiliated entity, wewould be able to exercise our shareholder rights to effect changes to its board of directors, which in turn could implement changes at the management andoperational level of the consolidated affiliated entity. However, under the current contractual arrangements, if our consolidated affiliated entity or itsshareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs to enforce such arrangements, andrely on legal remedies, including arbitration and litigation, under PRC law, which may not be sufficient or effective. In particular, the contractual arrangementsprovide that any dispute arising from these arrangements will be submitted to the China International Economic and Trade Arbitration Commission SouthChina Sub-Commission for arbitration, the ruling of which will be final and binding. The legal framework and system in China, particularly those relating toarbitration proceedings, is not as developed as other jurisdictions such as the United States. As a result, significant uncertainties relating to the enforcement oflegal rights through arbitration, litigation and other legal proceedings remain in China, which could limit our ability to enforce these contractual arrangementsand exert effective control over our consolidated affiliated entity. If we are unable to enforce these contractual arrangements, or if we suffer significant delay orother obstacles in the process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materiallyand adversely affect our results of operations and damage our reputation, and we may not be able to consolidate the financial results of Vipshop Informationinto our consolidated financial statements in accordance with U.S. GAAP. See “—Risks Relating to Doing Business in China—Uncertainties with respect tothe PRC legal system could adversely affect us.” 18Table of Contents The shareholders of our consolidated affiliated entity have potential conflicts of interest with us, which may adversely affect our business. Each shareholder of our consolidated affiliated entity is a shareholder and director of our company. Equity interest held by each of these shareholdersin our company is less than its interest in our consolidated affiliated entity as a result of our introduction of DCM Entities, Sequoia Entities, and publicinvestors as shareholders of our company. In addition, such shareholders’ equity interest in our company will be further diluted as a result of any futureoffering of equity securities. As a result, conflicts of interest may arise as a result of such dual shareholding and governance structure. Each of these shareholders is also a director of our company, and has a duty of care and loyalty to our company and to our shareholders as a wholeunder Cayman Islands law. Under the contractual arrangements with our consolidated affiliated entity and its shareholders, (a) we may replace any suchindividual as a shareholder of our consolidated affiliated entity at our discretion, and (b) each of these individuals has executed a power of attorney to appointVipshop China or its designated third party to vote on their behalf and exercise shareholder rights of our consolidated affiliated entity. However, we cannotassure you that these individuals will act in the best interests of our company should any conflicts of interest arise, or that any conflicts of interest will beresolved in our favor. These individuals may breach or cause our consolidated affiliated entity to breach the existing contractual arrangements. If we cannotresolve any conflicts of interest or disputes between us and any of these individuals, we would have to rely on legal proceedings, which may be expensive,time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings. We may lose the ability to use and enjoy assets held by our consolidated affiliated entity that are important to the operation of our business if suchentity goes bankrupt or becomes subject to a dissolution or liquidation proceeding. As part of our contractual arrangements with our consolidated affiliated entity, such entity holds certain assets that are important to the operation ofour business. If our consolidated affiliated entity goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we maybe unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results ofoperations. If our consolidated affiliated entity undergoes a voluntary or involuntary liquidation proceeding, the unrelated third-party creditors may claimrights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financialcondition and results of operations. Our contractual arrangements with our consolidated affiliated entity may result in adverse tax consequences to us. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between Vipshop China and ourconsolidated affiliated entity were not entered into on an arm’s length basis and therefore constitute favorable transfer pricing arrangements. If this occurs, thePRC tax authorities could request that our consolidated affiliated entity adjust its taxable income, if any, upward for PRC tax purposes. Such a pricingadjustment could adversely affect us by increasing our consolidated affiliated entity’s tax expenses without reducing our tax expenses, which could subject ourconsolidated affiliated entity to late payment fees and other penalties for underpayment of taxes. The PRC Enterprise Income Tax Law requires every enterprisein China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The taxauthorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s lengthprinciples. As a result, our contractual arrangements with our consolidated affiliated entity may result in adverse tax consequences to us. If our consolidated affiliated entity fails to obtain and maintain the requisite assets, licenses and approvals required under PRC law, our business,financial condition and results of operations may be materially and adversely affected. Foreign investment and the internet industry in China are highly regulated by the PRC government and numerous regulatory authorities of the centralPRC government are empowered to issue and implement regulations governing various aspects of the internet industry. See “Item 4.B. Information on theCompany—Business Overview—Regulation.” Our PRC subsidiaries and consolidated affiliated entity are required to obtain and maintain certain assetsrelevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide its current services. These assetsand licenses are essential to the operation of our business and are generally subject to annual review by the relevant governmental authorities. Furthermore, ourPRC subsidiaries and our consolidated affiliated entity may be required to obtain additional licenses. If we fail to obtain or maintain any of the required,assets, licenses or approvals, our continued business operations in the internet industry may subject it to various penalties, such as confiscation of illegal netrevenue, fines and the discontinuation or restriction of our operations. Any such disruption in the business operations of our consolidated affiliated entity willmaterially and adversely affect our business, financial condition and results of operations. For instance, we have recently started a pilot program to provideour own delivery service in Shanghai. We do not currently charge additional fees for such service. Under PRC law, we are required to obtain a roadtransportation permit and an express delivery service permit from relevant governmental authorities to provide delivery service. As of the date of this annualreport, we have not obtained all the relevant permits. As a result, we may be subject to penalties, such as fines and ban on providing such service in the future. 19Table of Contents Risks Relating to Doing Business in China Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our businessand operations. Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations andprospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth inChina as a whole. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, levelof development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizingthe utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporategovernance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese governmentcontinues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significantcontrol 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 amongvarious sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation ofresources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition andresults of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past theChinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may causedecreased economic activity in China, which may adversely affect our business and operating results. Uncertainties with respect to the PRC legal system could adversely affect us. We conduct our business primarily through Vipshop China, our PRC subsidiary, and Vipshop Information, our consolidated affiliated entity inChina. Our operations in China are governed by PRC laws and regulations. Vipshop China is a foreign invested enterprise and is subject to laws andregulations applicable to foreign investment in China and, in particular, laws applicable to foreign invested enterprises. The PRC legal system is a civil lawsystem based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limitedprecedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Theoverall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China.However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economicactivities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and courtauthorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome ofadministrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legalrequirements and our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited or frivolouslegal actions or threats in attempts to extract payments or benefits from us. 20Table of Contents 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 orat all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until some time after the violation. Inaddition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and managementattention. We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies. The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertainingto, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcementinvolve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be inviolations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the internet-related business include, but are notlimited to, the following: · We only have contractual control over our website. We do not directly own our website through our subsidiaries due to the restriction of foreigninvestment in businesses providing value-added telecommunication services in China, including ICP services. This may significantly disruptour business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us. · There are uncertainties relating to the regulation of the internet- related business in China, including evolving licensing practices. This means thatsome of our permits, licenses or operations may be subject to challenge, or we may fail to obtain permits or licenses that may be deemednecessary for our operations or we may not be able to obtain or renew certain permits or licenses. If we fail to maintain any of these requiredlicenses or approvals, we may be subject to various penalties, including fines and discontinuation of or restriction on our operations. Any suchdisruption in our business operations may have a material and adverse effect on our results of operations. · New laws and regulations may be promulgated that will regulate internet activities, including online retail businesses. If these new laws andregulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulationsafter they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties. The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internetindustry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internetbusinesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business inChina 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 maybe found to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of internet-related business. Regulation and censorship of information disseminated over the internet in China may adversely affect our business, and we may be liable forcontent that is displayed on our website. China has enacted laws and regulations governing internet access and the distribution of products, services, news, information, audio-videoprograms and other content through the internet. The PRC government has prohibited the distribution of information through the internet that it deems to be inviolation of PRC laws and regulations. If any of our internet content were deemed by the PRC government to violate any content restrictions, we would not beable to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocationof required licenses, which could materially and adversely affect our business, financial condition and results of operations. We may also be subject topotential liability for any unlawful actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficultto determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China. 21Table of Contents Our auditor is not inspected fully by PCAOB and, as such, you are deprived of the benefits of such inspection and we may be adversely affected bythe outcome of the administrative proceedings brought by the SEC against five accounting firms in China As an auditor of companies that are publicly traded in the United States and a firm registered with PCAOB, Deloitte Touche Tohmatsu is requiredby the laws in the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and the professionalstandards of PCAOB. However, because we have substantial operations within the People’s Republic of China, a jurisdiction where PCAOB is currentlyunable to conduct inspections without the approval of the Chinese government authorities, our auditor is not currently inspected fully by PCAOB. Inspections of other auditors conducted by PCAOB outside of China have at times identified deficiencies in those auditors’ audit procedures andquality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections inChina prevents PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, shareholders may be deprived of thebenefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of our financial statements. Fluctuations in exchange rates may have a material adverse effect on your investment. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political andeconomic conditions in China and elsewhere in the world. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of theRenminbi to the U.S. dollar. Under this policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreigncurrencies. Since then, Renminbi started to appreciate against U.S. dollar and reached one of its historical high point in July 2008. Thereafter, the Renminbiwas traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high point. In June 2010, the PRC government announced thatits plan to increase the flexibility of Renminbi exchange rate. Since that time, the Renminbi has gradually appreciated against the U.S. dollar, though there havebeen brief periods when the U.S. dollar appreciated against the Renminbi. There remains significant international pressure on the PRC government to adopt asubstantial liberalization of its currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar. All of our net revenues and most of our expenses are denominated in Renminbi. Any significant revaluation of Renminbi may materially andadversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, anappreciation of Renminbi against the U.S. dollar would reduce the amount of Renminbi we would receive if we need to convert U.S. dollars into Renminbi.Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which inturn could adversely affect the price of our ADSs. Limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. We did not enter into any hedgingtransactions to hedge our exposure to the risks relating to fluctuations in exchange rates. While we may decide to enter into hedging transactions in the future,the availability and effectiveness of these hedges may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our currencyexchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. Governmental control of currency conversion may limit our ability to utilize our revenue effectively and affect the value of your investment. The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currencyout of China. We receive substantially all of our revenue in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarilyrelies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchangeregulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or the SAFE, by complying with certain proceduralrequirements. Specifically, under the existing exchange restrictions, without prior approval of the SAFE, cash generated from the operations of Vipshop Chinain China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required whereRenminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreigncurrencies. As a result, we need to obtain the SAFE’s approval to use cash generated from the operations of our PRC subsidiaries and consolidated affiliatedentity to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outsideChina in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions inthe future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may notbe able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs. 22Table of Contents We principally rely on dividends and other distributions on equity paid by Vipshop China in China to fund our cash and financing requirements,and any limitation on the ability of Vipshop China to make payments to us could have a material adverse effect on our ability to conduct ourbusiness. We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from Vipshop China in Chinafor our cash requirements, including for the service of any debt we may incur. Our subsidiaries’ ability to distribute dividends is based upon theirdistributable earnings which are mainly derived from the payments for products and services from our consolidated affiliated entity. Current PRC regulationspermit our PRC subsidiaries to pay dividends to Vipshop HK only out of their accumulated profits, if any, determined in accordance with Chinese accountingstandards and regulations. In addition, each of our subsidiaries in China and our consolidated affiliated entity is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required tofurther set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretionof its board of directors. These reserves are not distributable as cash dividends. As of December 31, 2012, we had, on a consolidated basis, accumulatedlosses of US$176.0 million, representing losses incurred in Vipshop China, our consolidated affiliated entity and certain subsidiaries. As a result, suchentities in China are not able to distribute dividends to us until their accumulated losses have been made up. Furthermore, if Vipshop China in China incursdebt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitationon the ability of our PRC subsidiaries to distribute dividends or other payments to Vipshop HK could materially and adversely limit our ability to grow, makeinvestments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceedsof our equity offerings to make loans or additional capital contributions to Vipshop China in China. Any funds we transfer to Vipshop China, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registrationwith relevant governmental authorities in China. According to the relevant PRC regulations on foreign invested enterprises in China, capital contributions toVipshop China are subject to the approval of the PRC Ministry of Commerce or its local branches and registration with other governmental authorities inChina. In addition, (a) any foreign loan procured by Vipshop China is required to be registered with the SAFE or its local branches, and (b) Vipshop Chinamay not procure loans which exceed the difference between its registered capital and its total investment amount as approved by the PRC Ministry ofCommerce or its local branches. Any medium or long term loan to be provided by us to our consolidated affiliated entity must be approved by the NationalDevelopment and Reform Commission and the SAFE or its local branches. We may not obtain these government approvals or complete such registrations on atimely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals orcomplete such registration, our ability to use the proceeds of our equity offerings and to capitalize our PRC operations may be negatively affected, which couldadversely affect our liquidity and our ability to fund and expand our business. On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of thePayment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by aforeign invested enterprise of foreign currency into Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbicapital converted from registered capital in foreign currency of a foreign invested enterprise may only be used for purposes within the business scope approvedby PRC governmental authority and such Renminbi capital may not be used for equity investments within the PRC unless otherwise permitted by the PRClaw. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from registered capital in foreign currency of a foreigninvested enterprise. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi capital may not in any case be used torepay Renminbi loans if the proceeds of such loans have not been utilized. As a result, we are required to apply Renminbi funds converted from the netproceeds we received from our public offerings of equity securities within the business scope of Vipshop China. SAFE Circular 142 may significantly limitour ability to transfer the net proceeds from the public offerings of equity securities to Vipshop China or invest in or acquire any other companies in the PRC.Furthermore, the SAFE promulgated a circular on November 9, 2010, or SAFE Circular 59, which tightens the regulation over settlement of net proceedsfrom offshore offerings. In particular, it is specifically required that any net proceed settled from offshore offerings shall be applied in the manner described inthe offering documents. The SAFE also promulgated SAFE Circular 45 in November 2011, which, among other things, restrict a foreign-invested enterprisefrom using Renminbi funds converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. Violations of thesecirculars could result in severe monetary or other penalties. SAFE Circular 142, SAFE Circular 59 and SAFE Circular 45 may significantly limit our abilityto convert, transfer and use the net proceeds from the follow-on public offering and any offering of additional equity securities in China, which may adverselyaffect our business, financial condition and results of operations. 23Table of Contents The M&A Rules establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it moredifficult for us to pursue growth through acquisitions. The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, established additional proceduresand requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, amongother things, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRCdomestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification ofConcentrations of Undertakings, issued by the State Council on August 3, 2008, were triggered. In addition, PRC national security review rules which becameeffective on September 1, 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that arecrucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that arecomplementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming,and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete suchtransactions, which could affect our ability to expand our business or maintain our market share. PRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our PRC resident beneficial owners orour PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability toincrease their registered capital or distribute profits to us, or may otherwise adversely affect us. The SAFE has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Administration for DomesticResidents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1, 2005 and itsimplementation rules. These regulations require PRC residents and PRC corporate entities to register with local branches of the SAFE in connection with theirdirect or indirect offshore investment activities. These regulations are applicable to our shareholders who are PRC residents and may be applicable to anyoffshore acquisitions that we make in the future. Under these foreign exchange regulations, PRC residents who make, or have prior to the implementation ofthese foreign exchange regulations made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register suchinvestments with the SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filedregistration with the local branch of the SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China isrequired to urge the PRC resident shareholders to update their registration with the local branch of the SAFE. If any PRC shareholder fails to make the requiredregistration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceedsfrom any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into itssubsidiary in China. All of our shareholders that we are aware of being subject to the SAFE regulations have completed all necessary registrations with the local SAFEbranch as required by Circular 75. We cannot assure you, however, that all of these individuals may continue to make required filings or updates on a timelymanner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct orindirect interest in our company. Any failure or inability by such individuals to comply with the SAFE regulations may subject us to fines or legal sanctions,such as restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability tomake distributions to you could be materially and adversely affected. 24Table of Contents Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, itis unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented bythe relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchangeactivities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results ofoperations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be,will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrictour ability to implement our acquisition strategy and could adversely affect our business and prospects. Failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC planparticipants or us to fines and other legal or administrative sanctions. In December 2006, the People’s Bank of China, or the PBOC promulgated the Administrative Measures of Foreign Exchange Matters forIndividuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either thecurrent account or the capital account. In January 2007, the SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters forIndividuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in theemployee stock ownership plans or stock option plans of an overseas publicly-listed company. In February 2012, the SAFE promulgated the Notices onIssues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-ListedCompanies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participatingin Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by the SAFE in March 2007. Under these rules,PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with the SAFE or its local branches andcomplete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRCsubsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration andother procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution tohandle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. 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, thePRC agent or the overseas entrusted institution or other material changes. We and our PRC resident employees who participate in the employee stock incentive plans, which we adopted in March 2011 and March 2012,respectively, have been subject to these regulations since our company became a publicly- listed company in the United States in March 2012. We will assistour PRC option grantees to complete the required registrations and procedures. If we or our PRC option grantees fail to comply with these regulations, we or ourPRC option grantees may be subject to fines and other legal or administrative sanctions. See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations on Stock Incentive Plans.” We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SATCircular 698, issued by the State Administration of Taxation, or the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, oran Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not taxforeign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise thisIndirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks areasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such IndirectTransfer may be subject to PRC tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equityinterests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make areasonable adjustment to the taxable income of the transaction. In addition, the PRC resident enterprise may be required to provide necessary assistance tosupport the enforcement of SAT Circular 698. 25Table of Contents There is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it isunderstood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no directcontact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effectivetax rates in foreign tax jurisdictions, and the process and format of the reporting of an Indirect Transfer to the competent tax authority of the relevant PRCresident enterprise remain unclear. In addition, there are not any formal declarations with regard to how to determine whether a foreign investor has adopted anabusive arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the tax authorities to be applicable to our non-resident shareholders who acquired our shares outside of the open market and subsequently sell our shares in our private financing transactions or in the openmarket if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-residentinvestors may become at risk of being taxed under SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular 698 orto establish that we should not be taxed under SAT Circular 698, which may have a material adverse effect on our financial condition and results ofoperations or such non-resident shareholders’ investments in us. It is unclear whether we will be considered a PRC “resident enterprise” under the PRC Enterprise Income Tax Law and, depending on thedetermination of our PRC “resident enterprise” status, our global income may be subject to the 25% PRC enterprise income tax, which could havea material adverse effect on our results of operations. Under the PRC Enterprise Income Tax Law, or the EIT Law, and its implementation rules, which became effective in January 2008, an enterpriseestablished outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterpriseincome tax at the rate of 25% on its global income. The implementation rules of the EIT Law define the term “de facto management bodies” as “establishmentsthat carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., of anenterprise.” On April 22, 2009, the SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC TaxResident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which provides certain specific criteria for determining whether the “defacto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Further, Circular 82 states that certain PRC-controlled enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departmentsthat are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books,company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Inaddition, the SAT issued a bulletin on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of Circular 82. Thisbulletin clarifies matters including resident status determination, post-determination administration and competent tax authorities. See “Item 4.B. Informationon the Company—Business Overview—Regulation—PRC Enterprise Income Tax Law and Individual Income Tax Law.” Although both Circular 82 and thebulletin only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, thedetermining criteria set forth in Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should beapplied in determining the tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. In additionto the uncertainty regarding how the new resident enterprise classification may apply, it is also possible that the rules may change in the future, possibly withretroactive effect. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRCtax authorities could reach a different conclusion. In such case, we may be considered a resident enterprise and may therefore be subject to the enterpriseincome tax at 25% on our global income as well as PRC enterprise income tax reporting obligations. If we are considered a resident enterprise and earn incomeother than dividends from our PRC subsidiaries, a 25% enterprise income tax on our global income could significantly increase our tax burden and materiallyand adversely affect our cash flow and profitability. Dividends payable to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject totaxes under PRC tax laws. Under the EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable toinvestors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place ofbusiness but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sourceswithin the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC tax at a rate of 10%, subjectto any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRCresident enterprise, dividends paid on our ordinary shares or ADSs, and any gain realized from the transfer of our ordinary shares or ADSs, would be treatedas income derived from sources within the PRC and would as a result be subject to PRC taxation. See “Item 4.B. Information on the Company—BusinessOverview—Regulation—PRC Enterprise Income Tax Law and Individual Income Tax Law.” Furthermore, if we are deemed a PRC resident enterprise,dividends payable to investors that are non-PRC individual investors and any gain realized on the transfer of ADSs or ordinary shares by investors may besubject to PRC tax at a rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether, if we are considered a PRCresident enterprise, holders of our ADSs or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between Chinaand other countries or areas (although we do not expect to withhold at treaty rates if any withholding is required). If dividends payable to our non-PRCinvestors, or gains from the transfer of our ordinary shares or ADSs by such investors are subject to PRC tax, the value of your investment in our ordinaryshares or ADSs may be adversely affected. 26Table of Contents The enforcement of the Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results ofoperations. On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective onJanuary 1, 2008 and was amended on December 28, 2012. The Labor Contract Law introduces specific provisions related to fixed-term employmentcontracts, part-time employment, probation, consultation with labor union and employee assemblies, employment without a written contract, dismissal ofemployees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and regulations. According to the Labor ContractLaw, an employer is obliged to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, ifan employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have anunlimited term, with certain exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certainexceptions. In addition, the government has continued to introduce various new labor-related regulations after the effectiveness of the Labor Contract Law.Among other things, it is required that that annual leave ranging from five to 15 days be made available to employees and that the employee be compensatedfor any untaken annual leave days in the amount of three times of the employee’s daily salary, subject to certain exceptions. As a result of these new regulationsdesigned to enhance labor protection and increasing labor costs in China, our labor costs are expected to increase. In addition, as the interpretation andimplementation of these new regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in compliance withthe new regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business andresults of operations may be adversely affected. Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties. Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain socialinsurance, housing funds and other welfare-oriented payment obligations. We have not made adequate employee benefit payments as required under applicablePRC labor laws. Accruals for the underpaid amounts as recorded were nil, US$89 thousand, US$0.5 million, US$1.6 million and US$2.2 million as ofDecember 31, 2008, 2009, 2010, 2011 and 2012, respectively. Our failure in making contributions to various employee benefit plans and in complying withapplicable PRC labor-related laws may subject us to late payment penalties. If we are subject to such penalties in relation to the underpaid employee benefits,our financial condition and results of operations may be adversely affected. An occurrence of a widespread health epidemic or other outbreaks could have a material adverse effect on our business, financial condition andresults of operations. Our business could be adversely affected by the effects of Influenza A virus subtype H1N1, or the H1N1 virus, Severe Acute RespiratorySyndrome, or SARS, avian influenza or other epidemics or outbreaks on the economic and business climate. A prolonged outbreak of any of these illnesses orother adverse public health developments in China or elsewhere in the world could have a material adverse effect on our business operations. Such outbreakscould significantly impact the online retail industry and cause a temporary closure of the facilities we use for our operations. Such impact or closures wouldseverely disrupt our operations and adversely affect our business, financial condition and results of operations. Our operations could be disrupted if any ofour employees or employees of our partners were suspected of having the H1N1 virus, SARS or avian influenza, since this could require us or our partners toquarantine some or all of such employees or disinfect the facilities used for our operations and may deter our customers or potential customers frompurchasing or accepting our products. In addition, our business, financial condition and results of operations could be adversely affected to the extent that anoutbreak harms the global or Chinese economy in general, such as wars, acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents,power shortage or communication interruptions. 27Table of Contents Risks Related to Our ADSs The market price for our ADSs has fluctuated and may be volatile. The market price for our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the NYSE on March 23, 2012, thetrading price of our ADSs have ranged from US$4.12 to US$32.48 per ADS, and the last reported trading price on April 9, 2013 was US$29.99 per ADS. The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following: · actual or anticipated fluctuations in our quarterly results of operations and changes of our expected results; · announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital investments; · additions to or departures of our senior management personnel; · detrimental negative publicity about us, our competitors or our industry; · changes in financial estimates by securities research analysts; · regulatory developments affecting us, our brand partners or our industry; · changes in the economic performance or market valuations of other internet, e-commerce or online retail companies in China; · fluctuations of exchange rates between the Renminbi and the U.S. dollar; · release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and · sales or perceived potential sales of additional equity securities or ADSs. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operatingperformance of any particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs. Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on yourinvestment. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. Asa result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source forany future dividend income. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and paydividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, ourcapital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictionsand other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon anyfuture price appreciation of our ADSs. There is no assurance that our ADSs will appreciate in value or even maintain the price at which you purchased theADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs. 28Table of Contents Substantial future sales or perceived potential sales of our ADSs, ordinary shares or other equity securities in the public market could cause theprice of our ADSs to decline. Sales of our ADSs, ordinary shares or other equity securities in the public market, or the perception that these sales could occur, could cause themarket price of our ADSs to decline. As of the date of this annual report, we had 110,300,505 ordinary shares outstanding, including 38,969,200 ordinaryshares represented by ADSs. All ADSs representing our ordinary shares will be freely transferable by persons other than our “affiliates” without restriction oradditional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding will be availablefor sale, upon the expiration of the 90-day lock-up period in connection with the follow-on public offering in March 2013 (if applicable to such holder), subjectto volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to theexpiration of the lock-up period at the discretion of the representatives. To the extent shares are released before the expiration of the lock-up period and sold intothe market, the market price of our ADSs could decline. Certain holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the 90-daylock-up period in connection with the follow-on public offering in March 2013. Registration of these shares under the Securities Act would result in ADSsrepresenting these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales ofthese registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline. You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exerciseyour right to vote. Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attached toordinary shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative toexercise the voting rights attached to ordinary shares represented by the ADSs. Upon receipt of your voting instructions, the depositary will vote the underlyingordinary shares in accordance with these instructions. See “Item 10.B. Additional Information—Memorandum and Articles of Association—Voting Rights.” We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the ordinary shares underlying your ADSs,and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will as a result not have the opportunity to exercisea right to vote. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out votinginstructions. Although you may directly exercise your right to vote by withdrawing the ordinary shares underlying your ADSs, you may not be able to do so,on a timely basis or at all, to allow you to vote with respect to any specific matter. Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cashdividends if it is impractical to make them available to you. We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights availableto you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from theregistration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and theunderlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We areunder no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause a registration statement, if filed, to bedeclared effective. There might not be an exemption from registration under the Securities Act available to us for our rights offering. Accordingly, you may beunable to participate in our rights offerings and may experience dilution in your holdings. 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 orother deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSsrepresent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs.For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributionsmay be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you. 29Table of Contents You may be subject to limitations on transfer of your ADSs. Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to timewhen it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers ofADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of anyrequirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason. You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited becausewe are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of our directors andofficers reside outside the United States. We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries and consolidatedaffiliated entity. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets are located outside of theUnited States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or inChina in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an actionof this kind, the laws of the Cayman Islands and China may render you unable to enforce a judgment against our assets or the assets of our directors andofficers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands willgenerally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by theCompanies Law (2012 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actionsby minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. Thecommon law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English commonlaw, which provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilitiesof our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. Inparticular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. Inaddition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts. As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directorsor our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinaryshares and ADSs. Our third amended and restated memorandum and articles of association contain certain provisions that could limit the ability of third parties toacquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferredshares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisionscould have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging thirdparties from seeking to obtain control of our company in a tender offer or similar transactions. Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our othershareholders. As of March 31, 2013, our co-founders and shareholders, Mr. Eric Ya Shen and Mr. Arthur Xiaobo Hong, beneficially owned an aggregate of 28.3%of our outstanding shares, and our other pre-IPO investors beneficially owned an aggregate of 42.2% of our outstanding shares. As a result, our existing shareholders have substantial influence over our business and corporate matters, including without limitation, decisionsregarding mergers and consolidations, asset disposals and director elections. They may exercise their shareholder rights in a way that they believe is in theirbest interest, which may conflict with the interest of our other shareholders. These actions may be taken even if they are opposed by our other shareholders.Our concentrated ownership structure may also discourage, delay or prevent a change in control of our company, which could deprive our other shareholdersof the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. For more informationregarding our principal shareholders, see “Item 6.E. Directors, Senior Management and Employees—Share Ownership.” 30Table of Contents We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United Statesinvestors in the ADSs or ordinary shares to significant adverse United States income tax consequences. Depending upon the value of our ADSs and ordinary shares and the nature of our assets and income over time, we could be classified as a “passiveforeign investment company”, or “PFIC,” for United States federal income tax purposes. Although the law in this regard is unclear, we treat VipshopInformation as being owned by us for United States federal income tax purposes, not only because we control its management decisions but also because weare entitled to substantially all of the economic benefits associated with this entity, and, as a result, we combine this entity’s operating results in ourconsolidated financial statements. If it were determined, however, that we are not the owner of Vipshop Information for United States federal income taxpurposes, we would likely be treated as a PFIC for the current taxable year or any future taxable year. Assuming that we are the owner of Vipshop Information for United States federal income tax purposes, and based upon our current income andassets and projections as to the value of our ADSs and ordinary shares as of December 31, 2012, we do not presently expect to be a PFIC for the currenttaxable year or the foreseeable future. While we do not expect to become a PFIC, if, among other matters, our market capitalization is less than anticipated orsubsequently declines, we may be a PFIC for the current or future taxable years. The determination of whether we are or will be a PFIC will also depend, inpart, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets and the cash raised in thefollow-on public offering that we completed in March 2013. Because there are uncertainties in the application of the relevant rules and PFIC status is a factualdetermination made annually after the close of each taxable year, including ascertaining the fair market value of our assets on a quarterly basis and thecharacter of each item of income we earn, we can provide no assurance that we will not be a PFIC for the current taxable year or any future taxable year. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Item 10.E. Additional Information—Taxation—MaterialUnited States Federal Income Tax Considerations”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral ofUnited States federal income tax that a U.S. Holder could derive from investing in a non-United States corporation that does not distribute all of its earnings ona current basis. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continueto be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information see “Item 10.E.Additional Information—Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.” We incurred increased costs as a result of being a public company, and we cannot predict or estimate the amount of additional future costs we mayincur or the timing of such costs. As a public company, we have incurred significant accounting, legal and other expenses that we did not incur when we were a private company,including additional costs associated with our public company reporting obligations. The Sarbanes-Oxley Act, as well as rules subsequently implemented bythe SEC and the NYSE, requires significantly heightened corporate governance practices for public companies, including Section 404 relating to internalcontrol over financial reporting. As a company with less than US$1.0 billion in revenues for our last fiscal year, we qualify as an “emerging growthcompany” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that areotherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in theassessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company doesnot need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with suchnew or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accountingstandards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act isirrevocable. 31Table of Contents We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs andto make certain corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significantexpenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of theSEC. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with reasonablecertainty the amount of additional costs we may incur or the timing of such costs. In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in themarket price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention andother resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit.Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim issuccessfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition andresults of operations. ITEM 4. INFORMATION ON THE COMPANY A History and Development of the Company Our Company We are a holding company incorporated in the Cayman Islands and conduct our business through our subsidiaries and consolidated affiliated entityin China. We started our operations in August 2008 when our founders established Vipshop Information in China. In order to facilitate foreign investment inour company, our founders incorporated Vipshop Holdings Limited, an offshore holding company in Cayman Islands, in August 2010. In October 2010,Vipshop Holdings established Vipshop HK, a wholly owned subsidiary, in Hong Kong. Subsequently, Vipshop HK established a wholly owned PRCsubsidiary, Vipshop China, in January 2011. During 2011 and 2012, Vipshop China newly established five wholly owned PRC subsidiaries to support our regional business expansion, namely,Vipshop Kunshan, Vipshop Jianyang, Vipshop Beijing, Vipshop Tianjin and Pinwei Software. Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC governmentregulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and othergovernment regulations. We are a Cayman Islands company and our PRC subsidiary, Vipshop China, is a wholly foreign owned enterprise. As a whollyforeign owned enterprise, Vipshop China is restricted from holding the licenses that are necessary for our online operation in China. To comply with theserestrictions, we conduct our operations partly through Vipshop Information, our consolidated affiliated entity in China. Vipshop Information operates ourwebsite and holds the licenses necessary to conduct our internet-related operations in China. See “Item 4.C. Information on the Company—Organizational Structure” for a diagram illustrating our corporate structure as of December 31, 2012. On March 23, 2012, our ADSs began trading on the New York Stock Exchange under the ticker symbol “VIPS.” We issued and sold a total of11,176,470 ADSs, representing 22,352,940 ordinary shares, at an initial offering price of $6.50 per ADS. On March 19, 2013, we completed a follow-on public offering of 7,200,000 ADSs by our company and certain of our selling shareholders,representing 14,400,000 ordinary shares, at a public offering price of US$24.00 per ADS. Concurrently, the underwriters exercised in full the option topurchase an aggregate of 1,080,000 additional ADSs from certain selling shareholders at the public offering price of the follow-on offering. Our principal executive offices are located at No. 20 Huahai Street, Liwan District, Guangzhou 510370 the People’s Republic of China. Ourtelephone number at this address is +86 (20) 2233-0000. Our registered office in the Cayman Islands is located at the office of International CorporationServices Ltd., P.O. Box 472, 2nd Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1106, Cayman Islands. We also havethree branches in Beijing, Shanghai and Shenzhen, China. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.located at 400 Madison Avenue, 4th Floor, New York, New York 10017. 32Table of Contents B Business Overview Overview We are China’s leading online discount retailer for brands as measured by total revenues in 2011, the number of registered members as ofDecember 31, 2012 and the number of monthly unique visitors in December 2012, according to the Frost & Sullivan Report. We offer high-quality brandedproducts to consumers in China through flash sales on our vipshop.com website. Flash sales represents a new online retail format combining the advantagesof e-commerce and discount sales through selling a finite quantity of discounted products or services online for a limited period of time. Since our inception inAugust 2008, we have attracted a large and growing number of consumers and popular brands. We had 26.8 million registered members and over 4.9 millioncumulative customers and promoted and sold products for over 5,800 popular domestic and international brands as of December 31, 2012. Our business model provides a unique online shopping experience for our customers. We offer new sales events daily with a curated selection ofpopular branded products at deeply discounted prices in limited quantities during limited time periods, creating the element of “thrill and excitement”associated with our unique customer shopping experience. Our strong merchandizing expertise enables us to select the brand composition and product mix ofour daily sales events that appeal to our customers, which mostly consist of urban and educated individuals in China who are seeking lifestyle enhancements.We have built a highly engaged and loyal customer base that contributes to our sales growth, while also enabling us to attract new customers primarily throughword-of-mouth referrals. A majority of our customers have purchased products from us more than once. Our total number of repeat customers was0.2 million, 0.9 million and 2.6 million in 2010, 2011 and 2012, respectively, representing 56.2%, 60.6% and 63.9%, respectively, of the total number ofour active customers during the same periods. Orders placed by our repeat customers accounted for 86.7%, 91.9% and 93.2% of our total orders during thesame periods. We are a preferred online flash sales channel in China for popular domestic and international brands. We believe that well-known and popularbrands are attracted to our website and services because of our ability to monetize large volume of their inventory in short periods of time, increase consumerawareness of their brands and products, reach potential customers throughout China, and fulfill their demand for customer data analysis and inventorymanagement. Among the brands who have promoted and sold products on our website, substantially all of them have returned to pursue additional salesopportunities with us. To date, we have the exclusive rights to sell selective products from over 700 brands. We strive to optimize every aspect of our operations as we continue to grow our business. We generally have the right to return unsold items for mostof our products to our brand partners. Our logistics operations and inventory management systems are specifically designed to support the frequent salesevents on our website and handle a large volume of inventory turnover. We use both leading delivery companies with nationwide coverage and quality regionaland local couriers to ensure reliable and timely delivery. We have developed our IT infrastructure to support the surge of visitor traffic to our website during thepeak hours of our daily flash sales. We believe that our efficient operational and management systems combined with our robust IT infrastructure set a solidfoundation for our continuing growth. We began our operations in August 2008 and have grown significantly since then. In 2010, 2011 and 2012, we fulfilled over 0.9 million, over7.2 million and over 21.9 million customer orders, respectively, and we generated total net revenues of US$32.6 million, US$227.1 million andUS$692.1 million, respectively. In 2010, 2011 and 2012, we incurred net losses of US$8.4 million, US$107.3 million and US$9.5 million, respectively.Our net loss in 2011 and 2012 reflected non-cash share-based compensation expenses in an aggregate amount of US$73.9 million and US$7.6 million,respectively. We recorded net profit of US$6.3 million in the fourth quarter of 2012, the first time we achieved profitability after tax. PRC laws and regulations currently limit foreign ownership of companies that provide internet-based services, such as our online retail business. Tocomply with these restrictions, we conduct our online operations principally through our consolidated affiliated entity, Vipshop Information. We face risksassociated with our corporate structure, as our control over Vipshop Information is based upon contractual arrangements rather than equity ownership. See“Item 4.C. Information on the Company—Organizational Structure” and “Item 3.D. Key Information—Risk Factors—Risks Relating to Our CorporateStructure and Restrictions on Our Industry.” 33Table of Contents Our Flash Sales Model Flash sales embody characteristics of value, quality and convenience that are well suited to brand-conscious consumers in China seeking qualitygoods at substantial discounts. Through our flash sales model, we sell limited quantities of deeply discounted branded products online for limited periods oftime. We optimize the brand composition and product mix of our daily sales events based on our strong merchandizing expertise. As of December 31, 2012, wehave offered diversified product offerings from over 5,800 popular domestic and international brands, including apparel for women, men and children,fashion goods, cosmetics, home goods and other lifestyle products. We carefully select well-known and popular mid-level to premium brands and productsthat appeal to a broad base of consumers with different purchasing powers throughout China. To foster customer confidence of purchasing quality productsfrom our website, we provide limited product quality insurance for our products. We offer new sales events daily starting at 10 a.m. Beijing time, and our website experiences a surge of visitor traffic in the ensuing two hours asconsumers are eager to purchase popular deals of the day before they are sold out. In 2012, during the peak hours of our daily sales, average hourly visitortraffic to our website was over three times higher than the hourly average number of unique visitors to our website per day during the month. To provide ourcustomers with a greater opportunity to purchase featured discounted products, each customer is limited to purchasing two pieces of the same item and eachshopping cart can only hold 20 items at one time, except for food products. Unpaid items in the shopping cart will be automatically returned to the availableproducts pool in 20 minutes. Consequently, customers must make quick purchase decisions within a limited period of time, adding to the thrill of theexperience. Our flash sales model is also characterized by the high frequency and a large volume of inventory turnover. During 2012, we hosted 29,207 flashsales events, each lasting three to five days in general. Our Website Through our website vipshop.com, we offer a curated selection of products and services for consumers of different age groups and income levelsthroughout China to allow them to conveniently purchase branded products online without the hassle of shopping for bargain sales at crowded stores. Our website design offers many user-friendly features that enhance customer experience and convenience: · Browsing. All visitors to our website can browse and view our sales events, but a customer must register as a member, which is free, in order toparticipate in the sales events. Our website features a variety of different brands and products for each daily sales. For each featured brand,consumers can view a short flash animation to receive background information on a particular brand with which they are not already familiar. Inaddition, we provide customers with curated descriptions and proprietary photographs of each product shown from multiple angles. Our websitealso provides advance previews of upcoming sales of highly sought-after products. We sort our product offerings into different categories, suchas “women,” “men,” “children,” “lifestyle” and “luxury goods” so that our customers can easily find the products they are interested in. · Daily Sales Events. New sales events start daily at 10 a.m. Beijing time and typically last for three to five days. Each sale item is available inlimited quantities and remains on sale only while supplies last. We thoroughly plan in advance our daily sales to offer a balanced andcomplementary mix of brands and products. · Ordering. To order products on our website, our customers simply click on a button to add an item to their virtual shopping cart. To executeorders, customers click on the “check-out” button and are prompted to supply shipping details and payment details in the case of first-timecustomers buying from our website. Repeat customers can access their preferred checkout options after logging on to their Vipshop memberaccounts. Our members can track the status of their purchases and available credits online through their Vipshop member accounts. Customerscan always access our customer service representatives online or by phone for assistance while they are shopping online or after the order isplaced. In October 2009, we launched our mobile internet website, m.vipshop.com, based on wireless application protocol, or WAP, which is designed tooptimize the viewing experience and load time on mobile device web browsers. As a new sales event starts at 10 a.m. Beijing time everyday, mobile accessenables our customers to access and shop on our website anytime from anywhere they are connected to the internet. We have introduced mobile applications forthe iPad™, iPhone™, Android™ and Symbian™ devices in 2011 to increase our customer stickiness and to support customer engagement from anywhereand at any time. We believe that consumers’ increasing reliance on mobile internet through smartphones and other mobile devices presents opportunities for usto further enhance customer experience and increase customer stickiness. 34Table of Contents To diversify our offerings of products and brands that cater to individual preferences, we launched new channels on our website such as a groupbuychannel called Vipshop Groupon (唯品团) and a channel designated for promotion of chic and trendy branded products called VIP Fashion (唯品尚). Webelieve that the introduction of these new channels provides brands meaningful alternatives to monetize their inventory quickly and to increase consumerawareness throughout China. Our Brand Partners Since our inception in August 2008, we have attracted a broad and diverse group of brands enabling our website to become the online shoppingdestination of choice for urban, fashion-oriented and value conscious consumers. Our brand partners include primarily brand owners, and to a lesser extent,brand distributors and resellers. In 2010, 2011 and 2012, we worked with 411, 1,075 and 2,759 brand partners, respectively. None of the brands accountedfor more than 3% of our total revenues in 2010, 2011 and 2012. To date, substantially all of our brand partners have sought to pursue new sales opportunitieswith us. We believe that our ability to assist brands in effectively selling their inventory and in fulfilling their demand for marketing, customer data analysisand inventory management will attract new brands and build stronger ties with our existing brand partners. Brand Selection and Procurement Brand Selection We have implemented a strict and methodical brand selection process. Our merchandizing team, which consisted of 304 members as of December 31,2012, is responsible for identifying potential qualified brands based on our selection guidelines. We carefully select prospective brand partners, choosing towork only with those that are well-known and offer high quality or premium products that are popular among consumers in China, and that are willing toprovide competitive prices and favorable payment credit and product return terms. We generally select brands that have an established network of stores inmajor department stores or shopping malls in China. We seek input from our customers in the brand selection process. Through our homepage, consumerscan send us suggestions regarding the brands they would like to be able to purchase from us. Once a potential brand is identified, we conduct due diligencereviews on its qualifications, including whether it holds the proper business operation licenses and safety, sanitary and quality certifications, and trademarkregistration certificates and license agreements in relation to the branded products. This review process helps to ensure that we maintain a portfolio of brandswith high quality standards and good reputation that can meet our customers’ expectations. We generally enter into supply agreements with brands based on our standard form. We regularly communicate with our brand partners to discussthe dates and specific product offerings for particular sales events, striving to achieve favorable results for all constituents. Due to the short-term nature of eachflash sales event, for some brands, we enter into separate agreements for each flash sales event on our website. For other brands with whom we haveestablished long-term relationships, we often enter into supply agreements with them on an annual basis, with the agreements providing a general frameworkfor an agreed-upon number of flash sales events during the contract year. As we continue to focus on building long-term relationships with our brand partners,we plan to implement framework agreements with our brand partners with supplemental supply orders for each flash sales event. In each supply agreement, a brand partner grants us authorization to market and sell products of a particular brand on our website and provides uswith the official description and logo of the brand. In addition, we require our brand partners that contract with us to observe our anti-bribery and anti-corruption policy. Product Selection Our key management team members have extensive experience in the retail industry with insightful knowledge and understanding of consumers’needs and preferences. Before each flash sales event, we consider and analyze historical data, fashion trends, seasonality and customer feedback to projecthow many items of a particular product we should offer for the event. To maximize daily sales, we carefully plan our product mix to achieve a balanced andcomplementary product offering across different product categories. 35Table of Contents We effectively gather, analyze and use customer behavior and transaction data through our customer relationship management and businessintelligence systems. In addition to utilizing our customer data to strategize our upcoming flash sales event to enhance the timeliness and relevancy of ourproduct offerings, we also provide relevant portions of these data to our brand partners to help them optimize their product development and sales andmarketing strategies and further promote additional sales opportunities with us. Inventory Management For brands where we have established long-term relationships, we typically do not pay any deposit on the products we purchase. For other brands,however, we generally pay a deposit ranging from 10% to 15% of the total price for each purchase order. We generally have the right to return unsold items within a period after the end of a sales event. We typically pay for the purchase order ininstallments with the last installment paid upon full settlement of the unsold items or returned products we receive from customers. For some products, suchas certain sporting goods, which we do not have the right to return the unsold products to the brand partners, we have been able to utilize our strong marketingexpertise regarding customer preferences to achieve quick inventory turnover. We have implemented an inventory management system to manage the information related to our procurement plan, quality control upon receipt,stock maintenance, stock deliveries, sales invoicing and sales recording. We use an enterprise resource planning (ERP) system to monitor and actively tracksales data. This system helps us make timely adjustments to our procurement plan and minimize excess inventory. Quality Control In addition to our brand selection process, we have adopted stringent quality assurance and control procedures for products delivered through ourlogistics network. We carefully inspect all products delivered to our logistics centers, rejecting or returning products that do not meet our quality standards orthe purchase order specifications. We also inspect all products before shipment from our logistics centers to our customers. We believe that our strict brandselection process and quality control procedures enable us to ensure the high quality level of products sold on our website and increase customer satisfaction. Our Product Offerings Product Categories We offer a curated selection of apparel, fashion goods, cosmetics, home goods and lifestyle products from popular domestic and internationalbrands. The following table illustrates our current product categories: Product CategoryProduct DescriptionWomenswearWomen’s apparel, featuring a variety of apparel and styles for different age groups, including casualwear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas and maternity clothes.MenswearMen’s apparel, featuring a variety of apparel and styles for different age groups, including casual andsmart- casual T-shirts, stylish polo shirts, jackets, pants and underwear.FootwearShoes for women and men designed in a variety of styles, for both casual and formal occasions.AccessoriesFashion accessories in various styles and materials for women and men, including belts, fashionablejewelry, watches and glasses complementing our apparel offerings.HandbagsPurses, satchels, duffel bags and wallets in many colors, styles and materials.ChildrenApparel, gear and accessories, furnishings and decor, toys and games for boys, girls, infants andtoddlers of all age groups.Sportswear and sporting goodsSports apparel, sports gear and footwear for tennis, badminton, soccer and swimming.CosmeticsHigh quality, affordable skin care and cosmetic products, including cleansers, lotions, face and bodycreams, face masks, sunscreen, foundations, lipsticks, eye shadows and nail polish.Home goods and other lifestyle productsHome goods with an extensive selection of home furnishings, including bedding and bath product, homedecor, dining and tabletop items, and small household appliances.Luxury goodsInternationally-known premium designer apparel, footwear and accessories.Gifts and miscellaneousSnacks, health supplements and occasion-based gifts, such as chocolates, moon-cakes and tea. 36Table of Contents We pay close attention to every aspect of our services to enhance our customers’ shopping experience. For each purchase, we arrange items neatly andthoughtfully within each delivery box. Unlike many in-store sales items which have been tried on numerous times, are on display for a lengthy period of timeor may have minor defects, each item purchased from our website is new, contains its original tag and packaging and must pass our strict quality controlinspection prior to shipping. Pricing We price products on our website at significant discounts, typically ranging from 30% to 70% off the original retail price, which is one of the keyelements in the “thrill and excitement” shopping experience that we create. Our attractive pricing is made possible by cost savings achieved through volumediscounts that we receive, in particular for off-season or slower-moving inventory, and the absence of physical retail space and related overhead costs. Wetypically negotiate with our brand partners for prices that are competitive with those offered to other discount sales channels. Payment, Fufillment and Return Payment We provide our customers with the flexibility to choose from a number of payment options. Our payment options include cash on delivery, banktransfers, online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms,such as alipay.com and tenpay.com. Under the cash on delivery option, our third-party delivery service providers deliver products to customers’ designatedaddresses and collect payment on site. As of December 31, 2012, we had built an extensive distribution network to deliver products and provide our cash-on-delivery payment option to customers in over 350 cities across China. This payment method not only provides our customers with a secure and convenientpayment option, but also reduces our operating expenses as we can combine payment and delivery services by using the same third-party delivery serviceproviders, without incurring additional fees. In addition, as most of our third-party delivery service providers are large and reputable companies in China andgenerally make cash deposits or guarantee payments to us in order to secure the performance of their duties, our payment collection risk is very limited. Fulfillment We have established a logistics network and warehousing capacity with nationwide coverage. We have adopted a flexible logistics model supported byour robust and advanced warehouse management system. We use a mix of top delivery companies with nationwide coverage and quality regional or localcouriers to ensure reliable and timely delivery. Logistics Network and Warehouse Management System Our logistics network consists of regional logistics centers strategically located in Guangdong Province in Southern China, Kunshan in JiangsuProvince in Eastern China (which is within close proximity of Shanghai), Chengdu in Sichuan Province in Western China and Beijing in Northern China. Our warehouse management system enables us to closely monitor each step of the fulfillment process from the time a purchase order is confirmedwith the brand partners and the product stocked in our logistics centers, up to when the product is packaged and picked up by delivery service providers forshipment to a customer. Shipments from brand partners first arrive at one of our regional logistics centers, depending on demand from each warehouse. Ateach logistics center, inventory is bar-coded and tracked through our management information system, allowing real-time monitoring of inventory levels acrossour logistics network and item tracking at each logistics center. As we offer a curated selection of brands and products for each daily sales, our logisticscenters and inventory management systems are specifically designed to support the frequent sales events on our flash sales website and a large volume ofinventory turnover. In 2010, 2011 and 2012, we processed 0.9 million, 7.2 million and 21.9 million customer orders, respectively. 37Table of Contents Delivery Services We deliver orders placed on our website to all areas in China through leading reputable third-party delivery companies with nationwide coverage,including EMS, Shunfeng and Zhaijisong, and quality regional and local couriers. For luxury goods orders, we deliver the products by FedEx with an “anti-tampering lock” device to further enhance customer trust. For delivery to smaller cities, we use a combination of national delivery companies and regional orlocal couriers to achieve greater operational efficiency and ensure timely delivery to our customers. We bundle packages for customers in smaller cities within aparticular region and ship in bulk by national delivery companies to regional or local couriers who in turn deliver locally to our customers. We began toestablish our own in-house delivery capabilities in Shanghai in 2011. Our use of reputable national delivery companies and regional and local couriers inconjunction with our own delivery network which is being built up in selected regions such as Shanghai allows us to maintain operational flexibility andaccommodate order demand, thereby ensuring high service quality. We leverage our large-scale operations and reputation to obtain favorable contractual terms from third-party delivery companies. To reduce the risk ofreliance on any single delivery company, we typically contract with two or more regional delivery companies in each major city. We regularly monitor andreview the delivery companies’ performance and their compliance with our contractual terms. In addition, we typically require the delivery companies to paydeposits or provide payment guarantees before providing services to us. We typically negotiate and enter into logistics agreements on an annual basis. Return Policy Due to the limited quantities of each featured flash sales product, we do not offer a product exchange service but customers may return productspurchased from our website. We offer a seven-day product return policy where our customers can return products purchased on our website within seven daysof receipt of the products as long as the products are unused, unwashed, unworn, undamaged and in their original packaging and in original condition. Forreturn of luxury goods, the anti-tampering lock on the product must remain intact. Once a customer submits a return application request online, our customer service representatives will review and process the request or contact thecustomer by e-mail or by phone if there are any questions relating to the request. Upon our receipt of the returned product, we credit the customer’s Vipshopmember account or credit card with the purchase price. We also provide a shipping allowance of up to RMB10 for all shipments within China. We believe ourhassle-free return policies help to increase customer spending and enhance customer loyalty. Customer Service We believe that our emphasis on customer service enhances our ability to maintain a large and loyal customer base and create a positive customerexperience, encouraging repeat visits and purchases. We have a dedicated customer service team responsible for handling general customer inquiries andrequests, assisting customers with their ordering process, investigating the status of orders, shipments and payments, resolving customer complaints, andproviding other after-sales services. Our customers can contact customer service representatives through our customer service e-mail, real-time online chat, orour customer service hotline 15 hours a day, seven days a week. As of December 31, 2012, our customer service center, located in our headquarters inGuangzhou, had 327 well-trained employees. We maintain service quality by carefully selecting personnel, providing our customer service representatives with extensive training, and regularlymonitoring and evaluating the performance of each representative. Each new customer service representative is required to complete a mandatory trainingprogram in Guangzhou, conducted by experienced managers and covering product knowledge, complaint handling, service attitude and communication skills.To facilitate timely resolution of customer complaints, we also train and empower our customer service representatives to resolve complaints and remedysituations within a specified authorized amount determined based on their seniority without having to get approval from their supervisors. To maintain controlover the quality of customer services, we do not outsource any of our e-mail, online live chat or call center customer service operations. 38Table of Contents Marketing We believe that the most efficient form of marketing for our business is to continually improve and enhance the element of “thrill and excitement”associated with the customer shopping experience. This promotes word-of-mouth referrals and repeat customer visits to our website. Historically, we have notincurred substantial marketing expense, and have been able to build a large base of loyal customers with relatively low customer acquisition cost primarilythrough providing our customers with an enjoyable, satisfying and rewarding shopping experience and using cost-effective marketing means. As part of our viral marketing strategy, we provide various incentives to our existing customers to increase their spending and loyalty. Our customerscan earn reward points upon registration and for each purchase they make, and may exchange the reward points for coupons, gifts and lucky drawopportunities on our website. Our customers may also earn reward points by introducing new members and customers to our website. In addition, weencourage our customers to share their successful flash sales shopping experiences through social media and microblogging websites in China. We offer an“easy-to-share” function which enables our customers to easily share their shopping experiences with us on social networking internet platforms andmicroblogging websites. We also conduct marketing efforts online through search engines and portals in China and enhance our brand awareness by engaging in cost-effectivebrand promotion activities such as sponsoring high profile events. Technology Our IT systems are designed to enhance efficiency and scalability, and play an important role in the success of our business. We rely on acombination of internally developed proprietary technologies and commercially available licensed technologies to improve our website and managementsystems in order to optimize every aspect of our operations for the benefit of our customers and brand partners. We have adopted a service-oriented architecture supported by data processing technologies which consists of front-end and back-end modules. Ournetwork infrastructure is built upon self-owned servers located in data centers operated by major PRC internet data center providers. We are implementingenhanced cloud architecture and infrastructure for our core data processing system to augment our existing virtual private network as we continue to expandour operations in new geographic locations, enabling us to achieve significant internal efficiency through a virtual and centralized network platform. Our front-end modules, which refer to modules supporting our vipshop.com user-interface website, mainly include product display, registeredmember account management, category browsing, online shopping cart, order processing functions and payment functions. Our front-end modules aresupported by our proprietary content distribution network, dynamic and distributed cluster and a core database, providing our customers with quicker accessto the product display they are interested in, and facilitating faster processing of their purchases. We have developed our IT systems to handle a surge ofvisitor traffic to our website during the peak hours of our daily sales from 10 a.m. to 12 p.m. Beijing time, providing our customers with a smooth onlineshopping experience. Our back-end modules, which refer to modules supporting our business operations, mainly include customer service, ERP system, warehouse andlogistics management, product information management, business intelligence and administration management systems. Our customer service system mainlyconsists of our customer relationship management system, our audio and online customer service system and our customer data analysis and membershipmanagement system. We believe that we are one of the few PRC e-commerce companies to implement an ERP system, which we have customized to integrateour management of brand partners, accounting and product distribution information. Our warehouse and logistics management system primarily consists ofour warehouse management system and our track data storage and automated warehouse and logistics operations, which allows us to efficiently manage ourinventories, track the products, and deliver the products to our customers on a timely basis. We have designed our product information management system toperform a variety of functions such as products filing, products photographing, products-information compiling, sample products management, online salesscheduling and other functions relating to on-line sales of goods. This system greatly enhances the efficiency of our operations. 39Table of Contents Our customer relationship management and business intelligence systems enable us to effectively gather, analyze and make use of internally-generated customer behavior and transaction data. We regularly use this information in planning our marketing initiatives for upcoming flash sales. Inaddition, we also provide selected data to our brand partners to help them optimize their product development and sales and marketing strategies. Our businessintelligence system is an intelligence system built with the proprietary cloud computing infrastructure, providing decision-making intelligence such asdashboards operation, operational analysis, market analysis, sales forecasts and products such as anti-fraud filters, precision marketing, personalizedrecommendations and other application-oriented intelligent products that facilitate data-driven decision-making and increase our product sales. We have developed most of the key business modules through our internal IT department. We also license software from reputable third-partyproviders, such as Manhattan Information System and Oracle, and work closely with these third-party providers to customize the software for our operations.We have implemented a number of measures to protect against failure and data loss. We have developed a disaster tolerant system for our key businessmodules which includes real-time data mirroring, daily off-line data back-up and redundancy and load balancing. We believe that our module-based systems are highly scalable, which enable us to quickly expand system capacity and add new features andfunctionality to our systems in response to our business needs and evolving customers’ demands without affecting the operation of existing modules. We havealso adopted rigorous security policies and measures, including encryption technology, to protect our proprietary data and customer information. Intellectual Property We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to oursuccess, and we rely on trademark, copyright and trade secret protection laws in the PRC and other jurisdictions, as well as confidentiality procedures andcontractual provisions with our employees, partners, service providers, suppliers and others to protect our proprietary rights. As of December 31, 2012, weowned 12 registered trademarks, copyrights to 17 software products developed by us relating to various aspects of our operations, and 34 registered domainnames, including vipshop.com, vipshop.com.cn, vipshop.cn and vipshop.net. Competition The online flash sales market, as one of the fast-growing categories of the e-commerce market in China, is rapidly competitive and rapidly evolving.Our primary competitors include: B2C e-commerce companies that sell similar products and services online, such as Tmall, 360Buy and Dangdang, andother online flash sales companies. We believe we compete primarily on the basis of: · ability to identify products in demand among consumers and source these products on favorable terms from brands; · pricing; · breadth and quality of product offerings; · website features; · customer service and fulfillment capabilities; and · reputation among consumers and brands. We believe that our early mover advantage and leading market position help us to compete efficiently against our competitors. However, some of ourcurrent and potential competitors may have longer operating histories, larger customer bases, better brand recognition, stronger platform management andfulfillment capabilities and greater financial, technical and marketing resources than we do. See “Item 3.D. Key Information—Risk Factors—Risks Relating toOur Business and Industry—If we do not compete effectively against existing or new competitors, we may lose market share and customers.” 40Table of Contents Regulation This section summarizes all of the laws and regulations that materially affect our business and operations and the key provisions of such laws andregulations. The PRC government extensively regulates the telecommunications industry, including the internet sector. The State Council, the MIIT, the Ministryof Commerce, the State Administration for Industry and Commerce, or the SAIC, the General Administration of Press and Publication and other relevantgovernment authorities have promulgated an extensive regulatory scheme governing telecommunications, on-line sales and e-commerce. However, China’stelecommunications industry and internet-related industry are at an early stage of development. As a result, new laws and regulations may be adopted fromtime to time that will require us to obtain additional licenses and permits in addition to those that we currently have, and will require us to address new issuesthat arise from time to time. In addition, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese lawsand regulations applicable to the telecommunications, on-line sales and e-commerce services. See “Item 3.D. Key Information—Risk Factors—Risks Relatingto Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.” Regulations on Value-Added Telecommunications Services Licenses for Value-Added Telecommunication Services The Catalog for the Guidance of Foreign Investment Industries, or the Catalog, as promulgated and amended from time to time by the Ministry ofCommerce and the National Development and Reform Commission, is the principal guide to foreign investors’ investment activities in the PRC. The versionpromulgated in 2007 and the most updated version of the Catalog, which became effective on January 30, 2012, divide the industries into three categories:encouraged, restricted and prohibited. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted by other PRClaws and regulations. For encouraged industries, a wholly foreign-owned enterprise is generally permitted, while for restricted industries, such as value-addedtelecommunications service industry, there are some limitations to the ownership and/or corporate structure of the foreign invested companies that operate insuch industries. Industries in the prohibited category are not open to foreign investors. On September 25, 2000, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, were issued by the PRCState Council as the primary governing law on telecommunication services. The Telecom Regulations set out the general framework for the provision oftelecommunication services by PRC companies. Under the Telecom Regulations, it is a requirement that telecommunications service providers procureoperating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic telecommunications services” and“value-added telecommunications services.” A “Catalog of Telecommunications Business” was issued as an attachment to the Telecom Regulations tocategorize telecommunications services as basic or value-added. In February 2003, the Catalog was updated and the information services such as contentservice, entertainment and online games services are classified as value-added telecommunications services. On March 1, 2009, the MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, or the Telecom PermitMeasures, which took effect on April 10, 2009. The Telecom Permit Measures confirm that there are two types of telecom operating licenses for operators inChina, namely, licenses for basic telecommunications services and licenses for value-added telecommunications services. The operation scope of the licensewill detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator shall conduct its business inaccordance with the specifications recorded on its value-added telecommunications services operating license, or VATS License. In addition, a VATS License’sholder is required to obtain approval from the original permit-issuing authority prior to any change to its shareholders. On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures,which was amended in January 2011. Under the Internet Measures, commercial internet information services operators shall obtain a value-addedtelecommunications license for internet information services, or ICP License, from the relevant government authorities before engaging in any commercialinternet information services operations within the PRC. The ICP License has a term of five years and shall be renewed within 90 days before expiration. Our consolidated affiliated entity, Vipshop Information, has obtained an ICP License issued by Guangdong Province Administration ofTelecommunication since September 24, 2008, which was updated on August 9, 2012 and is scheduled to expire on September 24, 2013. Mr. Jacky Xutransferred his equity interests in Vipshop Information to Mr. Eric Ya Shen recently and Vipshop Information is in process of applying for approval from itsoriginal permit-issuing authority for such change. 41Table of Contents Foreign Investment in Value-Added Telecommunication Services Pursuant to the Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the State Council onDecember 11, 2001 and amended on September 10, 2008, the ultimate foreign equity ownership in a value-added telecommunications services provider maynot exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must satisfy anumber of stringent performance and operational experience requirements, including demonstrating good track records and experience in operating value-addedtelecommunication business overseas. Foreign investors that meet these requirements must obtain approvals from the MIIT and the Ministry of Commerce ortheir authorized local counterparts, which retain considerable discretion in granting approvals. Pursuant to publicly available information, the PRCgovernment has issued telecommunications business operating licenses to only a limited number of foreign invested companies, all of which are Sino-foreignjoint ventures engaging in the value-added telecommunication business. The MIIT Circular issued by the MIIT in July 2006 reiterated the regulations on foreign investment in telecommunications businesses, which requireforeign investors to set up foreign-invested enterprises and obtain a business operating license for ICP to conduct any value-added telecommunicationsbusiness in China. Under the MIIT Circular, a domestic company that holds an ICP License is prohibited from leasing, transferring or selling the license toforeign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-addedtelecommunications business must be owned by the local ICP license holder or its shareholder. The MIIT Circular further requires each ICP license holder tohave the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth underrelevant PRC regulations. To comply with the PRC regulations noted above, we operate our website and value-added telecommunications services through our consolidatedaffiliated entity, which is currently owned by Mr. Eric Ya Shen, Mr. Arthur Xiaobo Hong, Mr. Bin Wu and Mr. Xing Peng. Our consolidated affiliated entityholds an ICP license and all other licenses necessary to conduct online sales in China. It also has been registered and holds all significant domain names andhas been registered as the owner or is applying to be the owner of all trademarks used in our value-added telecommunications businesses. To conduct ourbusiness in China, our wholly owned subsidiary, Vipshop China, has entered into a series of contractual arrangements with our consolidated affiliated entity,Vipshop Information, and its shareholders. For a detailed discussion of our contractual arrangements, please refer to “Item 4.C. Information on the Company—Organizational Structure.” Regulations on Internet Privacy The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of theserights. In recent years, PRC government authorities have enacted legislation on internet use to protect personal information from any unauthorized disclosure. The Internet Measures prohibit an ICP operator from humiliating or defaming a third party or infringing the lawful rights and interests of a third party.Pursuant to the BBS Measures, ICP operators that provide electronic messaging services must keep users’ personal information confidential and must notdisclose such personal information to any third party without the users’ consent or unless it is required by law. The regulations further authorize the relevanttelecommunications authorities to order ICP operators to rectify unauthorized disclosure. ICP operators are subject to legal liability if the unauthorizeddisclosure results in damages or losses to users. Furthermore, The Decision on Strengthening Network Information Protection promulgated by the StandingCommittee of the National People’s Congress of the PRC in December 2012 provides that electronic information that is able to identify identities of citizens oris concerned with personal privacy of citizens is protected by law and shall not be unlawfully obtained or provided. ICP operators collecting or using personalelectronic information of citizens shall specify purposes, manners and scopes of information collection and use, obtain consent of citizens concerned, andstrictly keep confidential personal information collected. ICP operators are prohibited from disclosing, tampering with, damaging, selling or illegally providingothers with personal information collected. Technical and other measures are required to be taken by ICP operators to prevent personal information collectedfrom unauthorized disclosure, damage or being lost. ICP operators are subject to legal liability, including warnings, fines, confiscation of illegal gains,revocation of licenses or filings, closing of websites concerned, public security administration punishment, criminal liabilities, or civil liabilities, if theyviolate relevant provisions on internet privacy. The PRC government, however, has the power and authority to order ICP operators to turn over personalinformation if an internet user posts any prohibited content or engages in illegal activities on the internet. 42Table of Contents Regulations Relating to Foreign Invested Enterprises Engaging in Distribution Business We are subject to regulations relating to foreign invested enterprises engaging in the distribution business. In April 2004, the Ministry of Commerceissued the Administrative Measures on Foreign Investment in Commercial Fields, or the Commercial Fields Measures. Pursuant to the Commercial FieldsMeasures, foreign investors are permitted to engage in the distribution services by setting up commercial enterprises in accordance with the procedures andguidelines provided in the Commercial Fields Measures. To further simplify the approval procedures for foreign investment in the distribution sector, theMinistry of Commerce issued the Notice on Delegating Examination and Approval Authorities for Foreign Invested Commercial Enterprises inSeptember 2008, delegating the power to the provincial branches of the Ministry of Commerce except for certain specified items. In July 2009, the competentauthorities in Guangdong further delegated the power of examination and approval of foreign invested commercial enterprises in Guangdong for certain items tomunicipal branches of the Ministry of Commerce in Guangdong Province. In September 2012, the State Council promulgated the Decision of the State Councilon the Sixth Batch of Cancelled and Amended Administrative Examination and Approval Items, according to which the power of examination and approval offoreign invested commercial enterprises engaged in certain items, including online sales, has been assigned from the Ministry of Commerce to the provincialbranches of the Ministry of Commerce. Vipshop China has been approved to engage in wholesale business. Regulations Relating to Distribution of Books and Audio-Video Products We are also subject to regulations relating to the distribution of books and audio-video products. Under the Administrative Measures for thePublication Market which were promulgated by the General Administration of Press and Publication and became effective in September 2003, as amended inJune 2004 and March 2011, respectively, any entity or individual engaging in the distribution of publications, including books, newspapers, magazines andaudio-video products, must obtain an approval from the competent press and publication administrative authority and receive the Publication OperationPermit. Our consolidated affiliated entity has obtained a Publication Operation Permit for the retail sale of the publications. Furthermore, according to the Notice on Promoting the Healthy Development of Online Distribution of Publications recently issued by the GeneralAdministration of Press and Publication on December 7, 2010, any entities engaging in online publications distribution in China shall apply for thePublications Operation Permit with an “online distribution” notation. However, the Provisions on the Administration of Publication Market jointly promulgatedby the General Administration of Press and Publication and the Ministry of Commerce in 2011, provides that an entity that maintains a valid PublicationOperation Permit for the retail sale of publications is only required to file notice with a competent press and publication administrative authority within 15days from starting online publications distribution business. Currently, the competent press and publication administrative authority in Guangzhou onlyrequires online publication distributors, who have the Publication Operation Permit for the retail sale of publications, to complete the notice filing procedureand does not mandate the “online distribution” notation on the Publication Operation Permit in practice. Our consolidated affiliated entity has completed thenotice filing with the competent authority in Guangzhou. Regulations on E-commerce China’s e-commerce industry is at an early stage of development and there are few PRC laws or regulations specifically regulating the e-commerceindustry. In May 31, 2010, the SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services, or theOnline Commodities Measures, which took effective on July 1, 2010. Under the Online Commodities Measures, enterprises or other operators which engage inonline commodities trading and other services and have been registered with the SAIC or its local branches must make available to the public the informationstated in their business licenses or the link to their business licenses online on their websites. The online distributors must adopt measures to ensure safeonline transactions, protect online shoppers’ rights and prevent the sale of counterfeit goods. The information on trading of commodities released by onlinedistributors shall be authentic, accurate, complete and sufficient. 43Table of Contents Regulations on Sales of Food Sales of food in China must comply with laws and regulations regarding food hygiene and safety. Under the Food Safety Law of the PRC, whichtook effect from June 1, 2009, the sale of food or beverages must be licensed in advance. Furthermore, under the Measures on the Administration of FoodCirculation Permits issued by the SAIC on July 30, 2009, an enterprise needs to obtain a food distribution permit from a local branch of the SAIC to engage inthe food circulation business. The food distribution permit has a term of three years. The current food distribution permits held by our consolidated affiliatedentity and Vipshop China were issued on July 26, 2011 and August 6, 2012, respectively. Regulations on Software Products On October 27, 2000, the MIIT issued the Administrative Measures on Software Products, or the Software Measures, to strengthen the regulation ofsoftware products and to encourage the development of the PRC software industry. On March 1, 2009, the MIIT amended Software Measures, which becameeffective on April 10, 2009. The Software Measures provide a registration and filing system with respect to software products made in or imported into China.These software products may be registered with the competent local authorities in charge of software industry administration. Registered software productsmay enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years, and theregistration is renewable upon expiration. In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, the StateCopyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration,license contract registration and transfer contract registration. As of December 31, 2012, we had registered 17 software programs in China. Regulations on Trademarks Trademarks are protected by the PRC Trademark Law which was adopted in 1982 and subsequently amended in 1993 and 2001 as well as theImplementation Regulation of the PRC Trademark Law adopted by the State Council in 2002 and subsequently amended in 2013. The Trademark Officeunder the SAIC handles trademark registrations and grants a term of ten years to registered trademarks which may be renewed for consecutive ten-year periodsupon request by the trademark owner. Trademark license agreements must be filed with the Trademark Office for record. The PRC Trademark Law hasadopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar toanother trademark which has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similarcommodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark may notprejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and hasalready gained a “sufficient degree of reputation” through such party’s use. We have registered 12 trademarks in China as of December 31, 2012. Under PRC law, any of the following acts will be deemed as an infringement to the exclusive right to use a registered trademark: (1) use of atrademark that is the same as or similar to a registered Trademark for identical or similar goods without the permission of the trademark registrant; (2) sale ofany goods that have infringed the exclusive right to use any registered trademark; (3) counterfeit or unauthorized production of the label of another’s registeredTrademark, or sale of any such label that is counterfeited or produced without authorization; (4) change of any trademark of a registrant without theregistrant’s consent, and selling goods bearing such replaced Trademark on the market; or (5) other acts that have caused any other damage to another’sexclusive right to use a registered trademark. According to the PRC Trademark Law, in the event of any of the foregoing acts, the infringing party will be ordered to stop the infringementimmediately and may be imposed a fine; the counterfeit goods will be confiscated. The infringing party may also be held liable for the right holder’s damages,which will be equal to gains obtained by the infringing party or the losses suffered by the right holder as a result of the infringement, including reasonableexpenses incurred by the right holder for stopping the infringement. If both gains and losses are difficult to determine, the court may render a judgmentawarding damages no more than RMB500,000. Notwithstanding the above, if a distributor does not know that the goods it sells infringe another’s registeredtrademark, it will not be liable for infringement provided that the seller shall prove that the goods are lawfully obtained and identify its supplier. We source ourproducts from both domestic and international suppliers. Although we have adopted measures in the course of sourcing such products to ensure theirauthenticity and to minimize potential liability of infringing third parties’ rights, we can provide no assurance that such measures are effective. In the eventthat counterfeit products or products that otherwise infringe third parties’ rights are sold on our website, we could face infringement claims and might not beable to prove we should be exempted from liabilities. See “Item 3.D. Key Information—Risk Factors—Risks Relating to our Business and Industry—We mayincur liability for counterfeit products sold at our website.” 44Table of Contents Regulations on Foreign Currency Exchange The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, or the ForeignExchange Regulations, as amended on August 5, 2008. Under the Foreign Exchange Regulations, Renminbi is freely convertible for current account items,including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such asdirect investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained andprior registration with the SAFE is made. Though there are restrictions on the convertibility of Renminbi for capital account transactions, which principallyinclude investments and loans, we generally follow the regulations and apply to obtain the approval of the SAFE and other relevant PRC governmentalauthorities. However, we may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrationsor approvals, our ability to provide loans or capital contributions to our PRC subsidiaries and our PRC affiliated entity may be negatively affected, whichcould adversely affect our liquidity and our ability to fund and expand our business. On August 29, 2008, the SAFE promulgated SAFE Circular 142, regulating the conversion by a foreign invested company of foreign currency intoRenminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 requires that the registered capital of a foreign invested enterprise settledin Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authorityand may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the registered capital of aforeign invested enterprise settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without the SAFE’sapproval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Furthermore, the SAFE promulgatedSAFE Circular 59 on November 9, 2010, which tightens the regulation over settlement of net proceeds from overseas offerings and requires that the settlementof net proceeds must be consistent with the description in the prospectus for the relevant offering. The SAFE also promulgated SAFE Circular 45 inNovember 2011, which, among other things, restrict a foreign-invested enterprise from using Renminbi funds converted from its registered capital to provideentrusted loans or repay loans between non-financial enterprises. Violations of these circulars could result in severe monetary or other penalties. SAFE Circular142, SAFE Circular 59 and SAFE Circular 45 may limit our ability to transfer the net proceeds from our public offerings of equity securities to VipshopChina and convert the net proceeds into Renminbi, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC. Regulations on Dividend Distribution Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from Vipshop China, which isa wholly foreign owned enterprise incorporated in the PRC, to fund any cash and financing requirements we may have. The principal regulations governingdistribution of dividends of foreign invested enterprises include the Foreign Invested Enterprise Law, as amended on October 31, 2000, and the ImplementationRules of the Foreign Invested Enterprise Law, as amended on April 12, 2001. Under these laws and regulations, wholly foreign owned enterprises in China may pay dividends only out of their accumulated after-tax profits, ifany, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign owned enterprises in China are required to allocateat least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registeredcapital of the enterprises. Wholly foreign owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accountingstandards to staff welfare and bonus funds. These reserves are not distributable as cash dividends. Regulations on Offshore Financing On October 21, 2005, the SAFE issued Circular 75, which became effective as of November 1, 2005. Under Circular 75, prior registration withthe local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company withassets or equity interests in an onshore enterprise located in the PRC. An amendment to registration or filing with the local SAFE branch by such PRC residentis also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshorecompany, or any other material change involving a change in the capital of the offshore company. 45Table of Contents Moreover, Circular 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that havemade onshore investments in the PRC in the past are required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006.Under the relevant rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreignexchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to itsoffshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchangeadministration regulations. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilitiesfor such PRC subsidiary under PRC laws for evasion of applicable foreign exchange restrictions and individuals managing such PRC subsidiary who areheld directly liable for any violation may be subject to criminal sanctions. In May 2007, the SAFE issued a series of guidance to its local branches with respect to the operational process for SAFE registration, includingwithout limitation the Notice of SAFE on Printing and Distributing the Implementing Rules for the Administration of Foreign Exchange in Fund-Raising andRound-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular No. 19, which came into effect as ofJuly 1, 2011. The guidance standardized more specific and stringent supervision on the registration required by the Circular 75. For example, the guidanceimposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities in case there is anyshareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potentialliability for the subsidiaries, and in some instances, for their legal representatives and other liable individuals. All of our shareholders that we are aware of being subject to the SAFE regulations have completed all necessary registrations and amendments withthe local SAFE branch as required by Circular 75. They are also required to amend their registrations after the completion of the follow-on public offering inMarch 2013 and are in the process of doing so. Please see “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Corporate Structure andRestrictions on Our Industry—PRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our PRC residentbeneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.” Regulations on Stock Incentive Plans In December 2006, the PBOC promulgated the Administrative Measures of Foreign Exchange Matters for Individuals. In January 2007, the SAFEissued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approvalrequirements for certain capital account transactions such as a PRC citizen’s participation in employee share ownership plans or share option plans of anoverseas publicly-listed company. Pursuant to the Stock Option Rules, which was promulgated by the SAFE in February 2012 and replaced the Application Procedures of ForeignExchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-ListedCompanies issued by the SAFE in March 2007, PRC residents who are granted shares or stock options by companies listed on overseas stock exchangesbased on the stock incentive plans are required to register with the SAFE or its local branches. Pursuant to the Stock Option Rules, PRC residentsparticipating in the stock incentive plans of overseas listed companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseaspublicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respectto the stock incentive plans on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connectionwith their exercise of stock options, purchase and sale of corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required toamend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agents or the overseasentrusted institution or other material changes. The PRC agents shall, on behalf of the PRC residents who have the right to exercise the employee share options,apply to the SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of theemployee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted anddividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution tosuch PRC residents. In addition, the PRC agents shall file each quarter the form for record-filing of information of the Domestic Individuals Participating inthe Stock Incentive Plans of Overseas Listed Companies with the SAFE or its local branches. 46Table of Contents In March 2011 and March 2012, our board of directors and shareholders adopted the 2011 Stock Incentive Plan, or the 2011 Plan, and the 2012Share Incentive Plan, or the 2012 Plan, respectively, pursuant to which we may issue stock options to our qualified employees and directors and consultantson a regular basis. After our initial public offering in March 2012, we advised our employees and directors participating in our stock incentive plans to handleforeign exchange matters in accordance with the Stock Option Rules. We will assist our PRC option grantees to complete the required registrations andprocedures. However, we cannot assure you that our PRC individual beneficiary owners and the stock options holders can successfully register with theSAFE or in full compliance with the Stock Option Rules. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Doing Business in China—Failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants orus to fines and other legal or administrative sanctions.” Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by Ministry of Finance, or the MOF,and the SAT and its implementing rules, provide that domestic companies that implement employee share option programs shall (a) file the employee shareoption plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share option plans;(b) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exercise by the employeesof the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listedcompanies; and (c) withhold taxes from the PRC employees in connection with the PRC individual income tax. To comply with the requirement, we are in theprocess of filing our share incentive plans with the relevant local tax bureau. PRC Enterprise Income Tax Law and Individual Income Tax Law On March 16, 2007, the National People’s Congress, the PRC legislature, enacted the EIT Law and its implementing rules, both of which becameeffective on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprisestypically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its “de facto management bodies” located within thePRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes.The implementing rules of the EIT Law define de facto management body as a managing body that in practice exercises “substantial and overall managementand control over the production and operations, personnel, accounting, and properties” of the enterprise. The SAT issued Circular 82 on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto managementbody” of a PRC-controlled offshore incorporated enterprise is located in China, which include all of the following conditions: (a) the location where seniormanagement members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions aremade or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more thanhalf (inclusive) of all directors with voting rights or senior management have their habitual residence. In addition, the SAT issued a bulletin on July 27, 2011,effective September 1, 2011, providing more guidance on the implementation of Circular 82. This bulletin clarifies matters including resident statusdetermination, post-determination administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprisescontrolled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth inCircular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the taxresident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. Due to the short history of the EIT Law and lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine thePRC tax resident treatment of a foreign company controlled by individuals like us. We do not believe Vipshop Holdings or Vipshop HK meet all the criteriaprovided by the implementing rules. As holding companies incorporated outside China, neither Vipshop Holdings nor Vipshop HK is controlled by a PRCenterprise or PRC enterprise groups. Their key assets and records, including the resolutions of their respective boards of directors and the resolutions of theirrespective shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a similar corporatestructure as ours ever having been deemed a PRC “resident enterprise” by the PRC tax authorities. Therefore, we do not believe Vipshop Holdings or VipshopHK is a PRC “resident enterprise.” If, however, the PRC tax authorities determine that Vipshop Holdings or Vipshop HK is a “resident enterprise” for PRCenterprise income tax purposes, we would be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterpriseincome tax reporting obligations. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluatingappropriate organizational changes to avoid this treatment, to the extent possible. 47Table of Contents The EIT Law and the implementation rules provide that an income tax rate of 10% will normally be applicable to dividends payable to investors thatare “non-resident enterprises,” and gains derived by such investors, which (a) do not have an establishment or place of business in the PRC or (b) have anestablishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business to the extentsuch dividends and gains are derived from sources within the PRC. The State Council of the PRC or a tax treaty between the PRC and the jurisdictions inwhich the non-PRC investors reside may reduce such income tax. Pursuant to an Arrangement Between the Mainland of China and the Hong Kong SpecialAdministrative Region for the Avoidance of Double Taxation on Income, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a HongKong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double TaxAvoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC residententerprise may be reduced to 5%. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treatiesissued on February 20, 2009 by the SAT, or Circular 81, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from suchreduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; andbased on the Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Treaties, or Circular 601, issued on October 27, 2009 by the SAT,conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized asbeneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. Vipshop HKhas not obtained the approval for a withholding tax rate of 5% from the competent tax authority and does not plan to obtain such approval in the near futurebecause Vipshop China paid nil dividends since its establishment and does not plan to pay dividends in the near future. If we are considered a PRC residententerprise and the competent PRC tax authorities consider dividends we pay with respect to our ADSs or ordinary shares and the gains realized from thetransfer of our ADSs or ordinary shares income derived from sources within the PRC, such dividends and gains earned by our non-resident enterpriseinvestors may be subject to PRC enterprise income tax at a rate of 10% (or other applicable preferential tax rate if any such non-resident enterprises’ jurisdictionhas a tax treaty with China that provides for a preferential tax rate or a tax exemption). Moreover, if we are considered a PRC resident enterprise and the competent PRC tax authorities consider dividends we pay with respect to our ADSsor ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares income derived from sources within the PRC, such dividends andgains earned by non-resident individuals may be subject to PRC individual income tax at a rate of 20% (or other applicable preferential tax rate if any suchnon-resident individuals’ jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption). In January 2009, the SAT promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-residentEnterprises, or the Non-resident Enterprises Measures, pursuant to which, the entities which have the direct obligation to make certain payments to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise. Further, the Non-resident Enterprises Measures provides that in caseof an equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer paymentshall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at the place of the PRC company whose equity has been transferred,and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. On April 30,2009, the MOF and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, orCircular 59. On December 10, 2009, the SAT issued SAT Circular 698. Both Circular 59 and SAT Circular 698 became effective retroactively as ofJanuary 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirecttransfer of equity interests in a PRC resident enterprise by a non-resident enterprise. Under SAT Circular 698, where a non-resident enterprise transfers theequity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, andsuch overseas holding company is located in certain low tax jurisdictions, the non-resident enterprise, being the transferor, shall report to the competent taxauthority of the PRC “resident enterprise” this Indirect Transfer. The PRC tax authority may disregard the existence of the overseas holding company if itlacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from suchIndirect Transfer may be subject to PRC tax at a rate of up to 10%. Although it appears that SAT Circular 698 was not intended to apply to purchase and saleof shares of publicly traded companies in the open market, the PRC tax authorities may determine that SAT Circular 698 is applicable to our non-residentshareholders who acquired our shares outside of the open market and subsequently sell our shares in our private financing transactions or in the open marketif any of such transactions were determined by the tax authorities to lack reasonable commercial purpose, and we and our non-resident shareholders may be atrisk of being required to file a return and being taxed under SAT Circular 698 and we may be required to expend valuable resources to comply with SATCircular 698 or to establish that we should not be taxed under SAT Circular 698. 48Table of Contents Employment Laws We are subject to laws and regulations governing our relationship with our employees, including wage and hour requirements, working and safetyconditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources. China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which became effective onJanuary 1, 2008 and was amended on December 28, 2012, permit workers in both state-owned and private enterprises in China to bargain collectively. TheNational Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (orworker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. Thelaws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collectivecontract. The National Labor Contract Law has enhanced rights for the nation’s workers, including permitting open-ended labor contracts and severancepayments. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary labor and makes it harder foremployers to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract isrenewed twice or the employee has worked for the employer for a consecutive ten-year period. On October 28, 2010, the National People’s Congress of China promulgated the PRC Social Insurance Law, which became effective on July 1, 2011.In accordance with the PRC Social Insurance Law and other relevant laws and regulations, China establishes a social insurance system including basicpension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. An employer shall pay thesocial insurance for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance that should beassumed by the employees. The authorities in charge of social insurance may request an employer’s compliance and impose sanctions if such employer failsto pay and withhold social insurance in a timely manner. Under the Regulations on the Administration of Housing Fund effective in 1999, as amended in2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank.Both PRC companies and their employees are required to contribute to the housing funds. Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain socialinsurance, housing funds and other welfare-oriented payment obligations. We have not made adequate employee benefit payments as required under applicablePRC labor laws. Accrual for the underpaid amounts as recorded amounted to US$0.5 million, US$1.6 million and US$2.2 million as of December 31,2010, 2011 and 2012, respectively. We believe it is not probable for us to be exposed to any PRC governmental penalties in relation to the under-paid amount ofour employee benefits. However, our failure in making contributions to various employee benefit plans and complying with applicable PRC labor-related lawsmay still subject us to late payment penalties. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Doing Business in China—Our failure tomake adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.” 49Table of Contents C Organizational Structure Corporate Structure The following diagram illustrates our corporate structure as of the date of this annual report: (1) Shareholders of Vipshop Information include our co-founders and shareholders Eric Ya Shen, Arthur Xiaobo Hong, Bin Wu and Xing Peng, holding52.0%, 26.0%, 11.6% and 10.4% of the total equity interests in Vipshop Information, respectively.(2) An intermediary holding company.(3) A subsidiary primarily engaged in warehousing, logistics, product procurement, research and development, technology development and consultingbusinesses.(4) Subsidiaries primarily engaged in warehousing and logistics businesses in the respective cities of Chengdu, Kunshan, Beijing and Tianjin and theirrespective nearby regions.(5) A subsidiary primarily engaged in software development and information technology support. Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC governmentregulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and othergovernment regulations. We are a Cayman Islands company and our PRC subsidiary, Vipshop China, is a wholly foreign owned enterprise. As a whollyforeign owned enterprise, Vipshop China is restricted from holding the licenses that are necessary for our online operation in China. To comply with theserestrictions, we conduct our operations partly through Vipshop Information, our consolidated affiliated entity in China. Vipshop Information operates ourwebsite and holds the licenses necessary to conduct our internet-related operations in China. 50Table of Contents Our wholly owned subsidiary Vipshop China has entered into a series of contractual arrangements with our consolidated affiliated entity, VipshopInformation, and its shareholders, which enable us to: · exercise effective control over Vipshop Information; · receive substantially all of the economic benefits of Vipshop Information through service fees, which are equal to 100% of Vipshop Information’snet income and may be adjusted at Vipshop China’s sole discretion, in consideration for the technical and consulting services provided byVipshop China; and · have an exclusive option to purchase, or designate one or more person(s) to purchase, all of the equity interests in Vipshop Information to theextent permitted under PRC laws, regulations and legal procedures. We do not have any equity interest in Vipshop Information. However, as a result of contractual arrangements, we are considered the primarybeneficiary of Vipshop Information, and we treat it as our consolidated affiliated entity under U.S. GAAP. We have consolidated the financial results ofVipshop Information in our consolidated financial statements included in this annual report in accordance with U.S. GAAP. We face risks with respect to the contractual arrangements with our consolidated affiliated entity and its shareholders. If our consolidated affiliatedentity or its shareholders fail to perform their obligations under the contractual arrangements, our ability to enforce the contractual arrangements that give useffective control over the consolidated affiliated entity may be limited. If we are unable to maintain effective control over our consolidated affiliated entity, wewould not be able to continue to consolidate its financial results. The revenues generated by our directly owned subsidiaries, apart from revenues earned inrespect of the relevant contractual arrangements with Vipshop Information, are primarily derived from our product promotion activities for brands. In the yearsended December 31, 2010, 2011 and 2012, our subsidiaries contributed in aggregate approximately nil, 0.37% and 0.02%, respectively, of our totalconsolidated net revenues, exclusive of revenues derived from Vipshop Information. As of December 31, 2010, 2011 and 2012, our holding company and oursubsidiaries accounted for an aggregate of nil, 63.70% and 56.53%, respectively, of our consolidated total assets (excluding assets attributable to transactionswith Vipshop Information). For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see “Item 4.B.Information on the Company—Business Overview—Regulation.” For a detailed description of the risks associated with our corporate structure, see “Item 3.D.Key Information—Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry.” The following is a summary of the material provisions of the agreements among our wholly owned PRC subsidiary Vipshop China, our consolidatedaffiliated entity Vipshop Information and the shareholders of Vipshop Information. Contractual Arrangements with Our Consolidated Affiliated Entity Agreements that Provide Us Effective Control over Our Consolidated Affiliated Entity Equity Interest Pledge Agreement. Under the amended and restated pledge agreement among Vipshop China, Vipshop Information and itsshareholders, the shareholders of Vipshop Information pledged all of their equity interests in Vipshop Information to Vipshop China to guarantee VipshopInformation’s performance of its obligations under the exclusive business cooperation agreement. If any event of default as provided for therein occurs,including the failure by Vipshop Information to perform its contractual obligations under the exclusive business cooperation agreement, Vipshop China, aspledgee, will be entitled to certain rights, including the right to dispose the pledged equity interests. Without Vipshop China’s prior written consent,shareholders of Vipshop Information shall not transfer or otherwise dispose of, or create or allow the creation of any encumbrance on the pledged equityinterests. The equity interest pledge agreement will remain in full force and effect until all of the obligations of Vipshop Information under the exclusivebusiness cooperation agreement have been duly performed or terminated. We have completed registering the pledge of the equity interests in VipshopInformation with the local branch of the SAIC. Exclusive Option Agreement. Under the amended and restated exclusive option agreement among Vipshop China, Vipshop Information and theshareholders of Vipshop Information, Vipshop Information’s shareholders grant Vipshop China an exclusive option to purchase, or designate one or moreperson(s) to purchase, all or part of their respective equity interests in Vipshop Information at a purchase price of RMB10, subject to any adjustments as maybe required by the applicable PRC laws and regulations at the time. Vipshop China may exercise the option by issuing a written notice to Vipshop Information.Without Vipshop China’s written consent, Vipshop Information and its shareholders may not transfer, sell, pledge or otherwise dispose of, or create anyencumbrance on, any assets, business or equity or beneficiary interests of Vipshop Information. This agreement will remain in full force and effect for a termof ten years from the date of execution and may be extended for a period to be determined by Vipshop China. Powers of Attorney. Under the powers of attorney, the shareholders of Vipshop Information each irrevocably appointed Vipshop China as theirattorney-in-fact to act on their behalf and exercise all of their rights as shareholders of Vipshop Information, including the right to attend shareholder meetings,to exercise voting rights, to appoint directors and senior management of Vipshop Information, and to effect transfers of all or part of their equity interests inVipshop Information pursuant to the equity interest pledge agreements and exclusive option agreements. Vipshop China has the right to appoint any individualor entity to exercise the power of attorney on its behalf. Each power of attorney will remain in full force and effect until the shareholder ceases to hold anyequity interests in Vipshop Information. 51Table of Contents Agreements that Transfer Economic Benefits to Us Exclusive Business Cooperation Agreement. Under the amended and restated exclusive business cooperation agreement between Vipshop Chinaand Vipshop Information, Vipshop Information agrees to engage Vipshop China as its exclusive provider of technical, consulting and other services in relationto its business operations. In consideration of such services, Vipshop Information will pay to Vipshop China service fees which amount to all of VipshopInformation’s net income. The service fees may be adjusted at Vipshop China’s sole discretion based on the services rendered and the operational needs ofVipshop Information. Vipshop Information contributed approximately 100%, 99.63% and 99.98%, respectively, of our total consolidated net revenues in theyears ended December 31, 2010, 2011 and 2012. Vipshop China shall exclusively own any intellectual property arising from the performance of thisagreement. The term of this agreement is ten years from the execution date of October 8, 2011 and may be extended for a period to be determined by VipshopChina. Vipshop China may terminate this agreement at any time by giving 30 days’ prior written notice. Vipshop Information has no right to terminate thisagreement unless Vipshop China commits gross negligence or fraud. Exclusive Purchase Framework Agreement. Under the exclusive purchase framework agreement between Vipshop China and VipshopInformation, Vipshop Information agrees to purchase products or services exclusively from Vipshop China or its subsidiaries. Vipshop Information and itssubsidiaries must not purchase from any third party products or services that Vipshop China is capable of providing. Vipshop Information must payVipshop China for its products an amount, which includes a service fee, based on the unit price and the quantity of the products ordered by VipshopInformation, within five days after receipt of invoices issued by Vipshop China. The term of this agreement is five years from September 1, 2011. If neitherparty objects in writing and both parties remain cooperating at the expiration of the agreement, the parties will continue to be bound by this agreement until anew agreement is entered into. Vipshop China may terminate this agreement at any time by giving 15 days’ prior written notice. Vipshop Information has noright to terminate this agreement unless Vipshop China commits gross negligence or fraud. In October 2012, we effected transfer of 10.4% of equity interest from one of the former shareholder of Vipshop Information to Mr. Eric Ya Shen, ourco-founder, chief executive officer and an existing shareholder of Vipshop Information, and amended the original contractual arrangements we had withMr. Shen to reflect this transfer. As of December 31, 2012, shareholders of Vipshop Information include our co-founders and shareholders Eric Ya Shen,Arthur Xiaobo Hong, Bin Wu and Xing Peng, holding 52.0%, 26.0%, 11.6% and 10.4% of the total equity interests in Vipshop Information, respectively. In the opinion of Han Kun Law Offices, our PRC legal counsel: · the ownership structures of our consolidated affiliated entity and Vipshop China comply with all existing PRC laws and regulations; · the contractual arrangements among Vipshop China and Vipshop Information and its shareholders that are governed by PRC law are valid,binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and · each of Vipshop China and our consolidated affiliated entity has all necessary corporate power and authority to conduct its business as describedin its business scope under its business license. The business licenses of Vipshop China and our consolidated affiliated entity are in full forceand effect. Each of Vipshop China and our consolidated affiliated entity is capable of suing and being sued and may be the subject of any legalproceedings in PRC courts. To the best of Han Kun Law Offices’ knowledge after due inquires, none of Vipshop China, our consolidatedaffiliated entity or their respective assets is entitled to any immunity, on the grounds of sovereignty, from any action, suit or other legalproceedings; or from enforcement, execution or attachment. We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application ofcurrent and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the aboveopinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establishthe structure for operating our online commerce and the distribution of internet content in China do not comply with relevant PRC government restrictions onforeign investment in value-added telecommunication, we could be subject to severe penalties, including being prohibited from continuing operations. See “Item3.D. Key Information—Risk Factors——Risks Relating to Our Corporate Structure and Restrictions on Our Industry—Substantial uncertainties andrestrictions exist with respect to the interpretation and application of PRC laws and regulations relating to online commerce and the distribution of internetcontent in China. If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations,we could be subject to severe penalties, including the shutting down of our website.” and “Item 3.D. Key Information—Risk Factors—Risks Relating to DoingBusiness in China—Uncertainties with respect to the PRC legal system could adversely affect us.” 52Table of Contents D Property, Plants and Equipment We are headquartered in Guangzhou and have leased an aggregate of 11,616 square meters of office, data center, customer service center andwarehouse space in Guangzhou. As of December 31, 2012, we also have branches in Beijing, Shanghai and Shenzhen. We lease our premises under operatinglease agreements from unrelated third parties. A summary of our leased properties as of December 31, 2012 is shown below: LocationSpaceUsage of PropertyLease Term(in square meters)(years)Guangzhou11,616Office space, data center, customer service center and warehouse1-8Foshan89,237Logistics center1-3Kunshan65,640Logistics center and office space2-3Beijing31,023Logistics center and office space1-3Chengdu36,559Logistics center1-2Shanghai880Office space3 Our servers are hosted at leased internet data centers owned by leading PRC telecommunications carriers. We typically enter into leasing and hostingservice agreements that are renewable from year to year. We believe that our existing facilities are sufficient for our near term needs. ITEM 4A. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidatedfinancial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statementsbased upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth under “Item 3.D. Key Information—Risk Factors” or in other parts of this annual report onForm 20-F. A Operating Results We began our operations in August 2008 and have grown significantly since then. In 2010, 2011 and 2012, we fulfilled over 0.9 million, over7.2 million and over 21.9 million customer orders, respectively, and we generated total net revenues of US$32.6 million, US$227.1 million andUS$692.1 million, respectively. In 2010, 2011 and 2012, we incurred net losses of US$8.4 million, US$107.3 million and US$9.5 million, respectively.Our net loss in 2011 and 2012 reflected non-cash share-based compensation expenses in an aggregate amount of US$73.9 million and US$7.6 million,respectively. We recorded net profit of US$6.3 million in the fourth quarter of 2012, the first time we achieved profitability after tax. Our business and operating results are affected by general factors affecting the online retail market in China, including China’s overall economicgrowth, the increase in per capita disposable income, the growth in consumer spending and retail industry and the expansion of internet penetration.Unfavorable changes in any of these general factors could affect the demand for products we sell and could materially and adversely affect our results ofoperations. 53Table of Contents Our results of operations are also affected by the regulations and industry policies related to the online retail market. Although we have generallybenefited from the Chinese government’s policies to encourage economic growth, we are also affected by the complexity, uncertainties and changes in the PRCregulation of the internet industry. Due to PRC legal restrictions on foreign equity ownership of and investment in the online retail sector in China, we rely oncontractual arrangements with our consolidated affiliated entity, Vipshop Information, and its shareholders to conduct most of our business in China. We facerisks associated with our control over our consolidated affiliated entity, as our control is based upon contractual arrangements rather than equity ownership.For a description of these contractual arrangements, see “Item 4.C. Information on the Company—Organizational Structure.” For a detailed description of theregulatory environment that necessitates the adoption of our corporate structure, see “Item 4.B. Information on the Company—Business Overview—Regulation.” For a detailed description of the risks associated with our corporate structure, see “Item 3.D. Key Information—Risk Factors—Risks Relatingto Our Corporate Structure and Restrictions on Our Industry.” The major factors affecting our results of operations and financial condition are discussed below. Net Revenues We derive revenues from the sale of products offered on our website. Generally, we offer our customers an unconditional right of returning productspurchased for a period of seven days upon receipt of products, and the associated revenues are recognized when the return period expires. Our net revenues arerecorded net of value added tax and related surcharges. The following table sets forth the key factors that directly affect our net revenues for the periods indicated: For the year endedDecember 31,201020112012Active customers (in thousands)2761,4914,110Average net revenues per active customer (US$)118152168Total orders (in thousands)9277,26921,919Average orders per active customer3.34.95.3 Cost of Goods Sold Our cost of goods sold consists of cost of merchandise sold and inventory write-downs. We procure inventory from our brand partners and ourinventory is recorded at the lower of cost or estimated marketable value. Cost of inventory is determined using the identified cost of the specific item sold. Operating Expenses Our operating expenses consist of (a) fulfillment expenses, (b) marketing expenses, (c) technology and content expenses and (d) general andadministrative expenses. The following table sets forth the components of our operating expenses both in absolute amount and as a percentage of total netrevenues for the periods indicated: For the year ended December 31,201020112012US$%US$%US$%(in US$, except percentages)Fulfillment expenses5,809,11817.845,478,32720.096,523,44413.9Marketing expenses2,438,0667.515,253,3256.732,272,6294.7Technology and content expenses562,1201.75,516,3612.414,644,1132.1General and administrative expenses2,843,5838.784,575,53937.325,541,8123.7Total operating expenses11,652,88735.7150,823,55266.4168,981,99824.4 Fulfillment expenses. Fulfillment expenses primarily consist of shipping and handling expenses, packaging expenses and logistics center rentalexpenses, as well as compensation and benefits of our logistics staff. Our shipping and handling expenses amounted to US$4.3 million, US$29.4 million andUS$53.9 million in 2010, 2011 and 2012, respectively. Historically, we primarily relied on our regional logistics center in Guangdong Province in SouthernChina for our fulfillment services. In September, November and December 2011, we started operating our new logistics centers in Jiangsu Province in EasternChina, Sichuan Province in Western China and Beijing in Northern China, respectively, to enhance our fulfillment capacity. Throughout 2012, we were ableto fully utilize the regional logistics centers and warehouses. By utilizing these regional logistics centers and warehouses, we were able to rely more on qualityregional and local couriers, which generally have lower average delivery charges than national delivery companies. This shift to regional delivery companiesreduced our shipping and handling expense per order and partially offset the increase in fulfillment expenses. We expect to continue to invest in our logisticsnetwork and warehousing capacity to support our long-term growth. We expect our fulfillment expenses to continue to increase in absolute amount as a result ofour continued business growth and continue to constitute one of the largest components of our operating expenses. 54Table of Contents Marketing expenses. Marketing expenses primarily represent advertising expenses incurred in connection with our brand promotional activities, aswell as compensation and benefits of our marketing staff. Historically, we have benefited from viral marketing resulting from word-of-mouth referrals fromour customers who often expressed their excitement on social media platforms regarding their purchases on our website. As we enhance our brand awarenessby engaging in additional brand promotional activities, we expect our marketing expenses to increase in the foreseeable future. Technology and content expenses. Technology and content expenses primarily consist of the compensation and benefits of our IT staff,telecommunications expenses, and expenses incurred in creating content for our sales events on our websites, including model fees and professionalphotography expenses. As we continue to expand our IT capabilities to support our anticipated growth, we expect our technology and content expenses tocontinue to increase in the foreseeable future. General and administrative expenses. General and administrative expenses primarily consist of compensation and benefits of our headquarters andadministrative staff, rental expenses, costs for professional services and other administrative and overhead expenses. As our business further grows and wecontinue to incur increased costs related to our ongoing compliance and reporting obligations under U.S. securities laws as a public company, we expect ourgeneral and administrative expenses to continue to increase in the foreseeable future. Seasonality Our results of operations are subject to seasonal fluctuations. For example, our revenues are relatively lower during the holidays in China,particularly during the Chinese New Year period which occurs in the first quarter of the year, when customers tend to do less shopping, both online andoffline. Furthermore, sales in the retail industry are typically significantly higher in the fourth quarter of the year than in the preceding three quarters. Thisseasonality of our business, however, was not apparent historically as each quarter had greater revenues than the prior quarter due to the rapid growth in salesthat we experienced in recent years. Taxation Cayman Islands We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax in theCayman Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the Cayman Islands. Hong Kong Our subsidiary incorporated in Hong Kong is subject to the uniform tax rate of 16.5%. Under the Hong Kong tax laws, it is exempted from the HongKong income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on the remittance of dividends. No provision for Hong Kongtax has been made in our consolidated financial statements, as our Hong Kong subsidiary had not generated any assessable income for the years endedDecember 31, 2010, 2011 and 2012. PRC Our PRC subsidiaries and the consolidated affiliated entity are companies incorporated under PRC law and, as such, are subject to PRC enterpriseincome tax on their taxable income in accordance with the relevant PRC income tax laws. Under the PRC EIT Law and its implementation rules, both of whichbecame effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domesticenterprises, unless they qualify for certain exceptions. Our subsidiaries and the consolidated affiliated entity in the PRC are all subject to the tax rate of 25%for the periods presented, except for Vipshop Jianyang that enjoyed the following preferential tax treatment. Vipshop Jianyang was classified as a domestically-owned enterprise in the western regions that is in an industry sector encouraged by the PRC government. Vipshop Jianyang obtained final approval from thelocal tax bureau to enjoy a preferential enterprise income tax rate of 15% for the period from February 22, 2012 to December 31, 2020. The term “domestically-owned enterprise in an industry sector encouraged by the PRC government” as used herein refers to any enterprise with its primary business falling into thescopes of the encouraged industries stipulated in the existing related policies, including Industrial Restructuring Guidance Catalogue (2011), IndustrialRestructuring Guidance Catalogue (2005), Catalogue for the Guidance of Foreign Investment Industries (Revised in 2007), and Catalogues of Foreign-investedAdvantage Industries in Central-Western Areas (2008 Revision), and the annual primary business revenue of which accounts for more than 70% of the totalenterprise revenue. 55Table of Contents We evaluate the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technicalmerits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2010, 2011 and 2012, we did not have any unrecognizedtax benefits. We do not anticipate any significant increase to our liability for unrecognized tax benefit within the next 12 months. We will classify interest andpenalties related to income tax matters, if any, in income tax expense. Under the PRC Enterprise Income Tax Law and its implementation rules, dividends from Vipshop China paid out of profits generated afterJanuary 1, 2008, are subject to a withholding tax of 10%, unless there is a tax treaty with China that provides for a different withholding arrangement.Distributions of profits generated by Vipshop China before January 1, 2008 are exempt from PRC withholding tax. Under the PRC Enterprise Income Tax Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC isconsidered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define theterm “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and businessoperations, personnel, accounting, properties, etc. of an enterprise. The SAT issued Circular 82 on April 22, 2009. Circular 82 provides certain specificcriteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. In addition, theSAT issued a bulletin on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of Circular 82. This bulletin clarifiesmatters including resident status determination, post-determination administration and competent tax authorities. Although both Circular 82 and the bulletinonly apply to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, the determining criteria set forth in Circular 82 andthe bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status ofoffshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organizedoutside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. See “Item 3.D. KeyInformation—Risk Factors—Risks Relating to Doing Business in China—It is unclear whether we will be considered a PRC `resident enterprise’ under thePRC Enterprise Income Tax Law and, depending on the determination of our PRC `resident enterprise’ status, our global income may be subject to the 25%PRC enterprise income tax, which could have a material adverse effect on our results of operations.” However, even if one or more of our legal entities organizedoutside of the PRC were characterized as PRC resident enterprises, we do not expect any material change in our net current tax payable balance and the netdeferred tax balance as none of these entities had any profit during the periods presented in the consolidated financial statements included elsewhere in thisannual report. The amount of tax loss carry forwards of our PRC subsidiaries and consolidated affiliated entity was US$4.3 million, US$25.8 million andUS$7.7 million as of December 31, 2010, 2011 and 2012, respectively. We have provided a valuation allowance for the full amount of the deferred tax assetsrelating to the future benefit of net operating loss carry forwards of our PRC subsidiaries and consolidated affiliated entity, as our management is not able toconclude that the future realization of such net operating loss carry forwards is more likely than not. Critical Accounting Policies We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affectour reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and reportedamounts of revenue and expenses during the reporting periods. We continually evaluate these estimates and assumptions based on the most recently availableinformation, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimatesis an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. 56Table of Contents An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highlyuncertain at the time such estimate is made and if different accounting estimates that reasonably could have been used, or changes in the accounting estimatesthat are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following accounting policies involve ahigher degree of judgment and complexity in their application and require us to make significant accounting estimates. Significant accounting estimatesreflected in our financial statements include inventory write-down, revenue recognition cut off adjustments, valuation allowance for deferred tax assets,valuation of ordinary shares and preferred shares when the preferred shares were issued, valuation of stock options. Changes in facts and circumstances mayresult in revised estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with ourconsolidated financial statements and other disclosures included in this annual report. Revenue recognition We recognize revenue when persuasive evidence of an arrangement exists, products are delivered, the price to the buyer is fixed or determinable andcollectability is reasonably assured. We utilize delivery service providers to deliver goods to our customers directly from our own warehouses. We estimate anddefer revenue and the related product costs that are in-transit to the customer, which generally takes about three days. The three-days estimate was determinedbased on the average delivery days for sales made during the last month of the reporting period, derived from customer locations and delivery reports. A one-day change in the estimated good in-transit period would result in an increase or decrease of US$4.6 million to our net revenues in 2012. We offer our customers an unconditional right of return for a period of seven days upon receipt of products. We defer revenue until the return periodexpires as we do not currently have sufficient historical sales information to reasonably estimate the amount of expected returns. Revenue was recorded on a gross basis, net of surcharges and value added tax of 17% of gross sales. Surcharges are sales related taxes representingthe city maintenance and construction tax and education surtax. We have evaluated whether it is appropriate to record the gross amount of product sales andrelated costs or net amount earned as revenue. We recorded revenue on a gross basis because we have the following indicators for gross reporting: we are theprimary obligor of the sales arrangements; we are subject to inventory risks of physical loss; we have latitude in establishing prices and discretion in selectingsuppliers; and we assume credit risks on receivables from customers. We retain some general inventory risks despite our arrangements to return goods to somevendors within limited time periods. We generally have the right to return unsold items within a period after the end of a sales event. We typically pay for thepurchase order in installments with the last installment paid upon full settlement of the unsold items or returned products we receive from customers. For someproducts, such as certain sporting goods, which we do not have the right to return the unsold products to the brand partners, we have been able to utilize ourstrong marketing expertise regarding customer preferences to achieve quick inventory turnover. On an overall basis, most of these above indicators supportgross reporting. Discount coupons and membership reward program We voluntarily provide discount coupons through certain cooperative websites or through public distributions during our marketing activities. Thesecoupons are not related to prior purchases, and can only be utilized in conjunction with subsequent purchases on our platforms. These discount coupons arerecorded as reduction of revenues at the time of use. We have established a membership reward program wherein our customers earn one point for each Renminbi spent on our platforms. Existingmembers may also receive extra reward points when customers referred by them make their first purchase. Membership reward points can be either exchangedinto coupons to be used in connection with subsequent purchases, or exchanged into free gifts. The expiry dates of these reward points vary based on differentindividual promotional programs, while the coupons expire three months after redemption. We accrue liabilities for the estimated value of the points earned andexpected to be redeemed, which are based on all outstanding reward points related to prior purchases at the end of each reporting period, as we do not currentlyhave sufficient historical data to reasonably estimate the usage rate of these reward points. These liabilities reflect our management’s best estimate of the cost offuture redemptions. As of December 31, 2011 and 2012, we recorded deferred revenue related to reward points earned from prior purchases of US$2.6 millionand US$10.5 million, respectively. 57Table of Contents We do not charge any membership fees to our registered members. New members who register on our platforms or existing members who introducenew members to us are granted free membership reward points, which can be used to redeem coupons for future purchases. These reward points are not relatedto prior purchases and are recorded as reduction of revenues at the time of use. Other revenues We conduct product promotional activities for certain brands on our website. These revenues are recognized on a straight-line basis over the serviceperiods, net of business tax of approximately 5% of service revenues or 6% value-added tax, or VAT, in certain pilot locations as a result of the pilot VATreform program. Cost of goods sold Our cost of goods sold primarily consists of the cost of merchandise sold and inventory write-downs. Our cost of goods sold does not includeshipping and handling expenses, payroll, bonus and benefits of our logistic staff or logistics center rental expenses. Our cost of goods sold may not thereforebe comparable to other companies which include such expenses in their cost of goods sold. We recorded US$1.7 million and US$12.2 million in inventory write-downs in 2011 and 2012, respectively. Such write-downs primarily reflectedthe estimated market value of damaged or obsolete inventory. The increase in write-downs in 2012 is in line with the significant increase in our inventory andwas also due to the more comprehensive policy we established in 2012 in assessing inventory write-downs, which is made possible as our business grow andwe acquire more experience and historical data on inventory management. Inventories Inventory is stated at the lower of cost or market. Cost of inventory is determined using the identified cost of the specific item sold. We takeownership, risks and rewards of the products purchased from brand partners but have the right to return unsold products to certain brand partners.Adjustments are recorded to write down the cost of inventory to the estimated market value for slow-moving merchandise and damaged goods. The amount ofwrite down is also dependent upon factors such as whether the goods are returnable to vendors, inventory aging, historical and forecasted consumer demand,and promotional environment. Write-downs are recorded in cost of goods sold. Share-Based Compensation Share-based payments made to employees, including employee stock options, ordinary shares transferred to employees with no consideration, andrestricted shares issued to employees for which our company has a repurchase option, are recognized as compensation expenses over the requisite serviceperiods. We measure the cost of employee services received in exchange for share-based compensation at the grant date fair value of the awards. We have electedto recognize compensation expense on a straight-line basis over the requisite service period for the entire award with graded vesting provided that the amount ofcompensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. The estimate offorfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-basedcompensation expense to be recognized in future periods. 2011 stock incentive plan In March 2011, we adopted the 2011 Plan, which authorizes us to issue up to an aggregate of 7,350,000 ordinary shares of our company to ouremployees, directors, officers and consultants. 58Table of Contents 2012 share incentive plan In March 2012, we adopted our 2012 Plan, under which we are authorized to issue up to an aggregate of 9,000,000 ordinary shares of our companyto our employees, directors, officers and consultants. As of the date of this annual report, we have granted options to purchase 231,658 ordinary shares of ourcompany and 1,302,500 restricted shares. Founders’ unvested shares Mr. Eric Ya Shen, our chairman and chief executive officer and Mr. Arthur Xiaobo Hong, the vice chairman of our board of directors, who wecollectively refer to as our founders, entered into a share restricted agreement with the series A preferred shares investors and us on February 21, 2011. Thefounders’ unvested ordinary shares under the share restriction agreement were measured at the grant date fair value and recognized as compensation expenseover the vesting periods. Of the shares held by the founders, 40% vested immediately, with the remaining shares to be vested in 36 equal and continuousmonthly installments for each month starting from February 21, 2011, provided that the founders remain full-time employees of our company at the end ofsuch month. Our company has the option to repurchase the ordinary shares held by our founders in the event a founder ceases to be a full-time employee ofour company for any reason. We have an irrevocable and exclusive option to repurchase all the unvested shares held by our founders at par value, and all ofthe shares (including vested shares) held by the founders at fair market value. On April 11, 2011, our existing shareholders, our company and the series Bpreferred shares investors entered into an amended and restated share restriction agreement which superseded and replaced in its entirety the original agreementdated February 21, 2011. The amended and restated agreement included the Series B preferred shareholders as additional parties to the agreement, but did notchange any of the significant terms of the original share restriction agreement. On December 8, 2011, our company, the ordinary shareholders, and holders ofseries A and series B preferred shares entered into an agreement to terminate the amended and restated share restriction agreement, which in substanceaccelerated the vesting of the founders’ unvested ordinary shares to December 8, 2011. Therefore, for the year ended December 31, 2011, we recorded share-based compensation expense of US$63.9 million in connection with the unvested shares of the founders. Ordinary shares transferred to the vice chairman of our board of directors On June 15, 2011, Elegant Motion Holdings Limited, a company wholly owned by the Mr. Eric Ya Shen, transferred 1,521,007 ordinary shares toHigh Vivacity Holdings Limited, a company wholly owned by Mr. Arthur Xiaobo Hong, an employee and vice chairman of our board of directors. Thetransfer of shares was intended to compensate Mr. Hong for his services as an employee of our company. Mr. Shen determined the number of ordinary sharesand executed the share transfer on June 10, 2011. We considered June 10, 2011 as the grant date of the share award. Accordingly, the transaction wasrecognized as share-based compensation for the past services of Mr. Hong on the grant date. We recognized share-based compensation of US$6.2 million onJune 15, 2011, based on the fair value of our ordinary shares of US$4.08 per share on that date, multiplied by 1,521,007 ordinary shares transferred. The table below sets forth information concerning options, restricted shares and ordinary shares granted to our executives, other employees and aconsultant as of December 31, 2012: Grant DateNumber ofordinary sharesunderlying optionsgrants / number ofordinary shares grantedOption exerciseprice per shareFair value ofoptions atdate of grantFair value ofordinary sharesType of valuationIntrinsicValueFebruary 21, 201118,632,250——3.43RetrospectiveN/AMarch 18, 20111,470,0000.502.953.40Retrospective12.20183,7500.502.963.40Retrospective12.20735,0000.502.963.40Retrospective12.20735,0000.502.943.40Retrospective12.20367,5000.502.963.40Retrospective12.20March 28, 2011945,0000.502.993.44Retrospective12.20June 15, 20111,521,007——4.08RetrospectiveN/AJuly 10, 201150,0000.503.864.31Contemporaneous12.20August 30, 2011819,6382.523.324.78Contemporaneous10.18November 30, 2011551,2502.524.616.36Contemporaneous10.18November 30, 20111,310,0002.504.436.36Contemporaneous10.20February 1, 2012204,9102.523.604.70Contemporaneous10.18April 16, 2012452,0002.501.242.51Contemporaneous10.20April 16, 2012101,1382.501.452.51Contemporaneous10.20June 1, 2012367,500——2.76ContemporaneousN/ASeptember 30, 2012340.000——3.75ContemporaneousN/AOctober 1, 201234,000——3.70ContemporaneousN/A 59(1)(2)(3)(4)(5)(6)(6)(6)Table of Contents (1) We did not have to prepare any financial statements in conformity with U.S. GAAP until we decided to pursue an initial public offering in the U.S. in thethird quarter of 2011. In the process of preparing U.S. GAAP financial statements for our initial public offering, we significantly formalized and refinedour projections. We believe that these refined projections are more reliable than those previously used. Consequently, our valuations in determining the fairvalue of our ordinary shares before the availability of the revised financial projections, including as of February 21, 2011, March 18, 2011, March 28,2011 and June 15, 2011, have all been prepared on a retrospective basis, while the valuations in determining the fair value of our ordinary shares as ofJuly 10, 2011, August 30, 2011 and November 30, 2011, February 1, 2012 and April 16, 2012 have been prepared on a contemporaneous basis. (2) Intrinsic value is determined based on the difference between the public offering price and the exercise price of options. (3) The 18,632,250 shares were unvested restricted shares held by our founders as of February 21, 2011. (4) The 204,910 shares options were issued to our third party consultant. We measure the equity instruments at their then-current fair values at each of thefinancial reporting dates, and attributes the changes in those fair values over the future services period until the measurement date has been established. (5) The 101,138 shares were issued to two of our independent directors. (6) During 2012, a total of 741,500 non-vested shares were granted to an executive officer and employees under the 2012 stock incentive plan. The fairvalues of non-vested shares are measured at the fair value of our ordinary shares on the respective grant-dates. For the February 21, 2011 grants of restricted ordinary shares to our founders, we have calculated the ordinary share value to be US$3.43 per share.The fair value of the shares was determined with the assistance of a third-party valuation firm. To estimate the fair value of the ordinary shares, we firstdetermined our enterprise value by means of a discounted cash flow analysis using the retrospective approach. The cash flow derived by managementconsidered the nature of our business, our future business plan, specific business and financial risks, the stage of development of our operations, andeconomic and competitive elements affecting our business, industry and market. We also used other general assumptions, including the following: no majorchanges in the existing political, legal, fiscal and economic conditions in China; no major changes in the current taxation laws in the jurisdictions in which weoperate; our ability to retain competent management, key personnel and technical staff to support our ongoing operations; and no significant deviations inindustry trends and market conditions from our current economic forecasts. The cash flow is discounted using the weighted average cost of capital of21.50%, which was benchmarked with discount rates of comparable listed companies. In addition, a lack of marketability discount of 14% was applied toarrive at the estimated enterprise value. The lack of marketability discount takes into consideration the plans for and status of our initial public offering inMarch 2012. For the March 18, 2011, March 28, 2011, July 10, 2011 and August 30, 2011, November 30, 2011, February 1, 2012 and April 16, 2012 stockoptions grants, we have assessed the fair value of our options using the binomial option pricing model, which requires the input of highly subjectiveassumptions, including the options’ expected exercise multiples, expected volatility, expected dividend yields and risk-free interest rates, and the fair value ofthe underlying ordinary shares on those dates. We have attributed the ordinary shares underlying the options a fair value of US$3.40 and US$3.44 as of March 18, 2011 and March 28, 2011,respectively, determined based on a retrospective valuation using the discounted cash flow method prepared with the assistance of the appraiser. For theordinary shares underlying the options, we have attributed a fair value of US$4.78 and US$6.36 as of August 30, 2011 and November 30, 2011respectively, determined based on a contemporaneous valuation using the discounted cash flow method, also prepared with the assistance of the appraiser. Themethodology for the valuation of ordinary shares on March 18, 2011, March 28, 2011, August 30, 2011 and November 30, 2011 was similar to that used forthe valuation of ordinary shares on February 21, 2011 as described above. The cash flow is discounted using the weighted average cost of capital of 21.5%,21.5%, 20.0% and 19.5% on March 18, 2011, March 28, 2011, August 30, 2011, and November 30, 2011, respectively, which was benchmarked withdiscount rates of comparable listed companies. In addition, a lack of marketability discount of 13%, 12%, 8%, and 6% was applied respectively to arrive atthe estimated enterprise value. 60Table of Contents We have attributed to the ordinary shares underlying the options a fair value of US$4.31 as of July 10, 2011, determined based on the linearrelationship between the fair value of the ordinary shares as of June 15, 2011 and the fair value of the ordinary shares as of August 30, 2011. We did not usethe discounted cash flow method to determine the fair value of the ordinary shares as of July 10, 2011 because of: · the substantially smaller number of options granted on July 10, 2011 as compared with those granted on March 18, 2011, March 28, 2011 andAugust 30, 2011; and · our continuing business development according to our business plan between June 15, 2011 and August 30, 2011. In applying the binomial option pricing model on March 18, 2011, we also made the following assumptions: an expected dividend yield of 0%; arisk-free interest rate of 3.725%; an expected volatility of 56.68%; an option life of 10 years; and an expected exercise multiple of 2.8 times. In applying the binomial option pricing model on March 28, 2011, we also made the following assumptions: an expected dividend yield of 0%; arisk-free interest rate of 3.778%; an expected volatility of 56.53%; an option life of 10 years; and an expected exercise multiple of 2.2 times. In applying the binomial option pricing model on July 10, 2011, we also made the following assumptions: an expected dividend yield of 0%; a risk-free interest rate of 4.127%; and expected volatility of 55.26%; an option life of 10 years; and an expected exercise multiple of 2.2 times. In applying the binomial option pricing model on August 30, 2011, we also made the following assumptions: an expected dividend yield of 0%; arisk-free interest rate of 3.116%; and expected volatility of 54.99%; an option life of 10 years; and an expected exercise multiple of 2.8 times. In applying the binomial option pricing model on November 30, 2011, we also made the following assumptions: an expected dividend yield of 0%, arisk-free interest rate of 2.853%, an expected volatility of 54.00%, an option life of 10 years, and an expected exercise multiple of 2.2 times for 1,310,000options granted to employees and 2.8 times for 551,250 options granted to executive officers. In applying the binomial option pricing model on April 16, 2012, we also made the following assumptions: an expected dividend yield of 0%, a risk-free interest rate of 3.002%, an expected volatility of 53.12%, an option life of 5.13 years for 452,000 options granted to employees and 7.3 years for the101,138 options granted to the two independent directors, an expected exercise multiple of 2.2 times for 452,000 options granted to employees and 2.8 times the101,138 options granted to the two directors. In applying the binomial option pricing model on December 31, 2012 for the re-measurement of the 204,910 options granted to a consultant inFebruary 2012, we also made the following assumptions: an expected dividend yield of 0%, a risk-free interest rate of 2.5362%, an expected volatility of51.33%, an option life of 4.5 years. Exercise multiple is not considered for options granted to non-employees. For the purpose of determining the estimated fair value of our share options, we believe that the expected volatility, the expected exercise multiples andthe estimated share price of our ordinary shares are the most sensitive assumptions, since we were a privately-held company at the date we granted all ouroptions in 2011 and in February 2012. Changes in these assumptions could significantly impact the estimated fair values of the options calculated by thebinomial option pricing model, and change the share-based compensation expense materially in the future from that recorded in current period. Expectedvolatility was estimated based upon the average stock price volatility of comparable listed companies over a period comparable to the expected term of theoptions. We believe the average share price volatility of the selected comparable companies is a reasonable benchmark in estimating the expected volatility ofour ordinary shares. The expected exercise multiple is the average ratio of the stock price to the exercise price of when employees would decide to voluntarilyexercise their vested options. As we do not have sufficient information on past employee exercise history, we estimated the exercise multiples based on researchconducted by Huddart and Lang (1995). For the June 15, 2011 grants of ordinary shares, we have calculated the fair value of each ordinary share to be US$4.08, determined based on aretrospective valuation using the discounted cash flow method prepared with the assistance of the appraiser. The methodology for the valuation of ordinaryshares on June 15, 2011 was similar to the valuation of ordinary shares on February 21, 2011, as described above. The cash flow was discounted using theweighted average cost of capital of 21.00%, which was benchmarked with discount rates of comparable listed companies. In addition, a lack of marketabilitydiscount of 10% was applied to arrive at the estimated enterprise value. 61Table of Contents Income taxes Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which weoperate. We account for income taxes using the liability method. Under this method, deferred income taxes are recognized for tax consequences in future yearsof differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry-forwards.Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income. Deferred taxassets are reduced by a valuation allowance when, based upon the weight of available evidence, it is more likely than not that some portion or all of thedeferred tax assets will not be realized. As of December 31, 2012, we have provided a valuation allowance for the full amount of the deferred tax assets relating to the future benefit of netoperating loss carried forward of certain subsidiaries and the consolidated affiliated entity as we are not able to conclude that the future realization of those netoperating loss carry forwards is more likely than not. Recent Accounting Pronouncements In December 2011, the FASB issued an authoritative pronouncement on disclosures about offsetting assets and liabilities. Under thispronouncement, entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in thestatement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would includederivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. Anentity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annualperiods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect theadoption of this pronouncement to have a significant impact on its consolidated financial condition or results from operations. Internal Control Over Financial Reporting Prior to our initial public offering in March 2012, we were a private company with limited accounting personnel and other resources with which toaddress our internal controls and procedures. During the audits of our consolidated financial statements as of December 31, 2009 and 2010 and 2011 and forthe years ended December 31, 2009, 2010 and 2011 in connection with the initial public offering of our ADSs in March 2012, we identified one “materialweakness” in our internal control over financial reporting, as defined in the standards established by PCAOB, and other control deficiencies. A “materialweakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a materialmisstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The above material weakness related to the lack of comprehensive U.S. GAAP accounting policies, financial reporting and internal controlprocedures. In particular, we did not have a comprehensive accounting policies manual and financial reporting and closing procedure manual for our financedepartment, and we did not have sufficient personnel to build and maintain formalized accounting policies and financial policies and financial reportingprocedures in accordance with U.S. GAAP. Throughout 2012, we have implemented a number of measures to address the material weakness and other control deficiencies that have beenidentified, including, among other things, establishment of a separate internal audit department; and successful implementation of resource planning andwarehouse management systems as well as formalized stock-taking systems; development of an accounting manual including formal procedures and policiesfor U.S. GAAP closing and reporting; engagement of a reputable consulting firm to help us review and improve all procedures and policies for the purposes ofcompliance with applicable U.S. securities regulations and accounting principles and rules. We have also hired officers and personnel with finance,accounting, SEC reporting and U.S. GAAP experience. For example, we hired for our U.S. GAAP department two more staff members who are licensedCPAs. During 2012, we determined that the above-mentioned material weakness has been remediated. 62Table of Contents During 2012, we identified one “significant deficiency” in our internal control over financial reporting as defined in the standards established byPCAOB, and other control deficiencies. The significant deficiency relates to the deficient calculation mechanism of our e-Wallet system. We plan to commitsufficient IT resources to re-write and upgrade the e-Wallet program and establish internal control procedures over the system discrepancies. We also plan toimplement a number of measures to address other control deficiencies that have been identified. However, we cannot assure you that we will remediate our control deficiencies in a timely manner. See “Item 3.D. Key Information—RiskFactorsRisks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls or fail to remediate thematerial weakness in our internal control over financial reporting that has been identified, we may be unable to accurately report our results of operations orprevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.” Results of Operations The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and aspercentages of our net revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere inthis annual report. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period. For the year ended December 31,201020112012US$%US$%US$%(in US$, except percentages)Net revenues32,582,115100.0227,142,876100.0692,112,964100.0Cost of goods sold (29,374,315)(90.2)(183,801,334)(80.9)(537,637,860)(77.7)Gross profit3,207,8009.843,341,54219.1154,475,10422.3Operating expenses:Fulfillment expenses (5,809,118)(17.8)(45,478,327)(20.0)(96,523,444)(13.9)Marketing expenses(2,438,066)(7.5)(15,253,325)(6.7)(32,272,629)(4.7)Technology and content expenses(562,120)(1.7)(5,516,361)(2.4)(14,644,113)(2.1)General and administrative expenses(2,843,583)(8.7)(84,575,539)(37.3)(25,541,812)(3.7)Total operating expenses(11,652,887)(35.7)(150,823,552)(66.4)(168,981,998)(24.4)Other income78,6750.2564,1820.22,563,3210.4Loss from operations(8,366,412)(25.7)(106,917,828)(47.1)(11,943,573)(1.7)Interest expense——(494,509)(0.2)(222,868)(0.0)Interest income5640.0122,4370.13,558,0130.5Exchange gain (loss)——18,3750.0(157,473)(0.0)Loss before income tax(8,365,848)(25.7)(107,271,525)(47.2)(8,765,901)(1.3)Income tax expense————(706,173)(0.1)Net loss(8,365,848)(25.7)(107,271,525)(47.2)(9,472,074)(1.4)Deemed dividend on issuance of Series A PreferredShares——(49,214,977)(21.7)——Net loss attributable to ordinary shareholders(8,365,848)(25.7)(156,486,502)(68.9)(9,472,074)(1.4) (1) Excluding shipping and handling expenses, and including inventory write down which amounted to US$2.6 million, US$1.7 million andUS$12.2 million in the years ended December 31, 2010, 2011 and 2012, respectively. (2) Including share-based compensation expenses as set forth below: For the year endedDecember 31,201020112012(in US$)Allocation of share-based compensation expenses*Fulfillment expenses—(297,095)(292,866)Marketing expenses—(184,404)(169,100)Technology and content expenses—(729,420)(897,133)General and administrative expenses—(72,716,983)(6,237,850)Total—(73,927,902)(7,596,949) * The share-based compensation expenses for 2011 included (a) US$63.9 million in share-based compensation expenses in connection with the unvestedshares of our co-founders; (b) US$6.2 million in shared-based compensation expenses in connection with a transfer of ordinary shares between our co-founders; and (c) US$3.8 million share-based compensation expenses in connection with share options granted to executive officers and employees. Inaddition, unrecognized share-based compensation expenses as of December 31, 2011 were US$19.8 million, which were related to the unvested shareoptions granted to our executive officers and employees. The unrecognized share-based compensation expenses were expected to be recognized over aweighted-average period of 3.06 years on a straight-line basis as of December 31, 2011. The share-based compensation expenses for 2012 included(1)(2)(3)US$7.6 million share-based compensation expenses in connection with share options and non-vested shares granted to our executive officers, independentdirectors, employees and a consultant. The unrecognized share-based compensation expenses related to share options and non-vested shares wereUS$14.5 million and US$2.1 million, and were expected to be recognized over a weighted-average period of 2.45 years and 3.62 years on a straight-linebasis as of December 31, 2012, respectively. See “—Critical Accounting Policies—Share-Based Compensation” for details. 63Table of Contents (3) Including shipping and handling expenses, which amounted to US$4.3 million, US$29.4 million and US$53.9 million in the years ended December 31,2010, 2011 and 2012, respectively. Comparison of the Years Ended December 31, 2011 and 2012 Net Revenues. Our total net revenues increased from US$227.1 million in 2011 to US$692.1 million in 2012, primarily attributable to theincrease in the number of active customers and total orders. The number of our active customers increased significantly from 1.5 million in 2011 to 4.1million in 2012. The number of our total orders increased from over 7.2 million in 2011 to 21.9 million in 2012, mainly due to the increase in both thenumber of active customers during the period and the number of average orders per active customer from 4.9 in 2011 to 5.3 in 2012. Consequently, ouraverage net revenues per active customer also increased from US$152 in 2011 to US$168 in 2012. The increases in the foregoing key factors were primarilydue to our further optimized product selection, the increase in the number of sales events, the increase in the number of SKUs available on our website as wellas the high-quality customer services we provide. We established three logistics centers and set up several regional subsites within our website during 2011, thefull utilization of which in 2012 allowed us to cater our product offerings to regional customer demographics and offer additional sales events and SKUs. 93.2% of the total orders we fulfilled in 2012 were placed by repeat customers, as compared to 91.9% in 2011. Cost of Goods Sold. Our cost of goods sold increased from US$183.8 million in 2011 to US$537.6 million in 2012, primarily attributable to thesignificant increase in products procured from our brand partners in line with our significantly higher sales volume. We recorded US$1.7 million and US$12.2 million in inventory write-downs in 2011 and 2012, respectively. Such write-downs primarily reflectedthe estimated market value of damaged or obsolete inventory. The increase in write-downs in 2012 is in line with the significant increase in our inventory andwas also due to the more comprehensive accounting policy we established in 2012 in assessing inventory write-downs, which is made possible as ourbusiness grows and we acquire more experience and historical data on inventory management. Gross Profit and Gross Margin. As a result of the foregoing, our gross profit increased from US$43.3 million in 2011 to US$154.5 million in2012. Our gross margin increased from 19.1% in 2011 to 22.3% in 2012, primarily due to increased economies of scale in sourcing merchandise from oursuppliers which in turn increased our bargaining power. 64Table of Contents Operating Expenses. Our operating expenses increased from US$150.8 million in 2011 to US$169.0 million in 2012, primarily due to thefollowing factors: · Fulfillment expenses. Our fulfillment expenses increased from US$45.5 million in 2011 to US$96.5 million in 2012. Shipping and handlingexpenses, the largest component of our fulfillment expenses during these periods, increased from US$29.4 million in 2011 to US$53.9 millionin 2012. These increases were primarily attributable to the significant increase in our sales volume and the number of orders fulfilled, higher staffcompensation and benefits and increase in rental expenses in connection with our expanded warehouse facilities. In 2012, we fulfilled over21.9 million customer orders, as compared to over 7.2 million customer orders in 2011. Our fulfillment expenses as a percentage of our total netrevenues decreased from 20.0% in 2011 to 13.9% in 2012, primarily due to our shift of strategy towards using regional and local deliveryservices and capacity expansion of regional warehouses. Throughout 2012, we were able to fully utilize the regional logistics centers andwarehouses in Guangdong Province, Jiangsu Province, Sichuan Province and Beijing. In addition, our regional logistics centers and warehousesenabled us to rely more on quality regional and local couriers, which generally have lower average delivery charges than national deliverycompanies. This shift to regional delivery companies reduced our shipping and handling expense per order and partially offset the increase infulfillment expenses. · Marketing expenses. Our marketing expenses increased from US$15.3 million in 2011 to US$32.3 million in 2012, primarily attributable toour increased marketing and brand promotion activities. However, our marketing expenses as a percentage of our total net revenues decreasedfrom 6.7% in 2011 to 4.7% in 2012 as our net revenues increased at a faster pace during the same period, which demonstrated our ability tocontrol marketing expenses and leverage word-of-mouth referrals. · Technology and content expenses. Our technology and content expenses increased from US$5.5 million in 2011 to US$14.6 million in 2012,primarily attributable to the headcount increase of our IT personnel in connection with our expansion of IT capacities and increased compensationand benefit. However, as a percentage of our total net revenues, our technology and content expenses decrease from 2.4% to 2.1% during the sameperiods as our net revenues increased at a faster pace during the applicable periods. · General and administrative expenses. Our general and administrative expenses decreased from US$84.6 million in 2011 to US$25.5 millionin 2012, and as a percentage of our total net revenues, decreased from 37.2% to 3.7% during the same periods. The significant decrease in ourgeneral and administrative expenses was primarily due to our cost-control efforts and reduced share-based compensation expenses from US$72.7million in 2011 to US$6.2 million in 2012. Other Income. Our other income amounted to US$2.6 million in 2012, as compared to US$0.6 million in 2011. Our other income in 2012 wasprimarily due to income derived from providing ancillary services to our suppliers, project-based government grants and tax rebates. Interest Expense. Our interest expense decreased from US$0.5 million in 2011 to US$0.2 million in 2012 primarily due to repayment of our bankloans. Interest Income. Our interest income increased from US$0.1 million in 2011 to US$3.6 million in 2012 primarily due to our increased cashbalance which we used for bank deposits and other investment activities. Exchange Gain/Loss. We had an exchange loss of US$157.5 thousand in 2012 as a result of loss incurred when converting our cash balancedenominated in U.S. dollars into Renminbi during our operations, which was primarily attributable to the appreciation of the Renminbi against the U.S. dollarin 2012. Net Loss. As a result of the foregoing, we recorded a net loss of US$9.5 million in 2012 as compared to a net loss of US$107.3 million in 2011. Comparison of the Years Ended December 31, 2010 and 2011 Net Revenues. Our total net revenues increased from US$32.6 million in 2010 to US$227.1 million in 2011, primarily attributable to the increasein the number of active customers and total orders. The number of our active customers increased significantly from 0.3 million in 2010 to 1.5 million in2011. The number of our total orders increased from over 0.9 million in 2010 to over 7.2 million in 2011, mainly due to the increase in both the number ofactive customers and the number of average orders per active customer during the period. The increases in the number of active customers and average ordersper active customer were primarily due to our further optimized product selection, the increase in our number of sales events, and the increase in the number ofSKUs available on our website. We added three logistics centers and set up several regional subsites within our website during 2011, which allowed us to caterour product offerings to regional customer demographics and offer additional sales events and SKUs. Our average net revenues per active customer increasedfrom US$118 in 2010 to US$152 in 2011, mainly attributable to the increase in average orders per active customer from 3.3 in 2010 to 4.9 in 2011. 91.9%of the total orders we fulfilled in 2011 were placed by repeat customers, as compared to 86.7% in 2010. Cost of Goods Sold. Our cost of goods sold increased from US$29.4 million in 2010 to US$183.8 million in 2011, primarily attributable to thesignificant increase in products procured from our brand partners in line with our significantly higher sales volume. We recorded US$2.6 million and US$1.7 million in inventory write-downs in 2010 and 2011, respectively. Such write-downs primarily reflectedthe estimated market value of damaged or obsolete inventory. 65Table of Contents Gross Profit and Gross Margin. As a result of the foregoing, our gross profit increased from US$3.2 million in 2010 to US$43.3 million in2011. Our gross margin increased from 9.8% in 2010 to 19.1% in 2011, primarily due to the growth in revenues and increased economies of scale in sourcingmerchandise from our suppliers which in turn increased our bargaining power. We recorded a lower amount of inventory write-downs in 2011, which alsocontributed to our gross margin increase during the period. Operating Expenses. Our operating expenses increased from US$11.7 million in 2010 to US$150.8 million in 2011 primarily due to oursignificant business expansion and the US$73.9 million share-based compensation expenses recorded in 2011. · Fulfillment expenses. Our fulfillment expenses increased from US$5.8 million in 2010 to US$45.5 million in 2011. Shipping and handlingexpenses, the largest component of our fulfillment expenses during these periods, increased from US$4.3 million in 2010 to US$29.4 million in2011. These increases were primarily attributable to the significant increase in our sales volume and the number of orders fulfilled, higher staffcompensation and benefits and increase in rental expenses in connection with our expanded warehouse facilities. In 2011, we fulfilled over 7.2million customer orders, as compared to over 0.9 million customer orders in 2010. Our fulfillment expenses as a percentage of our total netrevenues increased from 17.8% in 2010 to 20.0% in 2011, primarily due to a more geographically diverse customer base, improved packagingquality, and increased rentals and other expenses incurred associated with the additional logistics centers. Until September 2011, we relied on onelogistics center in Guangdong Province in Southern China to support our increasingly national customer base. As we expanded our salesnationwide in 2011, we added logistics centers in Jiangsu Province in Eastern China, Sichuan Province in Western China and Beijing inNorthern China. By utilizing these regional logistics centers, we were able to rely more on quality regional and local couriers, which generallyhave lower average delivery charges than national delivery companies. This shift to regional delivery companies reduced our shipping andhandling expense per order and partially offset the increase in fulfillment expenses caused by the factors discussed above. · Marketing expenses. Our marketing expenses increased from US$2.4 million in 2010 to US$15.3 million in 2011, primarily attributable to ourincreased marketing and brand promotion activities. However, our marketing expenses as a percentage of our total net revenues decreased from7.5% in 2010 to 6.7% in 2011 as our net revenues increased at a faster pace during the same period. · Technology and content expenses. Our technology and content expenses increased from US$0.6 million in 2010 to US$5.5 million in 2011,and as a percentage of our total net revenues, increased from 1.7% to 2.4% during the same periods. The increase in our technology and contentexpenses was primarily attributable to higher IT staff compensation and expenses incurred in creating and maintaining content for oursignificantly increased number of sales events, including professional photography expenses for the curation of products in sales events. · General and administrative expenses. Our general and administrative expenses increased from US$2.8 million in 2010 to US$84.6 million in2011, and as a percentage of our total net revenues, increased from 8.7% to 37.3% during the same periods. The significant increase in ourgeneral and administrative expenses was primarily due to an increase in share-based compensation expenses of US$72.7 million and increases inadministrative staff compensation and benefits mainly attributable to an increase in headcount and higher rental expenses. For details of ourshare-based compensation expenses, see “—Critical Accounting Policies—Share-Based Compensation.” Other Income. Our other income amounted to US$0.6 million in 2011, as compared to US$78.7 thousand in 2010. Our other income in 2011was primarily due to income derived from providing ancillary services to our suppliers and a project-based government grant. Interest Expense. Our interest expense increased from nil in 2010 to US$0.5 million in 2011 primarily due to an increase in our bank borrowing. Interest Income. Our interest income increased from US$564 in 2010 to US$0.1 million in 2011 primarily due to the increased amount of cashheld in our bank deposits and the interest earned on short-term investment products . Exchange Gain. Our exchange gain increased from nil in 2010 to US$18.4 thousand in 2011, primarily attributable to the appreciation of theRenminbi against the U.S. dollar on the cash balance denominated in Renminbi. 66Table of Contents Net Loss. As a result of the foregoing, we recorded a net loss of US$107.3 million in 2011 as compared to a net loss of US$8.4 million in 2010. B Liquidity and Capital Resources Prior to our initial public offering in March 2012, we financed our operations primarily through the issuance of preferred shares in privateplacements, unsecured and interest-free working capital loans provided by our shareholders and other related parties and bank loans and in 2011, from cashgenerated from operating activities. As of December 31, 2010, 2011 and 2012, we had US$1.1 million, US$45.0 million and US$124.5 million,respectively, in cash and cash equivalents. We had held-to-maturity securities with an aggregate outstanding amount of US$86.1 million as of December 31,2012. Our cash and cash equivalents primarily consist of cash on hand, short-term bank demand deposits and highly liquid investments with maturities ofless than three months. We believe that our current cash and cash equivalents, our anticipated cash flows from operations together with the net proceeds thatwe received from the follow-on public offering that was completed in March 2013 will be sufficient to meet our anticipated working capital requirements andcapital expenditures for the next 12 months. We may, however, need additional capital in the future to fund our continued operations. The following table sets forth a summary of our cash flows for the periods indicated: For the year ended December 31,201020112012(in US$)Net cash (used in) from operating activities(6,573,521)1,306,775111,569,205Net cash used in investing activities(1,522,333)(23,813,556)(83,216,464)Net cash provided by financing activities9,137,22166,785,74650,170,648Cash and cash equivalents at beginning of year287,7201,111,09144,954,778Cash and cash equivalents at end of year1,111,09144,954,778124,472,629 Operating Activities Net cash from operating activities amounted to US$111.6 million in 2012, which was primarily attributable to a net loss of US$9.5 million,adjusted for certain non-cash expenses consisting primarily of share-based compensation expenses of US$7.6 million and changes in operating assets andliabilities. The adjustment for changes in operating assets and liabilities primarily reflected a significant increase in inventories of US$86.4 million, anincrease in account receivable of US$2.9 million and an increase in other receivables of US$0.6 million as a result of our increased sales volume and scale ofoperations. These increases were partially offset by a significant increase in accounts payable of US$105.4 million, primarily attributable to the increasedprocurement of inventories in connection with our expanded business and our ability to maintain favorable payment terms with our brand partners, anincrease in advances from customers of US$40.6 million, primarily attributable to our significant sales growth. Net cash from operating activities amounted to US$1.3 million in 2011, which was primarily attributable to a net loss of US$107.3 million,adjusted for certain non-cash expenses consisting primarily of share-based compensation expenses of US$73.9 million and changes in operating assets andliabilities. The adjustment for changes in operating assets and liabilities primarily reflected a significant increase in inventories of US$64.0 million, anincrease in advances to suppliers of US$7.7 million and an increase in other receivables of $8.8 million as a result of our increased sales volume and scale ofoperations. These increases were partially offset by a significant increase in accounts payable of US$79.7 million, primarily attributable to the increasedprocurement of inventories in connection with our expanded business and our ability to maintain favorable payment terms with our brand partners, anincrease in advances from customers of US$13.1 million, primarily attributable to increased sales volume, and an increase in accrued expenses and othercurrent liabilities of US$23.0 million, primarily reflecting an increase in accrued shipping and handling expenses, accrued advertising expenses, accruedpayroll and social benefit provisions. The significant increases in inventories and accounts payable resulted from our significant sales growth and the relatedincrease in products procured from our brand partners in 2011. Net cash used in operating activities amounted to US$6.6 million in 2010, which was primarily attributable to a net loss of US$8.4 million,adjusted for an inventory write-down and changes in operating assets and liabilities. The inventory write-downs of US$2.6 million primarily reflected theestimated market value of damaged or obsolete inventory. In addition, in the process of our implementation of new IT systems, the relocation of our warehouseand the implementation of improved inventory count procedures, some of our inventory stock items were not properly recorded in the inventory ledger,resulting in a subsequent write-down of the discrepancies in 2010. The adjustment for changes in operating assets and liabilities primarily reflected an increasein inventory of US$8.5 million and an increase in advances to suppliers of US$4.7 million, both reflecting our significant increase in sales in 2010. Theseincreases were partially offset by an increase in accounts payable of US$7.2 million, reflecting our increase in the procurement of inventories to support ourbusiness growth; an increase in accrued expenses and other current liabilities of US$3.2 million, reflecting an increase in accrued shipping and handlingexpenses, other tax payable and accrued advertising expense; and an increase in advances from customers of US$2.1 million, reflecting our increased salesvolume in 2010. 67Table of Contents Investing Activities Net cash used in investing activities amounted to US$1.5 million, US$23.8 million and US$83.2 million in the years ended December 31, 2010,2011 and 2012, respectively. Our net cash used in investing activities in each period was attributable to capital expenditure relating to our leaseholdimprovements, as well as purchases of office and other operating equipment, motor vehicles and IT software. In addition, net cash used in investing activitiesin 2012 was also attributable to purchase of held-to-maturity security of US$101.3 million. Financing Activities Net cash provided by financing activities amounted to US$50.2 million in 2012, primarily attributable to net proceeds of US$62.7 million receivedfrom our initial public offering in March 2012. In addition, we repaid bank borrowing of US$12.7 million in 2012. Net cash provided by financing activities amounted to US$66.8 million in 2011, primarily attributable to the proceeds from the issuance of series Aand series B preferred shares in an aggregate amount of US$51.7 million, shareholders loans of US$1.5 million, the US$1.5 million proceeds from theissuance of ordinary shares and net proceeds from bank borrowings of US$12.7 million. Net cash provided by financing activities amounted to US$9.1 million in the years ended December 31, 2010, primarily reflecting unsecured andinterest free working capital loans provided by our related parties. Capital Expenditures Our capital expenditures amounted to US$1.5 million, US$9.6 million and US$12.4 million in the years ended December 31, 2010, 2011 and2012, respectively. In the past, our capital expenditures were principally used for leasehold improvements, as well as purchases of office and other operatingequipment, and IT software. Our future capital expenditures, which are expected to increase significantly in 2013 and 2014, will primarily be used to furtherexpand our fulfillment capabilities and enhance our website and IT systems. We plan to fund these capital expenditures through our existing cash balances, aswell as the proceeds of the follow-on public offering. Holding Company Structure Vipshop Holdings Limited is a holding company with no material operations of its own. We conduct our operations primarily through our whollyowned subsidiaries and our consolidated affiliated entity in China. As a result, our ability to pay dividends depends upon dividends paid by our whollyowned subsidiaries. If our wholly owned subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instrumentsgoverning their debt may restrict their ability to pay dividends to us. In addition, our wholly owned subsidiaries are permitted to pay dividends to us only outof their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our wholly ownedPRC subsidiaries and our consolidated affiliated entity is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserveuntil such reserve reaches 50% of its registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital andeliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the eventof liquidation. As of December 31, 2012, we set aside general reserve of US$0.3 million. 68Table of Contents C Research and Development, Patents and Licenses, etc. Research and Development We have implemented various website and management systems using a combination of our internally developed proprietary technologies andcommercially available licensed technologies. We focus our internal development efforts on mobile solutions, warehouse and transportation managementsystems and several service platforms such as merchant platform, order and payment processing platform, and data platform. We have adopted a service-oriented architecture supported by data processing technologies which consist of front-end and back-end modules withdifferent functions. Our network infrastructure is built upon self-owned servers located in data centers operated by major PRC internet data center providers.We have developed most of the key business modules through our internal IT department. We also license software from reputable third-party providers andwork closely with them to customize the software for our operations. We have implemented a number of measures to protect against failure and data loss. Wehave developed a disaster tolerant system for our key business modules which includes real-time data mirroring, daily off-line data back-up and redundancyand load balancing. Our technology and content expenses consist primarily of the compensation and benefits of our IT staff, telecommunications expenses, and expensesincurred in creating content for our sales events on our websites, including model fees and professional photography expenses. We incurred US$0.6 million,US$5.5 million and US$14.6 million in technology and content expenses in 2010, 2011 and 2012. Intellectual Property We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to oursuccess, and we rely on trademark, copyright and trade secret protection laws in the PRC and other jurisdictions, as well as confidentiality procedures andcontractual provisions with our employees, partners, service providers, suppliers and others to protect our proprietary rights. As of December 31, 2012, weowned 12 registered trademarks, copyrights to 17 software products developed by us relating to various aspects of our operations, and 34 registered domainnames, including vipshop.com, vipshop.com.cn, vipshop.cn and vipshop.net. D Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year2012 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused thedisclosed financial information to be not necessarily indicative of future operating results or financial conditions. E Off-Balance Sheet Arrangements We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not enteredinto any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financialstatements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity ormarket risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or creditsupport to us or engages in leasing, hedging or research and development services with us. F Tabular Disclosure of Contractual Obligations We lease office space and certain equipment under non-cancelable operating lease agreements that expire at various dates from March 2013 throughDecember 2020. These lease agreements provide for periodic rental increases based on both contractually agreed upon incremental rates and on the generalinflation rate as agreed upon by us and our lessors. In the years ended December 31, 2010, 2011 and 2012, we incurred rental expenses of US$0.5 million,US$3.2 million and US$7.5 million, respectively. Our purchase obligations as of December 31, 2010 amounted to US$1.2 million, representing ourcontracted purchase of products from our brand partners. Our purchase obligations as of December 31, 2011 amounted to US$29.9 million, representing ourcontracted purchase of products from our brand partners. Our purchase obligations as of December 31, 2012 amounted to US$1.1 million, representingproperty, equipment and software contract. 69Table of Contents The following table sets forth our minimum lease payments under all non-cancelable leases and purchase obligations as of December 31, 2012: Payment due by periodTotalLess than 1year1-3 years3-5 yearsMore than5 years(in US$)Operating lease obligations85,198,01713,581,68627,596,19323,296,70020,703,438Purchase obligations1,096,2511,096,251——— G Safe Harbor This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements ofhistorical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause ouractual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,”“intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely onour current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy andfinancial needs. These forward-looking statements include, but are not limited to, statements relating to: · our goals and strategies; · our future business development, results of operations and financial condition; · the expected growth of the online discount retail market in China; · our ability to attract customers and brand partners and further enhance our brand recognition; · our expectations regarding demand for and market acceptance of flash sales products and services; · competition in our industry; · fluctuations in general economic and business conditions in China; and · assumptions underlying or related to any of the foregoing. You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual futureresults may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate inan evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors anduncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements. This annual report also contains certain data and information, which we obtained from various government and private publications, including theFrost & Sullivan Report. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in thesepublications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later foundto be incorrect, actual results may differ from the projections based on these assumptions. You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual reportrelate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise. 70Table of Contents ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A Directors and Senior Management The following table sets forth information regarding our directors and executive officers as of the date of this annual report. Directors and Executive OfficersAgePosition/TitleEric Ya Shen41Chairman of the Board of Directors, Chief Executive OfficerArthur Xiaobo Hong40Vice Chairman of the Board of Directors, Chief Operating OfficerBin Wu39DirectorJacky Xu40DirectorFrank Lin48Independent DirectorXing Liu42Independent DirectorNanyan Zheng44Independent DirectorKathleen Chien43Independent DirectorChun Liu45Independent DirectorDonghao Yang41Chief Financial OfficerDaniel Kao47Chief Technology OfficerAlex Jing Jiang43Senior Vice PresidentMaggie Mei Chuan Hung45Senior Vice PresidentYizhi Tang39Senior Vice PresidentXianfeng Cai43Vice President, General Manager of Shanghai BranchXiaohui Ma40Vice President Mr. Eric Ya Shen is our co-founder and has served as the chairman of our board of directors and chief executive officer since our inception inAugust 2008. He has over 18 years of experience in the distribution of consumer electronic products in domestic and overseas markets. Since 2001, Mr. Shenhas served as the chairman of the board of directors of Guangzhou NEM Import and Export Co., Ltd., a company primarily engaging in the sales ofconsumer electronic and telecommunication products. Mr. Shen received an EMBA degree from Cheung Kong Graduate School of Business in 2010 and anassociate degree in telecommunication from Shanghai Railway College in 1990. Mr. Arthur Xiaobo Hong is our co-founder and has served as the vice chairman of our board of directors since our inception in August 2008.Mr. Hong has served as our chief operating officer since August 2012. Mr. Hong has over 12 years of experience in the distribution of consumer electronicproducts in overseas markets. Mr. Hong has served as chairman of the board of directors of Société Europe Pacifique Distribution, a French companyengaging in the distribution of consumer electronic products, since 1998. Mr. Hong graduated from Cheung Kong Graduate School of Business in 2010. Mr. Bin Wu is an angel investor of our company and has served as our director since our inception in August 2008. Mr. Wu is the director of severalprivately held companies in China. Mr. Wu received an EMBA degree from Cheung Kong Graduate School of Business in 2006 and a master’s andbachelor’s degree in physics from Lanzhou University in 1998 and 1996, respectively. Mr. Jacky Xu is an angel investor of our company and has served as our director since our inception in August 2008. Mr. Xu is the director ofseveral privately held companies in China. Mr. Xu graduated from Cheung Kong Graduate School of Business in 2009. Mr. Frank Lin has served as our director since January 2011. Mr. Lin was elected to our board of directors by DCM Entities under the provisions ofour amended and restated shareholders’ agreement. Mr. Lin is a general partner of DCM, a technology venture capital firm. Prior to joining DCM in 2006,Mr. Lin was chief operating officer of SINA Corporation (NASDAQ: SINA). He co-founded SINA’s predecessor, SinaNet, in 1995 and later guided SINAthrough its listing on NASDAQ. Prior to founding SinaNet, Mr. Lin was a consultant at Ernst & Young Management Consulting Group. Mr. Lin had alsoheld various marketing, engineering and managerial positions at Octel Communication Inc. and NYNEX. Mr. Lin currently serves on the board of directors ofnumerous DCM portfolio companies. Mr. Lin received an MBA degree from Stanford University and a bachelor’s degree in engineering from DartmouthCollege. Mr. Xing Liu has served as our director since January 2011. Mr. Liu was elected to our board of directors by Sequoia Entities under the provisionsof our amended and restated shareholders’ agreement. Mr. Liu is a managing director of Sequoia Capital China. Prior to joining Sequoia Capital China in2007, Mr. Liu had over nine years of work experience in investment banking, technology and product development and consulting at Merrill Lynch, Xeroxand GlobalSight, respectively. Mr. Liu currently serves on the board of directors of numerous Sequoia Capital China portfolio companies. Mr. Liu received amaster’s degree in computer engineering from Syracuse University, an MBA degree from The Wharton School of the University of Pennsylvania and abachelor’s degree in management information systems from Fudan University. 71Table of Contents Mr. Nanyan Zheng has served as our director since March 2012. Mr. Zheng is currently the chief executive officer of 7 Days Groups Holdings Ltd.,a leading national economy hotel chain based in China and listed on the NYSE. Mr. Zheng co-founded 7 Days Groups Holdings Ltd. and has been serving asits chief executive officer since October 2004. From 2000 to October 2004, Mr. Zheng worked for Ctrip.com International Ltd., a NASDAQ-listed companyand a leading travel service provider in China, and served as vice president and general manager of southern China, and later as vice president of marketing incharge of national marketing. During 2001, Mr. Zheng also worked for the computer center of the Economic and Trade Commission of Guangdong Province.Mr. Zheng received a bachelor’s degree from Sun Yat-Sen University in China. Ms. Kathleen Chien has served as our director since March 2012. Ms. Chien is currently the chief operating officer and acting chief financial officerof 51job, Inc., a NASDAQ-listed provider of integrated human resource services in China, and an independent director of ChinaCache International HoldingsLtd., a NASDAQ-listed provider of content and application delivery network services in China. Ms. Chien joined 51job, Inc. in 1999 and served as its chieffinancial officer from 2004 to March 2009. Prior to joining 51job, Inc., Ms. Chien worked in the financial services and management consulting industries,including three years with Bain & Company in Hong Kong and two years with Capital Securities Corp. in Taiwan. During her tenure at Bain & Company,Ms. Chien was a consultant to a number of companies on strategic and marketing issues, including entry into the Chinese market and achieving cost andoperating efficiencies. While at Capital Securities Corp., Ms. Chien completed a number of equity and equity-linked transactions, enabling Taiwanesecompanies to raise significant capital from the international capital markets. Ms. Chien received her bachelor’s degree in economics from the MassachusettsInstitute of Technology and an MBA degree from the Walter A. Haas School of Business at University of California, Berkeley. Mr. Chun Liu has served as our director since March 2013. Mr. Chun Liu is currently the vice president and managing director of Sohu.com Inc.,and chief operating officer of Sohu Video. Prior to joining Sohu, Mr. Liu worked with Phoenix TV from 2000 to 2011. His last position was the executivedirector and the head of Phoenix TV Beijing Program Center. Earlier in his career, Mr. Liu worked in the Youth Division and News Commentary Departmentin CCTV, China’s state television broadcaster. As the executive producer of a famous program “News Investigation,” he produced dozens of award winningdocumentaries. Mr. Chun Liu received an EMBA degree from Cheung Kong Graduate School of Business in China and a master’s degree from theCommunication University of China. Mr. Donghao Yang has served as our chief financial officer since August 2011. Mr. Yang has held senior executive and managerial positions invarious public and private companies, including serving as the chief finance officer of Synutra International Inc. (NASDAQ: SYUT) from May 2010 toAugust 2011, as the chief financial officer of Greater China of Tyson Foods, Inc. (NYSE: TSN) from March 2007 to April 2010, as a finance director of AsiaPacific of Valmont Industries, Inc. (NYSE: VMI) from October 2003 to March 2007, and as a director of China Minmetals Brazil Holding Limited fromJanuary 1999 to April 2001. Mr. Yang received an MBA degree from Harvard Business School in 2003 and a bachelor’s degree in international economicsfrom Nankai University in 1993. Mr. Daniel Kao has served as our chief technology officer since June 2012. He has over 16 years of experience with leading e-commerce and internetcompanies in the U.S. and China. Before joining our company, Mr. Kao was the director of site operation and quality engineering at eBay Inc. (NASDAQ:EBAY) from October 2010 to March 2012. During his tenure at eBay, Mr. Kao focused on customer service enhancements as well as online branding andorganization growth strategies. Prior to that, he was the enterprise architect at AccelOps, a provider of integrated data center and cloud service monitoringsoftware solutions to enterprises and service providers, from October 2007 to July 2008. In 2007, Mr. Kao co-founded and served as the chief technologyofficer of AdChina Ltd., a leading integrated internet advertising platform in China, from March 2007 to October 2007. Mr. Kao received a bachelor’s degreein computer science from Iowa State University in 1995. Mr. Alex Jing Jiang has served as our senior vice president since November 2012. Before that, Mr. Jiang served as our vice president fromAugust 2012 to November 2012 and our chief operating officer from February 2011 to August 2012. Mr. Jiang has over 20 years of experience in China’sretail sector, including over five years of experience in e-commerce in China. Before joining our company, Mr. Jiang founded and served as a director of E-elephant Consulting Company Limited, a company focusing on consulting services in e-commerce and chain retail sectors in China, from 2008 to 2010.Mr. Jiang served as a vice president of Dangdang.com from 2006 to 2007, responsible for the management of finance, human resource, administration andlogistics. He served as a senior director of China Resources Vanguard Co. Ltd. from 2003 to 2006 and a manager of Carrefour from 1997 to 2003. Mr. Jiangreceived his bachelor’s degree in accounting from Chongqing Business School in 1991. 72Table of Contents Ms. Maggie Mei Chuan Hung has served as our senior vice president since November 2012. Before that, Ms. Hung served as out vice presidentfrom October 2009 to November 2012. She has over 20 years of experience in merchandise retail. Prior to joining us, Ms. Hung served as a vice president ofGrand Pacific Mall from 2003 to 2009. Ms. Hung worked as the general manager of Grand Ocean Department Store in Nanjing from 2002 to 2003, as thedepartment manager of Pacific Sogo Department Store in Taipei from 1998 to 2002, and as the manager of Chongqing Pacific Department Store from 1997 to1998. Ms. Hung received her bachelor’s degree from Ling Tung University in 1991. Mr. Yizhi Tang has served as our senior vice president since November 2012. Before that, Mr. Tang served as our vice president fromSeptember 2010 to November 2012. Mr. Tang has over 10 years of experience in the logistics industry. Prior to joining us, Mr. Tang served as an operatingdirector of Best Logistics Technology Co., Ltd. from 2009 to 2010. From 2008 to 2009, Mr. Tang served as the head of logistics department of Tesco,responsible for the logistics in the northern China area. From 2006 to 2008, Mr. Tang worked as the senior director of the logistics department ofDangdang.com. Mr. Tang received a master’s degree from Sun Yat-Sen University in 2003 and a bachelor’s degree from Nanjing University of Aeronauticsand Astronautics in 1997. Mr. Xianfeng Cai has served as our vice president since November 2012 and the general manager of our Shanghai branch since January 2011. Priorto joining us, Mr. Cai had served for over 18 years in various roles at IGA Distribution Pty. Ltd., a licensed grocery supermarkets chain in Melbourne,Australia. His last role was general manager responsible for IGA Distribution Pty. Ltd.’s daily business operations. Mr. Cai received a bachelor’s degree incommerce from University of Melbourne in 1992. Mr. Xiaohui Ma has served as our vice president since November 2012. Mr. Ma joined us in August 2011 as a senior director of marketing. Prior tojoining us, Mr. Ma was vice president for marketing at Xiu.com, a fashion shopping business-to-consumer website in China, from September 2008 toJuly 2011. Previously, Mr. Ma worked at several prominent media and news agencies in China, including serving as planner of China Central Television(CCTV), China’s state television broadcaster, from October 2001 to November 2003, and as editor-in-chief of SINA Corporation (NASDAQ:SINA), aChinese leading online media company, from November 2003 to March 2006. Mr. Ma graduated from Communication University of China in 2000. Employment Agreements We have entered into employment agreements with each of our executive officers. Under these agreements, each of our senior executive officers isemployed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of theexecutive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, ormisconduct or a failure to perform agreed duties. In such case, the executive officer will not be entitled to receive payment of any severance benefits or otheramounts by reason of the termination, and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We mayalso terminate an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are required toprovide compensation to the executive officer, including severance pay, as expressly required by the applicable law of the jurisdiction where the executiveofficer is based. The executive officer may terminate the employment at any time with a one-month advance written notice if there is any significant change inthe executive officer’s duties and responsibilities that is inconsistent in any material and adverse respect with his or her title and position or a materialreduction in the executive officer’s annual salary before the next annual salary review, or if otherwise approved by the board of directors. Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence andnot to use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information or trade secrets,any confidential information or trade secrets of our clients or prospective clients or the confidential or proprietary information of any third party received by usand for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secretswhich they conceive, develop or reduce to practice and to assign all right, title and interest in them to us, and assist us in obtaining patents, copyrights andother legal rights for these inventions, designs and trade secrets. 73Table of Contents In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or heremployment and for one year following the last date of employment. Specifically, each executive officer has agreed not to (a) approach our clients, customers,contacts or other persons or entities introduced to the executive officer for the purpose of doing business with such persons or entities that will harm ourbusiness relationships with these persons or entities; (b) assume employment with or provide services to any of our competitors, or engage with, whether asprincipal, partner, licensor or otherwise, any of our competitors; or (c) seek directly or indirectly, to solicit the services of any of our employees who isemployed by us on or after the date of the executive officer’s termination, or in the year preceding such termination. B Compensation of Directors and Executive Officers For the fiscal year ended December 31, 2012, we paid an aggregate of US$1.7 million in cash to our executive officers, and we paid an aggregate ofUS$46.6 thousand in cash to our non-executive directors. For stock incentive grants to our officers and directors, see “—Stock Incentive Plans.” Stock Incentive Plans 2011 Stock Incentive Plan In March 2011, we adopted our 2011 Plan, in order to attract and retain the best available personnel, to provide additional incentives to employees,directors, officers, consultants and other eligible persons and to promote the success of our business. Under the 2011 Plan, the maximum number of sharesmay be granted is 7,350,000 ordinary shares. As of the date of this annual report, options to acquire 7,350,000 ordinary shares have been granted under the2011 Plan. The following paragraphs summarize the terms of the 2011 Plan. Plan Administration. The plan administrator is our board or a committee designated by our board. Awards. We may grant options, restricted shares and restricted share units as well as other rights or benefits, such as share appreciation rights anddividend equivalent rights, under the 2011 Plan. Award Agreement and Notice of Stock Option Award. Awards granted under the 2011 Plan are evidenced by an award agreement and, in the caseof stock options, a notice of stock option award that sets forth the terms, conditions, and limitations for each grant. Exercise Price. The exercise price of an award shall be determined by the administrator in accordance with the 2011 Plan. Eligibility. We may grant awards other than incentive stock options to our employees, directors and consultants or those of our related entities.Incentive stock options may be granted only to employees of our company or a parent or a subsidiary of our company. Term of the Awards. The term of each award grant shall be determined by the plan administrator and stated in the award agreement, provided thatthe term of incentive stock options shall not exceed 10 years from the date of grant. In the event of an incentive stock option granted to a grantee who, at thetime the option is granted, owns shares representing more than 10% of the voting power of all classes of shares of our company or any parent or subsidiary ofour company, the term of the incentive stock option shall be five years from the date of grant or such shorter term as may be provided in the award agreement. Vesting Schedule. The vesting schedule is determined by the plan administrator and set forth in the notice of stock option award and awardagreement. Except as unanimously approved by our board, awards granted under the 2011 Plan shall be subject to a minimum four-year vesting schedulecalling for vesting no faster than the following: one-fourth of the total ordinary shares subject to the awards shall vest at the first anniversary of the vestingcommencement date and one-forty-eighth of the total ordinary shares subject to the awards shall vest at the end of each month thereafter; provided that theawards shall not be exercised or released until the earlier of consumption of a qualified initial public offering or immediately prior to a change in control. Ourinitial public offering in March 2012 is a qualified initial public offering under the 2011 Plan. 74Table of Contents Transfer Restrictions. Incentive stock options may not be transferred in any manner other than by will or by the laws of descent or distribution andmay be exercised, during the lifetime of the grantee, only by the grantee. Other awards are transferable by will and by the laws of descent and distribution, andduring the lifetime of the grantee, may be transferred to the extent and in the manner authorized by the plan administrator. Termination of Employment or Service. In the event that an award recipient ceases employment with us or ceases to provide services to us, anaward may be exercised following the termination of employment or service to the extent provided in the award agreement. Termination and Amendment of the Plan. Unless terminated earlier, the 2011 Plan will terminate automatically in 2021. Our board has theauthority to amend, suspend or terminate the plan subject to shareholder approval with respect to certain amendments. However, no suspension or terminationshall adversely affect any rights under awards previously granted. 2012 Share Incentive Plan In March 2012, we adopted our 2012 Plan, in order to attract and retain the best available personnel, provide additional incentives to employees,directors and consultants, and promote the success of our business. The plan permits the grant of options to purchase our ordinary shares, restricted sharesand restricted share units as deemed appropriate by the administrator under the plan. The maximum aggregate number of shares that may be issued pursuantto our 2012 Plan is 9,000,000, and the maximum aggregate number of shares that may be issued per calendar year is 1,500,000 from 2012 until thetermination of this plan. As of the date of this annual report, options to acquire 282,227 ordinary shares and 1,312,500 restricted shares have been grantedunder the 2012 Plan. The following paragraphs describe the principal terms of our 2012 Plan: Plan Administration. The plan will be administered by a committee of one or more directors to whom the board shall delegate the authority to grantor amend awards to participants other than any of the committee members. The committee will determine the provisions and terms and conditions of eachaward grant. Awards and Award Agreement. We may grant options, restricted shares or restricted share units to our directors, employees or consultants underthe plan. Awards granted under the plan will be evidenced by award agreements that set forth the terms, conditions and limitations for each award. These mayinclude the term of an award, the provisions applicable in the event the participant’s employment or service terminates, and our authority to unilaterally orbilaterally amend, modify, suspend, cancel or rescind an award. Option Exercise Price. The exercise price of an option shall be determined by the plan administrator and set forth in the award agreement. It may bea fixed price or a variable price related to the fair market value of our ordinary shares, to the extent not prohibited by applicable laws. Subject to certain limitsset forth in the plan, the exercise price may be amended or adjusted in the absolute discretion of the plan administrator, whose determination shall be final,binding and conclusive. To the extent not prohibited by applicable laws or any exchange rule, a downward adjustment of the exercise prices of options shall beeffective without the approval of the shareholders or the approval of the affected participants. Eligibility. We may grant awards to our employees, directors and consultants or those of any of our related entities, which include our subsidiaries orany entities in which we hold a substantial ownership or control interest, as determined by our plan administrator. Awards other than incentive share optionsmay be granted to our employees, directors and consultants. Incentive share options may be granted only to employees of our company or a parent or asubsidiary of our company. Term of the Awards. The term of each award grant shall be determined by our plan administrator, provided that the term shall not exceed 10 yearsfrom the date of the grant. 75Table of Contents Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies, the vesting schedule. Restricted shares grantedunder the plan will have either a three-year, a two-year or a one-year vesting schedule. We have the right to repurchase the restricted shares until they havevested. Transfer Restrictions. Except as otherwise provided by the plan administrator, an award may not be transferred or otherwise disposed of by aparticipant other than by will or the laws of descent and distribution. The plan administrator may permit an award other than an incentive share option to betransferred to or exercised by certain persons related to the participant by express provision in the award or by an amendment to the award. Corporate Transactions. Except as otherwise provided in an individual award agreement or any other written agreement entered into between aparticipant and us, our plan administrator may provide for one or more of the following in the event of a change of control or other similar corporatetransaction: (i) the termination of each award outstanding under the plan at a specific time in the future, with each participant having the right to exercise thevested portion of the awards during a period of time as determined by the plan administrator; (ii) the termination of any award in exchange for an amount ofcash equal to the amount that could have been obtained upon the exercise of the award; (iii) the replacement of an award with other rights or property selectedby the plan administrator; (iv) the assumption of the award by our successor, parent or subsidiary, or the substitution of an award granted by our successor,parent or subsidiary, with appropriate adjustments; or (v) payment of an award in cash based on the value of our ordinary shares on the date of the corporatetransaction plus reasonable interest on the award. Amendment and Termination of the Plan. With the approval of our board, the plan administrator may amend, modify or terminate the plan at anytime and from time to time. However, no amendment may be made without the approval of our shareholders to the extent that approval is required byapplicable laws. The approval of our shareholders would also be required in the event that the amendment increased the number of shares available under ourplan, permitted the plan administrator to extend the term of our plan or the exercise period for an option beyond ten years from the date of grant, or resulted in amaterial increase in benefits or a change in eligibility requirements, unless we decided to follow home country practice. Grants The following table summarizes, as of the date of this annual report, the outstanding options we granted to our directors and executive officers underthe 2011 Plan and 2012 Plan. NameNumber ofOrdinarySharesUnderlyingOptionsExercise Price(US$/Share)Date of GrantDate of ExpirationDonghao Yang*0.50August 30, 2011August 29, 2021*0.50January 1, 2013December 31, 2022Alex Jing Jiang*0.50March 18, 2011March 17, 2021Maggie Mei Chuan Hung*0.50March 18, 2011March 17, 2021*2.52November 30, 2011November 29, 2021Yizhi Tang*0.50March 18, 2011March 17, 2021*2.52November 30, 2011November 29, 2021Xianfeng Cai*0.50March 18, 2011March 17, 2021*2.52November 30, 2011November 29, 2021Nanyan Zheng*2.50April 16, 2012April 15, 2022Kathleen Chien*2.50April 16, 2012April 15, 2022Xiaohui Ma*2.50November 30, 2011November 29, 2021Chun Liu*2.50March 22, 2013March 22, 2023 * The ordinary shares that the person has right to acquire within 60 days after March 31, 2013 represent less than 1% of the total outstanding ordinaryshares of our company. 76Table of Contents The following table summarizes, as of this annual report, the outstanding restricted shares we granted to our directors and executive officers underthe 2012 Plan. NameNumber ofOrdinary SharesUnderlyingRestricted SharesDate of GrantFrank Lin*January 1, 2013Xing Liu*January 1, 2013Nanyan Zheng*January 1, 2013Kathleen Chien*January 1, 2013Maggie Mei Chuan Hung*January 1, 2013Yizhi Tang*January 1, 2013Xianfeng Cai*January 1, 2013Xiaohui Ma*September 30, 2012*January 1, 2013Daniel Kao*June 1, 2012Chun Liu*March 22, 2013 * The ordinary shares that the person has right to acquire within 60 days after March 31, 2013 represent less than 1% of the total outstanding ordinaryshares of our company. As of the date of this annual report, other individuals as a group hold options to purchase 2,719,632 ordinary shares of our company, with exerciseprices of US$0.50, US$2.50 or US$2.52 per ordinary share, as well as 195,000 restricted shares of our company. C Board Practices Board of Directors Our board of directors consists of nine directors. A director is not required to hold any shares in our company by way of qualification. A directormay vote with respect to any contract or transaction in which he or she is materially interested provided the nature of the interest is disclosed prior to itsconsideration. Subject to our amended and restated memorandum and articles of association, the directors may exercise all the powers of our company toborrow money, mortgage their undertaking, property and uncalled capital and issue debentures or other securities whether outright or as security for any debt,liability or obligation of our company or of any third party. None of our directors has a service contract with us that provides for benefits upon termination ofservice. Committees of the Board of Directors We have three committees under the board of directors, namely the audit committee, the compensation committee and the nominating and corporategovernance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit Committee. Our audit committee consists of Ms. Kathleen Chien, Mr. Nanyan Zheng and Mr. Chun Liu. Ms. Kathleen Chien, Mr. NanyanZheng and Mr. Chun Liu satisfy the “independence” requirements under Section 303A of the Corporate Governance Rules of the NYSE and Rule 10A-3 underthe Securities Exchange Act of 1934, as amended. Ms. Kathleen Chien is the chair of our audit committee. We have determined that Ms. Kathleen Chienqualifies as an “audit committee financial expert.” The purpose of the audit committee is to assist our board of directors with its oversight responsibilitiesregarding: (a) the integrity of our financial statements, (b) our compliance with legal and regulatory requirements, (c) the independent auditor’s qualificationsand independence and (d) the performance of our internal audit function and independent auditor. The audit committee will be responsible for, among otherthings: 77Table of Contents · appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independentauditors; · reviewing with the independent auditors any audit problems or difficulties and management’s response; · discussing the annual audited financial statements with management and the independent auditors; · reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor andcontrol major financial risk exposures; · reviewing and approving all proposed related party transactions; · meeting separately and periodically with management and the independent auditors; and · monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures toensure proper compliance. Compensation Committee. Our compensation committee consists of Mr. Nanyan Zheng, Ms. Kathleen Chien and Mr. Frank Lin. Mr. NanyanZheng, Mr. Frank Lin and Ms. Kathleen Chien satisfy the “independence” requirements under Section 303A of the Corporate Governance Rules of the NYSE.Mr. Nanyan Zheng is the chair of our compensation committee. The compensation committee assists the board in reviewing and approving compensationstructure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committeemeeting during which his compensation is deliberated. The compensation committee is responsible for, among other things: · reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executiveofficers; · reviewing and recommending to the board for determination with respect to the compensation of our directors; and · reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements. Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Nanyan Zheng, Ms.Kathleen Chien and Mr. Xing Liu. Mr. Nanyan Zheng, Ms. Kathleen Chien and Mr. Xing Liu satisfy the “independence” requirements under Section 303A ofthe Corporate Governance Rules of the NYSE. Mr. Nanyan Zheng is the chair of our nominating and corporate governance committee. The nominating andcorporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition ofthe board and its committees. The nominating and corporate governance committee is responsible for, among other things: · selecting and recommending to the board nominees for election by the shareholders or appointment by the board; · reviewing annually with the board the current composition of the board with regard to characteristics such as independence, knowledge, skills,experience and diversity; · making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and · advising the board periodically with regard to significant developments in the law and practice of corporate governance as well as our compliancewith applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedialaction to be taken. Duties of Directors Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors alsohave a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparablecircumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Our companyhas the right to seek damages if a duty owed by our directors to us is breached. 78Table of Contents Terms of Directors and Officers Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office untilsuch time as they are removed from office by special resolution or by the unanimous written resolution of all shareholders. A director will be removed fromoffice automatically if, among other things, the director (a) becomes bankrupt or makes any arrangement or composition with his creditors; or (b) dies or isfound by our company to be or becomes of unsound mind. D Employees As of December 31, 2012, we had 5,043 full time employees, compared with 831 and 2,934 employees as of December 31, 2010 and 2011,respectively. We also employ independent contractors and part-time personnel from time to time. The following table sets forth the number of our full timeemployees categorized by areas of operations as of December 31, 2012: Operations Number of EmployeesProducts502Business development, sales and marketing117Customer services327Technology support246Logistics and delivery3,609Administration and management242Total5,043 Our success depends on our ability to attract, retain and motivate qualified personnel. We have developed a corporate culture that encouragesteamwork, effectiveness, self-development and commitment to providing our customers with superior services. We regularly provide our employees withtraining tailored to each job function to enhance performance and service quality. As required by regulations in China, we participate in various employee social security plans that are organized by municipal and provincialgovernments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance.We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of ouremployees, up to a maximum amount specified by the local government from time to time. In addition, we also provide our employees fringe benefits such asfree lunches and periodic appreciation payments to employees’ family members. To date, we have not experienced any significant labor disputes. E Share Ownership The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2013 by: · each of our directors and executive officers; and · each person known to us to own beneficially more than 5% of our ordinary shares. The calculations in the shareholder table below are based on 110,300,505 ordinary shares issued and outstanding as of March 31, 2013. Beneficialownership is determined in accordance with the rules and regulations of the SEC. 79Table of Contents Ordinary SharesBeneficiallyOwnedNumber%Directors and Executive Officers*:Eric Ya Shen17,622,35816.0Arthur Xiaobo Hong13,563,81012.3Jacky Xu4,752,1554.3Bin Wu5,071,1914.6Frank Lin15,906,27414.4Xing Liu——Nanyan Zheng****Kathleen Chien****Chun Liu****Donghao Yang****Alex Jing Jiang****Daniel Kao——Maggie Mei Chuan Hung****Yizhi Tang****Xianfeng Cai****Xiaohui Ma****All directors and executive officers as a group58,755,77152.4 Principal Shareholders:Sequoia Entities18,582,27216.8Elegant Motion Holdings Limited17,622,35816.0DCM Entities15,906,27414.4High Vivacity Holdings Limited13,563,81012.3 * Except for Mr. Frank Lin, Mr. Xing Liu, Mr. Nanyan Zheng, Ms. Kathleen Chien and Mr. Chun Liu, the business address of our directors andexecutive officers are c/o No. 20 Huahai Street, Liwan District, Guangzhou 510370, People’s Republic of China. ** Less than 1% of our total outstanding shares. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. For each person and group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned bysuch person or group by the sum of the number of shares outstanding and the number of shares such person or group has the right to acquire uponexercise of the stock options or vesting of restricted shares within 60 days after March 31, 2013. Beneficially owned through Elegant Motion Holdings Limited, a British Virgin Islands company. Elegant Motion Holdings Limited is ultimatelywholly owned by the SYZXC Trust. Under the terms of the SYZXC Trust, Mr. Eric Ya Shen and his wife Ms. Xiaochun Zhang have the power tojointly direct the trustee with respect to the retention or disposal of, and the exercise of any voting and other rights attached to these shares. Beneficially owned through High Vivacity Holdings Limited, a British Virgin Islands company wholly owned by Mr. Hong. Beneficially owned through Advanced Sea International Limited, a British Virgin Islands company wholly owned by Mr. Xu. Beneficially owned through Rapid Prince Development Limited, a British Virgin Islands company. Rapid Prince Development Limited is ultimatelywholly owned by the Wu Family Trust. Under the terms of the Wu Family Trust, Mr. Wu has the power to direct the trustee with respect to theretention or disposal of, and the exercise of any voting and other rights attached to these shares. Represents (a) 9,231,361 ordinary shares owned by DCM V, L.P., (b) 225,253 ordinary shares owned by DCM Affiliates Fund V, L.P.,(c) 3,372,740 ordinary shares owned by DCM Hybrid RMB Fund, L.P., and (d) 3,076,920 ordinary shares, in the form of ADSs, that a DCMEntity has subscribed for and was allocated in our initial public offering in March 2012. DCM V, L.P., DCM Affiliates Fund V, L.P. and DCMHybrid RMB Fund, L.P. are collectively referred to as DCM Entities. Mr. Lin is a director of our company named by DCM Entities. Mr. Lindisclaims beneficial ownership with respect to the shares held by DCM Entities, except to the extent of his pecuniary interest therein. The businessaddress of Mr. Lin is 2420 Sand Hill Road, Suite 200, Menlo Park, CA 94025, the United States. 80(1)(2)(3)(4)(5)(6)(7)(8)(9)(11)(11)(12)(12)(12)(12)(12)(12)(13)(14)(15)(16)(1)(2)(3)(4)(5)(6)(7)Table of Contents Mr. Liu is managing director of Sequoia Entities. The business address of Mr. Liu is Suite 2215, Two Pacific Place, 88 Queensway, Hong Kong. The business address of Mr. Zheng is 10F, 705 GuangzhouDaDaoNan Road, Guangzhou, Guangdong, 510290, People’s Republic of China. The business address of Ms. Chien is Building 3, No. 1387 Zhang Dong Road, Shanghai 201203, People’s Republic of China. The business address of Mr. Liu is Level 11, Sohu.com Internet Plaza, No. 1 Unit Zhongguancun East Road, Haidian District, Beijing 100084,People’s Republic of China. Certain of our directors and executive officers have been granted options pursuant to our stock incentive plans. See “Item 6.B. Directors, SeniorManagement and Employees—Compensation of Directors and Executive Officers—Stock Incentive Plans.” Represents (a) 9,629,566 ordinary shares owned by Sequoia Capital China II, L.P., (b) 200,662 ordinary shares owned by Sequoia Capital ChinaPartners Fund II, L.P., (c) 1,546,454 ordinary shares owned by Sequoia Capital China Principals Fund II, L.P., and (d) 7,205,590 ordinaryshares owned by Sequoia Capital 2010 CV Holdco, Ltd. Sequoia Capital China II, L.P., Sequoia Capital China Partners Fund II, L.P., SequoiaCapital China Principals Fund II, L.P. and Sequoia Capital 2010 CV Holdco, Ltd. are collectively referred to as Sequoia Entities. The general partnerof Sequoia Capital China II, L.P., Sequoia Capital China Partners Fund II, L.P. and Sequoia Capital China Principals Fund II. L.P. is SequoiaCapital China Management II, L.P. Sequoia Capital 2010 CV Holdco., Ltd is wholly owned by Sequoia Capital China Venture 2010 Fund, L.P.,Sequoia Capital China Venture 2010 Partners Fund, L.P. and Sequoia Capital China Venture 2010 Principals Fund, L.P. (collectively “SCC 2010Venture Funds”). The SCC 2010 Venture Funds’ general partner is SC China Venture 2010 Management, L.P. The general partner of SequoiaCapital China Management II, L.P. and SC China Venture 2010 Management, L.P. is SC China Holding Limited, a company incorporated in theCayman Islands. SC China Holding Limited is wholly owned by SNP China Enterprises Limited, a company wholly owned by Mr. Neil NanpengShen. Mr. Shen disclaims beneficial ownership of the shares held by Sequoia Entities, except to the extent of his pecuniary interest therein. Thebusiness address of Sequoia Entities is Suite 2215, Two Pacific Place, 88 Queensway, Hong Kong. Elegant Motion Holdings Limited is a British Virgin Islands company. Elegant Motion Holdings Limited is ultimately wholly owned by the SYZXCTrust. Under the terms of the SYZXC Trust, Mr. Eric Ya Shen and his wife Ms. Xiaochun Zhang have the power to jointly direct the trustee withrespect to the retention or disposal of, and the exercise of any voting and other rights attached to these shares. The registered address of ElegantMotion Holdings Limited is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands. Represents (a) 9,231,361 ordinary shares owned by DCM V, L.P., (b) 225,253 ordinary shares owned by DCM Affiliates Fund V, L.P.,(c) 3,372,740 ordinary shares owned by DCM Hybrid RMB Fund, L.P., and (d) 3,076,920 ordinary shares, in the form of ADSs, that a DCMEntity has subscribed for and was allocated in our initial public offering in March 2012. The general partner of DCM V, L.P. and DCM AffiliatesFund V, L.P. is DCM Investment Management V, L.P., whose general partner is DCM International V, Ltd. DCM International V, Ltd., throughDCM Investment Management V, L.P., has sole voting and investment power over these shares, and such voting and investment power is exercisedby K. David Chao, Thomas Blaisdell and Peter W. Moran, the directors of DCM International V, Ltd. Each of the directors disclaims beneficialownership of the shares held by DCM V, L.P. and DCM Affiliates Fund V, L.P., except to the extent of each person’s pecuniary interest therein. Thebusiness address of DCM V, L.P. and DCM Affiliates Fund V, L.P. is 2420 Sand Hill Road, Suite 200, Menlo Park, CA 94025, the United States.The general partner of DCM Hybrid RMB Fund, L.P. is DCM Hybrid RMB Fund Investment Management, L.P., whose general partner is DCMHybrid RMB Fund International, Ltd. DCM Hybrid RMB Fund International, Ltd., through DCM Hybrid RMB Fund InvestmentManagement, L.P., has sole voting and investment power over these shares, and such voting and investment power is exercised by K. David Chao,Thomas Blaisdell, Jason Krikorian and Peter W. Moran, the directors of DCM Hybrid RMB Fund International, Ltd. Each of the directorsdisclaims beneficial ownership of the shares held by DCM Hybrid RMB Fund, L.P., except to the extent of each person’s pecuniary interest therein.The business address of DCM Hybrid RMB Fund, L.P. is 2420 Sand Hill Road, Suite 200, Menlo Park, CA 94025, the United States. 81(8)(9)(10)(11)(12)(13)(14)(15)Table of Contents High Vivacity Holdings Limited is a British Virgin Islands company wholly owned by Mr. Hong. The registered address of High Vivacity HoldingsLimited is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands. As of March 31, 2013, 110,300,505 of our ordinary share were issued and outstanding. To our knowledge, 48,425,814 ordinary shares were heldof record by three holders in the United States including 38,969,200 ordinary shares held of record by Deutsche Bank Trust Company Americas, thedepositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of recordholders of our ordinary shares in the United States. None of our existing shareholders has different voting rights from other shareholders as of the date of thisannual report. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. For the options granted to our directors, officers and employees, please refer to “—B. Compensation of Directors and Executive Officers.” ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A Major Shareholders Please refer to “Item 6.E. Directors, Senior Management and Employees—Share Ownership.” B Related Party Transactions Contractual Arrangements Our wholly owned subsidiary, Vipshop China, has entered into a series of contractual arrangements with our consolidated affiliated entity, VipshopInformation, and its shareholders, which enable us to exercise effective control over Vipshop Information, receive substantially all of the economic benefits ofVipshop Information through service fees in consideration for the technical and consulting services provided by Vipshop China, and have an exclusive optionto purchase, or designate one or more person(s) to purchase, all of the equity interests in Vipshop Information to the extent permitted under PRC laws,regulations and legal procedures. For a description of these contractual arrangements, see “Item 4.C. Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entity.” Private Placement Prior to 2012, we made various issuances of ordinary shares to our early-stage investors. In January 2011, we issued and sold a total of 20,212,500series A preferred shares for US$1.00 per share to our series A preferred shareholders and in April 2011, we issued a total number of 8,166,667 series Bpreferred shares for US$5.05 per share to our series B preferred shareholders. All of the series A and series B preferred shares were converted into ordinaryshares upon the completion of the initial public offering in March 2012 pursuant to the terms of applicable conversion rights of the holders of respective seriesof preferred shares. Shareholders’ Agreement In April 2011, in connection with the issuance and sale of our series B preferred shares, we and our shareholders entered into a revised shareholders’agreement, which amended and restated the shareholders’ agreement we previously entered into with the investors of our series A preferred shares. Under the amended and restated shareholders’ agreement, our preferred shareholders and the holders of ordinary shares converted from our preferredshares are also entitled to certain registration rights, including demand registration, piggyback registration and Form F-3 registration. Except for the registrationrights, the shareholders’ rights under the amended and restated shareholders’ agreement terminated automatically upon the completion of our initial publicoffering in March 2012. 82(16)Table of Contents Transactions with Our Directors, Executive Officers and Shareholders Since our inception in August 2008 through December 31, 2012, our shareholders, namely, Eric Ya Shen, Arthur Xiaobo Hong, Bin Wu, Jacky Xuand Xing Peng, provided certain loans to us for our daily business operations. All of these loans from our ordinary shareholders were unsecured and interestfree. As of December 31, 2012, the outstanding loan balances due to shareholders amounted to US$0.8 million. We also purchased products and goods from companies controlled by certain of our ordinary shareholders, namely, Eric Ya Shen, Bin Wu, JackyXu and Xing Peng, in the amount of US$2.4 million, US$6.3 million and US$6.7 million for the years ended December 31, 2010, December 31, 2011 andDecember 31, 2012, respectively. All of the purchases were made at prices and on terms substantially similar to the prices and terms of purchases fromunrelated suppliers. As of December 31, 2011 and 2012, the amounts due to companies controlled by our ordinary shareholders were US$0.8 million andUS$0.5 million, respectively, which were unsecured and interest free. As of December 31, 2012, we also recorded an amount of US$0.2 million due from arelated entity controlled by Jacky Xu, one of our shareholders, representing prepayments related to purchases of goods. Employment Agreements See “Item 6.A. Directors, Senior Management and Employees—Directors and Senior Management—Employment Agreements.” Share Options See “Item 6.B. Directors, Senior Management and Employees—Compensation of Directors and Executive Officers—Stock Incentive Plans.” C Interests of Experts and Counsel Not applicable. ITEM 8. FINANCIAL INFORMATION A Consolidated Statements and Other Financial Information We have appended consolidated financial statements filed as part of this annual report. Legal Proceedings From time to time, we have become and may in the future become a party to various legal or administrative proceedings arising in the ordinary courseof our business, including actions with respect to intellectual property infringement, violation of third-party license or other rights, breach of contract, laborand employment claims. We are currently not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion ofour management, are likely to have a material and adverse effect on our business, financial condition or results of operations and cash flows. Dividend Policy We have not paid in the past and do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. Wecurrently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. Our board of directors has discretion as to whether to distribute dividends, subject to the approval of our shareholders and applicable laws. Even ifour board of directors decides to declare dividends, their form, frequency and amount will depend upon our future operations and earnings, capitalrequirements and surplus, general financial condition, contractual and statutory restrictions and other factors that the board of directors may deem relevant. Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of ourordinary shares. Cash dividends will be paid to the depositary of our ADSs in U.S. dollars, which will distribute them to the holders of ADSs according tothe terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair andpractical. 83Table of Contents We are a holding company incorporated in the Cayman Islands. We principally rely on dividends from our subsidiaries in China and Hong Kongfor our cash needs. To pay dividends to us, our subsidiaries in China and Hong Kong need to comply with the applicable regulations. See “Item 3.D. KeyInformation—Risk Factors—Risks Relating to Doing Business in China—We principally rely on dividends and other distributions on equity paid byVipshop China in China to fund our cash and financing requirements, and any limitation on the ability of Vipshop China to make payments to us could havea material 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 consolidatedfinancial statements included in this annual report. ITEM 9. THE OFFER AND LISTING A Offering and Listing Details Our ADSs, each representing two of our ordinary shares, have been listed on the NYSE since March 23, 2012. Our ADSs trade under the symbol“VIPS.” Update until April 9, 2013 (starting from March 23, 2012), the trading price of our ADSs on NYSE ranged from US$4.12 to US$32.48 per ADS. The following table provides the high and low trading prices on the NYSE for the periods indicated below. Trading PricePer ADSHigh(US$)Low(US$)Monthly High and LowApril 2013 (through April 9, 2013)32.4828.81March 201332.4023.27February 201328.4918.03January 201322.8115.65December 201219.3111.75November 201213.969.90October 201210.677.19Quarterly High and LowSecond Quarter 2013 (through April 9, 2013)32.4828.81First Quarter 201332.4015.65Fourth Quarter 201219.317.19Third Quarter 20127.674.76Second Quarter 20126.384.12Annual High and Low2012 (from March 23, 2012 to December 31, 2012)19.314.12 B Plan of Distribution Not applicable. C Markets Our ADSs, each representing two of our ordinary shares, have been listed on the NYSE since March 23, 2012. Our ADSs trade under the symbol“VIPS.” 84Table of Contents D Selling Shareholders Not applicable. E Dilution Not applicable. F Expenses of the Issue Not applicable. ITEM 10. ADDITIONAL INFORMATION A Share Capital Not applicable. B Memorandum and Articles of Association Our current memorandum and articles of association became effective in March 2012. The following are summaries of material provisions of ouramended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares. General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued inregistered form. Our shareholders may freely hold and vote their shares. Each holder of our ordinary shares is entitled to one vote for each ordinary share heldon matters submitted to a vote of shareholders. Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the CompaniesLaw. Voting Rights. Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at anyshareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of our board of directors or one or moreshareholders holding at least 10% of the paid up voting share capital, present in person or by proxy. A quorum required for a meeting of shareholders consists of at least one shareholder present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative, who holds no less than 10% of our voting share capital. Shareholders’ meetings are held annually andmay be convened by our board of directors on its own initiative or upon a request to the directors by shareholders holding in aggregate at least one-third of ourvoting share capital. Advance notice to shareholders of at least seven days is required for the convening of our annual general meeting and other shareholders’meetings. An ordinary resolution to be passed by the shareholders requires a simple majority of votes cast in a general meeting, while a special resolutionrequires no less than two-thirds of the votes cast. A special resolution is required for important matters such as a change of name. Our shareholders may effectcertain changes by ordinary resolution, including increasing the amount of our authorized share capital, consolidating and dividing all or any of our sharecapital into shares of larger amount than our existing shares and canceling any shares. Transfer of Shares. Subject to the restrictions of our memorandum and articles of association, as applicable, any of our shareholders may transferall 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. Our board of directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which wehave a lien. Our directors may also decline to register any transfer of any share unless (a) the instrument of transfer is lodged with us, accompanied by thecertificate for the 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 makethe 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) in thecase of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; (e) the shares conceded are free ofany lien in favor of us; or (f) a fee of such maximum sum as the NYSE may determine to be payable, or such lesser sum as our board of directors may fromtime to time require, has been paid to us in respect thereof. 85Table of Contents If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to eachof the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one ormore newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time totime determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year. Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available fordistribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares in accordance with the company law and thememorandum or articles of association of the company. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets willbe distributed so that the losses are borne by our shareholders proportionately. Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid ontheir shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The shares that have been called upon and remainunpaid on the specified time are subject to forfeiture. Redemption of Shares. Subject to the provisions of the Companies Law, we may issue shares on terms that are subject to redemption, at our optionor at the option of the holders, on such terms and in such manner as may be determined by special resolution. Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of the CompaniesLaw, be varied either with the written consent of the holders of a majority of the issued shares of that class or with the sanction of a special resolution passed ata general meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class shall not, unless otherwiseexpressly 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 in priority to orpari passu with such previously existing shares. Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copiesof our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. Anti-Takeover Provisions. Some provisions of our amended and restated memorandum and articles of association may discourage, delay or preventa change of control of our company or management that shareholders may consider favorable, including provisions that: · authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges andrestrictions of such preferred shares without any further vote or action by our shareholders; and · limit the ability of shareholders to requisition and convene general meetings of shareholders. However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restatedmemorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company. C Material Contracts Other than in the ordinary course of business and other than those described under this item, in “Item 4. Information on the Company” or elsewherein this report, we have not entered into any material contract. 86Table of Contents D Exchange Controls See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations on Foreign Currency Exchange.” E Taxation The following summary of the material Cayman Islands, People’s Republic of China and United States federal income tax consequences of aninvestment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this registration statement, all ofwhich are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, suchas the tax consequences under state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it is the opinion ofTravers Thorp Alberga, our special Cayman Islands counsel; to the extent that the discussion relates to matters of PRC tax law, it is the opinion of Han KunLaw Offices, our special PRC counsel; and to the extent that the discussion states definitive legal conclusions under United States federal income tax law as tothe material United States federal income tax consequences of an investment in our ADSs or ordinary shares, and subject to the qualifications herein, itrepresents the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, our special United States counsel. Cayman Islands Taxation The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is notaxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands exceptfor stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is notparty to any double tax treaties that are applicable to any payments made to or by us. There are no exchange control regulations or currency restrictions in theCayman Islands. People’s Republic of China Taxation PRC EIT Law Under the PRC EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a “residententerprise,” meaning it can be treated in a manner similar to a Chinese enterprise for EIT purposes, although the dividends paid to one resident enterprise fromanother may qualify as “tax-exempt income.” The implementation rules of the EIT Law define a “de facto management body” as a body that has substantialand overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of anenterprise. Circular 82 issued by the PRC SAT on April 22, 2009 specifies that certain foreign enterprises controlled by a PRC company or a PRC companygroup will be classified as PRC “resident enterprises” if the following requirements are satisfied: (a) the senior management and core management departmentsin charge of its daily operations function are mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval bypersons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings arelocated or kept in the PRC; and (d) at least half of the enterprise’s directors with voting rights or senior management reside in the PRC. Although Circular 82,only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals, the determining criteria set forth inCircular 82, may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status ofoffshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC individuals. We believe that we are not a PRC resident enterprise and therefore we are not subject to PRC EIT reporting obligations and the dividends paid by us toholders of our ADSs or ordinary shares will not be subject to PRC withholding tax. However, if the PRC tax authorities determine we are a PRC residententerprise for EIT purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our non-PRC enterprise shareholders and a 20%withholding tax from dividends we pay to our non-PRC individual shareholders, including the holders of our ADSs. In addition, non-PRC shareholders maybe subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares if such income is treated as sourced from within the PRC. Itis unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event we aretreated as a PRC resident enterprise. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Doing Business in China—It is unclear whether wewill be considered a PRC `resident enterprise’ under the PRC Enterprise Income Tax Law and, depending on the determination of our PRC `resident enterprise’status, our global income may be subject to the 25% PRC enterprise income tax, which could have a material adverse effect on our results of operations.” 87Table of Contents Circular on Strengthening the Administration of Enterprise Income Tax for Share Transfer by Non-PRC Resident Enterprises Pursuant to SAT Circular 698, issued by the SAT on December 10, 2009, where a non-PRC resident enterprise transfers the equity interests of aPRC resident enterprise indirectly via disposing of the equity interests of an overseas holding company, or an “Indirect Transfer,” and such overseas holdingcompany is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the foreign investorshall report this Indirect Transfer to the competent tax authority. The PRC tax authority will examine the true nature of the Indirect Transfer, and if the taxauthority concludes that the foreign investor has adopted an “abusive arrangement” in order to avoid PRC tax, it may disregard the existence of the overseasholding company and re-characterize the Indirect Transfer and as a result, gains derived from such Indirect Transfer may be subject to PRC withholding taxat a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise toits related parties at a price lower than the fair market value, the competent tax authority has the power to make a reasonable adjustment to the taxable incomeof the transaction. SAT Circular 698 is retroactively effective from January 1, 2008. On March 28, 2011, the SAT released the SAT Public Notice (2011)No. 24, or SAT Public Notice 24, to clarify several issues related to SAT Circular 698. SAT Public Notice 24 became effective on April 1, 2011. Accordingto SAT Public Notice 24, the term “effective tax rate” refers to the effective tax rate on the gains derived from disposition of the equity interests of an overseasholding company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseasholding company is not subject to income tax in the country or region where the overseas holding company is a resident. Material United States Federal Income Tax Considerations The following is a summary of the material United States federal income tax consequences of the ownership and disposition of our ADSs or ordinaryshares by a U.S. Holder, as defined below, that acquires our ADSs or ordinary shares and holds our ADSs or ordinary shares as “capital assets” (generally,property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing UnitedStates federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the InternalRevenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS ora court will not take a contrary position. This summary does not discuss all aspects of United States federal income taxation that may be important toparticular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions,insurance companies, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, pension plans, regulatedinvestment companies, real estate investment trusts, cooperatives, and tax-exempt organizations (including private foundations)), holders who are not U.S.Holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, holders that hold or will hold their ADSs or ordinaryshares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, United Statesexpatriates, persons liable for alternative minimum tax, or holders that have a functional currency other than the United States dollar, all of whom may besubject to tax rules that differ significantly from those summarized below. In addition, this summary of material United States federal income taxconsiderations does not discuss any state, local, or non-United States tax considerations. Each U.S. Holder is advised to consult its tax advisors regarding theUnited States federal, state, local, and non-United States income and other tax considerations of an investment in our ADSs or ordinary shares. General For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income taxpurposes, (a) an individual who is a citizen or resident of the United States, (b) a corporation (or other entity treated as a corporation for United States federalincome tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (c) an estate the income ofwhich is includible in gross income for United States federal income tax purposes regardless of its source, or (d) a trust (A) the administration of which issubject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantialdecisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code. 88Table of Contents If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or ordinaryshares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnershipsand partners of a partnership holding our ADSs or ordinary shares are advised to consult their tax advisors regarding an investment in our ADSs or ordinaryshares. The discussion below is written on the basis that the representations contained in the deposit agreement are true and all parties to such depositagreement and any related agreement have been and will be in compliance with the terms in such agreements. For United States federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented bythe ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax. Passive Foreign Investment Company Considerations A non-United States corporation, such as our company, will be a PFIC for United States federal income tax purposes for any taxable year if either(a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of its assets(as determined on the basis of fair market value) during such year is attributable to assets that produce or are held for the production of passive income. Forthis purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s unbooked intangibles associated with activebusiness activities may generally be classified as active assets. We will be treated as owning a proportionate share of the assets and earning a proportionateshare of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock. Although the law in this regard is unclear, we treat Vipshop Information as being owned by us for United States federal income tax purposes, notonly because we control its management decisions but also because we are entitled to substantially all of the economic benefits associated with this entity, and,as a result, we consolidate this entity’s operating results in our consolidated financial statements. If it were determined, however, that we are not the owner ofVipshop Information for United States federal income tax purposes, we would likely be treated as a PFIC for the current taxable year or any future taxable year. Assuming that we are the owner of Vipshop Information for United States federal income tax purposes, we believe that we primarily operate as anonline commerce company in China. Based upon our current income and assets and projections as to the value of our ADSs and ordinary shares following thefollow-on offering that was completed in March 2013, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. While we donot expect to become a PFIC, the determination of whether we will be or become a PFIC will depend in part upon the value of our ADSs and ordinary shares,which we cannot control. Among other matters, if market capitalization is less than anticipated or subsequently declines, we may be classified as a PFIC forthe current or future taxable years. It is also possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles,which may result in our company being, or becoming, a PFIC for the current or one or more future taxable years. The determination of whether we are or will be a PFIC will also depend, in part, on the composition of our income and our assets, which will beaffected by how, and how quickly, we use our liquid assets and the cash raised in the follow-on public offering that was completed in March 2013. Undercircumstances where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantiallyincrease. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, noassurance can be given that we are not or will not become a PFIC and our special United States counsel expresses no opinion with respect to our PFIC statusand also expresses no opinion with respect to our expectations regarding our PFIC status. If we are a PFIC for any year during which a U.S. Holder holds ourADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs orordinary shares. The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Ordinary Shares” assumes that we will not be a PFIC forUnited States federal income tax purposes. The United States federal income tax rules that apply if we are a PFIC for the current taxable year or anysubsequent taxable years are generally discussed below under “Passive Foreign Investment Company Rules.” 89Table of Contents Dividends Subject to the PFIC rules discussed below, any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or ordinaryshares out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally be includible inthe gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or bythe depositary bank, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income taxprinciples, any distribution paid will generally be reported as a “dividend” for United States federal income tax purposes. A non-corporate recipient ofdividend income generally will be subject to tax on dividend income from a “qualified foreign corporation” at a reduced capital gains rate rather than themarginal tax rates generally applicable to ordinary income provided that a certain holding period requirement is met (more than 60 days of ownership, withoutprotection from the risk of loss, during the 121-day period beginning 60 days before the ex-dividend date). Each U.S. Holder is advised to consult its taxadvisors regarding the availability of the reduced tax rate on dividends to its particular circumstances. A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or thepreceding taxable year) generally will be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with theUnited States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchangeof information provision, or (b) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an establishedsecurities market in the United States. Our ADSs are listed on the NYSE, which is an established securities market in the United States, and we expect ourADSs to be readily tradable on the NYSE. Accordingly, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced taxrate. Since we do not expect that our ordinary shares will be listed on an established securities market in the United States, it is unclear whether dividends thatwe pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance thatour ADSs will be considered readily tradeable on an established securities market in the United States in later years. In the event that we are deemed to be a PRC “resident enterprise” and are liable to tax under the PRC EIT Law, we should be eligible for the benefits ofthe United States-PRC income tax treaty (the “U.S.-PRC Treaty”), which the Secretary of Treasury of the United States has determined is satisfactory forpurposes of clause (a) above and which includes an exchange of information provision. If we are eligible for such benefits, dividends we pay on our ordinaryshares, regardless of whether such shares are represented by the ADSs, would generally be eligible for the reduced rate of taxation applicable to qualifieddividend income whether or not such shares are readily tradable on an established securities market in the United States. Dividends received on the ADSs orordinary shares will not be eligible for the dividends received deduction allowed to corporations. Each U.S. Holder is advised to consult its tax advisorsregarding the availability of the lower capital gains rate applicable to qualified dividend income for any dividends we pay with respect to our ADSs or ordinaryshares. Dividends paid on our ADSs or ordinary shares generally will be treated as income from foreign sources for United States foreign tax credit purposesand generally will constitute passive category income. In the event that we are deemed to be a PRC “resident enterprise” under the PRC EIT Law, a U.S. Holdermay be subject to PRC withholding taxes on dividends paid on our ADSs or ordinary shares. A U.S. Holder may be eligible, subject to a number of complexlimitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S.Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for United States federal income tax purposes inrespect of such withholdings, but only for a year in which such U.S. Holder elects to do so for all creditable foreign income taxes. The rules governing theforeign tax credit are complex. Each U.S. Holder is advised to consult its tax advisors regarding the availability of the foreign tax credit under its particularcircumstances. Sale or Other Disposition of ADSs or Ordinary Shares Subject to the PFIC rules discussed below, a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs orordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such ADSsor ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally beUnited States source gain or loss for United States foreign tax credit purposes. In the event that we are deemed to be a “resident enterprise” under the PRC EITLaw and gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, a U.S. Holder that is eligible for the benefits of the U.S.-PRCTreaty may elect to treat the gain as PRC source income. The deductibility of a capital loss may be subject to limitations. Each U.S. Holder is advised toconsult its tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or ordinary shares, including the availabilityof the foreign tax credit under its particular circumstances. 90Table of Contents Passive Foreign Investment Company Rules If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remaina PFIC, on (a) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holderthat is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for theADSs or ordinary shares), and (b) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ADSs or ordinaryshares. Under the PFIC rules: · such excess distribution and/or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares; · such amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in whichwe are classified as a PFIC, or pre-PFIC year, will be taxable as ordinary income; · such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable toindividuals or corporations as appropriate for that year; and · an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares and any of our non-United States subsidiariesis also a PFIC (i.e., a lower-tier PFIC), such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC andwould be subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though suchU.S. Holder would not receive the proceeds of those distributions or dispositions. Each U.S. Holder is advised to consult its tax advisors regarding theapplication of the PFIC rules to any of our subsidiaries. As an alternative to the foregoing rules, if we are a PFIC, a U.S. Holder of “marketable stock” may make a mark-to-market election with respect toour ADSs, provided that the ADSs are regularly traded on the NYSE. In addition, we do not expect that holders of ordinary shares that are not represented byADSs will be eligible to make a mark-to-market election. We anticipate that our ADSs should qualify as being regularly traded, but no assurances may begiven in this regard. If a U.S. Holder makes this election, the U.S. Holder will generally (a) include as ordinary income for each taxable year that we are a PFICthe excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (b) deduct as an ordinaryloss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but such deductionwill only be allowed to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted taxbasis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-marketelection, any gain recognized upon the sale or other disposition of ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, butonly to the extent of the net amount previously included in the income as a result of the mark-to-market election. If a U.S. Holder makes a mark-to-market election and we cease to be a PFIC, the U.S. Holder will not be required to take into account the mark-to-market gain or loss described above during any period that we are not classified as a PFIC. Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investmentsheld by us that are treated as an equity interest in a PFIC for United States federal income tax purposes. We do not intend to provide the information necessary for U.S. Holders to make qualified electing fund elections, which, if available, would result intax treatment different from the general tax treatment for PFICs described above. If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the U.S. Holder must file an annual reportcontaining such information as the United States Treasury Department may require and may be required to file an annual IRS Form 8621. Each U.S. Holderis advised to consult its tax advisors concerning the United States federal income tax consequences of purchasing, holding, and disposing of ADSs orordinary shares if we are or become a PFIC, including the possibility of making a mark-to-market election. 91Table of Contents Information Reporting and Backup Withholding U.S. Holders may be subject to information reporting to the IRS with respect to an investment in the ADSs or ordinary shares, including, amongothers, IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation). Specific types of holders (as identified in the United States taxcompliance rules) will be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our ADSsor ordinary shares. Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale or other disposition of our ADSs or ordinaryshares are not generally subject to United States backup withholding (provided that certification requirements are satisfied). Each U.S. Holder is advised toconsult its tax advisors regarding the application of the United States information reporting and backup withholding rules to its particular circumstances. Individuals who are U.S. Holders, and who hold “specified foreign financial assets”, including stock of a non-U.S. corporation that is not held inan account maintained by a U.S. “financial institution”, whose aggregate value exceeds US$50,000 during the tax year, may be required to attach to their taxreturns for the year certain specified information. An individual who fails to timely furnish the required information may be subject to a penalty. U.S. Holderswho are individuals should consult their own tax advisors regarding their reporting obligations under this legislation. F Dividends and Paying Agents Not applicable. G Statement by Experts Not applicable. H Documents on Display We have filed with the SEC a registration statement on Form F-1, including relevant exhibits and securities under the Securities Act with respect tounderlying ordinary shares represented by the ADSs. We have also filed with the SEC a related registration statement on F-6 (File No. 333-180029) to registerthe ADSs. 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. All information filed with the SEC can be obtainedover the internet at the SEC’s website at www.sec.gov or 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 or visit the SEC website for further information on the operation of the public reference rooms. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements toshareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisionscontained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements withthe SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish the depositarywith our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity withU.S. GAAP, and all notices of shareholders’ meeting and other reports and communications that are made generally available to our shareholders. Thedepositary will make such notices, reports and communications available to holders of ADSs and, upon our written request, will mail to all record holders ofADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us. I Subsidiary Information For a listing of our subsidiaries, see “Item 4.C. Information on the Company—Organizational Structure.” 92Table of Contents ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 demanddeposits and held-to-maturity securities. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due tochanges in interest rates. We have not used any derivative financial instruments to manage our interest risk exposure. Foreign Exchange Risk All of our revenues and most of our expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to the U.S. dollarproceeds of the public offerings of our equity securities, most or substantially all of which we expect to convert into Renminbi over time. As the impact offoreign currency risk on our operations was not material in the past, we have not used any forward contracts, currency borrowings or derivative instrumentsto hedge our exposure to foreign currency exchange risk. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economicconditions and China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to theU.S. dollar, and the Renminbi appreciated significantly against the U.S. dollar over the following several years. However, the PBOC regularly intervenes inthe foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. Since reaching a high against the U.S. dollar inJuly 2008, the Renminbi traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008against other freely traded currencies such as Euro, in tandem with the U.S. dollar, and like the U.S. dollar it has depreciated against most other freely tradedcurrencies since March 2009. In June 2010, the PRC government announced that it would increase the Renminbi exchange rate flexibility, and since that time,the Renminbi has gradually appreciated against the U.S. dollar. It is difficult to predict how long the current situation may last and when and how thisrelationship between the Renminbi and the U.S. dollar may change again. To the extent that we need to convert the U.S. dollars we received from our initial and follow-on public offerings into Renminbi to fund ouroperations, acquisitions, or for other uses within the PRC, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbiamount we receive from the conversion. To the extent that we seek to convert Renminbi into U.S. dollars, depreciation of the Renminbi against the U.S. dollarwould have an adverse effect on the U.S. dollar amount we receive from the conversion. On the other hand, a decline in the value of the Renminbi against theU.S. dollar could reduce the U.S. dollar equivalent of our financial results, the value of your investment in the company and the dividends that we may payin the future, if any, all of which may have a material adverse effect on the prices of our ADS. The Renminbi has appreciated significantly against the U.S. dollar during the reporting periods presented, from a rate of RMB6.6000 to US$1.00 asof December 30, 2010 to a rate of RMB6.2301 to US$1.00 as of December 30, 2012. As all of our revenues and most of our expenses are denominated inRenminbi, the changes in the exchange rates of Renminbi against U.S. dollars have not historically materially impacted our results of operations. However,since our reporting currency in the financial statements is U.S. dollars, the translation effect on our revenues and expenses in our income statements has beenincreasing due to the accelerated appreciation of the Renminbi against the U.S. dollar during the reporting periods, and has been further magnified by thesignificant increases in our net revenues and total operating expenses during the corresponding periods. For example, during 2011, the Renminbi appreciatedagainst the U.S. dollar from a rate of RMB6.6000 to US$1.00 as of January 3, 2011 to a rate of RMB6.2939 to US$1.00 as of December 30, 2011, resultingin a currency translation increase in our net revenues of US$10.8 million and a currency translation increase in our total operating expenses ofUS$3.6 million. During 2012, the Renminbi appreciated against the U.S. dollar from a rate of RMB6.2940 to US$1.00 as of January 3, 2012 to a rate ofRMB6.2301 to US$1.00 as of December 31, 2012, resulting in a currency translation increase in our net revenues of US$7.1 million and a currencytranslation increase in our total operating expenses of US$1.6 million. We are not currently subject to any significant direct foreign exchange risk and accordingly, we have not hedged exposures denominated in foreigncurrencies, nor do we have any other derivative financial instruments outstanding. Based on the amount of our cash and cash equivalents on hand as ofDecember 31, 2012, a 1.0% change in the exchange rate between the Renminbi and the U.S. dollar would result in an increase or decrease of US$1.2 million toour cash and cash equivalents. 93Table of Contents Inflation Inflation in China has not historically materially impacted our results of operations. According to the National Bureau of Statistics of China, theyear-over-year percent changes in the consumer price index for December 2010, 2011 and 2012 in China were increases of 4.6%, 4.1% and 2.5%, respectively.Although we have not been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higherrates of inflation in China. 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 Deutsche Bank Trust Company Americas, the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly frominvestors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees formaking distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. Thedepositary may collect its annual fee for depositary services by deducting 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 arepaid. Set forth below is a summary of fees holders of our ADSs may be required to pay for various services the depositary may provide: ServiceFees· Issuance of ADSs, including issuances resulting from a distribution ofshares or rights or other propertyUp to US$0.05 per ADS issued· Cancellation of ADSs, including the case of termination of the depositagreementUp to US$0.05 per ADS cancelled· Distribution of cash dividends or other cash distributionsUp to US$0.05 per ADS held· Distribution of ADSs pursuant to share dividends, free sharedistributions or exercise of rights.Up to US$0.05 per ADS held· Distribution of securities other than ADSs or rights to purchaseadditional ADSsA fee equivalent to the fee that would be payable if securities distributed toyou had been ordinary shares and the ordinary shares had been deposited forissuance of ADSs· Depositary servicesUp to US$0.05 per ADS held on the applicable record date(s) established bythe depositary bank· Transfer of ADRsUS$1.50 per certificate presented for transfer 94Table of Contents As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmentalcharges such as: · Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands(i.e., upon deposit and withdrawal of ordinary shares). · Expenses incurred for converting foreign currency into U.S. dollars. · Expenses for cable, telex and fax transmissions and for delivery of securities. · Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes(i.e., when ordinary shares are deposited or withdrawn from deposit). · Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit. · Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable toordinary shares, deposited securities, ADSs and ADRs. · Any applicable fees and penalties thereon. Fees and Other Payments Made by the Depositary to Us The depositary has agreed to reimburse us for a portion of certain expenses we incur that are related to establishment and maintenance of the ADRprogram, including investor relations expenses. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount ofreimbursement available to us is not related to the amounts of fees the depositary collects from investors. Further, the depositary has agreed to reimburse uscertain fees payable to the depositary by holders of ADSs. Neither the depositary nor we can determine the exact amount to be made available to us because(i) the number of ADSs that will be issued and outstanding, (ii) the level of service fees to be charged to holders of ADSs and (iii) our reimbursable expensesrelated to the program are not known at this time. PART II. ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged. The following “Use of Proceeds” information relates to: · the registration statement on Form F-1 (File number: 333-179581) for our initial public offering of 11,004,600 ADSs, representing 22,009,200ordinary shares, which registration statement was declared effective by the SEC on March 22, 2012. Goldman Sachs (Asia) L.L.C. andDeutsche Bank Securities Inc. acted as the representatives of the underwriters in the initial public offering. · The registration statement on Form F-1 (File number: 333-186781), together with the post-effective Registration Statement on Form F-1 (Filenumber: 333-187247) to register additional securities that became effective immediately upon filing, for the follow-on public offering of 7,200,000ADSs, representing 14,400,000 ordinary shares, by us and the selling shareholders therein, and the underwriters’ full exercise of their option topurchase an additional 1,080,000 ADSs from certain selling shareholders, which registration statement was declared effective by the SEC onMarch 13, 2013. Goldman Sachs (Asia) L.L.C., Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC acted as the representatives ofthe underwriters in the follow-on public offering. We received net proceeds of US$61.9 million from our initial public offering and net proceeds of US$90.5 million from our follow-on publicoffering. Our expenses incurred and paid to others in connection with the issuance and distribution of the ADSs in our initial public offering totaled US$9.6million, which included US$5.0 million for underwriting discounts and commissions and US$4.6 million for other expenses. Our expenses incurred andpaid to others in connection with the issuance and distribution of the ADSs in our follow-on public offering totaled US$5.5 million, which included US$4.1million for underwriting discounts and commissions and US$1.4 million for other expenses. 95Table of Contents As of December 31, 2012, we used RMB415.7 million of the net proceeds from our initial public offering. ITEM 15. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our senior management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of theeffectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Basedupon that evaluation, our senior management has concluded that, as of December 31, 2012, our disclosure controls and procedures were effective. Disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SecuritiesExchange Commission’s rule and forms and that such information required to be disclosed by us in the reports that we file or submit under the Exchange Actis accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding required disclosures. Management’s Annual Report on Internal Control over Financial Reporting This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report ofour company’s registered public accounting firm due to a transition period established by rules of the SEC for new public companies. Changes in Internal Control over Financial Reporting Prior to our initial public offering in March 2012, we were a private company with limited accounting personnel and other resources with which toaddress our internal controls and procedures. During the audits of our consolidated financial statements as of December 31, 2009 and 2010 and 2011 and forthe years ended December 31, 2009, 2010 and 2011 in connection with the initial public offering of our ADSs in March 2012, we identified one “materialweakness” in our internal control over financial reporting, as defined in the standards established by PCAOB, and other control deficiencies. A “materialweakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a materialmisstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The above material weakness related to the lack of comprehensive U.S. GAAP accounting policies, financial reporting and internal controlprocedures. In particular, we did not have a comprehensive accounting policies manual and financial reporting and closing procedure manual for our financedepartment, and we did not have sufficient personnel to build and maintain formalized accounting policies and financial policies and financial reportingprocedures in accordance with U.S. GAAP. Throughout 2012, we have implemented a number of measures to address the material weakness and other control deficiencies that have beenidentified, including, among other things, establishment of a separate internal audit department; and successful implementation of resource planning andwarehouse management systems as well as formalized stock-taking systems; development of an accounting manual including formal procedures and policiesfor U.S. GAAP closing and reporting; engagement of a reputable consulting firm to help us review and improve all procedures and policies for the purposes ofcompliance with applicable U.S. securities regulations and accounting principles and rules. We have also hired officers and personnel with finance,accounting, SEC reporting and U.S. GAAP experience. For example, we hired for our U.S. GAAP department two more staff members who are licensedCPAs. During 2012, we determined that the above-mentioned material weakness has been remediated. During 2012, we identified one “significant deficiency” in our internal control over financial reporting as defined in the standards established byPCAOB, and other control deficiencies. The significant deficiency relates to the deficient calculation mechanism of our e-Wallet system. We plan to commitsufficient IT resources to re-write and upgrade the e-Wallet program and establish internal control procedures over the system discrepancies. We also plan toimplement a number of measures to address other control deficiencies that have been identified. 96Table of Contents ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Ms. Kathleen Chien, an independent director (under the standards set forth in Section 303A of theCorporate Governance Rules of the NYSE and Rule 10A-3 under the Exchange Act) and member of our audit committee, qualifies as an audit committeefinancial expert. ITEM 16B. CODE OF ETHICS Our board of directors has adopted a code of ethics that applies to all of the directors, officers and employees of us and our subsidiaries, whetherthey work for us on a full-time, part-time, consultative, or temporary basis. In addition, we expect those who do business for us such as consultants,suppliers and collaborators to also adhere to the principles outlined in the code. Certain provisions of the code apply specifically to our chief executive officer,chief financial officer, senior finance officer, controller, vice presidents and any other persons who perform similar functions for us. We have filed our code ofbusiness conduct and ethics as an exhibit to our registration statement on Form F-1 (No. 333-179581) in connection with our initial public offering inMarch 2012. 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 DeloitteTouche Tohmatsu, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below. 20112012USD(in thousands)Audit fees1,132685Audit-related fees——All other fees—48 (1) “Audit fees” represent the fees billed and expected to be billed for professional services rendered by our principal auditors for the audit of our annualconsolidated financial statements, review of quarterly financial information, and audit services that are normally provided by the independent registeredpublic accounting firm in connection with regulatory filing or engagement for those years.(2) “Audit-related fees” represent the aggregate fees billed and expected to be billed in each of the fiscal years listed for assurance and related services by ourprincipal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”(3) “All other fees” represent the aggregate fees billed and expected to be billed in each of the fiscal years listed for professional services rendered by ourindependent registered public accounting firm other than the services reported in (1) and (2). The fees in 2012 relates to financial process review. All audit and permitted non-audit services provided by our independent auditors, including audit services, audit-related services, tax services andother services as described above, must be approved in advance by our audit committee. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES None. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT Not applicable. 97(1)(2)(3)Table of Contents ITEM 16G. CORPORATE GOVERNANCE We have followed and intend to continue to follow the applicable corporate governance standards under the NYSE Corporate Governance Rules. Weare not aware of any significant differences between our corporate governance practices and those followed by domestic companies under NYSE listingstandards. ITEM 16H. MINE SAFETY DISCLOSURE Not applicable. PART III. ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS The consolidated financial statements of Vipshop Holdings Limited are included at the end of this annual report. ITEM 19. EXHIBITS Exhibit NumberDocument1.1Amended and Restated Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.2 from our F-1 registrationstatement (File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).2.1Form of Ordinary Share Certificate of the Registrant (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (FileNo. 333-179581), as amended, initially filed with the Commission on February 17, 2012).2.2Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts Registrant, dated as ofMarch 22, 2012 (incorporated by reference to Exhibit 4.3 from our S-8 registration statement (File No.333-181559) filed with theCommission on May 21, 2012)2.3Amended and Restated Shareholders’ Agreement, among the Registrant and other parties therein dated as of April 11, 2011(incorporated by reference to Exhibit 4.4 from our F-1 registration statement (File No.333-179581), as amended, initially filed with theCommission on February 17, 2012).4.12011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No.333-179581), asamended, initially filed with the Commission on February 17, 2012).4.22012 Share Incentive Plan (incorporated by reference to Exhibit 10.11 from our F-1 registration statement (File No.333-179581), asamended, initially filed with the Commission on February 17, 2012).4.3Form of Employment Agreement between the Registrant and the executives of the Registrant (incorporated by reference to Exhibit 10.2from our F-1 registration statement (File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).4.4English Translation of the Loan Contract between the Registrant and China Merchants Bank Co., Ltd, Shenzhen Keyuan Sub-Branchdated as of June 30, 2011 (incorporated by reference to Exhibit 10.3 from our F-1 registration statement (File No.333-179581), asamended, initially filed with the Commission on February 17, 2012).4.5English Translation of the Loan Contract between the Registrant and China Merchants Bank Co., Ltd, Shenzhen Keyuan Sub-Branchdated as of May 27, 2011 (incorporated by reference to Exhibit 10.4 from our F-1 registration statement (File No.333-179581), asamended, initially filed with the Commission on February 17, 2012).4.6Amended and Restated Business Operation Agreement, dated as of October 8, 2011, between Guangzhou Vipshop Computer ServiceCo., Ltd (now Vipshop (China) Co., Ltd.) and Vipshop Information (incorporated by reference to Exhibit 10.5 from our F-1registration statement (File No.333-179581), as amended, initially filed with the Commission on February 17, 2012). 98Table of Contents 4.7Amended and Restated Equity Interest Pledge Agreement, dated as of October 8, 2011, among Guangzhou Vipshop Computer ServiceCo., Ltd (now Vipshop (China) Co., Ltd.), the shareholders of Vipshop Information and Vipshop Information (incorporated byreference to Exhibit 10.6 from our F-1 registration statement (File No.333-179581), as amended, initially filed with the Commission onFebruary 17, 2012).4.8Amended and Restated Exclusive Option Agreement, dated as of October 8, 2011, among Guangzhou Vipshop Computer Service Co.,Ltd (now Vipshop (China) Co., Ltd.), the shareholders of Vipshop Information and Vipshop Information (incorporated by reference toExhibit 10.7 from our F-1 registration statement (File No.333-179581), as amended, initially filed with the Commission onFebruary 17, 2012).4.9Power of Attorney, dated as of January 20, 2011 by the shareholders of Vipshop Information (incorporated by reference to Exhibit 10.8from our F-1 registration statement (File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).4.10English Translation of the Exclusive Purchase Framework Agreement between Guangzhou Vipshop Computer Service Co., Ltd (nowVipshop (China) Co., Ltd.) and Vipshop Information (incorporated by reference to Exhibit 10.9 from our F-1 registration statement(File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).4.11Form of Indemnity Agreement between the Registrant and its directors and officers (incorporated by reference to Exhibit 10.10 from ourF-1 registration statement (File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).4.12Second Amended and Restated Equity Interest Pledge Agreement, dated as of October 17, 2012, among Vipshop China, theshareholders of Vipshop Information and Vipshop Information (incorporated by reference to Exhibit 10.4 from our F-1 registrationstatement (File No. 333-186781), as amended, initially filed with the Commission on February 21, 2013).4.13Second Amended and Restated Exclusive Option Agreement, dated as of October 17, 2012, among Vipshop China, the shareholders ofVipshop Information and Vipshop Information (incorporated by reference to Exhibit 10.5 from our F-1 registration statement (FileNo. 333-186781), as amended, initially filed with the Commission on February 21, 2013).4.14Amended and Restated Power of Attorney, dated as of October 17, 2012, by the shareholders of Vipshop Information (incorporated byreference to Exhibit 10.7 from our F-1 registration statement (File No. 333-186781), as amended, initially filed with the Commission onFebruary 21, 2013).8.1Subsidiaries of the Registrant (incorporated by refenrece to Exhibit 21.1 from our F-1 registration statement (File No.333-186781), asamended, initially filed with the Commission on February 21, 2013).11.1Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our F-1 registration statement(File No.333-179581), as amended, initially filed with the Commission on February 17, 2012).12.1*Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1**Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2**Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1*Consent of Deloitte Touche Tohmatsu15.2*Consent of Han Kun Law Offices15.3*Consent of Travers Thorp Alberga101.INS***XBRL Instance Document 99Table of Contents 101.SCH***XBRL Taxonomy Extension Scheme Document101.CAL***XBRL Taxonomy Extension Calculation Linkbase Document101.DEF***XBRL Taxonomy Extension Definition Linkbase Document101.LAB***XBRL Taxonomy Extension Label Linkbase Document101.PRE***XBRL Taxonomy Extension Presentation Linkbase Document * Filed with this annual report on Form 20-F.** Furnished with this annual report on Form 20-F*** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes ofSections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, andotherwise is not subject to liability under these sections. 100Table of Contents SIGNATURES 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 tosign this annual report on its behalf. Vipshop Holdings Limited By:/s/ Eric Ya ShenName:Eric Ya ShenTitle:Chairman of the Board of DirectorsChief Executive Officer Date: April 10, 2013 101Table of Contents VIPSHOP HOLDINGS LIMITED INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2011 and 2012F-3Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2012F-4Consolidated Statements of Shareholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2012F-5Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2012F-6Notes to the Consolidated Financial StatementsF-7Schedule I—Vipshop Holding Limited Condensed Financial Information as of December 31, 2011 and 2012 and for the period from August 27,2010 to December 31, 2010 and for each of the two years in the period ended December 31, 2012F-43 F-1Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Vipshop Holdings Limited: We have audited the accompanying consolidated balance sheets of Vipshop Holdings Limited and subsidiaries (the “Group”) as of December 31,2011 and 2012, and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity (deficit), and cash flows foreach of the three years in the period ended December 31, 2012. Our audits also included the financial statements schedule in Schedule I. These consolidatedfinancial statements and the financial statement schedule is the responsibility of the Group’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire 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 considerationof internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as ofDecember 31, 2011 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31,2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forththerein. /s/ Deloitte Touche TohmatsuCertified Public AccountantsHong Kong February 21, 2013, except for Note 18 (c), as to which the date is March 19, 2013 F-2Table of Contents VIPSHOP HOLDINGS LIMITED CONSOLIDATED BALANCE SHEETS (In U.S. dollars, except for share data) As of December 31,20112012$$ASSETSCURRENT ASSETSCash and cash equivalents44,954,778124,472,629Restricted deposits (Note 7)14,214,585—Held-to-maturity securities (Note 5)—86,097,191Accounts receivable (Note 3)4,150, 6646,990,560Amounts due from related parties (Note 15(a))2,101,853177,237Other receivables (Note 4)9,410,4819,993,887Inventories69,742,200143,963,931Advance to suppliers12,626,2869,569,795Prepaid expenses1,077,194686,876Total current assets158,278,041381,952,106NON-CURRENT ASSETSProperty and equipment, net (Note 6)9,148,16212,637,567Deposits for property and equipment—4,322,217Other assets9,1175,230Total non-current assets9,157,27916,965,014Total assets167,435,320398,917,120LIABILITIES AND EQUITY (DEFICIT)CURRENT LIABILITIESAccounts payable (Including accounts payable of the VIE without recourse to the Company of $2,243,711 and$101,556 as of December 31, 2011 and 2012, respectively)88,020,376193,455,827Advance from customers (Including advance from customers of the VIE without recourse to the Company of$15,378,465 and $55,948,713 as of December 31, 2011 and 2012, respectively)15,381,35755,948,713Accrued expenses and other current liabilities (Note 8)(Including accrued expenses and other current liabilities of the VIE without recourse to the Company of$11,825,417 and $24,908,418 as of December 31, 2011 and 2012, respectively)26,666,50252,676,443Amounts due to related parties (Note 15(b)) (Including amounts due to related parties of the VIE withoutrecourse to the Company of $2,992,516 and 789,057 as of December 31, 2011 and 2012, respectively)3,797,5081,335,756Deferred income (Including deferred income of the VIE without recourse to the Company of $2,569,655 and$10,850,319 as of December 31, 2011 and December 31,2012 , respectively)2,569,65512,917,567Bank borrowings (Note 7)12,710,720—Total current liabilities149,146,118316,334,306Total liabilities149,146,118316,334,306COMMITMENTS AND CONTINGENCIES (Note 14)EQUITY (DEFICIT):Ordinary shares (US$0.0001 par value, 471,620,833 shares authorized, and 46,234,659 and 101,284,881shares issued and outstanding as of December 31, 2011 and December 31, 2012, respectively)4,62410,128Series A Preferred Shares (US$0.0001 par value, 20,212,500 shares authorized, issued and outstanding as ofDecember 31, 2011)20,113,898—Series B Preferred Shares (US$0.0001 par value, 8,166,667 shares authorized, issued and outstanding as ofDecember 31, 2011)41,147,021—Additional paid-in capital124,341,953258,368,448Accumulated losses(166,553,261)(176,025,335)Accumulated other comprehensive income (loss)(765,033)229,573Total shareholders’ equity18,289,20282,582,814TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY167,435,320398,917,120 The accompanying notes are an integral part of the consolidated financial statements. F-3Table of Contents VIPSHOP HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (In U.S. dollars, except for share data) 1.1.2010 to12.31.20101.1.2011 to12.31.20111.1.2012 to12.31.2012$$$Net revenues32,582,115227,142,876692,112,964Cost of goods sold (including inventory written down of $2,601,368, $1,694,336 and$12,166,659 for the years ended December 31, 2010, 2011 and 2012, respectively)(29,374,315)(183,801,334)(537,637,860)Gross Profit3,207,80043,341,542154,475,104Fulfillment expenses (including shipping and handling expenses of $4,318,131,$29,416,463 and $53,897,805 for the years ended December 31, 2010, 2011 and2012, respectively) (Note 16 (e))(5,809,118)(45,478,327)(96,523,444)Marketing expenses (Note 16 (e))(2,438,066)(15,253,325)(32,272,629)Technology and content expenses (Note 16 (e))(562,120)(5,516,361)(14,644,113)General and administrative expenses (Note 16 (e))(2,843,583)(84,575,539)(25,541,812)Total operating expenses(11,652,887)(150,823,552)(168,981,998)Other income78,675564,1822,563,321Loss from operations(8,366,412)(106,917,828)(11,943,573)Interest expenses—(494,509)(222,868)Interest income564122,4373,558,013Exchange gain (loss)—18,375(157,473)Loss before income taxes(8,365,848)(107,271,525)(8,765,901)Income tax expense (Note 12)——(706,173)Net loss(8,365,848)(107,271,525)(9,472,074)Deemed dividend on issuance of Series A Preferred Shares—(49,214,977)—Net loss attributable to ordinary shareholders(8,365,848)(156,486,502)(9,472,074)Net loss per share (Note 13)—Basic(0.18)(3.38)(0.11)—Diluted(0.18)(3.38)(0.11)Weighted average numbers of shares used in calculating net loss per share:—Basic47,775,00046,255,57488,849,206—Diluted47,775,00046,255,57488,849,206Net loss(8,365,848)(107,271,525)(9,472,074)Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments(195,771)(569,628)994,606Comprehensive loss(8,561,619)(107,841,153)(8,477,468) The accompanying notes are an integral part of the consolidated financial statements. F-4Table of Contents VIPSHOP HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (In U.S. dollars, except for share data) AccumulatedAdditionalotherSeries A Preferred sharesSeries B Preferred sharesOrdinary sharespaid-inAccumulatedcomprehensiveNo. of sharesAmountNo. of sharesAmountNo. of sharesAmountcapitallossesincome (loss)Total$$$$$$$Balance as ofJanuary 1, 2010————47,775,0004,778145,805(1,700,912)366(1,549,963)Net loss———————(8,365,848)—(8,365,848)Repayment from theshareholders———————1—1Foreign currencytranslation————————(195,771)(195,771)Balance as ofDecember 31,2010————47,775,0004,778145,805(10,066,759)(195,405)(10,111,581)Net loss———————(107,271,525)—(107,271,525)Repurchase ofordinary shares————(1,837,500)(184)(1,837,316)——(1,837,500)Issuance of ordinaryshares————297,159301,499,964——1,499,994Issuance of Series APreferred shares20,212,50020,113,898———————20,113,898Issuance of Series BPreferred shares——8,166,66741,147,021—————41,147,021Registered capitalcontributions byshareholders of theVIE——————1,390,621——1,390,621Deemed dividend onissuance ofSeries A Preferredshares——————49,214,977(49,214,977)——Share-basedcompensationexpenses——————73,927,902——73,927,902Foreign currencytranslation————————(569,628)(569,628)Balance as ofDecember 31,201120,212,50020,113,8988,166,66741,147,02146,234,6594,624124,341,953(166,553,261)(765,033)18,289,202Net loss———————(9,472,074)—(9,472,074)Issuance of ordinaryshares pursuant toinitial publicoffering————22,009,2002,20166,020,596——66,022,797Direct offeringexpenses——————(3,332,962)——(3,332,962)Conversion ofSeries A PreferredShares intoordinary shares(20,212,500)(20,113,898)——20,212,5002,02120,111,877———Conversion ofSeries B PreferredShares intoordinary shares——(8,166,667)(41,147,021)12,682,2061,26841,145,753———Proceeds fromregistered capitalcontributions byshareholders of theVIE——————2,292,763——2,292,763Proceeds fromissuance ofordinary sharesupon exercise ofstock options————146,31614191,519——191,533Share-basedcompensationexpenses——————7,596,949——7,596,949Foreign currencytranslation————————994,606994,606Balance as ofDecember 31,2012————101,284,88110,128258,368,448(176,025,335)229,57382,582,814 The accompanying notes are an integral part of the consolidated financial statements. F-5Table of Contents VIPSHOP HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In U.S. dollars, except for share data) 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$CASH FLOW FROM OPERATING ACTIVITIES:Net loss(8,365,848)(107,271,525)(9,472,074)Adjustments to reconcile net income to net cash by operating activities:Allowance for doubtful debts49,042——Prepaid expenses write-down——222,999Inventory write-down2,601,3681,694,33612,166,659Depreciation of property and equipment103,1931,368,8244,527,122Amortization of other assets7314,4534,801Loss on disposal of property and equipment31,56861,19420,670Impairment loss of property and equipment—437,725—Share-based compensation expenses—73,927,9027,596,949Interest income on held-to-maturity securities——(1,026,325)Changes in operating assets and liabilities:Accounts receivable(935,944)(2,777,955)(2,866,381)Amounts due from related parties—(2,101,853)1,924,616Other receivables(649,971)(8,764,669)(583,406)Inventories(8,471,539)(64,028,801)(86,388,390)Advances to suppliers(4,696,241)(7,652, 930)2,859,976Prepaid expenses(57,133)(1,020,061)390,318Accounts payable7,247,17379,716,575105,435,451Advances from customers2,117,56113,072,78340,567,356Accrued expenses and other current liabilities3,195,24223,025,08326,009,941Amounts due to related parties(b)1,164,032(856,307)(168,989)Deferred income93,2452,472,00110,347,912Net cash (used in) from operating activities(6,573,521)1,306,775111,569,205Cash flows used in investing activities:Purchase of property and equipment(1,519,205)(9,592,160)(12,379,386)Purchase of other assets(3,128)(9,989)(770)Proceed from disposal of property and equipment—3,17819,972(Increase) decrease in restricted deposits—(14,214,585)14,214,585Purchase of held-to-maturity securities——(101,302,171)Proceed from redemption of held-to-maturity securities upon maturities——16,231,306Net cash used in investing activities(1,522,333)(23,813,556)(83,216,464)Cash flows from financing activities:Proceeds from registered capital contributions by shareholders of the VIE(b)—1,390,621—Proceeds from bank borrowings—17,477,240—Repayment to bank borrowings—(4,766,520)(12,710,720)Loans from shareholders9,137,2201,470,635—Issuance of Series A Preferred shares(a)—10,503,138—Issuance of Series B Preferred shares—41,223,892—Issuance costs of Series A and Series B Preferred shares—(175,754)—Issuance costs of ordinary shares11,499,994—Repurchase of ordinary shares—(1,837,500)—Proceeds from issuance of ordinary shares in the initial public offering, net ofissuance cost——62,689,835Proceeds from issuance of ordinary shares upon exercise of stock options——191,533Net cash provided by financing activities9,137,22166,785,74650,170,648Effect of exchange rate changes(217,996)(435,278)994,462Net increase in cash and cash equivalents823,37143,843,68779,517,851Cash and cash equivalents at beginning of the period287,7201,111,09144,954,778Cash and cash equivalents at end of the period1,111,09144,954,778124,472,629 (a) Noncash financing activities: refer to note 11, US$9,709,643 of the Assigned Loan amount was settled with the accumulated shareholder loan duefrom the Company to the Chairman on February 21, 2011. The rest of the subscription price of US$10,503,138 was settled in cash. (b) Noncash financing activities: US$2,292,763 registered capital was contributed by shareholders of the VIE via offsetting the accumulatedshareholder loan due from the Company to the shareholders on June 14, 2012. The accompanying notes are an integral part of the consolidated financial statements. F-6Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In U.S. dollars, except for share data) 1. Organization and principal activities Vipshop Holdings Limited (the “Company”) was incorporated in the Cayman Islands on August 27, 2010 to be the holding company, itssubsidiaries and variable interest entity (“VIE”) is engaged in the provision of operating an online platform. The Company offers high-quality brandedproducts to consumers in the People’s Republic of China (the “PRC”) through flash sales on its vipshop.com website. Flash sales represents a new online retailformat combining the advantages of e-commerce and discount sales through selling a finite quantity of discounted products or services online for a limitedperiod of time. At the time of the Company’s incorporation and through the date of the Reorganization as described below, the ownership interest of theCompany was held by five individuals indirectly through their respective investment holding companies. These individuals are Mr. Eric YaShen(“Mr. Shen”), the Chairman and chief executive officer of the Company, Mr. Arthur Xiaobo Hong, the Vice Chairman of the Board of Directors of theCompany (collectively, the “Founders”), and three other investors (the “Original Investors”). The Company, its subsidiaries and consolidated variable interestentity (“VIE”) are collectively referred to as the “Group”. Vipshop Information Technology Co., Ltd. (“Vipshop Information” or the “VIE”) was incorporated in the PRC on August 22, 2008, to operate anonline platform for sales of products. On the date of Reorganization, Vipshop Information are owned by the same five ultimate shareholders of the Company asdescribed above, with the same respective percentage of ownership for each of the five ultimate shareholders. To comply with PRC laws and regulations that restrict foreign owned enterprises from holding the licenses that are necessary for the operation ofinternet access, the distribution of online information and the conduct of online commerce, the Company entered into the following transactions (collectively,the “Reorganization”). On October 22, 2010, the Company incorporated a wholly owned subsidiary, Vipshop International Holdings Limited in Hong Kong (“VipshopHK”) as the intermediate holding company for Vipshop (China) Co., Ltd. (formerly known as Vipshop Information Computer Service Co. Ltd., the“WOFE”). The WOFE was incorporated on January 20, 2011 in the PRC as a wholly owned subsidiary of Vipshop HK with initial registered capital ofRMB10 million (US$1.6 million). On the same day, the WOFE entered into series agreements with Vipshop Information and each of its individualshareholders that are disclosed in the Note 2(b). The Reorganization has been accounted for as a recapitalization because there was no control or collaborative group established before or after theReorganization, and the assets and liabilities were recorded at their historical costs. The Company, its subsidiaries and variable interest entity are collectivelyreferred to as the Group. Accordingly, the Group’s consolidated financial statements for the periods presented have been prepared by including the financialstatements of the Company, its subsidiaries and the VIE. F-7Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 1. Organization and principal activities (Continued) As of December 31, 2012, the Company’s significant consolidated subsidiaries and VIE consist of the following: NameDate ofincorporationPlace ofincorporationPercentage ofshareholdingsPrincipal activitiesGuangzhou Vipshop InformationTechnology Co., Ltd.(“VipshopInformation” or the “VIE”)August 22, 2008ChinaVIEOnline retailVipshop International HoldingsLimited(“Vipshop HK”)October 22, 2010Hong Kong100%Investment holdingVipshop (China) Co., Ltd.(the “WOFE”)January 20, 2011China100%Warehousing, logistics, procurement,research and development, consultingVipshop (Kunshan) E-Commerce Co., Ltd.(“Vipshop Kunshan”)August 2, 2011China100%Warehousing and logisticsVipshop (Jianyang) E-Commerce Co., Ltd.(“Vipshop Jianyang”)February 22, 2012China100%Warehousing and logisticsVipshop (Beijing) E-Commerce Co., Ltd.(“Vipshop Beijing”)March 13, 2012China100%Warehousing and logisticsVipshop (Tianjin) E-Commerce Co., Ltd.(“Vipshop Tianjin”)July 31, 2012China100%Warehousing and logisticsGuangzhou Pinwei Software Co., Ltd.(“Pinwei Software”)December 6, 2012China100%Software development and informationtechnology support 2. Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”). (b) Principles of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIE for which it is deemed the primarybeneficiary. All intercompany transactions, balances and unrealized profit and losses have been eliminated on consolidation. The Company evaluates the need to consolidate its VIE in which equity investors do not have the characteristics of a controlling financial interest ordo not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. F-8Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) Details of certain key agreements entered into between the WOFE, the VIE and each of its individual shareholders on January 20, 2011 are asfollows: Power of Attorney Agreements: Each equity holder of Vipshop Information irrevocably authorized the WOFE to exercise the rights related to theirshareholdings, including attending shareholders’ meetings and voting on their behalf on all matters, including but not limited to matters related to the transfer,pledge or disposition of their respective equity interests in Vipshop Information, and appointment of the executive directors and senior management of VipshopInformation. The WOFE has the right to appoint any individual or entity to exercise the power of attorney on its behalf. Each power of attorney will remain ineffect until the shareholder ceases to hold any equity interest in Vipshop Information. Exclusive Business Cooperation Agreement: The WOFE entered into an agreement with Vipshop Information to provide Vipshop Information withtechnical, consulting and other services. In considerations of these services, Vipshop Information shall pay the WOFE fees equal to 100% of its net income, therate of service fees may be adjusted upon mutual discussions between the two parties. The WOFE is the exclusive provider of these services for a term of10 years. Equity Interest Pledge Agreements: Each equity holder of Vipshop Information pledged all their respective equity interests in Vipshop Informationas security to ensure that Vipshop Information fully performs its obligations under the Exclusive Business Cooperation Agreement, and pays the consultingand service fees to the WOFE when the fees becomes due. Exclusive Option Agreements: Each equity holder of Vipshop Information granted the WOFE an irrevocable and exclusive right to purchase, ordesignate one or more persons to purchase, their equity interest in Vipshop Information at the WOFE’s sole and absolute discretion to the extent permitted bythe PRC laws. The purchase price is 10 Renminbi (“RMB”) (US$1.61); if appraisal is required by laws of the PRC at the time when the WOFE exercises theoption, the parties shall negotiate in good faith, to make necessary adjustments to the purchase price based on the appraisal result to comply with applicablelaws of the PRC. On October 8, 2011, the WOFE entered into the following amended agreements with Vipshop Information and each of its individual shareholders toreplace the respective original agreements entered into on January 20, 2011: Amended and Restated Exclusive Business Cooperation Agreement: The WOFE entered into this agreement with Vipshop Information to provideVipshop Information with technical, consulting and other services. This agreement replaced the original Exclusive Business Cooperation Agreement datedJanuary 20, 2011. There was no significant change of terms from the original agreement except that the service fee to be paid by Vipshop Information to theWOFE in consideration of the services to be provided by the WOFE, shall equal to 100% of the net income of Vipshop Information, provided that the WOFE,at its sole discretion, shall have the right to adjust the rate of the service through written notice. The term of this agreement is ten years from the execution dateof October 8, 2011 and may be extended for a period to be determined by the WOFE. The WOFE may terminate this agreement at any time by giving 30 daysprior written notice. Vipshop Information has no right to terminate this agreement unless the WOFE commits gross negligence or fraud. F-9Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) Amended and Restated Equity Interest Pledge Agreement: This agreement replaced the original Equity Interest Pledge Agreements entered into onJanuary 20, 2011. There was no significant change of terms from the original agreement. The agreement will remain in effect until all of the obligations ofVipshop Information under the Amended and Restated Exclusive Business Cooperation Agreement have been duly performed or terminated. Amended and Restated Exclusive Option Agreement: This agreement replaced the original Exclusive Option Agreement entered into on January 20,2011. There was no significant change of terms from the original agreement. The term of this agreement is ten years from the execution date of October 8,2011, which may be extended for a period to be determined by the WOFE. Exclusive Purchase Framework Agreement: The WOFE and Vipshop Information entered into this agreement during the third quarter of fiscal2011. Under this agreement, Vipshop Information agrees to purchase products or services exclusively from the WOFE or its subsidiaries. VipshopInformation and its subsidiaries must not purchase from any third party products or services which the WOFE is capable of providing. The term of thisagreement is five years from September 1, 2011. If neither party objects in writing and both parties remain cooperating at the expiration of the agreement, theparties will continue to be bound by this agreement until a new agreement is entered into. Vipshop Information must pay the WOFE for its products anamount, which includes a service fee, based on the unit price and the quantity of the products ordered by Vipshop Information. The WOFE may terminatethis agreement at any time by giving 15 days’ prior written notice. Vipshop Information has no right to terminate this agreement unless the WOFE commitsgross negligence or fraud. As explained in Note 1, at the time of the Company’s incorporation and through the date of the Reorganization as described below, the ownershipinterest of the Company was held by five individuals indirectly through their respective investment holding companies. In October 2012, the Company effected transfer of 10.4% of equity interest from one of the former shareholder of Vipshop Information to Mr. Shen,an existing shareholder of Vipshop Information, and amended the contractual arrangements the relevant entities had as explained above with Mr. Shen to reflectthis transfer. As of December 31, 2012, shareholders of Vipshop Information include Mr. Shen, Mr. Arthur Xiaobo Hong, Mr. Bin Wu and Mr. Xing Peng,holding 52.0%, 26.0%, 11.6% and 10.4% of the total equity interests in Vipshop Information, respectively. The Company participated significantly in the design of Vipshop Information. Based on the Equity Interest Pledge Agreements and the Amended andRestated Equity Pledge Agreements, the Exclusive Option Agreement and the Amended and Restated Exclusive Option Agreement, and the Power of AttorneyAgreements dated January 20, 2011, which has not been subsequently amended, the Company has the ability to effectively control Vipshop Informationthrough the WOFE. The Company is also able to receive a majority of the economic benefits of Vipshop Information, because of its ability to effectivelydetermine the service fees payable by Vipshop Information to the WOFE under the Exclusive Business Cooperation Agreement and the Amended and RestatedExclusive Business Cooperation Agreement, and through the Exclusive Purchase Framework Agreement. Therefore, the Company has determined that it is theprimary beneficiary of Vipshop Information and has consolidated its respective results for the periods presented. Other than Vipshop Information, theCompany has no interest in any other variable interest entities. F-10Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) Risks in relation to the VIE structure The Group believes that the VIE arrangements are in compliance with PRC law and are legally enforceable. The equity holders of the VIE are alsoshareholders of the Company and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, there are certain risksrelated to the VIE arrangements, which include but are not limited to the following: · If the Group’s ownership structure, are found to be in violation of any existing or future PRC laws or regulations, the relevant governmentalauthorities, including the China Securities Regulatory Commission, would have broad discretion in dealing with such violation, includinglevying fines, confiscating its income or the income of the WOFE or the VIE, revoking the business licenses or operating licenses of the WOFEor the VIE, shutting down the Group’s servers or blocking the Group’s website, discontinuing or placing restrictions or onerous conditions onthe Group’s operations, requiring the Group to undergo a costly and disruptive restructuring, restricting or prohibiting the Group’s use ofvarious funding to finance its business and operations in China, and taking other regulatory or enforcement actions that could be harmful to theGroup’s business; · The Group relies on contractual arrangements with the VIE and its equity holders for a majority all of its PRC operations, which may not be aseffective as direct ownership in providing operational control; · The Group may have to incur significant cost to enforce, or may not be able to effectively enforce, the contractual arrangements with the VIEand their equity holders in the event of a breach or non-compliance by the VIE or their equity holders; and · Each of the shareholders of the VIE is also a director of the Company, and has a duty of care and loyalty to the Company and its shareholdersas a whole under Cayman Islands law. Under the contractual arrangements with the VIE and its shareholders, (a) the Company may replace anysuch individual as a shareholder of the VIE at the Company’s discretion, and (b) each of these individuals has executed a power of attorney toappoint the WOFE or its designated third party to vote on their behalf and exercise shareholder rights of the VIE. However, the Company cannotassure that these individuals will act in the best interests of the Company should any conflicts of interest arise, or that any conflicts of interestwill be resolved in the Company’s favor. These individuals may breach or cause the VIE to breach the existing contractual arrangements. If theCompany cannot resolve any conflicts of interest or disputes between the Company and any of these individuals, the Company would have torely on legal proceedings, which may be expensive, time-consuming and disruptive to its operations. There is also substantial uncertainty as tothe outcome of any such legal proceedings. F-11Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) Vipshop Information’s total assets, total liabilities, total equity, net revenues, total operating expenses and net (loss) income attributable to theCompany and after intercompany eliminations are as follows: As of December 31,20112012$$Total assets60,721,481173,424,245Current Liabilities:Accounts payable(2,243,711)(101,556)Advance from customers(15,378,465)(55,948,713)Accrued expenses and other current liabilities(11,825,417)(24,908,418)Amounts due to related parties(2,992,516)(789,057)Deferred income(2,569,655)(10,850,319)Total current liabilities(35,009,764)(92,598,063)Total liabilities(35,009,764)(92,598,063)Total equity25,711,71780,826,182 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Net revenues32,582,115226,291,723691,975,575Total operating expenses(11,626,563)(55,725,479)(70,858,631)Net (loss) income(8,339,525)(26,409,424)8,058,229 (c) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management of the Group to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reportedamounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates. The Group’s management based their estimateson historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in the Group’sfinancial statements include inventory write-down, revenue recognition cut off adjustments, valuation allowance for deferred tax assets, valuation of ordinaryshares and preferred shares when the preferred shares were issued, valuation of stock options. Changes in facts and circumstances may result in revisedestimates. F-12Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) (d) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand demand deposits and highly liquid investments with maturity of less than three months. Cash and cash equivalents are placed with financial institutions with high-credit ratings and quality. (e) Held-to-maturity securities The Group invests in debt securities which have fixed maturity dates, pay a fixed return on the amount invested and early redemption of thesesecurities is not allowed. The Group classifies these investments as held-to-maturity as it has both the positive intent and ability to hold them until maturity.Held-to-maturity securities are recorded at amortized cost and are classified as short-term, since their contractual maturity dates are less than one year. (f) Inventories Inventory is stated at the lower of cost or market. Cost of inventory is determined using the weighted average cost method. Adjustments are recordedto write down the cost of inventory to the estimated market value for slow-moving merchandise and damaged goods. The amount of write down is alsodependent upon factors such as whether the goods are returnable to vendors, inventory aging, historical and forecasted consumer demand, and promotionalenvironment. The Group takes ownership, risks and rewards of the products purchased, but has arrangements to return unsold goods with certain vendors.Write downs are recorded in cost of goods sold in the consolidated statements of income (loss) and comprehensive income (loss). (g) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property andequipment are included in operating income (loss). Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed asincurred. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets areplaced in service. Estimated useful lives are as follows, taking into account the assets’ estimated residual value: ClassificationEstimated useful lifeFurniture, fixtures and equipment2 to 3 yearsLeasehold improvementsOver the lease termMotor vehicles5 years Direct and incremental costs related to the construction of assets, including costs under the construction contracts, duties and tariffs, equipmentinstallation and shipping costs, are capitalized. Management estimates the residual value of its furniture, fixtures and equipment and motor vehicles to be 5%. F-13Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) (h) Impairment of long-lived assets The Group evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assetsmay not be recoverable. When these events occur, the Group assesses the recoverability of these long-lived assets by comparing the carrying amount of theassets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted cash flow isless than the carrying amount of the assets, the Group recognizes an impairment equal to the difference between the carrying amount and fair value of theseassets. The Group recorded impairments in the amount of nil, $437,725 and nil for the years ended December 31, 2010, 2011 and 2012, respectively. (i) Revenue recognition The Group recognizes revenue from the sale of apparel and accessories, home products, healthcare products and other merchandise through its onlineplatform, including its internet website and cellular phone application. The Group recognizes revenue when persuasive evidence of an arrangement exists,products are delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured. The Group utilizes delivery service providers to deliver goods to its customers directly from its own warehouses. The Group estimates and defersrevenue and the related product costs for goods that are in-transit to the customers. The Group offers customers with an unconditional right of return for a period of seven days. The Group defers revenue until the return period expiresas it does not currently have sufficient historical data related to such sales to reasonably estimate the amount of future returns. Revenue was recorded on a gross basis, net of surcharges and value added tax (“VAT”) of 17% of gross sales. Surcharges are sales related taxesrepresenting the City Maintenance and Construction Tax and Education Surtax. The Group recorded revenue on a gross basis because the Group has thefollowing indicators for gross reporting: it is the primary obligor of the sales arrangements, is subject to inventory risks of physical loss, has latitude inestablishing prices, has discretion in suppliers’ selection and assumes credit risks on receivables from customers. The Group also retains some of generalinventory risks despite its arrangements to return goods to some vendors within limited time periods. Discount coupons membership reward program The Group voluntarily provides discount coupons through certain co-operative websites or through public distributions during its marketingactivities. These coupons are not related to prior purchases, and can only be utilized in conjunction with subsequent purchases on the Group’s platforms.These discount coupons are recorded as reduction of revenues at the time of use. The Group has established a membership reward program wherein customersearn one point for one RMB of purchase made on the Group’s platforms. Existing members may also receive extra reward points at the time of the firstpurchase by those customers referred by them. Membership reward points can be either exchanged into coupons to be used in connection with subsequentpurchases, or exchanged into free gifts. The expiry dates of these reward points vary based on different individual promotional programs, while the couponsexpire three months after redemption. The Group accrues liabilities for the estimated value of the points earned and expected to be redeemed, which are based onall outstanding reward points related to prior purchases at the end of each reporting period, as it does not currently have sufficient historical data to reasonablyestimate the usage rate of these reward points. These liabilities reflect management’s best estimate of the cost of future redemptions. As of December 31, 2011and 2012, the Group recorded deferred revenue related to reward points earned from prior purchases of $2,569,655 and $10,513,246, respectively. F-14Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) The Group does not charge any membership fees from its registered members. New members who register on the Group’s platforms or existingmembers introducing new members to the Group’s website will be granted free membership reward points, which can be used to redeem coupons for futurepurchases. These reward points are not related to prior purchases and are recorded as reduction of revenues at the time of use. Amounts collected by delivery service providers but not yet remitted to the Group are classified as accounts receivable on the consolidated balancesheets. Payments received in advance of delivery are classified as advances from customers. Revenues include fees charged to customers for shipping andhandling expenses. The Company pays a fee to the delivery service provider and records such fee as shipping and handling expenses. Other revenues The Group conducts product promotion activities for certain brands on its website, including advanced and prominent placement of vendors’products on its website, and technical consultations services related to on-line advertising. These revenues are recognized on a straight-line basis over theservice periods, net of business tax of approximately 5% of service revenues. (j) Cost of goods sold Cost of goods sold consists primarily of cost of merchandise sold and inventory write-down. The amounts of inventory write-down were$2,601,368, $1,694,336 and $12,166,659 for the years ended December 31, 2010, 2011 and 2012, respectively. Our cost of goods sold does not includeshipping and handling expenses, payroll, bonus and benefits of logistic staffs or logistic centers rental expenses, therefore our cost of goods sold may not becomparable to other companies which include such expenses in their cost of goods sold. (k) Fulfillment expenses Fulfillment expenses primarily consist of payroll, bonus and benefits of logistics staff, logistics centers rental expenses, shipping and handlingexpenses and packaging expenses. (l) Marketing expenses Marketing expenses primarily consist of payroll, bonus and benefits of marketing staff, advertising costs, agency fees and costs for promotionalmaterials. The amounts of advertising expenses were $1,994,348, $14,562,477 and $29,332,178 for the years ended December 31, 2010, 2011 and 2012,respectively. F-15Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) (m) Technology and content expenses Technology and content expenses primarily consist of payroll, bonus and benefits of the staff in the technology and system department,telecommunications expenses, model fees and photography expenses. (n) General and administrative expenses General and administrative expenses primarily consist of payroll, bonus and benefit costs for retail and corporate employees, legal, finance,information systems, rental expenses and other corporate overhead costs. (o) Foreign Currency Transactions and Translations The functional currency of the Company and Vipshop HK are the United States dollar (“US dollar”). The functional currency of all the othersubsidiaries and the variable interest entity is RMB. Foreign currency denominated monetary assets and liabilities have been translated into the functionalcurrency at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies have been translated into the functional currency at theapplicable rates of exchange prevailing on the date transactions occurred. Transaction gains and losses are recognized in the consolidated statements of income(loss) and comprehensive income (loss). The financial statements of the subsidiaries and the variable interest entity have been translated into US dollars for the purposes of consolidation.Assets and liabilities are translated into US dollars based on the rates of exchange existing on the balance sheet date. Equity accounts are translated at historicalexchange rates. The statements of operations are translated using a weighted average rate for the period. Translation adjustments have been reported as aseparate component of other comprehensive income. The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank ofChina, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to internationaleconomic and political developments affecting supply and demand in the China foreign exchange trading system market. The Group’s cash and cashequivalents denominated in RMB amounted to $44,478,829 and $123,300,918 at December 31, 2011 and 2012, respectively. (p) Income Taxes Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financialstatements, the Group is required to estimate its income taxes in each of the jurisdictions in which it operates. The Group accounts for income taxes using theliability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assetsand liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities aremeasured using enacted tax rates applicable for the differences that are expected to affect taxable income. Deferred tax assets are reduced by a valuationallowance when, based upon 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. F-16Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) (q) Value added taxes The Company’s PRC subsidiaries are subject to VAT at a rate of 17% on proceeds received from customers, and are entitled to a refund for VATalready paid or borne on the goods purchased by it and utilized in the production of goods that have generated the gross sales proceeds. The VAT balance isrecorded either in other current liabilities or other current receivables on the face of consolidated balance sheets. (r) Comprehensive income (loss) Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions toowners. During the periods presented, comprehensive income (loss) is reported in the consolidated statements of income (loss) and comprehensive income(loss), and other comprehensive income (loss) includes foreign currency translation adjustments. (s) Concentration of credit risk Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, accountsreceivable, held-to-maturity securities, amounts due from related parties, other receivables and advances to suppliers. The Group places its cash and cashequivalents and held-to-maturity securities with financial institutions with high-credit ratings and quality. Accounts receivable primarily comprise of amountsreceivable from product delivery service providers. These amounts are collected from customers by the service providers when products are delivered. Theprincipal amounts of all held-to maturity securities are guaranteed by the issuers. The Group conducts a credit evaluation of these service providers andgenerally requires a small amount of security deposit. Amounts due from related parties are prepayments related to purchases of goods from the entitiescontrolled by shareholders of the Company. Due to the nature of the relationship, the Company considers there to be no collection risks in regard to amountsdue from related parties. With respect to advances to product suppliers, the Group performs on-going credit evaluations of the financial condition of itssuppliers. The Group establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific delivery serviceproviders and other information. F-17Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) (t) Fair value of financial instruments Fair value is considered to be the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded atfair value, the Group considers the principal or most advantageous market in which it would transact and considers assumptions that market participantswould use when pricing the asset or liability. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize theuse of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level ofinput that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include: Level 1applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.Level 2applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset orliability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets withinsufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable orcan be derived principally from, or corroborated by, observable market data.Level 3applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement ofthe fair value of the assets or liabilities. The carrying values of the Group’s financial instruments, including cash and cash equivalents, restricted deposits, accounts receivable, otherreceivables, accounts payable, other current liabilities, amounts due from and to related parties and short term bank borrowings, approximate their fair values. (u) Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases.Other leases are accounted for as capital leases. Payments made under operating leases, net of any incentives received by the Group from the leasing company,are charged to the statements of operations on a straight-line basis over the lease periods. (v) Share-based Compensation Employee share-based compensation Share-based payments make to employees, including employee stock options, and restricted shares issued to employees which the Company has arepurchase option, are recognized as compensation expenses over the requisite service periods. The Group measures the cost of employee services received inexchange for share-based compensation at the grant date fair value of the awards. The Company has elected to recognize compensation expense on a straight-line basis over the requisite service period for the entire award with graded vesting provided that the amount of compensation cost recognized at any date mustat least equal the portion of the grant-date value of the award that is vested at that date. The estimate of forfeitures will be adjusted over the requisite serviceperiod to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through acumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized in futureperiods. F-18Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) Modification of equity awards The Group treated a modification of the terms or conditions of an equity award as an exchange of the original award for a new award. Theincremental compensation cost as an effect of a modification is measured as the excess, if any, of the fair value of the modified award over the fair value of theoriginal award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. Total recognizedcompensation cost for an equity award shall at least equal the fair value of the award at the grant date unless at the date of the modification the performance orservice conditions of the original award are not expected to be satisfied. Thus, the total compensation cost measured at the date of a modification shall be thesum of the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) atthat date, and the incremental cost resulting from the modification. The Group records the incremental fair value of the modified award, as compensation coston the date of modification for vested awards, or over the remaining service period for unvested awards. Non-employee share-based compensation Share-based compensation make to non-employees are recognized as compensation expenses ratably over the requisite service periods. The Groupmeasures the cost of non-employee services received in exchange for share-based compensation based on the fair value of the equity instruments issued. TheGroup measures the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions on the measurementdate, which is determined as the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or thedate at which the counterparty’s performance is complete. As the quantity and terms of the equity instruments issued to non-employees are known up front, the Group recognizes the cost incurred duringfinancial reporting periods before the measurement date. The Group measures the equity instruments at their then-current fair values at each of the financialreporting dates, and attributes the changes in those fair values over the future services period until the measurement date has been established. (w) Series A & B Convertible Preferred Shares The Series A convertible preferred shares (“Series A Preferred Shares”) and the Series B convertible preferred shares (“Series B Preferred Shares”) arenon-redeemable and classified as permanent equity and have been initially recorded at their fair value upon issuance. F-19Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 2. Summary of Significant Accounting Policies (Continued) In March 2012, upon the completion of the Company’s initial public offering, all Series A Preferred Shares and Series B Preferred Shares wereautomatically converted into ordinary shares. (x) Earnings (loss) per share During the period when the preferred shares are outstanding, basic earnings (loss) per share are computed by dividing net income (loss) attributableto ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. The Group hasdetermined that its convertible Series A and B Preferred Shares participate in undistributed earnings on the same basis as the ordinary shares. Accordingly, theGroup has used the two-class method of computing earnings (loss) per share. Under this method, net income (loss) applicable to holders of ordinary shares isallocated on a pro rata basis to the ordinary and convertible Series A and B Preferred shares to the extent that each class may share in income (loss) for theperiod had it been distributed. Losses are not allocated to the participating securities. Diluted earnings (loss) per share is computed using the more dilutive of(a) the two-class method or (b) the if-converted method. After the conversion of the preferred shares, basic earnings (loss) per share are computed by dividing net earnings (loss) attributable to ordinaryshareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share reflect the potential dilution that couldoccur if securities or other contracts to issue common shares were exercised or converted into ordinary shares. (y) Recent Changes in Accounting Standards In December 2011, the FASB issued an authoritative pronouncement related to disclosures about offsetting assets and liabilities. The guidancerequires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of thosearrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, andinterim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periodspresented. The Group does not expect the adoption of this pronouncement to have a significant impact on its consolidated financial condition or results fromoperations. 3. Accounts Receivable As of December 31,20112012$$Components of accounts receivable are as follows:Delivery service providers (note)4,094,0826,875,717Other customers56,582114,843Less: allowance for doubtful debts——Total4,150,6646,990,560 F-20Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 3. Accounts Receivable (Continued) The accounts receivable for more than 10% are as follows: As ofDecember 3120112012Delivery service provider A35%—Delivery service provider B36%—Delivery service provider C—18%Delivery service provider D—17% Note:For certain sales transactions, delivery service providers will collect payments from the Group’s customers upon delivery of goods, andremit such payments back to the Group on a periodic basis. 4. Other Receivables As of December 3120112012$$Components of other receivables are as follows:Deposits (Note)2,369,1314,734,991Cash advanced to staff163,682104,310VAT receivable6,756,2284,934,645Others121,440219,941Total9,410,4819,993,887 Note:Deposits consist of amounts paid to vendors for inventory, advertising, and rental deposits 5. Held-to-maturity securities As of December 31, 2012, the Group’s held-to-maturity securities consist of five debt securities carried at amortized cost of $86,097,191, whichapproximate the aggregate fair value. All of these securities mature within one year and are classified as current asset. The amount of unrecognized holding gainas of December 31, 2012 was $1,026,325. There has been no impairment recognized and no sales of any held-to-maturity securities before maturities during the periods presented. F-21Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 6. Property and Equipment, Net As of December 3120112012$$CostFurniture, fixtures and equipment6,342,36312,506,256Leasehold improvements1,372,4512,624,050Motor vehicles & Software2,891,7933,613,056Sub-total10,606,60718,743,362Less: accumulated depreciation(1,458,445)(6,105,795)Property and equipment, net9,148,16212,637,567 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Depreciation expenses were charged to:Fulfillment expenses—352,9212,265,757Marketing expenses—2,1286,648Technology and content expenses—360,1941,634,180General and administrative expenses103,193653,581620,537Total103,1931,368,8244,527,122 During the year ended December 31, 2011, the Group has recognized impairment loss of leasehold improvements in the amount of US$437,725.The amount has been charged to general and administrative expenses, as such loss relates to a leased office premise that has no future expected usage due tochange of business plan. 7. Bank borrowings The Group had short term loans from banks in the total amount of US$12,710,720 and nil outstanding as of December 31, 2011 and 2012respectively. The interest rates on the loans ranged from 105% to 120% of the benchmark interest rate quoted by the People’s Bank of China, the averageinterest rate was 7.11% for the period ended December 31, 2011. The restricted deposits of US$14,214,585 and nil as of December 31, 2011 and 2012respectively, represent fixed guarantee deposits required by a bank for the loan and bank facility provided. F-22Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 8. Accrued Expenses and other current liabilities As of December 31,20112012$$Accrued advertising expense1,458,2796,442,327Accrued shipping and handling expenses7,156,72116,979,115Accrued payroll2,660,6308,049,376Social benefit provision1,599,1252,189,601Deposits from delivery service providers1,091,0563,730,277Other tax payable10,383,0259,513,784Accrued rental expenses180,4121,580,588Accrued administrative expenses331,2262,028,619Others1,806,0282,162,756Total26,666,50252,676,443 9. Employee Retirement Benefit Full time employees in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medicalcare, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Group to makecontributions based on certain percentages of the employees’ basic salaries. Other than the contribution, there is no further obligation under these plans. Thetotal contributions and accruals made for such employee benefits was $548,282, $2,651,763 and $5,280,299 for the years ended December 31, 2010,2011 and 2012, respectively. 10. Distribution of Profit Pursuant to laws applicable to entities incorporated in the PRC, the PRC subsidiaries are prohibited from distributing their statutory capital and arerequired to appropriate from PRC GAAP profit after tax to other non-distributable reserve funds after offsetting accumulated losses from prior years, until thecumulative amount of such reserve fund reaches 50% of their registered capital. These reserve funds include one or more of the following: (i) a general reserve,(ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annualappropriation at 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end); the appropriation to theother fund are at the discretion of the subsidiaries. The general reserve is used to offset future extraordinary losses. A subsidiary may, upon a resolution passed by the shareholders, convert the generalreserve into capital. The staff welfare and bonus reserve is used for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve isfor the expansion of the subsidiary’s operations and can be converted to capital subject to approval by the relevant authorities. These reserves representappropriations of the retained earnings determined in accordance with Chinese law, and are not distributable as cash dividends to the Group. F-23Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 10. Distribution of Profit (Continued) Relevant PRC statutory laws and regulations permit payment of dividends by the Company’s PRC subsidiaries only out of their retained earnings, ifany, as determined in accordance with PRC accounting standards and regulations. The Company’s PRC subsidiaries transferred nil, nil and $266,478 togeneral reserve during the year ended December 31, 2010, 2011 and 2012, respectively. 11. Capital Structure On August 27, 2010, the Company was incorporated with authorized and issued share capital of $50,000 divided into 50,000 ordinary shares of parvalue of US$1.0 each to Mr. Eric Ya Shen, the Chairman and chief executive officer of the Company, Mr. Arthur Xiaobo Hong, the Vice Chairman of theBoard of Directors of the Company (collectively, the “Founders”) and three other investors (the “Original Investors”). On November 22, 2010, the Company subdivided its share capital into 500,000,000 shares at par value of US$0.0001 each. On the same day, theCompany redeemed and cancelled 499,990,000 issued shares owned by the existing shareholders on a pro rata basis, at par value of US$0.0001 per share. Asa result of these transactions, there were 10,000 issued and outstanding ordinary shares at par value of US$0.0001 per share. Issuance of Series A Preferred Shares In preparation for the issuance of the Company’s Series A Preferred Shares, the Series A Preferred Shares investors entered into three loansagreements with the Chairman of the Company on July 20, 2010, October 14, 2010 and December 17, 2010, with an aggregated amount of $9,709,643.Pursuant to these three loan agreements, the entire outstanding principals had been converted into the number of Series A Preferred Shares upon issuance ofsuch shares. During 2010, the Chairman utilized the majority of the proceeds from these three loans to finance the operation of the Company throughshareholder loans (refer to note 15). On January 24, 2011, the Company, the Series A Preferred Share investors and the Chairman of the Company entered into the Loan Assignment andAssumption Agreement, pursuant to which the Chairman of the Company assigned the entire principal of the three loan agreements entered into with theSeries A Preferred Shares investors to the Company (the “Assigned Loans”). On January 31, 2011, the Company re-designated its authorized share capital of $50,000 divided into (a) 479,787,500 ordinary shares of par valueof US$0.0001 each and (b) 20,212,500 Series A Preferred Shares of par value of US$0.0001 each. On the same day, the Company issued 47,765,000ordinary shares to its five original investors in the same proportion of their existing ownership. As a condition to the closing of the Series A Preferred Sharessubscription, the Company also repurchased 1,837,500 ordinary shares from one of its Original Investors, Rapid Prince Development Limited (“RapidPrince”), a company wholly owned by Mr. Bin Wu at an aggregate purchase price of $1,837,500 and these shares were cancelled on the same day. On January 31, 2011, the shareholders and directors of the Company also resolved to reserve 7,350,000 ordinary shares for future issuance underthe employee stock incentive plan to be adopted by the Company (the “ESOP”). F-24Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 11. Capital Structure (Continued) On February 21, 2011, 20,212,500 Series A Preferred Shares of US$0.0001 each were issued to investors for $20,212,781 or US$1 each.Concurrently, the Company entered into a Convertible Loan Agreement with the Series A Preferred Share investors, also the lenders of the three AssignedLoans, which converted the entire assigned loan amounts into part of the subscription price for Series A Preferred Shares upon closing. The Assigned Loan amount was settled with the accumulated shareholders loan due from the Company to the Chairman on February 21, 2011. Therest of the subscription price of US$10,503,138 was settled in cash on February 23, 2011. Each Series A Preferred Share were convertible, at the option of the holder, at any time after the date of issuance, into one ordinary share of theCompany, subject to certain anti-dilution adjustments such as share splits and combination, adjustment for ordinary share dividends and distributions,reorganization and mergers. Each Series A Preferred Share were automatically converted into ordinary shares of the Company upon the closing of an initialpublic offering of the Company in the United States or on a reputable stock exchange determined by the Company, with gross proceeds to the Company of notless than $30,000,000 (the “Qualified IPO”), or in the event that holders of two-thirds of the Series A Preferred Shares then outstanding elect to convert. EachSeries A Preferred Share carried such number of votes as was equal to the number of votes of ordinary shares then issuable upon the conversion of suchSeries A Preferred Shares, and was entitled to dividend declared or paid on ordinary shareholders on an as-if-converted basis. Upon a liquidation event, the Series A Preferred Shares were entitled to receive out of the assets of the Company available for distribution to itsmembers, prior and in preference to any distribution to ordinary shareholders, the amount of 120% of the Series A Preferred Shares subscription price,adjusted for certain anti-dilutive events, plus all declared but unpaid dividends and distribution on such Series A Preferred Shares. The Series A PreferredShares were not redeemable at the option of the holders. As another condition to the closing of the Series A Preferred Shares, the Founders and the Original Investors of the Company, entered into the ShareRestriction Agreement with the Series A Preferred Share investors and the Company on February 21, 2011. Pursuant to which the Founders and the OriginalInvestors are prohibited from transferring, selling, assigning, pledging or disposing in any way their equity interest in the Company before such shares arevested. The shares held by the Founders were 40% vested immediately, with the remaining shares to be vested in 36 equal and continuous monthlyinstallments for each month starting from February 21, 2011; provided that the Founders remain full-time employees of the Group at the end of such month. Atotal of 18,632,250 unvested share were held by the Founders as of February 21, 2011. The shares held by the Original Investors, were 25% vested onFebruary 21, 2012, with the remaining shares to be vested in 36 equal and continuous monthly installments for each month starting from February 21, 2012.The Company had the option to repurchase the ordinary shares held by the Founders in the event a Founder ceased to be a full-time employee of the Group forany reasons. The Company had an irrevocable and exclusive option to repurchase all the unvested shares held by Founders at par value, and all the shares(including vested shares) held by the Founders at fair market value. The Founders and the Original Investors also agreed not to transfer their equity interest inthe Company during the 180 day period following the effective date of the Company’s first registration statement, or such shorter periods as may be requestedby the managing underwriter. The Share Restriction Agreement was terminated upon the closing of the Qualified IPO. F-25Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 11. Capital Structure (Continued) This Share Restriction Agreement between the Founders and the Company was accounted for as a reverse stock split follow by the grant of arestricted stock award under a stock-based compensation plan. Accordingly, the Group measured the fair value of the unvested shares of the Founders at grantdate and recognizes the whole amount as compensation expense (refer to note 16(b)). As a result of all the above transactions, the Company had an authorized capital of US$50,000 divided into (a) 479,787,500 ordinary shares of apar value of US$0.0001 each, 45,937,500 of which had been issued and outstanding, and (b) 20,212,500 Series A Preferred Shares of par value ofUS$0.0001 each, all of which had been issued and outstanding. All ordinary shares and per share data had been retroactively restated, unless otherwiseindicated, in the accompanying consolidated financial statements and notes to the financial statements for all periods presented to reflect the impact of theabove transactions. The Group recorded the initial carrying amount of the convertible non-redeemable Series A Preferred Shares as equity at US$20,113,898, whichwas the total proceed from the issuance of the shares offset by the direct costs of equity issuance of US$98,883. The fair value of Series A Preferred Shares on issuance date of February 21, 2011 was determined to be US$3.75 per share, and the fair value ofordinary shares of the Company was determined to be US$3.43 per share on that day. Series A Preferred Shareholders paid approximately US$1.00 per share. When estimating the fair values of the ordinary shares as of the issuance date. The Group first determined its enterprise value by means of adiscounted cash flow analysis. The discounted cash flow derived by management considered the Group’s future business plan, specific business andfinancial risks, the stage of development of the Group’s operations and economic and competitive elements affecting the Group’s business, industry andmarket, and with reference to equity transactions of the Company. The Group then allocated the resulting enterprise value between the ordinary shares andSeries A Preferred Shares. The fair values of the shares were determined with the assistance of an independent valuation firm. The Company recognized a deemed dividend of US$49,214,977 for the beneficial conversion feature (“BCF”) the Series A Preferred Shareholdersreceived, which is equal to the amount of the intrinsic value of the conversion feature. The intrinsic value was calculated at the commitment date ofFebruary 21, 2011, as the difference between the effective conversion price based on the proceeds received of approximately US$1.00 per share and the fairvalue of the ordinary shares of US$3.43 per share into which the Series A Preferred Shares are convertible, multiplied by the number of ordinary shares intowhich the Series A Preferred Shares was convertible. Issuance of Series B Preferred Shares On April 11, 2011, in preparation for the closing of the subscription of the 8,166,667 Series B Preferred Shares, the Company re-designated itsauthorized capital of US$50,000 to be divided into (a) 471,620,833 ordinary shares of par value of US$0.0001 each, (b) 20,212,500 Series A PreferredShares of par value of US$0.0001 each, and (c) 8,166,667 Series B Preferred Shares of par value of US$0.0001 each. All of the issued and outstanding45,937,500 ordinary shares and 20,212,500 issued and outstanding Series A Preferred Shares remain unchanged. On the same date, 8,166,667 Series BPreferred Shares were issued to investors, for a total consideration of US$41,223,892 (approximately $5.05 per Series B Preferred Share). F-26Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 11. Capital Structure (Continued) Series B Preferred Shareholders had the same rights as Series A Preferred Shareholders as described above, except a different liquidation preference.Upon a liquidation event, and the valuation of the liquidation event was more than RMB5 billion, the holders of the Series B Preferred Shares was entitled toreceive on a pro rata basis, the RMB$100 million prior to any distribution to the holders of any other class of shares. After such distribution, the holders ofthe Series B Preferred Shares was entitled to receive the amount equal to 135% of the Series B Preferred Shares purchase price, plus all declared but unpaiddividends and distributions on such Series B Preferred Shares. Lastly, if there were still any assets or funds, then each holder of Series A Preferred Shareswere entitled to receive their distribution at 120% of the Series A purchase price as described above. On April 11, 2011, the Company also adopted the Second Amended and Restated Memorandum and Articles of Association, which raised theamount of the Qualified IPO to an offering with gross proceeds to the Company of not less than $150,000,000. Based on the Second Amended and RestatedMemorandum and Articles of Association, each Series A and B Preferred Share were automatically converted into ordinary share upon the closing of theQualified IPO or with the written consent of the holders of two-thirds of the Series A and B Preferred Shares then outstanding. On April 11, 2011, the Company, the Founders, the Original Investors, Series A and B Preferred Shareholders, entered into the Amended andRestated Share Restriction Agreement (the “Amended SRA”) which superseded and replaced in its entirety the Share Restriction Agreement dated February 21,2011 (the “Original SRA”). The Amended SRA included the Series B Preferred Shareholders as an addition party to the agreement, but did not change any ofthe significant terms of the Original SRA. The Group recorded the initial carrying amount of the convertible non-redeemable Series B Preferred Shares as equity at US$41,147,021, which wasthe total proceed from the issuance of the shares offset by the direct costs of equity issuance of US$76,871. The fair value of Series B Preferred Shares on issuance date of April 11, 2011 was determined to be US$5.04 per share, and the fair value ofordinary shares of the Company was determined to be US$3.79 per share on that day. Series B Preferred Shareholders paid approximately US$5.05 pershare. Accordingly, there is no BCF related to the issuance of Series B Preferred Shares. The Group determined the fair value of its Series B Preferred Shares and ordinary shares on April 11, 2011 using the same methodologies as itsFebruary 21, 2011 valuations described above. F-27Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 11. Capital Structure (Continued) Ordinary shares transactions in June 2011 On June 15, 2011, the Chairman and two of the Original Investors, collectively through their respective investment holding companies, transferred215,431 ordinary shares to Rapid Prince at nil consideration, to correct for an unintended error in earlier share distributions. On the same date, Elegant Motion Holdings Limited (“Elegant Motion”), a company wholly-owned by the Chairman, transferred 1,521,007ordinary shares of the Company to High Vivacity Holdings Limited (“High Vivacity”), a company wholly-owned by the Mr. Arthur Xiaobo Hong at nilconsideration. This transaction was conducted to redistribute the Founders’ diluted shareholdings of the Company to align their original agreed uponshareholdings after taken into the effect of the dilutions incurred from the issuance of Series A and B Preferred Shares and the ESOP. As Mr. Arthur XiaobaoHong is the Group’s Founder and has served as the Vice Chairman of the Board of Directors of the Group since its inception, the Company considers thetransfer of 1,521,007 ordinary shares from Elegant Motion to High Vivacity a compensation for past services. Accordingly, the Group recognized a stockbased compensation of US$6,205,709 on the date of grant based on the fair value of the Company’s ordinary share of US$4.08 per share on June 15, 2011,multiple by 1,521,007 ordinary shares transferred (refer to note 16(c)). Further, the Company also issued 198,106 ordinary shares to Elegant Motion and 99,053 ordinary shares to High Vivacity at an aggregate price ofUS$1.5 million (approximately US$5.05 per share) on June 15, 2011. Termination of the Amended SRA in December 2011 On December 8, 2011, the Company, the Founders, the Original Investors, Series A and B Preferred Shareholders, entered into the TerminationAgreement to terminate the Amended SRA. Such termination of the Amended SRA was without prejudice to any rights, obligations or claims that have accruedand were outstanding as at the date of such termination. Such transaction was accounted for as a modification of the vesting conditions of the Founders’restricted stock award (refer to note 16(b) for details). 2012 Stock Incentive Plan In March 2012, the Company adopted the Vipshop Holdings Limited 2012 Stock Incentive Plan (the “2012 Plan”). The plan permitted the grant ofoptions to purchase the Company’s ordinary shares, restricted shares and restricted share units as deemed appropriate by the administrator under the plan.The maximum aggregate number of shares that could be issued pursuant to the 2012 Share Incentive Plan was 9,000,000. Initial public offering In March 2012, upon the completion of the Company’s initial public offering, all Series A Preferred Shares and Series B Preferred Shares wereautomatically converted into 20,212,500 and 12,682,206 ordinary shares respectively. In addition, as part of the initial public offering, the Company issued22,009,200 ordinary shares. The gross proceeds received were US$66,022,797 and the related issuance costs were US$3,332,962. F-28Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 11. Capital Structure (Continued) Exercise of stock options During the year ended December 31, 2012, 146,316 ordinary shares were issued respectively as a result of exercises of share options by employees. 12. Income Taxes Cayman Islands Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, upon payments ofdividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. Hong Kong The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of16.5% for the year ended December 31, 2010, 2011 and 2012, if applicable. People’s Republic of China On March 16, 2007, the National People’s Congress of China enacted a new Corporate Income Tax Law (“New Tax Law”) which became effectiveon January 1, 2008. Under the New Tax Law, domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of25%. While the New Tax Law equalizes the tax rates for FIEs and domestically-owned enterprises, preferential tax treatment may continue to be given tocompanies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these are domestically-owned enterprisesor FIEs. The Group’s subsidiaries and the variable interest entity in the PRC are all subject to the tax rate of 25% for the periods presented, except for VipshopJianyang that enjoyed the following preferential tax treatment: Vipshop Jianyang was classified as a domestically-owned enterprise in the western regions that is in an industry sector encouraged by the PRCgovernment. The management of the Group expects that Vipshop Jianyang will obtain final approval from the local tax bureau to enjoy a preferential tax rate of15% for the year ended December 31, 2012 before its annual EIT filing in 2013. Accordingly, Vipshop Jianyang has accrued for income tax expenses using thetax rate of 15% for the year ended December 31, 2012. The term “domestically-owned enterprises in an industry sector encouraged by the PRC government” as used herein refers to any enterprise that itsprimary business falls into the scopes of the encouraged industries stipulated in the existing related policies, including Industrial Restructuring GuidanceCatalogue (2011), Industrial Restructuring Guidance Catalogue (2005), Catalogue for the Guidance of Foreign Investment Industries (Revised in 2007), andCatalogues of Foreign-invested Advantage Industries in Central-Western Areas (2008 Revision), and the annual primary business revenue of which accountsfor more than 70% of the total enterprise revenue. F-29Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 12. Income Taxes (Continued) The Group evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on thetechnical merits, and measures the unrecognized benefits associated with the tax positions. At December 31, 2011 and 2012, the Group had no unrecognizedtax benefits. The Group does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Group willclassify interest and penalties related to income tax matters, if any, in income tax expense. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due tocomputational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined,but an underpayment of income tax liability exceeding RMB100,000 ($16,051) is specifically listed as a special circumstance. In the case of a transfer pricingrelated adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. Income tax expense is comprised of: 1.1.2010 to12.31.20101.1.2011 to12.31.20111.1.2012 to12.31.2012$$$Current tax (note)——706,173Deferred tax———Total tax expenses——706,173 Note: All current tax was related to income tax in PRC. Under the New Tax Law, enterprises are classified as either resident or non-resident. A resident enterprise refers to one that is incorporated under thePRC law or under the law of a jurisdiction outside the PRC with its “de facto management organization” located within the PRC. Non-residential enterpriserefers to one that is incorporated under the law of a jurisdiction outside the PRC with its “de facto management organization” located also outside the PRC, butwhich has either set up institutions or establishments in the PRC or has income originating from the PRC without setting up any institution or establishmentsin the PRC. On December 6, 2007, the State Council of the PRC issued New Enterprise Income Tax Implementation Regulations on the New Taxation Law(“New EIT Implementation Regulations”). Under the New EIT Implementation Regulations, “de facto management organization” is defined as the organizationof an enterprise through which substantial and comprehensive management and control over the business, operations, personnel, accounting and properties ofthe enterprise are exercised. Under the New Tax Law and the New EIT Implementation Regulations, a resident enterprise’s global net income will be subject to a25% enterprise income tax rate. Uncertainties exist with respect to how the New Tax Law and New EIT Implementation Regulations apply to the Group’soverall operations, and more specifically, with regard to tax residency status. On April 22, 2009, the State Administration of Taxation, or the SAT, issuedSAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that isincorporated offshore is located in China. In addition, the SAT issued a bulletin on July 27, 2011 providing more guidance on the implementation ofCircular 82 and clarifies matters such as resident status determination. Due to the present uncertainties resulting from the limited PRC tax guidance on thisissue, it is unclear that the legal entities organized outside of PRC should be treated as residents for New Tax Law purposes. Nevertheless, even if one or moreof its legal entities organized outside of the PRC were characterized as PRC tax residents, none of them had profit and no significant impact would be expectedon the net current tax payable balance and the net deferred tax balance. F-30 Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 12. Income Taxes (Continued) If the entity were to be non-resident for PRC tax purpose, dividends paid to it out of profits earned after January 1, 2008 would be subject to awithholding tax. A reconciliation of the income tax expense (credit) to loss before income tax computed by applying the PRC statutory income tax rate of 25% per theconsolidated statements of operations is as follows: 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Loss before income tax(8,365,848)(107,271,525)(8,765,901)Computed income tax expense at PRC EIT tax rate(2,091,462)(26,817,881)(2,191,475)Effect of non-deductible expenses118,88119,532,656938,532Effect of different tax rates of a subsidiary operating in other jurisdiction—44,048135,975Effect of tax holidays on concessionary rates granted to a PRC subsidiary——(136,527)Change in valuation allowance1,972,5817,241,1771,959,668Actual income tax expenses——706,173 The aggregate amount and per share effect of the tax holidays and tax concessions are as follows: 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$The aggregate effect——136,527Per share effect—basic——0.00Per share effect—diluted——0.00 F-31Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 12. Income Taxes (Continued) The principal components of deferred tax assets are as follows: As of December 31,20112012$$Deferred tax assets:Net operating loss carry forwards6,411,5431,752,613Allowance for doubtful debts12,85762,369Inventory write-down394,0822,672,334Payroll payable and other accruals1,561,8642,139,275Deferred revenue1,584,9855,443,072Others14,50314,653Foreign exchange (note)(343,023)(487,837)Less: valuation allowance(9,636,811)(11,596,479)Total deferred tax assets—— The amount of tax loss carried forward was US$25,822,363 and US$7,730,540 of December 31, 2011 and 2012, respectively, for the Group’scertain subsidiaries and the variable interest entity in the PRC. The Group has provided a valuation allowance for the full amount of the deferred tax assets relating to the future benefit of net operating loss carriedforward of certain subsidiaries and the variable interest entity as management is not able to conclude that the future realization of those net operating loss carryforwards is more likely than not. Note:Foreign exchange represents the differences of exchange rate on balance sheet date used to translate the deferred tax assets balances and theweighted average rate used to translate the valuation allowance recognized during the period. 13. Net Loss Per Share The Group had the following securities which could potentially dilute basic net loss per share in the future, but which were excluded from thecomputation of diluted net loss per share in the periods presented, as their effects would have been anti-dilutive. As of December 31,201020112012Employee Stock Options—7,167,1386,657,794Series A Preferred Shares—20,212,500—Series B Preferred Shares—8,166,667—Non-vested ordinary shares——741,500 Basic net loss per share is based on the weighted average number of common shares outstanding during each period. For the purpose of calculatingbasic earnings per share as a result of the Reorganization, the number of ordinary shares used in the calculation reflects the issuance of ordinary shares as if ittook place on August 22, 2008. F-32Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 13. Net Loss Per Share (Continued) The calculations of basic net and diluted loss per share are computed as follows: 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Numerator:Net loss(8,365,848)(107,271,525)(9,472,074)Deemed dividend on issuance of Series APreferred Shares—(49,214,977)—Net loss attributable to ordinary shareholders(8,365,848)(156,486,502)(9,472,074)Denominator:Weighted-average ordinary shares47,775,00046,255,57488,849,206Outstanding—basic and dilutedBasic net loss per share(0.18)(3.38)(0.11)Diluted net loss per share(0.18)(3.38)(0.11) The Series A and B Preferred shares are convertible participating securities but have not been included in the computation of basic net loss per sharefor the periods presented, as based on the contractual terms, Series A and B Preferred shareholders have no contractual obligation to share in the losses of theCompany. The Company granted a number of non-vested ordinary shares to an executive officer and certain employees during 2012 (refer to Note 16 (d)), thesenon-vested shares are not included in the computation of basic earnings per share. Such shares are considered contingently returnable shares because in theevent a non-vested shareholder’s employment for the Company is terminated for any reason prior to the fourth anniversary of the grant date, the outstandingnon-vested shares shall be forfeited and automatically transferred to and reacquired by the Company at nil consideration. 14. Commitments and contingencies Operating Leases Agreements The Group leases office space and certain equipment under non-cancellable operating lease agreements that expire at various dates throughDecember 2020. Those lease agreements provide for periodic rental increases based on both contractual incremental rates and inflation rates adjustments overthe leased periods. During the three years ended December 31, 2010, 2011 and 2012, the Company incurred rental expenses amounting to $522,471,$3,153,903 and $7,500,451, respectively. F-33Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 14. Commitments and contingencies (Continued) As of December 31, 2012, minimum lease payments under all non-cancellable leases were as follows: $Year ending December 31, 201313,581,686Year ending December 31, 201415,323,926Year ending December 31, 201512,272,267Year ending December 31, 201611,648,350Year ending December 31, 201711,648,350Over December 31, 201720,723,438Total minimum lease payments85,198,017 Capital commitment As of December 31, 2012, the Group had contracted for capital expenditures of $1,096,251. Contingencies The Group is subject to periodic legal or administrative proceedings in the ordinary course of business. The Group does not believe that anycurrently pending legal proceeding to which the Group is a party will have a material effect on its business, results of operations or cash flows. The Group has not made adequate social welfare payments as required under applicable PRC labor laws. Accrual for the amounts under-paid hasbeen made in the reported periods and amounted to $1,559,125 and $2,189,601 as of December 31, 2011 and 2012, respectively. However, accruals for theinterest on underpayments and penalties that may be imposed by the relevant PRC government authorities have not been made in the financial statements asmanagement considered that it is not probable the relevant PRC government authorities will impose any significant interests or penalties. 15. Related Party Transactions For the years ended December 31, 2011 and 2012, the Group entered into the following material related party transactions: 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Purchase of goods2,352,1646,310,3086,663,431 F-34Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 15. Related Party Transactions (Continued) Details of those material related party transactions provided in the table above are as follows: (a) Amounts due from related parties Amounts due from related parties as of December 31, 2011 and 2012 amounted to $2,101,853 and $177,237 respectively are prepayments relatedto purchases of goods from the entities controlled by shareholders of the Company. (b) Amounts due to related parties Amounts due to related parties are made up by shareholder loans and amounts due to companies controlled by shareholders. Shareholders provided loans to the Group, which are mainly used for working capital purposes. The outstanding loan balances due to shareholdersas of December 31, 2011 and 2012 amounted to $2,948,446 and $789,700 respectively, were unsecured, interest free and repayable on demand. Theshareholder loan amount of $578,809 and $789,700 as of December 31, 2011 and 2012 respectively was mainly funded by the Chairman. The amounts due to companies controlled or significantly influenced by shareholders as of December 31, 2011 and 2012 amounted to $849,062and $546,056 respectively, and were unsecured and interest free. These amounts are all related to purchases of goods from companies controlled byshareholders. 16. Share-based Payments (a) Stock incentive plan In March 2011, the Company adopted the Vipshop Holdings Limited 2011 Stock Incentive Plan (the “2011 Plan”), which provide up to an aggregateof 7,350,000 ordinary shares of the Company as stock based compensation to employees, directors, officers and consultants and other eligible personal of theGroup. In 2012, the Company adopted the 2012 Plan, which provide up to an aggregate of 9,000,000 ordinary shares of the Company, and the maximumaggregate number of shares that may be issued per calendar year is 1,500,000 from 2012 until the termination of the 2012 Plan. F-35Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) During the year ended December 31, 2011 and 2012, a total of 7,167,138 and 758,048 share options were granted to executive officers, employeesand a non-employee of the Group under the 2011 and 2012 stock incentive plan respectively. Grant dateExercisePriceper shareNumber ofoptionsVesting period$March 18, 20110.51,470,00036% of the shares shall vest at the first anniversary of the grant date, and 1/36th of the totalshares shall vest at the end of each month thereafterMarch 18, 20110.5183,75029% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterMarch 18, 20110.5735,00037.5% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterMarch 18, 20110.5735,00056% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterMarch 18, 20110.5367,50033% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterMarch 28, 20110.5945,00025% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterJuly 10, 20110.550,00025% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterAugust 30,20112.52819,63825% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterNovember 30,20112.52551,25025% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterNovember 30, 20112.501,310,00025% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterFebruary 1, 20122.52204,91025% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafter of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafterApril 16, 20122.50553,13825% of the shares shall vest at the first anniversary of the grant date, and 1/48 of the totalshares shall vest at the end of each month thereafter F-36 ththththththththththththTable of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) The expiration dates of the above options were 10 years from grant date, vesting is subject to the continuous services of the option holders to theGroup, and post-termination exercise period was nine months. During any authorized leave of absence, the vesting of the option shall be suspended after theleave of absence exceeds a period of 90 days. Vesting of the option shall resume upon the option holders’ return to service to the Group. The vesting scheduleshall be extended by the length of the suspension. In the event of termination of the option holders’ continuous service for cause, the option holders’ right to exercise the option shall terminateconcurrently, except otherwise determined by the plan administrator, and the Company shall have the rights to repurchase all vested options purchased by theoption holders at a discount price determined by the plan administrator. The stock option holders have waived any voting rights with regard to the shares andgranted a power of attorney to the Board of Directors of the Company to exercise voting rights with respect to the shares. The Company uses the Binomial model to determine the estimated fair value for each option granted below with the assistance of an independentvaluation firm. The Group estimates that the forfeiture rate for key management and employees will be nil and 9% respectively. The assumptions used in determining the fair value of the share options were as follows: AssumptionsValuation asof March 18,2011Valuation asof March 28,2011Valuation asof July 10,2011Valuation asof August 30,2011Valuation asof November 30,2011Valuation as ofDecember 31,2012 (granted onFebruary 1,2012)Valuation asof April 16,2012Expected dividend yield0%0%0%0%0%0%0%Risk-free interest rate3.725%3.778%4.127%3.116%2.853%2.5362%3.002%Expected Volatility56.68%56.53%55.26%54.99%54.00%51.33%53.12%Expected life10 years10 years10 years10 years10 years4.5 years10 yearsExercise multiples2.8 times2.2 times2.2 times2.2 times2.2 to 2.8 times*N/A**2.2 to 2.8 times***Fair value of underlying ordinaryshares3.403.444.314.786.368.922.51Type of valuationRetrospectiveRetrospectiveContemporaneousContemporaneousContemporaneousContemporaneousContemporaneous *2.2 times multiple for 1,310,000 numbers of options granted to employees; 2.8 times multiple for 551,250 numbers of options granted to independent directors. **The options were granted to a non-employee, the exercise multiple is not considered. ***2.2 times multiple for 452,000 numbers of options granted to employees; 2.8 times multiple for 101,138 numbers of options granted to independent directors. Notes: (1) Expected dividend yield: The expected dividend yield was estimated by the Company based on its dividend policy over the expected life of the options. (2) Risk-free interest rate: Risk-free interest rate was estimated based on the fair market yields of China International Government Bond as of the valuation dates witha maturity period close to the expected life of the options. (3) Expected volatility: The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility oflisted comparable companies over a period comparable to the expected maturity period of the options. (4) Expected life: As the Company did not have sufficient historical share option exercise experience, it estimated the expected life based on the term accordingto the option agreement. (5) Exercise multiples: F-37Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) The expected exercise multiple is the average ratio of the stock price to the exercise price of when employees would decide to voluntarilyexercise their vested options. As the Company did not have sufficient information of past employee exercise history, it estimated the exercise multiples based onresearches conducted by Huddart and Lang (1995). (6) Fair value of underlying ordinary shares: (i) When estimating the fair value of the ordinary shares on grant dates as of March 18, 2011 and March 28, 2011, the Group determined itsenterprise value by means of a discounted cash flow analysis using the retrospective approach, and when estimating the fair value of theordinary shares on grant dates as of August 30, 2011 and November 30, 2011, the Group determined its enterprise price value by means ofa discounted cash flow analysis using the contemporaneous approach. The discounted cash flow derived by management considered theGroup’s future business plan, specific business and financial risks, the stage of development of the Group’s operations and economic andcompetitive elements affecting the Group’s business, industry and market, and with reference to equity transactions of the Company. TheGroup then allocated the resulting enterprise value between the ordinary shares and Series A Preferred Shares. The fair values of the shareswere determined with the assistance of an independent valuation firm. (ii) The Group attributed the ordinary shares underlying the options granted on July 10, 2011 at an estimated fair value of $4.31 per share,determined based on the linear relationship between the fair value of the ordinary shares as of June 15, 2011 and the fair value of theordinary shares as of August 30, 2011. (iii) After the Company’s initial public offering in March 2012, the fair values of ordinary shares were determined based on actual quotedprices (unadjusted) in the market. For the year ended December 31, 2010, 2011 and 2012, the share option movements were as follows: OptionsoutstandingWeightedaverageexerciseprice pershareWeightedaverageremainingcontractual lifeper shareWeightedaveragefair valueat grantdateWeightedaverageintrinsicvalue peroptionAggregateintrinsicvalue$$$As of January 1, 2010 and 2011———Granted during the period7,167,1381.253.61 years3.403.0922,119,207Outstanding as of December 31, 20117,167,1381.253.06 yearsGranted758,0482.513.26 years1.910.59449,469Exercised(146,316)1.312.53 years3.625.74840,014Forfeited(376,028)0.902.42 years1.88Outstanding as of December 31, 20127,402,8421.162.16 yearsNon-vested as of December 31,20124,256,0833.29Options vested and expected to vest as ofDecember 31, 20127,242,9201.142.14 years56,324,013Exercisable as of December 31, 20123,146,7590.781.78 years25,602,927 For the year ended December 31, 2010, 2011 and 2012, the Group recognized share-based payment expenses of nil, $3,813,576 and $7,369,081 inconnection with the share options granted to employees, respectively. The total fair value of shares vested during 2012 was $10,617,312. F-38Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) As of December 31, 2011 and 2012, there was $19,767,597 and $14,511,914 unrecognized compensation cost related to unvested share optionsgranted to executive and employees of the Group respectively. The unvested share options expense relating to the stock options of the Group is expected to berecognized over a weighted-average period of 3.06 and 2.45 years on a straight-line basis schedule as of December 31, 2011 and 2012 respectively. Option modification In July 2012, the Board of Directors approved an option modification to reduce the exercise price of 819,638 options from $2.52 to $0.50 perordinary shares. All other terms of the share options granted under the 2011 stock option plan remain unchanged. The modification resulted in incrementalcompensation cost of $1,122,360, of which $484,862 was recorded during the year ended December 31, 2012. The remaining $637,498 will be amortizedover the remaining vesting period of the modified options up to August 2015. The fair value of the options immediately before and after the aforementioned modification is estimated on that date using the Black-Scholes optionpricing model with the assumptions noted below. The basis of the assumptions used is similar to those explained in this note above. BeforeModificationAfterModificationExpected dividend yield0%0%Risk-free interest rate3.00%3.00%Expected volatility42.55%42.55%Expected life4.5 years4.5 yearsExercise multiples2.2 times2.2 timesFair value of underlying ordinary shares2.782.78Exercise price2.520.50 (b) Founders’ unvested shares As described on note 11, the Founders’ unvested ordinary shares pursuant to the Share Restricted Agreement dated February 21, 2011 and theAmended SRA dated April 11, 2011, were measured at grant date fair value and to be recognized as compensation expense over the vesting periods. The sharesheld by the Founders shall be 40% vested immediately, with the remaining shares to be vested in 36 equal and continuous monthly installments for eachmonth starting from February 21, 2011; provided that the Founders remain full-time employees of the Group at the end of such month. The Company has theoption to repurchase the ordinary shares held by the Founders in the event a Founder ceases to be a full-time employee of the Group for any reasons. TheCompany shall have an irrevocable and exclusive option to repurchase all the unvested shares held by Founders at par value, and all the shares (includingvested shares) held by the Founders at fair market value. Before the Founders’ unvested shares were vested and released from the repurchase rights, the Founders shall be entitled to all rights and privileges asshareholders of the ordinary shares, including voting rights and dividends. Therefore, these unvested shares were considered participating securities for thepurpose of earnings (loss) per share calculation. F-39Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) On December 8, 2011, the Company, the Founders, the Original Investors, Series A and B Preferred Shareholders entered into the TerminationAgreement to terminate the Amended SRA. This transaction in substance accelerated the vesting terms of services provided by the Founders related to theirrestricted stock awards, from the original vesting terms to December 8, 2011. Accordingly, this transaction was accounted for as a modification of the vestingconditions, and all unrecognized share-based compensation expense related to the Founders’ unvested shares as of December 8, 2011 was expensed to profit orloss on that day. For the year ended December 31, 2011, the Group recorded share-based compensation expense of $63,908,618 related to the unvested shares of theFounders. (c) Ordinary shares transferred to the Vice Chairman of the Board of Directors On June 15, 2011, Elegant Motion, a company wholly-owned by the Chairman, transferred 1,521,007 ordinary shares to High Vivacity, acompany wholly-owned by Mr. Hong, who is an employee and vice chairman of the board of directors of the Company. The transfer of shares was intended tocompensate Mr. Hong’s contribution for his services as an employee of the Company. In conjunction with the Reorganization of the Company that took placein 2011, Mr. Shen determined the number of ordinary shares and executed the share transfer on June 10, 2011. The Company considers June 10, 2011 as thegrant date of the share award. Accordingly, the transaction was recognized as share-based compensation for past services of Mr. Arthur Xiaobo on the grantdate. The Group recognized a share-based compensation of US$6,205,708 on June 15, 2011, based on the fair value of the Company’s ordinary share ofUS$4.08 per share on that date multiple by 1,521,007 ordinary shares transferred. The following table summarizes information regarding the ordinary shares granted during the year ended December, 31 2011 as share-basedcompensation: Number ofordinarysharesWeighted averagegranted datefair value(A)Ordinary shares granted as share-based compensation outstanding as of January 1, 2011——Granted (note 16(b))18,632,2503.43Granted (note 16(c))1,521,0074.08Vested(20,153,257)Outstanding as of December 31, 2011—— Note A:The fair value of ordinary shares are determined using the same methodologies as described in note 16(a) footnote 6(i), with the assistance of anindependent valuation firm F-40Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 16. Share-based Payments (Continued) (d) Non-vested shares During 2012, a total of 741,500 non-vested shares were granted to an executive officer and employees of the Group under the 2012 stock incentiveplan. The Company granted 367,500, 340,000 and 34,000 non-vested shares on June 1, September 30 and October 1, 2012 respectively. These shares have avesting period of four years of employment services with the first one-fourth vesting on the first anniversary from grant date, and the remaining three-fourthvesting on a monthly basis over a three-year period ending on the fourth anniversary of the grant date. The non-vested shares are not transferable and may notbe sold or pledged and the holder has no voting or dividend right on the non-vested shares. In the event a non-vested shareholder’s employment for theCompany is terminated for any reason prior to the fourth anniversary of the grant date, the holder’s right to the non-vested shares will terminate effectively.The outstanding non-vested shares shall be forfeited and automatically transferred to and reacquired by the Company at nil consideration. The Group recognized compensation expense over the four year service period on a straight line basis, and applied a forfeiture rate of 9% on 374,000non-vested shares grant to certain employees. The aggregate fair value of the restricted shares at grant dates was $2,413,092. The fair values of non-vestedshares are measured at the fair value of the Company’s ordinary shares on the grant-date, which was US$2.76, US$3.75 and US$3.70 on June 1,September 30 and October 1, 2012 respectively. As of December 31, 2012 there was $2,059,168 unrecognized compensation cost related to non-vested shares which is expected to be recognizedover a weighted average vesting period of 3.62 years. The weighted average granted fair value of non-vested shares granted during the year ended December 31,2012 was $3.25. There has been no forfeiture of non-vested shares during the year ended December 31, 2012. (e) Share-based compensation expenses For the years ended December 31, 2010, 2011 and 2012, share-based compensation expenses have been included in the following balances on theconsolidated statements of income (loss) and comprehensive income (loss): 1.1.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$Fulfillment expenses—(297,095)(292,866)Marketing expenses—(184,404)(169,100)Technology and content expenses—(729,420)(897,133)General and administrative expenses—(72,716,983)(6,237,850)—(73,927,902)(7,596,949) 17. Segment information The Group has only one reportable segment, which is the sales, product distribution and offering of goods on its online platforms. The Group’s chiefoperating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocatingresources and assessing performance for the entire Group. The Group’s net revenues are all generated from customers in the PRC. Hence, the Group operatesand manages its business without segments. All the property, plant and equipment of the Group are located at the PRC. F-41Table of Contents VIPSHOP HOLDINGS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In U.S. dollars, except for share data) 17. Segment information (Continued) Product revenues: relate to sales of apparel, shoes and bags and other products. Other revenues: relate to revenues generated from product promotion activities provided to certain brands of the Group, including advanced andprominent placement of vendors’ products on the Group’s website and technical consultations services related to on-line advertising. Revenues from different product groups and services are as follow: As of December 31,20112012$$Product revenuesApparel92,954,694296,463,332Shoes and bags31,673,85884,801,417Cosmetics27,261,87675,221,908Sportswear and sporting goods26,652,99870,721,110Home goods and other lifestyle products17,893,17268,810,873Other goods29,855,12594,038,609226,291,723690,057,249Other revenues851,1532,055,715Total net revenues227,142,876692,112,964 18. Subsequent event (a) On January 1, 2013, the Company has granted an executive the option to purchase 400,000 ordinary shares of the Company, with an exerciseprice of US$0.5 per share, in accordance with the provisions of the 2012 Plan. Starting from the grant date, each one-forty-eighth of the total option will vestand become exercisable at the end of each month thereafter. (b) On January 1, 2003, the Group also granted 561,000 non-vested ordinary shares to its employees and independent directors. These shares havea vesting period of four years of employment services with the first twenty five percent vesting on the first anniversary of the grant date, and the remainingseventy five percent vesting on a monthly basis over a three-year period ending on the fourth anniversary of the grant date. The non-vested shares are nottransferable and may not be sold, pledged or otherwise transferred, and the holder has no voting or dividend right on the non-vested shares. The aggregate fairvalue of the non-vested shares on grant date was US$5,004,120. (c) On March 19, 2013, the Group completed its follow-on public offering of an aggregate of 7,200,000 American depositary shares (“ADSs”) bythe Company and certain selling shareholders, priced at US$24.00 per ADS. 4,000,000 ADSs are being offered by the Company and an aggregate of 3,200,000ADSs are being offered by the selling shareholders. Each ADS represents two ordinary shares of the Company. Concurrently, the underwriters exercised in fullthe option to purchase an aggregate of 1,080,000 additional ADSs from certain selling shareholders at the public offering price of the follow-on offering. Thegross proceeds to the Group were approximately US$96 million. The Group would not receive any proceeds from the sale of the ADSs by the sellingshareholders. F-42Table of Contents Vipshop Holdings Limited Schedule I—Condensed Financial Information Statements of Income (Loss) and Comprehensive Income (Loss) (In U.S. dollars, except for share data) 8.27.2010to12.31.20101.1.2011to12.31.20111.1.2012to12.31.2012$$$General and administrative expenses—(73,927,902)(7,596,949)Loss from operations—(73,927,902)(7,596,949)Equity in losses of subsidiaries and a variable interest entity(6,657,478)(33,343,623)(1,875,125)Net loss(6,657,478)(107,271,525)(9,472,074)Deemed dividend on issuance of Series A Preferred Shares—(49,214,977)—Net loss attributable to ordinary shareholders(6,657,478)(156,486,502)(9,472,074)Net loss(6,657,478)(107,271,525)(9,472,074)Other comprehensive (loss) income, net of tax:Foreign currency translation adjustments(155,502)(569,628)994,606Comprehensive loss(6,812,980)(107,841,153)(8,477,468) F-43Table of Contents Vipshop Holdings Limited Schedule I—Condensed Financial Information Balance Sheets (In U.S. dollars, except for share data) As of December 31,20112012$$ASSETSNON-CURRENT ASSETSAmount due from a subsidiary18,289,20382,582,815TOTAL ASSETS18,289,20382,582,815LIABILITIES AND EQUITY(DEFICIT)Amount due to a shareholder11Total liabilities11EQUITY(DEFICIT)Ordinary shares (US$0.0001 par value, 471,620,833 shares authorized, and 46,234,659 and 101,284,881shares issued and outstanding as of December 31, 2011 and December 31, 2012, respectively)4,62410,128Series A Preferred Shares (US$0.0001 par value, 20,212,500 shares authorized, issued and outstanding as ofDecember 31, 2011)20,113,898—Series B Preferred Shares (US$0.0001 par value, 8,166,667 shares authorized, issued and outstanding as ofDecember 31, 2011)41,147,021—Additional paid-in capital124,341,953258,368,448Accumulated losses(166,553,261)(176,025,335)Accumulated other comprehensive income (loss)(765,033)229,573Total shareholders’ equity18,289,20282,582,814TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)18,289,20382,582,815 F-44Table of Contents VIPSHOP HOLDINGS LIMITED Schedule I—Condensed Financial Information Statements of Shareholders’ Equity (Deficit) (In U.S. dollars, except for share data) Series A Preferred sharesSeries B Preferred sharesOrdinary sharesAdditionalpaid-inAccumulatedAccumulatedothercomprehensiveNo. of sharesAmountNo. of sharesAmountNo. of sharesAmountcapitallossesincome (loss)Total$$$$$$$Balance as ofAugust 27, 2010————47,775,0004,778145,805(3,409,281)(39,903)(3,298,601)Net loss———————(6,657,478)—(6,657,478)Foreign currencytranslation————————(155,502)(155,502)Balance as ofDecember 31,2010————47,775,0004,778145,805(10,066,759)(195,405)(10,111,581)Net loss———————(107,271,525)—(107,271,525)Repurchase ofordinary shares————(1,837,500)(184)(1,837,316)——(1,837,500)Issuance of ordinaryshares————297,159301,499,964——1,499,994Issuance of Series APreferred shares20,212,50020,113,898———————20,113,898Issuance of Series BPreferred shares——8,166,66741,147,021—————41,147,021Registered capitalcontributions byshareholders of theVIE——————1,390,621——1,390,621Deemed dividend onissuance ofSeries A Preferredshares——————49,214,977(49,214,977)——Share-basedcompensationexpenses——————73,927,902——73,927,902Foreign currencytranslation————————(569,628)(569,628)Balance as ofDecember 31,201120,212,50020,113,8988,166,66741,147,02146,234,6594,624124,341,953(166,553,261)(765,033)18,289,202Net loss———————(9,472,074)—(9,472,074)Issuance of ordinaryshares pursuant toinitial publicoffering————22,009,2002,20166,020,596——66,022,797Direct offeringexpenses——————(3,332,962)——(3,332,962)Conversion ofSeries A PreferredShares intoordinary shares(20,212,500)(20,113,898)——20,212,5002,02120,111,877———Conversion ofSeries B PreferredShares intoordinary shares——(8,166,667)(41,147,021)12,682,2061,26841,145,753———Proceeds fromregistered capitalcontributions byshareholders of theVIE——————2,292,763——2,292,763Proceeds fromissuance ofordinary sharesupon exercise ofstock options————146,31614191,519——191,533Share-basedcompensationexpenses——————7,596,949——7,596,949Foreign currencytranslation————————994,606994,606Balance as ofDecember 31,2012————101,284,88110,128258,368,448(176,025,335)229,57382,582,814 F-45 Table of Contents VIPSHOP HOLDINGS LIMITED NOTE TO SCHEDULE I (In U.S. dollars, except for share or per share data) Schedule I has been provided pursuant to the requirement of Rule 12-04(a) and 4-08(e)(3) of Regulation S-X, which require condensed financialinformation as to financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periodsfor which audited consolidated financial statements have been presented when the restricted net assets of the consolidated and unconsolidated subsidiariestogether exceed 25 percent of consolidated net assets as of end of the most recently completed fiscal year. As of December 31, 2011 and 2012, $34,351,666 and $121,629,677 of the restricted capital and reserves are not available for distributionrespectively, and as such, the condensed financial information of Vipshop Holdings Limited (“Parent Company”) has been presented. Relevant PRC laws andregulations also restrict the WFOE and the VIE from transferring a portion of their net assets to the Company in the form of loans and advances or cashdividends. No dividends have been paid by the WFOE or the VIE to the Company during the periods presented. Total restricted net assets of the Groupinclude net assets of VIE and paid in capital of WOFE. The balance of restricted net assets was $34,351,666 and $121,629,677, of which $1,536,426and $3,829,188 was attributed to the net assets of the VIE and $31,226,400 and $105,000,000 was attributed to the paid in capital of the WFOE, as ofDecember 31, 2011 and 2012, respectively. During the each of the three years in the period ended December 31, 2012, no cash dividend was declared and paid by the Parent Company. Basis of preparation The condensed financial information of the Parent Company has been prepared using the same accounting policies as set out in its consolidatedfinancial statements, except that the Parent Company has used the equity method to account for its investment in its subsidiaries and its variable interestentity. Accordingly, the condensed financial information presented herein represents the financial information of the Parent Company. No cash flow statement has been presented as the Parent Company has no cash transactions for all the years presented. F-46EXHIBIT 12.1 Certification by the Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Eric Ya Shen, certify that: 1. I have reviewed this annual report on Form 20-F of Vipshop Holdings Limited (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theCompany and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) [intentionally omitted.] (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by thisannual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controlover financial reporting. Date: April 10, 2013 By:/s/ Eric Ya ShenName:Eric Ya ShenTitle:Chief Executive Officer EXHIBIT 12.2 Certification by the Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Donghao Yang, certify that: 1. I have reviewed this annual report on Form 20-F of Vipshop Holdings Limited (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theCompany and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) [intentionally omitted.] (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by thisannual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controlover financial reporting. Date: April 10, 2013 By:/s/ Donghao YangName:Donghao YangTitle:Chief Financial Officer EXHIBIT 13.1 Certification by the Chief Executive OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Vipshop Holdings Limited (the “Company”) on Form 20-F for the year ended December 31, 2012 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric Ya Shen, Chief Executive Officer of the Company, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 10, 2013 By:/s/ Eric Ya ShenName:Eric Ya ShenTitle:Chief Executive Officer EXHIBIT 13.2 Certification by the Chief Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Vipshop Holdings Limited (the “Company”) on Form 20-F for the year ended December 31, 2012 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Donghao Yang, Chief Financial Officer of the Company, certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 10, 2013 By:/s/ Donghao YangName:Donghao YangTitle:Chief Financial Officer EXHIBIT 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in this Registration Statement (No.333-181559) on Form S-8 of our report dated February 21, 2013, except forNote 18 (c), as to which the date is March 19, 2013, relating to the consolidated financial statements of Vipshop Holdings Limited as of December 31, 2011and 2012, and for each of the three years in the period ended December 31, 2012 and the related financial statement schedule, appearing in the Annual Reporton Form 20-F of Vipshop Holdings Limited for the year ended December 31, 2012. /s/ Deloitte Touche TohmatsuDeloitte Touche TohmatsuCertified Public AccountantsHong KongApril 10, 2013 Exhibit 15.2 HAN KUN LAW OFFICESSuite 906, Office Tower C1, Oriental Plaza, 1 East Chang An Avenue, Beijing 100738, P. R. ChinaTEL: (86 10) 8525-5500; FAX: (86 10) 8525-5511/ 5522 Date: April 10, 2013 VIPSHOP HOLDINGS LIMITEDNo. 20 Huahai Street,Liwan District, Guangzhou 510370The People’s Republic of China Dear Sir/Madam: We hereby consent to the reference to our firm in Vipshop Holdings Limited’s annual report on Form 20-F for the fiscal year ended December 31, 2012, whichwill be filed by Vipshop Holdings Limited in April 2013 with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934. Yours Sincerely, /s/ HAN KUN LAW OFFICESHAN KUN LAW OFFICES CONFIDENTIALITY. This document contains confidential information which may also be privileged. Unless you are the addressee (or authorized toreceive for the addressee), you may not copy, use, or distribute it. If you have received it in error, please advise Han Kun Law Offices immediately bytelephone or facsimile and return it promptly by mail. Thanks. Exhibit 15.3 Office:+852 2801 6066Mobile:+852 6621 8994rthorp@traversthorpalberga.com Vipshop Holdings LimitedNo. 20 Huahai Street,Liwan District, Guangzhou 510370The People’s Republic of China 10 April 2013 Dear Sirs Re: Vipshop Holdings Limited We consent to the reference to our firm under the heading “Item 10.E. Additional Information—Taxation” on Form 20-F for the year ended 31 December 2012,which will be filed with the Securities and Exchange Commission in the month of April 2013. Yours faithfully /s/TRAVERS THORP ALBERGATRAVERS THORP ALBERGA Tel: +852 2801 60661205A The CentriumFax: +852 2801 676760 Wyndham Streetwww.traversthorpalberga.comCentral HONG KONGCayman Islands and British Virgin Islands Attorneys-at-LawResident Hong Kong Partners: Richard Thorp, HarrietUnger (England & Wales), Everton Robertson (England & Wales) 

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