SEC Company Response from Vipshop Holdings (VIPS) — Jan 15, 2016
Vipshop Holdings Ltd
Date: Jan. 15, 2016 · CIK: 0001529192 · Accession: 0001104659-16-089990
AI Filing Summary & Sentiment
Referenced dates: December 14, 2015
Letter
VIA EDGAR Vipshop Holdings Limited Form 20-F for Fiscal Year Ended December 31, 2014 Filed April 24, 2015 (File No. 1-35454)
Re:
Dear Mr. Thompson, Mr. Watson and Ms. Silvio:
This letter sets forth the Company’s responses to the comments contained in the letter dated December 14, 2015 from the staff of the Securities and Exchange Commission (the “Staff”) regarding the Company’s Form 20-F for the fiscal year ended December 31, 2014 (the “2014 Form 20-F”). The comments are repeated below and followed by the Company’s responses. All capitalized terms used but not defined in this letter shall have the meanings ascribed to such terms in the 2014 Form 20-F.
* * * *
Critical Accounting Policies
Intangible Assets, page 82
1. Please disclose the method you used to determine the fair value of the various intangible assets acquired in the business combination and the significant assumptions and judgments used to determine their value. Additionally, we note your disclosure that you reassessed the future undiscounted cash flows of certain trademarks and recorded a $2.7 million impairment in 2014. Please tell us the factors that changed between initial recording of the trademarks and the reassessment that lead to the impairment.
In response to the Staff’s comments, the Company proposes to include in “Critical Accounting Policies” in future filings of the annual reports on Form 20-F the enhanced disclosure similar to the following:
The Company considered the following valuation methods and significant assumptions in evaluating certain significant intangible assets acquired in the business combination:
Trademark
The fair value of the trademark was determined using the Relief-From-Royalty Method, which is a specific application of the discounted-cash-flow method under the income approach. It is based on the principle that ownership of intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset. The most significant assumptions used to determine the fair value of the trademark include a) the estimation of a fair royalty rate of 0.55% for the subject trademarks, determined with reference to the relevant licensing transaction as well as the profitability of the business; and b) a discount rate of 23% which is commensurate with the weighted average cost of capital (“WACC”) of the acquired company’s business of 22%, plus a 1% premium for the risk associated with the trademark.
Customer Relationship
The fair value of the customer relationship was determined based on the income approach method known as the excess earnings method. The excess earnings method assumes that the value of an intangible asset equals the present value of the incremental after-tax cash flows attributable to the subject intangible asset. The most significant assumptions used include a) an estimation of the future revenue expected from the existing customers; b) an attrition rate of 25.1% based on historical statistics of revenue generated from old customers and new customers, and an estimated useful life of customer relationships of 10 years, and c) a discount rate of 23% which is commensurate with the WACC of 22%, plus a 1% risk premium attributable to the customer relationship.
Non-compete Agreement
The fair value of the non-compete agreement was determined based on the Incremental Cash Flow Analysis Method under the income approach, which takes into consideration the cash flow increments between the scenario where the non-compete agreement is not in place and the scenario where the non-compete agreement is in place for a period of 3 years from the acquisition. The most significant assumptions include a) without the non-compete agreement, the revenues would be reduced by 40%, 30% and 20%, respectively, in the next three years, and b) a discount rate of 22% which is consistent with the WACC of the business.
Impairment of the Trademark
The Company respectfully advises the Staff that the $2.7 million impairment of trademark recorded in 2014 represented the amount of a series of brand names purchased from an overseas third party in November 2013, which was unrelated to the acquisition of Lefeng.com. To clarify the disclosure, the Company proposes to move such disclosure in future filings of the Form 20-F from the caption of “Intangible assets arising from business combination” to the “Domain names and trademarks” caption, as the acquisition of these brand names was accounted for as acquisition of assets not business combination.
The trademark related to these brand names was acquired with an original plan to develop these brands for sales on the Company’s marketplace platforms in China. However, with the original owner of the brand names having gone into bankruptcy at the time of purchase, the trademark became less well known at the end of year of 2014 after one year as all overseas stores have been closed by the seller. In 2014, after further assessing the estimated marketing costs that would be potentially required to promote these brands in China, the Company changed its business plan to suspend the execution of the sales campaigns in connection with these brands. Several factors, including shutdown of stores overseas, strong competition in retail market, and lack of immediate marketing campaign to promote the brand names in China, further reduced the brand recognition in the marketplace and lowered projected cash flows from these brand names. Accordingly, the Company evaluated the fair value of the assets upon these changes in circumstances, and assessed the recoverability by comparing the carrying amount of these brands with their estimated fair value. The fair value was derived from the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. It was assessed that the fair value would be negligible, so the Company fully wrote off the related balances during fiscal year 2014.
Goodwill, page 83
2. We note your disclosure that you performed a quantitative analysis of goodwill impairment for 2014. As such, please disclose the percentage by which fair value exceeded carrying value as of the date of the most recent test.
In response to the Staff’s comments, the Company proposes to include in “Critical Accounting Policies” in future filings of the annual reports on Form 20-F the following enhanced disclosure.
Based on the quantitative test, it was determined that the fair value of the reporting unit tested exceeded its carrying amount by 18%, and therefore, step two of the two-step goodwill impairment test was not required. We concluded that goodwill was not impaired as of December 31, 2014.
Results of Operations, page 91
3. Please tell us your consideration for disclosing the reasons for the changes in other non-operating income, share of loss of affiliates, net loss attributed to non-controlling interest and the factors that lead to you recording the impairment loss of other investments. Since these amounts were not included in your results of operations in the prior year they may be necessary to understanding your results of operations. Refer to Item 303(a) of Regulation S-K.
In response to the Staff’s comments, the Company proposes to include the enhanced disclosure similar to the following in “Results of Operations” in the Company’s annual report on Form 20-F for the fiscal year of 2015, and similar disclosure will be included in future filings of the Form 20-F:
Other non-operating income. Our non-operating income increased from nil in 2013 to US$3.3 million in 2014, mainly attributable to government subsidies received in 2014. There was no such transactions in 2013.
Share of loss of affiliates. Our share of loss of affiliates increased from nil in 2013 to US$10.2 million in 2014, which mainly represent our share of losses of the 23% equity interest in Ovation, and the amortization adjustment of basis difference between our investment cost and underlying equity in net assets of Ovation from the date of acquisition in February. We did not have any investment in affiliates in 2013.
Net loss attributable to noncontrolling interests. Our net loss attributable to noncontrolling interests increased from nil in 2013 to US$14.5 million in 2014, which mainly represents the loss attributable to 25% noncontrolling interest holders of Lefeng from the date of acquisition of Lefeng. We did not have any noncontrolling interest in 2013.
The Company respectfully advises the Staff that impairment loss of other investment represents the write down of the Company’s investment related to a cost method investee. The investee conducts e-commerce business in the United States, and as its operation results worsened during the year ended December 31, 2014, the Company has assessed that it should be fully written off. Since the amount of impairment was not material, the Company concluded that there is no need for any disclosure.
B Liquidity and Capital Resources, page 96
4. Please disclose:
· Material amounts of cash and held to maturity securities disaggregated by currency denomination as of the most recent balance sheet date in each jurisdiction in which your affiliated entities are domiciled. For entities within China, disclose material amounts of cash and held to maturity securities held by VIEs separately from the amount of cash and held to maturity securities held by other entities.
In response to the Staff’s comments, the Company proposes to include in “Liquidity and Capital Resources” in future filings of the annual reports on Form 20-F the enhanced disclosure on cash and cash equivalents and held to maturity securities similar to below.
As of December 31, 2014 and 2015, the Company’s cash and cash equivalents and held to maturity securities (“HTM”) are held in the following currency denominations and jurisdictions in which our subsidiaries domiciled:
As of December 31,
Currency denomination
Subsidiaries PRC
Subsidiaries in HK
Subsidiary in USA
Total
Subsidiaries PRC
Subsidiaries in HK
Subsidiary in USA
Total
US$
US$
US$
US$
US$
US$
US$
US$
RMB
895,186,528
327,453,513
—
1,222,640,041
USD
53,299,757
102,991,163
478,039
156,768,959
Others
—
65,798
—
65,798
Total
948,486,285
430,510,474
478,039
1,379,474,798
As of December 31, 2014 and 2015, the Company’s cash and cash equivalents and HTM held by VIEs and other entities within China are as follows:
As of December 31,
$
$
HTM:
VIEs
425,780,657
Other entities in China
181,565,247
Total
607,345,904
As of December 31,
$
$
Cash and cash equivalents:
VIEs
222,825,162
Other entities in China
118,315,219
Total
341,140,381
· The restrictions on foreign exchange and your ability to transfer cash between entities, across borders, and to U.S. investors.
In response to the Staff’s comments, the Company proposes to include in “Liquidity and Capital Resources” in future filings of the annual reports on Form 20-F the enhanced disclosure similar to below.
The PRC governmental authorities impose controls on the convertibility of the Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our company in the Cayman Islands may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our wholly foreign-owned subsidiaries in China are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate shareholders who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. There is no requirement imposed on U.S. investors for them to complete registration or obtain approval from appropriate government authorities before they can receive dividend payments from our Cayman company. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Consolidated Statements of Cash Flows, page F-8
5. Please tell us your basis for recording the deposit related to the acquisition of land use right as operating activities as opposed to investing activities. Refer to ASC 230.
The Company respectfully advises the Staff that the Company has accounted for the land use rights arrangement as an operating lease in accordance with ASC 840 as the arrangements pursuant to which the land is leased do not contain any provisions for the transfer of ownership or bargain-purchase-options. As such, considering the payments for land use rights as operating lease payments is consistent with the guidance provided in ASC 840-10-25-37, which states as follows:
If land is the sole item of property leased and either the transfer-of-ownership criterion in paragraph 840-10-25-1(a) or the bargain-purchase-option criterion in paragraph 840-10-25-1(b) is met, the lessee shall account for the lease as a capital lease. Otherwise, the lessee shall account for the lease as an operating lease.
Accordingly, the pre-payments for such land use rights can be considered prepaid rent. ASC 230-10-20 defines operating activities as (i.e., emphasized parts are bolded and italicized):
Operating activities include all transactions and other events that are not defined as investing or financing activities. (See paragraphs 230-10-45-12 through 45-15). Operating activities generally involve producing and delivering goods and providing services. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income.
The Company also performed a practice search to identify other SEC registrants that disclose the statement of cash flows presentation of land use rights and observed significant diversity in practice with certain registrants presenting such payments within operating activities and others presenting such payments within investing activities.
Given that ASC 230 does not specifically require operating lease payments or prepaid rent to be presented within investing activities or financing activities and the diversity in practice identified in the practice search, the Company believes it is acceptable to classify these payments within operating activities, consistent with its definition in ASC 230-10-20.
However, in light of change in the
Show Raw Text
CORRESP 1 filename1.htm January 15, 2016 VIA EDGAR William H. Thompson, Accounting Branch Chief Tony Watson, Staff Accountant Donna Di Silvio, Staff Accountant Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: Vipshop Holdings Limited Form 20-F for Fiscal Year Ended December 31, 2014 Filed April 24, 2015 (File No. 1-35454) Dear Mr. Thompson, Mr. Watson and Ms. Silvio: This letter sets forth the Company’s responses to the comments contained in the letter dated December 14, 2015 from the staff of the Securities and Exchange Commission (the “Staff”) regarding the Company’s Form 20-F for the fiscal year ended December 31, 2014 (the “2014 Form 20-F”). The comments are repeated below and followed by the Company’s responses. All capitalized terms used but not defined in this letter shall have the meanings ascribed to such terms in the 2014 Form 20-F. * * * * Critical Accounting Policies Intangible Assets, page 82 1. Please disclose the method you used to determine the fair value of the various intangible assets acquired in the business combination and the significant assumptions and judgments used to determine their value. Additionally, we note your disclosure that you reassessed the future undiscounted cash flows of certain trademarks and recorded a $2.7 million impairment in 2014. Please tell us the factors that changed between initial recording of the trademarks and the reassessment that lead to the impairment. In response to the Staff’s comments, the Company proposes to include in “Critical Accounting Policies” in future filings of the annual reports on Form 20-F the enhanced disclosure similar to the following: The Company considered the following valuation methods and significant assumptions in evaluating certain significant intangible assets acquired in the business combination: Trademark The fair value of the trademark was determined using the Relief-From-Royalty Method, which is a specific application of the discounted-cash-flow method under the income approach. It is based on the principle that ownership of intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset. The most significant assumptions used to determine the fair value of the trademark include a) the estimation of a fair royalty rate of 0.55% for the subject trademarks, determined with reference to the relevant licensing transaction as well as the profitability of the business; and b) a discount rate of 23% which is commensurate with the weighted average cost of capital (“WACC”) of the acquired company’s business of 22%, plus a 1% premium for the risk associated with the trademark. Customer Relationship The fair value of the customer relationship was determined based on the income approach method known as the excess earnings method. The excess earnings method assumes that the value of an intangible asset equals the present value of the incremental after-tax cash flows attributable to the subject intangible asset. The most significant assumptions used include a) an estimation of the future revenue expected from the existing customers; b) an attrition rate of 25.1% based on historical statistics of revenue generated from old customers and new customers, and an estimated useful life of customer relationships of 10 years, and c) a discount rate of 23% which is commensurate with the WACC of 22%, plus a 1% risk premium attributable to the customer relationship. Non-compete Agreement The fair value of the non-compete agreement was determined based on the Incremental Cash Flow Analysis Method under the income approach, which takes into consideration the cash flow increments between the scenario where the non-compete agreement is not in place and the scenario where the non-compete agreement is in place for a period of 3 years from the acquisition. The most significant assumptions include a) without the non-compete agreement, the revenues would be reduced by 40%, 30% and 20%, respectively, in the next three years, and b) a discount rate of 22% which is consistent with the WACC of the business. Impairment of the Trademark The Company respectfully advises the Staff that the $2.7 million impairment of trademark recorded in 2014 represented the amount of a series of brand names purchased from an overseas third party in November 2013, which was unrelated to the acquisition of Lefeng.com. To clarify the disclosure, the Company proposes to move such disclosure in future filings of the Form 20-F from the caption of “Intangible assets arising from business combination” to the “Domain names and trademarks” caption, as the acquisition of these brand names was accounted for as acquisition of assets not business combination. The trademark related to these brand names was acquired with an original plan to develop these brands for sales on the Company’s marketplace platforms in China. However, with the original owner of the brand names having gone into bankruptcy at the time of purchase, the trademark became less well known at the end of year of 2014 after one year as all overseas stores have been closed by the seller. In 2014, after further assessing the estimated marketing costs that would be potentially required to promote these brands in China, the Company changed its business plan to suspend the execution of the sales campaigns in connection with these brands. Several factors, including shutdown of stores overseas, strong competition in retail market, and lack of immediate marketing campaign to promote the brand names in China, further reduced the brand recognition in the marketplace and lowered projected cash flows from these brand names. Accordingly, the Company evaluated the fair value of the assets upon these changes in circumstances, and assessed the recoverability by comparing the carrying amount of these brands with their estimated fair value. The fair value was derived from the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. It was assessed that the fair value would be negligible, so the Company fully wrote off the related balances during fiscal year 2014. 2 Goodwill, page 83 2. We note your disclosure that you performed a quantitative analysis of goodwill impairment for 2014. As such, please disclose the percentage by which fair value exceeded carrying value as of the date of the most recent test. In response to the Staff’s comments, the Company proposes to include in “Critical Accounting Policies” in future filings of the annual reports on Form 20-F the following enhanced disclosure. Based on the quantitative test, it was determined that the fair value of the reporting unit tested exceeded its carrying amount by 18%, and therefore, step two of the two-step goodwill impairment test was not required. We concluded that goodwill was not impaired as of December 31, 2014. Results of Operations, page 91 3. Please tell us your consideration for disclosing the reasons for the changes in other non-operating income, share of loss of affiliates, net loss attributed to non-controlling interest and the factors that lead to you recording the impairment loss of other investments. Since these amounts were not included in your results of operations in the prior year they may be necessary to understanding your results of operations. Refer to Item 303(a) of Regulation S-K. In response to the Staff’s comments, the Company proposes to include the enhanced disclosure similar to the following in “Results of Operations” in the Company’s annual report on Form 20-F for the fiscal year of 2015, and similar disclosure will be included in future filings of the Form 20-F: Other non-operating income. Our non-operating income increased from nil in 2013 to US$3.3 million in 2014, mainly attributable to government subsidies received in 2014. There was no such transactions in 2013. Share of loss of affiliates. Our share of loss of affiliates increased from nil in 2013 to US$10.2 million in 2014, which mainly represent our share of losses of the 23% equity interest in Ovation, and the amortization adjustment of basis difference between our investment cost and underlying equity in net assets of Ovation from the date of acquisition in February. We did not have any investment in affiliates in 2013. 3 Net loss attributable to noncontrolling interests. Our net loss attributable to noncontrolling interests increased from nil in 2013 to US$14.5 million in 2014, which mainly represents the loss attributable to 25% noncontrolling interest holders of Lefeng from the date of acquisition of Lefeng. We did not have any noncontrolling interest in 2013. The Company respectfully advises the Staff that impairment loss of other investment represents the write down of the Company’s investment related to a cost method investee. The investee conducts e-commerce business in the United States, and as its operation results worsened during the year ended December 31, 2014, the Company has assessed that it should be fully written off. Since the amount of impairment was not material, the Company concluded that there is no need for any disclosure. B Liquidity and Capital Resources, page 96 4. Please disclose: · Material amounts of cash and held to maturity securities disaggregated by currency denomination as of the most recent balance sheet date in each jurisdiction in which your affiliated entities are domiciled. For entities within China, disclose material amounts of cash and held to maturity securities held by VIEs separately from the amount of cash and held to maturity securities held by other entities. In response to the Staff’s comments, the Company proposes to include in “Liquidity and Capital Resources” in future filings of the annual reports on Form 20-F the enhanced disclosure on cash and cash equivalents and held to maturity securities similar to below. As of December 31, 2014 and 2015, the Company’s cash and cash equivalents and held to maturity securities (“HTM”) are held in the following currency denominations and jurisdictions in which our subsidiaries domiciled: As of December 31, 2014 2015 Currency denomination Subsidiaries PRC Subsidiaries in HK Subsidiary in USA Total Subsidiaries PRC Subsidiaries in HK Subsidiary in USA Total US$ US$ US$ US$ US$ US$ US$ US$ RMB 895,186,528 327,453,513 — 1,222,640,041 USD 53,299,757 102,991,163 478,039 156,768,959 Others — 65,798 — 65,798 Total 948,486,285 430,510,474 478,039 1,379,474,798 4 As of December 31, 2014 and 2015, the Company’s cash and cash equivalents and HTM held by VIEs and other entities within China are as follows: As of December 31, 2014 2015 $ $ HTM: VIEs 425,780,657 Other entities in China 181,565,247 Total 607,345,904 As of December 31, 2014 2015 $ $ Cash and cash equivalents: VIEs 222,825,162 Other entities in China 118,315,219 Total 341,140,381 · The restrictions on foreign exchange and your ability to transfer cash between entities, across borders, and to U.S. investors. In response to the Staff’s comments, the Company proposes to include in “Liquidity and Capital Resources” in future filings of the annual reports on Form 20-F the enhanced disclosure similar to below. The PRC governmental authorities impose controls on the convertibility of the Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our company in the Cayman Islands may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our wholly foreign-owned subsidiaries in China are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate shareholders who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. There is no requirement imposed on U.S. investors for them to complete registration or obtain approval from appropriate government authorities before they can receive dividend payments from our Cayman company. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs. 5 Consolidated Statements of Cash Flows, page F-8 5. Please tell us your basis for recording the deposit related to the acquisition of land use right as operating activities as opposed to investing activities. Refer to ASC 230. The Company respectfully advises the Staff that the Company has accounted for the land use rights arrangement as an operating lease in accordance with ASC 840 as the arrangements pursuant to which the land is leased do not contain any provisions for the transfer of ownership or bargain-purchase-options. As such, considering the payments for land use rights as operating lease payments is consistent with the guidance provided in ASC 840-10-25-37, which states as follows: If land is the sole item of property leased and either the transfer-of-ownership criterion in paragraph 840-10-25-1(a) or the bargain-purchase-option criterion in paragraph 840-10-25-1(b) is met, the lessee shall account for the lease as a capital lease. Otherwise, the lessee shall account for the lease as an operating lease. Accordingly, the pre-payments for such land use rights can be considered prepaid rent. ASC 230-10-20 defines operating activities as (i.e., emphasized parts are bolded and italicized): Operating activities include all transactions and other events that are not defined as investing or financing activities. (See paragraphs 230-10-45-12 through 45-15). Operating activities generally involve producing and delivering goods and providing services. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The Company also performed a practice search to identify other SEC registrants that disclose the statement of cash flows presentation of land use rights and observed significant diversity in practice with certain registrants presenting such payments within operating activities and others presenting such payments within investing activities. Given that ASC 230 does not specifically require operating lease payments or prepaid rent to be presented within investing activities or financing activities and the diversity in practice identified in the practice search, the Company believes it is acceptable to classify these payments within operating activities, consistent with its definition in ASC 230-10-20. However, in light of change in the