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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(cid:134) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015.
OR
OR
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
OR
(cid:134) SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
Commission file number: 001-36427
Cheetah Mobile Inc.
(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)
Hui Tong Times Square
No. 8, Yaojiayuan South Road
Chaoyang District, Beijing 100123
People’s Republic of China
(Address of Principal Executive Offices)
Ka Wai Andy Yeung
Chief Financial Officer
Cheetah Mobile Inc.
Hui Tong Times Square
No. 8, Yaojiayuan South Road
Chaoyang District, Beijing 100123
Tel: +86-10-6292-7779
Email: IR@cmcm.com
(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 class
American depositary shares, each
representing ten Class A ordinary shares
Class A ordinary shares, par value
US$0.000025 per share*
Name of each exchange on which registered
The New York Stock Exchange
* Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares, each
representing ten Class A ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report: 365,961,759 Class A ordinary shares and 1,058,514,152 Class B ordinary shares, par value
US$0.000025 per share, as of December 31, 2015.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
(cid:134) Yes (cid:95) No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
(cid:134) Yes (cid:95) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
(cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
(cid:95) Yes (cid:134) 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 and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)
(cid:130)
Accelerated filer (cid:95)
(cid:130)
Non-accelerated filer (cid:134)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP (cid:95)
International Financial Reporting Standards as issued
by the International Accounting Standards Board (cid:134) (cid:130)
(cid:130)
Other (cid:134)
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.
(cid:134) Item 17 (cid:134) 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).
(cid:134) Yes (cid:95) No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
(cid:134) Yes (cid:134) No
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TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
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3
3
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INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
“Cheetah Mobile Inc.,” “we,” “us,” “our company” or “our” refers to Cheetah Mobile Inc., its subsidiaries and, in
the context of describing our operations and consolidated financial data, also includes our variable interest entities
and the subsidiary of a variable interest entity;
“ADSs” refers to American depositary shares, each of which represents ten of our Class A ordinary shares;
“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report,
Hong Kong, Macau and Taiwan;
“Ordinary shares,” prior to the completion of our initial public offering in May 2014, refers to our ordinary shares,
par value US$0.000025 per share and, upon the completion of the offering, to our Class A and Class B ordinary
shares, par value US$0.000025 per share;
“RMB” or “Renminbi” refers to the legal currency of China;
“US$,” “U.S. dollars,” “$,” or “dollars” refers to the legal currency of the United States;
“Kingsoft Corporation Limited” or “Kingsoft Corporation” refers to Kingsoft Corporation Limited, our controlling
shareholder, a company listed on the Hong Kong Stock Exchange (Stock Code: 3888);
(cid:120) Number of “monthly active users,” in reference to all of our products, refers to the number of computers, tablets or
smartphones on which one or more of our products have been installed or downloaded and that accessed the internet
at least once during the relevant month; and number of “monthly active users,” in reference to an individual product,
refers to the number of computers, tablets or smartphone on which such product has been installed or downloaded
and that accessed the internet at least once during the relevant month. A single device with multiple applications
installed is counted as one user. A single person with applications installed on multiple devices is counted as
multiple users. Multiple persons using a single device are counted as one user. The number of monthly active users
for our mobile products is based on our internal statistics.
(cid:120) Number of mobile devices on which our applications have been “installed,” as of a specified date, refers to the
cumulative number of mobile devices on which one or more of our applications have been installed as of the
specified date;
(cid:120)
“Hong Kong Listing Rules” refers to the Rules Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited;
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(cid:120)
(cid:120)
“Overseas revenues” or “revenues from overseas markets” refers to revenues generated by our operating legal
entities incorporated outside China. Such revenues are primarily attributable to customers located outside China; and
“Variable interest entities” or “VIEs” refers to those entities incorporated in PRC consolidated in our financial
statements and over which our subsidiaries exercise effective control through a series of contractual arrangements.
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of
future events. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of
1995. You can identify these forward-looking statements by words or phrases such as “may,” “could,” “should,” “would,” “will,”
“expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to,” “project,” “continue,” “potential,” or other similar
expressions. We have based these forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
These forward-looking statements include, but are not limited to, statements about:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our growth strategies;
our ability to retain and attract users, customers and business partners, and to expand our product and service
offerings;
our ability to monetize our platform;
our future business development, results of operations and financial condition;
expected changes in our revenues and certain cost or expense items;
competition in our industry;
relevant government policies and regulations relating to our industry;
general economic and business condition globally and in China; and
assumptions underlying or related to any of the foregoing.
You should not place undue reliance on these forward-looking statements and you should read these statements in
conjunction other sections of this annual report, in particular the risk factors disclosed in “Item 3. Key Information—D. Risk Factors.”
These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from those expressed or implied by the forward-looking statements. Moreover, we operate in a
rapidly evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors,
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 results to differ from those contained in any forward-looking statement. The forward-looking statements made in this annual
report relate only to events or information as of the date on which the statements are made in this annual report. We do not undertake
any obligation to update or revise the forward-looking statements except as required under applicable law.
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PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
A.
Selected Financial Data
The following table presents the selected consolidated financial information of our company. The selected consolidated
statements of comprehensive income data for each of the three years ended December 31, 2015 and the selected consolidated balance
sheets data as of December 31, 2014 and 2015 have been derived from our audited consolidated financial statements, which are
included in this annual report beginning on page F-1. The selected consolidated statements of comprehensive income (loss) data for
each of the two years ended December 31, 2011 and 2012 and the selected consolidated balance sheets data as of December 31, 2012
and 2013 have been derived from our audited consolidated financial statements that are not included in this annual report. Our audited
consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future period. You should read
the following selected financial data in conjunction with the consolidated financial statements and related notes and “Item 5.
Operating and Financial Review and Prospects” included elsewhere in this annual report.
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Selected Consolidated Statements
of Comprehensive Income
(Loss) Data:
Revenues
Online marketing services
Internet value-added services
Internet security services and
(1)
others
Cost of revenues
Gross profit
Operating income and expenses
(1)
Research and development
Selling and marketing
(1)
General and administrative
Impairment of goodwill and
(1)
intangible assets
Other operating income
Operating (loss)/profit
Other income and expenses
(Loss)/income before taxes
Income tax benefit/(expenses)
Net (loss)/income
Less: net loss attributable to
noncontrolling interests
Net (loss)/income attributable to
Cheetah Mobile Inc.
(Losses)/earnings per share
Basic
Diluted
(Losses)/earnings per ADS
(2)
Basic
Diluted
Weighted average number of
shares used in computation:
Basic
Diluted
2011
RMB
140,054
23,916
—
116,138
(53,737)
86,317
(79,105)
(28,810)
(15,301)
—
—
(123,216)
(36,899)
4,067
(32,832)
2,597
(30,235)
—
(30,235)
(0.0345)
(0.0345)
(0.3452)
(0.3452)
2012
RMB
Year Ended December 31,
2013
RMB
2014
RMB
RMB
(In thousands except for shares, per share and per ADS data)
2015
US$
287,927
212,443
2,354
73,130
(71,560)
216,367
(114,329)
(57,167)
(34,408)
—
—
(205,904)
10,463
4,296
14,759
(4,915)
9,844
—
9,844
0.0097
0.0094
0.0974
0.0940
749,911
612,565
83,155
54,191
(140,526)
609,385
(217,846)
(201,504)
(97,817)
—
—
(517,167)
92,218
18,470
110,688
(48,670)
62,018
1,763,579
1,322,612
400,671
40,296
(403,412)
1,360,167
(436,840)
(580,610)
(251,743)
(8,304)
—
(1,277,497)
82,670
8,234
90,904
(23,993)
66,911
3,684,429
3,244,130
395,312
44,987
(935,154)
2,749,275
(687,235)
(1,479,441)
(423,248)
(49,882)
97,468
(2,542,338)
206,937
24,438
231,375
(60,097)
171,278
568,778
500,807
61,026
6,945
(144,363)
424,415
(106,091)
(228,386)
(65,338)
(7,700)
15,046
(392,469)
31,946
3,771
35,717
(9,277)
26,440
—
(1,030)
(5,318)
(821)
62,018
0.0567
0.0538
0.5671
0.5381
67,941
176,596
0.0527
0.0506
0.5272
0.5064
0.1286
0.1238
1.2863
1.2377
27,261
0.0199
0.0191
0.1986
0.1911
929,119,153 1,210,501,020 1,372,863,321 1,372,863,321
875,944,795
875,944,795 1,046,982,205 1,135,982,953 1,341,732,457 1,426,810,939 1,426,810,939
908,457,367
(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:
2011
RMB
2012
RMB
2013
RMB
2014
RMB
2015
RMB
US$
Year Ended December 31,
Cost of revenues
Research and development
Selling and marketing
General and administrative
Total
94
4,313
47
1,381
5,835
(2) Each ADS represents ten Class A ordinary shares.
21
6,663
609
12,994
20,287
4
(In thousands)
10
14,520
2,835
20,031
37,396
1,393
51,176
7,407
113,298
173,274
1,523
142,682
18,068
153,134
315,407
235
22,026
2,789
23,640
48,690
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Selected Consolidated Balance Sheets Data:
Cash and cash equivalents
Short-term investments
Total assets
Total current liabilities
Total liabilities
Total mezzanine equity
Total Cheetah Mobile Inc. shareholders’ equity
Total equity
Exchange Rate Information
2012
RMB
2013
RMB
As of December 31,
2014
RMB
(In thousands)
2015
RMB
US$
134,376
40,376
316,995
152,062
156,869
119,976
40,150
40,150
530,536
55,780
909,593
263,968
315,525
441,941
152,127
152,127
1,093,285
513,621
3,001,175
621,656
718,306
—
2,206,338
2,282,869
1,809,288
29,234
4,942,649
1,708,687
1,894,519
—
2,911,939
3,048,130
279,306
4,513
763,012
263,776
292,463
—
449,525
470,549
Our revenues and costs are partly denominated in Renminbi and partly denominated in foreign currencies, primarily U.S.
dollars. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of
the reader. The conversion of RMB into U.S. dollars in this annual report is based on the noon buying rate in New York City for cable
transfers in RMB as certified for customs purposes by the Board of Governors of the Federal Reserve System. Unless otherwise noted,
all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.4778 to
US$1.00, the noon buying rate in effect as of December 31, 2015. We make no representation that any RMB or U.S. dollar amounts
could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC
government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade. On April 15, 2016, the noon buying rate was RMB6.4730 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods
indicated.
Period
2011
2012
2013
2014
2015
October
November
December
2016
January
February
March
April (through April 15)
Period End
Average
(1)
Low
High
(RMB per U.S. Dollar)
Noon Buying Rate
6.2939
6.2301
6.0537
6.2046
6.4778
6.3180
6.3883
6.4775
6.5752
6.5525
6.4480
6.4730
6.4475
6.2990
6.1412
6.1704
6.2821
6.3505
6.3640
6.4491
6.5726
6.5501
6.5027
6.4713
6.6364
6.3879
6.2438
6.2591
6.4896
6.3591
6.3945
6.4896
6.5932
6.5795
6.5500
6.4810
6.2939
6.2221
6.0537
6.0402
6.1870
6.3180
6.3180
6.3883
6.5219
6.5154
6.4480
6.4580
(1) Annual averages are calculated using the average of month-end rates of the relevant year. Monthly averages are calculated using
the average of the daily rates during the relevant month.
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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
If we fail to retain or grow our user base, or if our users decrease their engagement with our mobile and PC applications, our
business, financial condition and results of operations would be materially and adversely affected.
The size of our user base and our users’ level of engagement are critical to our success. Our business and financial
performance have been and will continue to be significantly determined by our success in adding, retaining and engaging active users.
We have been consistently anticipating user demand and developing innovative products and services in an effort to attract and retain
users. However, the internet industry, including the mobile internet industry, is characterized by constant and rapid technological
changes. As a result, users may switch from one set of products to others more quickly than in other sectors. To the extent our user
growth rate slows, our success will become increasingly dependent on our ability to increase levels of user engagement and
monetization. Our user growth and engagement could be adversely affected if:
(cid:120) we fail to maintain the popularity of our existing products for users in China and globally;
(cid:120) we are unsuccessful in launching new and popular applications in a cost-effective manner to further diversify our product
offerings;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
technical or other problems prevent us from delivering our products or services in a rapid and reliable manner or
otherwise affect user experience;
there are user concerns related to privacy, safety, security or other factors;
our products are displaced by products adopting new technologies;
there are adverse changes in our products or services that are mandated by, or that we elect to make to address,
legislation, regulatory authorities or litigation, including settlements or consent decrees;
(cid:120) we fail to provide adequate customer service to users; or
(cid:120) we do not maintain our brand image or our reputation is damaged.
We received in the past, and may continue to receive, complaints from users regarding our mobile applications primarily
regarding privacy settings and certain third-party website promotion activities on our mobile applications. We have not incurred any
material costs to address the complaints. If we are unable to address user complaints timely or at all, our reputation may be harmed
and our user base may decline. Our efforts to avoid or address any of these events could require us to incur substantial expenditures to
modify or adapt our products, services or infrastructure. If we fail to retain or continue to grow our user base, or if our users decrease
their engagement with our products, our business, financial condition and results of operations would be materially and adversely
affected.
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We only began to offer and monetize our mobile applications in recent years, and there is uncertainty as to whether we can achieve
continued growth in, or successful monetization of, our mobile business operations.
In 2015, 66.0% of our revenues were derived from our mobile applications, compared to 26.4%, 7.4% and 2.2% in 2014,
2013 and 2012, respectively. Although our mobile applications have proven to be highly popular, we have a short operating history
and limited experience in the mobile internet industry. We launched our first mobile application, Battery Doctor, in July 2011, and
have since then launched a number of new mobile applications on the Android and iOS platforms. The mobile internet industry is
characterized by constant change, including but not limited to rapid technological evolution, shifting user demands, frequent
introduction of new products and services, and constant emergence of new industry standards, operating systems and practices. As a
result of these factors and our limited mobile internet industry experience, we may not be able to sustain the popularity of our existing
mobile applications or introduce new mobile applications that meet the expectations of our users and customers.
Even if we succeed in continuing to grow the user base for our mobile applications and increase revenues generated from our
mobile business, or mobile revenues, we may not be able to maintain the growth trajectories. The mobile internet industry only began
to experience rapid growth in recent years, and there are relatively few proven models for us to monetize our mobile traffic. We are
currently exploring a number of monetization models for our mobile business. We currently generate mobile revenues primarily
through mobile advertising services. If the mobile advertising industry fails to grow as we expect, or if we fail to develop or maintain
effective monetization models for our mobile applications, our business, financial condition and results of operations may be
materially and adversely affected.
Because a limited number of customers contribute to a significant portion of our revenues, our revenues and results of operations
could be materially and adversely affected if we were to lose a significant customer or a significant portion of its business.
Currently, a limited number of customers contribute a significant portion of our revenues. Our customers, in the case of
online marketing services, primarily comprise mobile application developers, mobile game developers, mobile advertising networks,
e-commerce companies and search engines to which we refer traffic and sell advertisements. In 2013, 2014 and 2015, our five largest
customers in aggregate contributed approximately 65.0%, 55.5% and 59.1% of our revenues, respectively. We expect that a limited
number of our customers will continue to contribute a significant portion of our revenues in the near future. If we lose any of these
customers, or if a significant customer substantially reduces its spending with us, our business, financial condition and results of
operations may be materially and adversely affected.
We rely on online marketing for the majority of our revenues, and our profitability and financial prospects may be affected by the
revenue sharing and fee arrangement with our customers.
We generated 81.7%, 75.0% and 88.0% of our revenues from online marketing services in 2013, 2014 and 2015,
respectively. We generate revenues from our online marketing services primarily by providing mobile advertising services to
advertisers worldwide, as well as selling advertisements and referring user traffic on our mobile and PC platforms. The revenue
sharing and fee arrangement with these customers are subject to changes which may not be favorable to us. For example, our fee
arrangement with one of our significant customers was changed from a pay per click and pay per sale model to pay per sale only
model for certain traffic we refer to them, which affected our revenues in 2013. If our customers reduce or discontinue their
advertising spending with us, or if we fail to attract new customers or if the revenue sharing and fee arrangements with our customers
become less favorable to us, our business, financial condition and results of operations could be materially and adversely affected.
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We are subject to risks and uncertainties faced by companies in a rapidly evolving industry.
We operate in the rapidly evolving internet industry, which makes it difficult to predict our future results of operations.
Accordingly, our future prospects are subject to the risks and uncertainties experienced by companies in evolving industries. Some of
these risks and uncertainties relate to our ability to, among others:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
successfully implement our plan to further develop and monetize our mobile platform both in China and globally;
offer new, innovative products and services and enhance our existing products and services with innovative and
advanced technology to attract and retain a larger user base;
retain existing customers and attract additional customers and increase spending per customer;
respond to evolving user preferences and industry changes;
respond to competitive market conditions;
upgrade our technology to support increased traffic and expanded product and service offerings;
(cid:120) maintain effective control of our costs and expenses;
(cid:120)
(cid:120)
respond to changes in the regulatory environment in China and overseas markets and manage legal risks, including those
associated with intellectual property rights; and
execute our strategic investments and acquisitions and post-acquisition integrations effectively.
If we fail to address any of the above risks and uncertainties, our business may be materially and adversely affected.
If we fail to compete effectively, our business, financial condition and results of operations may be materially and adversely
affected.
We face intense competition in our businesses. In the mobile space, we compete with other mobile application developers,
including those developers that offer products purported to perform similar functions as Clean Master, Battery Doctor and our other
products. In the internet space, we mainly compete with Qihoo 360 Technology Co., Ltd., or Qihoo, in China’s internet security and
anti-virus market. In addition, we compete with all major internet companies for user attention and advertising spend.
Some of our competitors have longer operating histories and significantly greater financial, technological and marketing
resources than we do and, in turn, have an advantage in attracting and retaining users and customers. If we are not able to effectively
compete in any aspect of our business or if our reputation is harmed by negative publicity relating to us, our products and services or
our key management, our user base may decrease, which could make us less attractive to customers, and our business, financial
condition and results of operations may be materially and adversely affected.
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We have a limited operating history in international markets. If we fail to meet the challenges presented by our increasingly
globalized operations, our business, financial condition and results of operations may be materially and adversely affected.
Our business has continued to expand internationally since we released our Clean Master overseas version in September 2012
and established Cheetah Mobile America, Inc., one of our U.S. subsidiaries in November 2012. In December 31, 2013, 2014 and
2015, approximately 53.2%, 68.8% and 78.6%, respectively, of our mobile monthly active users were from overseas markets,
including the United States, Europe and certain emerging markets (other than China), while the remainder were from China. Revenues
from overseas markets accounted for 1.4%, 12.6% and 50.0% of our total revenues in 2013, 2014 and 2015, respectively. We
currently expect to continue our global expansion as a key growth strategy, which exposes us to a number of risks, including:
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challenges in formulating effective local sales and marketing strategies targeting mobile internet users from various
jurisdictions and cultures, who have a diverse range of preferences and demands;
challenges in identifying appropriate local business partners and establishing and maintaining good working
relationships with them. Our business partners primarily include third parties that promote our platform and applications,
and mobile advertising networks, such as Facebook, Yahoo, Google and Tencent, through which advertisers place their
advertisements on our mobile applications. In addition, we work with game developers for our game publishing
business;
challenges in selecting suitable geographical regions for global expansion;
fluctuations in currency exchange rates;
compliance with applicable foreign laws and regulations, including but not limited to internet content requirements,
foreign exchange controls, cash repatriation restrictions, intellectual property protection rules and data privacy
requirements; and
exposure to different tax jurisdictions that may subject us to greater fluctuations in our effective tax rate and assessments
in multiple jurisdictions on various tax-related assertions, including transfer pricing adjustments and permanent
establishment; and
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increased costs associated with doing business in foreign jurisdictions.
Our business, financial condition and results of operations may be materially and adversely affected by these and other risks
associated with our increasingly globalized operations.
More people are using devices other than personal computers to access the internet. If users do not widely adopt versions of our
applications developed for these devices, our business could be adversely affected.
The number of people who access the internet through devices other than personal computers, including mobile phones,
smartphones, handheld computers such as iPad and other tablets, and television set-top devices, is increasing dramatically. The
varying display sizes, functionality, and memory associated with alternative devices make the use of our applications on such devices
more difficult and the versions of our applications developed for these devices may not be compelling to users, manufacturers or
distributors of devices. Each manufacturer or distributor may establish unique technical standards for its devices, and our applications
may not work or be accessible on these devices. Some manufacturers may also elect not to include our applications on their devices.
As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in
developing versions of our applications for use on these alternative devices and we may need to devote significant resources to the
creation, support, and maintenance of our applications tailored for such devices. If we are unable to attract and retain a substantial
number of alternative device manufacturers, distributors, and users to adopt and use our applications, or if we are slow to develop
products and technologies that are more compatible with alternative devices, we may fail to capture a significant share of an
increasingly important portion of the market for online marketing services, which could adversely affect our business.
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If our mobile and PC applications fail to address security threats and optimize system performance or otherwise do not work
properly, we may lose users, and our business, financial condition and results of operations may be materially and adversely
affected.
Our users rely on our applications to optimize internet system performance of their mobile devices and PC and provide real
time protection against security threats. Our applications are highly technical and complex and, when deployed, may contain defects
or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by our
users.
Our applications for users rely on our cloud-based data analytics engines to optimize system performance and protect against
security threats. The data analytics engines include our most up-to-date security threats library and application behavior library in the
cloud, and our applications only include a subset of these libraries on the users’ end devices. If our data analytics engines do not
function properly, or if the infrastructure supporting the data analytics engine malfunctions, our applications may not achieve optimal
results.
Our cloud-based data analytics engines employ a heuristic, or experience-based, approach to detect unknown security threats
and behavior of unknown mobile applications. However, new malware and malicious applications are constantly appearing and
evolving, and our detection technologies may not detect all forms of security threats or malicious applications encountered by our
users. In addition, our applications may not work properly with the Windows, Android or iOS operating systems if we cannot
promptly upgrade our applications following any changes or updates to these operating systems. We previously experienced system
disruption due to compatibility issues resulting from an update to the Windows operating system.
Any of these defects, vulnerabilities or failures may cause security breaches and suboptimal system performance of the
mobile and PC internet, which could result in damage to our reputation, decrease in our user base and loss of customers, and our
business, financial condition and results of operations may be materially and adversely affected.
If any system failure, interruption or downtime occurs, our business, financial condition and results of operations may be
materially and adversely affected.
Although we seek to reduce the possibility of disruptions and other outages, our applications may be disrupted by problems
with our own cloud-based technology and system, such as malfunctions in our software or other facilities or network overload. Our
systems may be vulnerable to damage or interruption caused by telecommunication failures, power loss, human error, computer
attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. While we locate our servers in multiple data centers
across China, as well as in other Asian countries, the United States, Europe, Australia and Brazil, our system are not fully redundant or
backed up, and our disaster recovery planning may not be sufficient for all eventualities. Despite any precautions we may take, the
occurrence of natural disasters or other unanticipated problems at our hosting facilities could result in interruptions in the availability
of our products and services. Any interruption in the ability of our users to use our applications could damage our reputation, reduce
our future revenues, harm our future profits, subject us to regulatory scrutiny and lead users to seek alternative products.
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Our servers may experience downtime from time to time, which may adversely affect our brands and user perception of the
reliability of our systems. Any scheduled or unscheduled interruption in the ability of users to use our servers could result in an
immediate, and possibly substantial, loss of revenues.
If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to
us, or terminate their existing relationship with us, our business, financial condition and results of operations may be materially
and adversely affected.
We rely on third party mobile application distribution channels such as Google Play and iOS App Store to distribute most of
our mobile applications to users. In China, where Google Play is not available, we collaborate with similar local distribution channels
to distribute our mobile applications. We expect a substantial number of downloads of our mobile applications will continue to be
derived from these distribution channels. As such, the promotion, distribution and operation of our applications are subject to such
distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent
changes by, these distribution channels. If Google Play, iOS App Store or any other major distribution channel changes their standard
terms and conditions in a manner that is detrimental to us, or terminate their existing relationship with us, our business, financial
condition and results of operations may be materially and adversely affected.
As most of our core mobile applications are created for Android devices, a decrease in the popularity of the Android ecosystem may
materially and adversely affect our mobile business.
Most of our core mobile applications are created for Android devices. Any significant downturn in the overall popularity of
the Android ecosystem or the use of Android devices could materially and adversely affect the demand for and revenues generated
from our mobile applications. Although the Android ecosystem has grown rapidly in recent years, it is uncertain whether it will
continue to grow at a similar rate in the future. In addition, due to the constantly evolving nature of the mobile industry, another
operating system for mobile devices may eclipse Android and decrease its popularity. To the extent that our mobile applications
continue to mainly support Android devices, our mobile business would be vulnerable to any decline in popularity of the Android
operating system.
If we fail to source suitable third party products, such as online games, on reasonable terms, revenues from our internet value-
added services, or IVAS, may be materially and adversely affected.
We derive a portion of our revenues from IVAS, which mainly include game publishing services. The success of our IVAS
business depends on our ability to source suitable third party products on reasonable terms. For example, we have exclusive
publishing or joint operating arrangements for games we publish on our platform. We may not be able to identify popular and
profitable games and license such games on acceptable terms. We may incur significant expenses in exclusive game publishing
arrangements with game developers if their products turn out to be unpopular. Game developers with popular games may discontinue
their cooperation with us. In addition, increased competition in China’s game publishing market may negatively impact the fee sharing
arrangement between game developers and us. Should any of these occur, our business, financial condition and results of operations
may be materially and adversely affected.
We may not be able to prevent unauthorized use of our intellectual property, which could harm our business and competitive
position.
We regard our trademarks, service marks, patents, domain names, trade secrets, proprietary technologies know-how and
similar intellectual property as critical to our success, and we rely on trademark and patent law, trade secret protection and
confidentiality and invention assignment agreements with our employees and third parties to protect our proprietary rights. See “Item
4. Information on the Company—B. Business Overview—Intellectual Property” for a description for our intellectual property. There
can be no assurance that any of our pending patent, trademark or other intellectual property applications will be issued or registered.
Any intellectual property rights we have obtained or may obtain in the future may not be sufficient to provide us with a competitive
advantage, and could be challenged, invalidated, circumvented, infringed or misappropriated. Given the potential cost, effort, risks and
disadvantages of obtaining patent protection, we have not and do not plan to apply for patents or other forms of intellectual property
protection for certain of our key technologies. If some of these technologies are later proven to be important to our business and are
used by third parties without our authorization, especially for commercial purposes, our business and competitive position may be
harmed.
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Monitoring for infringement or other unauthorized use of our intellectual property rights is difficult and costly, and we cannot
be certain that we can effectively prevent such infringement or unauthorized use of our intellectual property, particularly in countries
where laws may not protect our proprietary rights to the same extent as in the United States. From time to time, we may need to resort
to litigation or other proceedings to enforce our intellectual property rights, which could result in substantial cost and diversion of
resources. Our efforts to enforce or protect our intellectual property rights may be ineffective and could result in the invalidation or
narrowing of the scope of our intellectual property or expose us to counterclaims from third parties, any of which may adversely affect
our business and operating results.
In addition, it is often difficult to create and enforce intellectual property rights in China and other countries outside of the
United States. Even where adequate, relevant laws exist in China and other countries outside of the United States, it may not be
possible to obtain swift and equitable enforcement of such laws, or to enforce court judgments or arbitration awards delivered in
another jurisdiction. Accordingly, we may not be able to effectively protect our intellectual property rights in such countries.
Additional uncertainty may result from changes to intellectual property laws enacted in the jurisdictions in which we operate, and
from interpretations of intellectual property laws by applicable courts and government bodies.
Our confidentiality and invention assignment agreements with our employees and third parties, such as consultants and
contractors, may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or
technology and may not provide an adequate remedy in the event of such unauthorized use or disclosure. Trade secrets and know-how
are difficult to protect, and our trade secrets may be disclosed, become known or be independently discovered by others. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our website features, software and
functionality or obtain and use information that we consider confidential and proprietary. If we are not able to adequately protect our
trade secrets, know-how and other confidential information, intellectual property or technology, our business and operating results
may be adversely affected.
We may be subject to intellectual property infringement lawsuits which could result in our payment of substantial damages or
license fees, disruption to our product and service offerings and reputational harm.
Third parties, including our competitors, may assert claims against us for alleged infringements of their technology patents,
copyrights, trademarks, trade secrets and internet content. Our internal procedures and licensing practices may not be effective in
completely preventing the unauthorized use of copyrighted materials or the infringement of other rights of third parties by us or our
users. The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in
China, is uncertain and still evolving. If a claim of infringement brought against us in China or another jurisdiction is successful, we
may be required to pay substantial penalties or other damages and fines, enter into license agreements which may not be available on
commercially reasonable terms or at all or be subject to injunction or court orders. We may be subject to injunction or court orders or
required to redesign our products or technology, any of which could adversely affect our business, financial condition and results of
operations. Even if allegations or claims lack merit, defending against them could be both costly and time-consuming and could
significantly divert the efforts and resources of our management and other personnel. In addition, regardless of the outcome of the
lawsuit, we could suffer reputational harm.
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For example, we changed our corporate name, company logo and trademark to reflect our new name Cheetah Mobile in the
first half of 2014. Cheetah is commonly used in corporate names in China, the United States and elsewhere. Although we believe in
good faith that our use of Cheetah Mobile does not infringe on any third party intellectual property rights and we have filed trademark
applications in certain categories in China, third parties may bring trademark and other intellectual property infringement claims
against us, which could distract our management attention and result in us incurring significant cost to defend ourselves.
Further, we license and use technologies from third parties in our applications. These third-party technology licenses may not
continue to be available to us on acceptable terms or at all, and may expose us to liability. Any such liability, or our inability to use
any of these third-party technologies, could result in disruptions to our business that could materially and adversely affect our
operating and financial results.
Some of our applications contain open source software, which may pose increased risk to our proprietary software.
We use open source software in some of our applications, including our Cheetah Browser, which incorporates Chromium
browser technology, and will use open source software in the future. In addition, we regularly contribute source code to open source
software projects and release internal software projects under open source licenses, and anticipate doing so in the future. The terms of
many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such
licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to sell or distribute our
applications. Additionally, we may from time to time face threats or claims from third parties claiming ownership of, or demanding
release of, the alleged open source software or derivative works we developed using such software, which could include our
proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These threats or claims could
result in litigation and could require us to make our source code freely available, purchase a costly license or cease offering the
implicated applications unless and until we can re-engineer them to avoid infringement. Such a re-engineering process could require
significant additional research and development resources, and we may not be able to complete it successfully. In addition to risks
related to license requirements, our use of certain open source software may lead to greater risks than use of third party commercial
software, as open source licensors generally do not provide warranties or controls on the origin of the software. Additionally, because
any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property
rights with respect to such software source code may be limited or lost entirely, and we are unable to prevent our competitors or others
from using such contributed software source code. Any of these risks could be difficult to eliminate or manage and, if not addressed,
could adversely affect our business, financial condition and results of operations.
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Our business depends substantially on the continuing efforts of our management team, key employees and skilled personnel, and
our business operations may be severely disrupted if we lose their services.
Our future success depends substantially on the continued efforts of our management team and key employees, in particular,
Mr. Sheng Fu, our chief executive officer, Mr. Ming Xu, our president, and Mr. Charles Chenggong Fan, our chief technology officer.
The loss of Mr. Fu, Mr. Xu, Mr. Fan or any of our management team members could harm our business. In addition, if our key
employees were unable or unwilling to continue their services with us, we may not be able to replace them easily, in a timely manner,
or at all, which could result in significant disruptions to our business. The integration of any replacement personnel could be time-
consuming, expensive and cause additional disruption to our business. If any of our management team members or key employees
joins a competitor or forms a competing company, we may lose customers, know-how and staff.
Each of our executive officers and key employees has agreed to non-competition obligations. However, these agreements
may not be enforceable in China, where our executives and key employees reside, in light of uncertainties relating to China’s legal
system. If any of our executive officers or key employees violates the terms of their non-competition or other employment agreements
with us, or their legal duties by diverting business opportunities from us, it will result in our loss of corporate opportunities. Although
we have adopted a code of business conduct and ethics to help restrict conflicts of interest involving directors and officers, any
violation of this code by our directors or officers may materially and adversely affect our business operations, prospects and
reputation.
Allegations or lawsuits against us or our management may harm our reputation and have a material and adverse impact on our
business, results of operations and cash flows.
We have been, and may become, subject to allegations or lawsuits brought by our competitors, customers, business partners,
short sellers, investment research firms or other individuals or entities, including claims of breach of contract or unfair competition.
Any such allegation or lawsuit, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice
by us or perceived malfeasance by our management could harm our reputation and user base and distract our management from our
daily operations. Allegations or lawsuits against us or our management may also generate negative publicity that significantly harms
our reputation, which may materially and adversely affect our user base and our ability to attract customers. In addition to the related
cost, managing and defending litigation and related indemnity obligations can significantly divert management’s attention. We may
also need to pay damages or settle the litigation with a substantial amount of cash. All of these could have a material adverse impact
on our business, results of operation and cash flows.
Our chief executive officer, Mr. Sheng Fu, is named in a lawsuit filed by Qihoo in Hong Kong; there is uncertainty as to the
outcome of this lawsuit and its impact on us.
In September 2011, Mr. Sheng Fu, our chief executive officer, was named as a defendant in a lawsuit filed by Qihoo in the
High Court of the Hong Kong Special Administrative Region. The complaint was subsequently amended in May 2012, July 2012 and
January 2014. The amended complaint alleges that Mr. Fu has breached his contractual obligations of confidentiality, non-
competition, non-solicitation and non-disparagement under the agreements Mr. Fu had entered into with a subsidiary of Qihoo prior to
his resignation from the subsidiary in August 2008. The complaint asserts that Mr. Fu was a product manager of Qihoo and was
responsible for, and participated in, product design and research of certain anti-virus products, including 360 Anti-virus and 360 Safe
Guard, and had access to the related confidential information, trade secret, technology and know-how.
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In connection with the above claims, the complaint specifically alleges that Mr. Fu: (i) used confidential information of
Qihoo to develop, by himself or through Beijing Conew Technology Development Co. Ltd., or Beijing Conew, and Conew Network
Technology (Beijing) Co., Ltd., or Conew Network, an anti-virus product released around May 2010 that was allegedly substantially
similar to Qihoo’s 360 Anti-virus and 360 Safe Guard and infringed upon the confidential information, trade secrets and other rights
of Qihoo; (ii) engaged in or dealt with businesses and products that directly competed with the businesses and/or products of Qihoo
within the 18-month restricted period; (iii) employed employees of Qihoo within the 18-month restricted period, including Mr. Ming
Xu, our president and chief technology officer, who was the then director of technology of 360 Safe Guard, a division of Qihoo; and
(iv) publicly made certain negative statements about Qihoo.
Qihoo is seeking a court declaration that Qihoo’s repurchase of its shares previously granted to Mr. Fu under Qihoo’s share
incentive plan at a nominal value was valid, a court order that Mr. Fu cease to use any confidential information or know-how of
Qihoo, damages for disparagement, and a court order that Mr. Fu account to Qihoo for any profits that he earned as a result of the
alleged breach.
Mr. Fu joined us in October 2010 when we acquired Conew.com Corporation for which Mr. Fu served as the chief executive
officer prior to the acquisition. Our product offerings do not include, and are not derived from, the anti-virus products referenced in
the complaint. Mr. Fu believes that Qihoo’s allegations are without merit and intends to contest them vigorously. However, it is
inherently difficult to predict the length, process and outcome of any court proceedings. Any litigation, regardless of the merits, can be
time-consuming and can divert Mr. Fu’s attention away from our business. Should Qihoo prevail in the lawsuit against Mr. Fu,
Mr. Fu’s reputation may be harmed and he may be ordered to cease using such confidential information. Moreover, although neither
we nor Mr. Ming Xu have been named as a defendant in the lawsuit, we cannot guarantee that Qihoo will not initiate proceedings
against us or Mr. Ming Xu in the future, which could adversely affect our reputation, business and results of operations.
We have made and intend to continue to make significant capital investment in a number of strategic investments, acquisitions and
partnerships, which may not be successful and may have a material and adverse effect on our business, reputation and results of
operations.
We have made and intend to continue to make significant capital investment in strategic investments, acquisitions and
partnerships to complement our organic business expansion. We have also made a number of short-term investments in securities and
minority investments in companies with strategic value for us. These investments and acquisitions require a significant amount of
capital, which decreases the amount of cash available for working capital or capital expenditures. In 2014 and 2015, we have made
investments, both long-term and short-term, and acquisitions in an aggregate amount of RMB583.0 million and RMB961.8 million
(US$148.5 million), respectively. If these investments and acquisitions do not perform as we have expected, become less valuable to
our business due to a change in our overall business strategy, or if the industry or economic trends deteriorate, they could result in
significant impairment of goodwill, intangible assets and investments. In addition, acquisitions of businesses and assets may increase
our capital and expenses in integrating new businesses and personnel into our own, require significant management attention and
result in a diversion of resources away from our existing business, which in turn could have an adverse effect on our business
operations. Further, acquisitions could result in increased leverage, potentially dilutive issuances of equity securities and exposure to
potential unknown liabilities of the acquired business. The costs of identifying and consummating acquisitions may also be significant.
In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government
authorities for the acquisitions and comply with applicable laws and regulations, which could result in increased costs and delays.
In the future, if appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that
are complementary to our existing business. However, we may fail to select appropriate acquisition targets, negotiate acceptable
arrangements (including arrangements to finance acquisitions) or integrate the acquired businesses and their personnel into our own.
In addition, strategic partnerships could subject us to a number of risks, including risks associated with sharing proprietary information
and non-performance by third parties. We may not be able to monitor or control the actions of our strategic partners and, to the extent
any such strategic partner suffers negative publicity or harm to its reputation from events relating to its own business, we may also
suffer negative publicity or harm to our reputation by association.
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If we fail to effectively manage our growth, our business and operating results could be harmed.
Our revenues have grown significantly in recent years. Our revenues increased from RMB749.9 million in 2013 to
RMB1,763.6 million in 2014, representing a 135.2% growth, and further to RMB3,684.4 million (US$568.8 million) in 2015,
representing a 108.9% growth.
In recent years, we have reoriented our business model, expanded our product offerings to include a wide array of mobile and
PC applications and rapidly established our market position in China and globally. While we expect our user base for mobile
applications to continue to grow, we do not expect our user base for PC based applications to show a similar trend, as the PC
applications market has ceased to grow. Accordingly, the growth and successful monetization of our mobile business is critical for the
continued growth of our business. In addition, our ability to grow our online game business will be limited by a non-competition
agreement between us and Kingsoft Corporation. For more information, see “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Transactions and Agreements with Kingsoft Corporation and its Subsidiaries—Non-
compete undertaking.” To manage the further expansion of our business and the growth of our operations and personnel, we need to
continuously improve our operational and financial systems, procedures and controls, and expand, train, manage and maintain good
relations with our growing employee base. In addition, we must maintain and expand our relationships with a growing number of
users, customers and business partners. We operate in a dynamic and rapidly evolving market and investors should not rely on our past
results as an indication of our future operating performance.
We rely on certain assumptions to calculate our mobile monthly active user and mobile installation figures, and real or perceived
inaccuracies may harm our reputation and adversely affect our business.
We derive the number of mobile monthly active users of our applications using a combination of our internal statistics and
data provided by a third-party research firm, and we derive the number of mobile devices installed with our applications using our
internal statistics. Our internal statistics have not been independently verified. While we believe third-party data we use are reliable,
we have not independently verified such data. Furthermore, there are inherent challenges in measuring usage across our large user
base. For example, we calculate the number of active users of our mobile applications based on the number of unique devices. We
count each device on which one or more of our mobile applications have been installed or downloaded as a single user. As such, a
single individual using our applications on multiple devices is counted as multiple users, while multiple individuals sharing a device
on which our applications are installed or downloaded is counted as a single user.
Our measures of user base and user activity may differ from estimates published by third parties or from similarly titled
metrics used by our competitors due to differences in methodology. If customers or investors do not perceive our user metrics to be
accurate representations of our user base or user activity, or if we discover material inaccuracies in our user metrics, our reputation
may be harmed and customers may be less willing to allocate their spending or resources to us, which could negatively affect our
business and operating results.
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Our results of operations are subject to seasonal fluctuations due to a number of factors, any of which could adversely affect our
business and operating results.
We are subject to seasonality and other fluctuations in our business. Revenues from our online marketing services, which
constitute a majority of our revenues, are affected by seasonality in advertising spending in both China and overseas markets. We
believe that such seasonality in advertising spending affects our quarterly results, resulting in significant growth in our online
marketing services revenues between the third and the fourth quarters but a decline from the fourth quarter to the next quarter. Thus,
our operating results for one or more future quarters or years may fluctuate substantially or fall below the expectations of securities
analysts and investors. In such event, the trading price of the ADSs may fluctuate significantly.
If we fail to build, maintain and enhance our brands, incur excessive expenses in this effort or if there is confusion in the market
between our brands and that of Kingsoft Corporation, our business, results of operations and prospects may be materially and
adversely affected.
We believe that building, maintaining and enhancing our brands are critical to the success of our business and our ability to
compete. Well-recognized brands are important to increasing our number of users and expanding our online marketing business.
Many factors, some of which are beyond our control, are important to maintaining and enhancing our brands and may
negatively impact our brands and reputation if not properly managed, such as:
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our ability to provide a convenient and reliable user experience as user preferences evolve and we expand into new
applications;
our ability to increase brand awareness among existing and potential users and customers through various marketing and
promotional activities;
our ability to adopt new technologies or adapt our applications to meet user needs or the expectations of our customers;
our ability to maintain and enhance our brands in the face of potential challenges from third parties;
actions by third parties, through whom we collect revenues and perform other business functions, that may affect our
reputation;
actions by Kingsoft Corporation, from whom we license the name “Kingsoft,” that may affect the “Kingsoft” brand; and
our ability to differentiate our brands and products from those of Kingsoft Corporation.
In addition, we changed our corporate name and company logo in the first half of 2014 as part of our corporate re-branding
efforts. The change of our corporate name and logo is to better align our corporate name with the products we offer, and we will
continue our efforts to strengthen our key brand assets, including Clean Master, Battery Doctor and Duba Anti-virus. However, there
is no assurance that we will be able to achieve the same or similar name recognition or status under our new corporate brand as that
we have enjoyed. If our customers do not accept our new brand, our sales, performance and business relationships could be adversely
affected.
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As we expand, we may conduct various marketing and brand promotion activities. We cannot assure you, however, that these
activities will be successful or that we will be able to achieve the outcomes we expect. In addition, any negative publicity in relation to
our applications, regardless of its veracity, could harm our brands and reputation.
Non-compliance on the part of third parties with whom we conduct business could disrupt our business and adversely affect our
results of operations.
Third parties with whom we conduct our business, including our game developers, may be subject to regulatory penalties or
punishments because of their regulatory compliance failures, which may disrupt our business. Any legal liabilities of, or regulatory
actions against, such third parties may affect our business activities and reputation and, in turn, our results of operations. For example,
we primarily conduct our online game publishing services through joint operating arrangements, in which we cooperate with game
developers to publish their games through our mobile and PC applications. The online game industry is highly regulated in China and
many other jurisdictions, and online game operators like our game developers are generally required to obtain licenses and permits, to
complete filing procedures for specific mobile games and to comply with various requirements when conducting business. We require
our game developers to provide their licenses, permits or filing documents relating to the relevant online games before entering into
cooperation arrangements with them, but we cannot assure you that our existing or future game developers will continue to maintain
all applicable permits and approvals, and any non-compliance on their part may cause potential liabilities to us and disrupt our
operations.
If we fail to obtain and maintain the requisite licenses and approvals or otherwise comply with the laws and regulations under the
complex regulatory environment applicable to our businesses in China, or if we are required to take actions that are time-
consuming or costly, our business, financial condition and results of operations may be materially and adversely affected.
The internet industry, including the mobile internet industry, is highly regulated in China. Our VIEs and a VIE’s subsidiary
are required to obtain and maintain applicable licenses and approvals from different regulatory authorities in order to provide their
current services. Under the current PRC regulatory scheme, a number of regulatory agencies, including but not limited to the State
Administration of Press, Publication, Radio, Film and Television, or SARFT, the Ministry of Culture, or MOC, Ministry of Industry
and Information Technology, or MIIT, the State Council Information Office, or SCIO, and the Cyberspace Administration of China,
or CAC, jointly regulate all major aspects of the internet industry, including mobile and PC internet businesses. Operators must obtain
various government approvals and licenses for relevant internet or mobile business.
We have obtained Internet Content Provider Licenses, or ICP licenses, for the provision of internet information services,
Online Culture Operating Licenses for the operation of online games and Computer Information System Security Products Sales
Licenses for our mobile and PC security applications. These licenses are essential to the operation of our business and are generally
subject to regular government review or renewal. However, we cannot assure you that we can successfully renew these licenses in a
timely manner or that these licenses are sufficient to conduct all of our present or future business.
The online games currently offered on our platform are primarily developed by and jointly operated with game developers. In
addition to the Online Culture Operating License from the MOC, we are also required to obtain an Internet Publishing License from
SARFT in order to operate and distribute games through the mobile and PC internet networks. Each online game is also required to be
approved by SARFT prior to the commencement of its operations in China. For domestic online games, within 30 days after the
commencement of operation, the operator must finish the registration process with the MOC. Furthermore, an online game operator
such as our game developers is required to obtain approval from the MOC in order to distribute virtual currencies for online games
such as prepaid value cards, prepaid money or game points. While we endeavor to comply with the registration requirements, some of
the developers of the games we publish, who have contractual obligations to procure such approval from SARFT, have not obtained
such approval, and certain of the games we published were not registered within 30 days of their commencement of operations. We
cannot assure you that we or our game developers will be able to obtain all the required permits, approvals or licenses in a timely
manner, or at all. If we or any of such game developers fails to do so, we may have to modify our online game publishing services in a
manner disruptive to our business or may not be able to continue to operate the affected online games, which may adversely affect our
business and results of operations.
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In addition, we commenced our online lottery sales business in April 2014 but suspended such business in March 2015 due to
regulatory uncertainty in China. Prior to the suspension in March 2015, we conducted online lottery sales through an online lottery
platform by way of a series of cooperation agreements, including (i) cooperation agreements between Suzhou Jiangduoduo and lottery
sales offices, which are authorized by lottery issuance authorities, and (ii) cooperation agreements between Suzhou Jiangduoduo’s
authorized employees and lottery sales agents that are authorized by lottery issuance authorities or lottery sales offices. Under such
business model, we may be deemed a lottery sales agent conducting online lottery sales or an entity providing online sales services to
lottery sales offices or lottery sales agents, which would require us to obtain an approval from the Ministry of Finance, or the MOF.
We do not have such an approval. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on
Online Lottery Sales” for relevant laws and regulations.
Considerable uncertainties exist regarding the interpretation and implementation of existing and future laws and regulations
governing our business activities. We cannot assure you that we will not be found in violation of any future laws and regulations or
any of the laws and regulations currently in effect due to changes in the relevant authorities’ implementation or interpretation of these
laws and regulations. If we fail to complete, obtain or maintain any of the required licenses or approvals or make the necessary filings,
or otherwise fail to comply with the laws and regulations, we may be subject to various penalties, such as confiscation of revenues that
were generated through the unlicensed internet or mobile activities, the imposition of fines and the discontinuation or restriction of our
operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial
condition and results of operations.
Failure to comply with data privacy and protection laws and regulations could damage our reputation, deter current and potential
users from using our applications and subject us to fines and damages, which could have material adverse effects on our business
and results of operations.
We are subject to the data privacy and protection laws and regulations adopted by PRC and foreign governmental agencies.
Data privacy laws restrict our storage, use, processing, disclosure, transfer and protection of non-public personal information provided
to us by our users. In December 2012 and July 2013, new laws and regulations were issued by the standing committee of the PRC
National People’s Congress and MIIT to enhance the legal protection of information security and privacy on the internet. The laws
and regulations also require internet operators to take measures to ensure confidentiality of user information. In addition, we are also
subject to regulation under U.S. state law regarding the publication and dissemination of our privacy policy with respect to user data.
It is possible that we may become subject to additional U.S. state or federal legislation or rules and regulations of governmental
authorities outside China regarding the use of personal information or privacy-related matters, which may conflict with, or be more
stringent than, the regulations to which we are currently subject. Complying with any additional or new regulatory requirements could
force us to incur substantial costs or require us to change our business practices.
While we strive to protect our users’ privacy and comply with all applicable data protection laws and regulations, any failure
or perceived failure to do so may result in proceedings or actions against us by government entities or others, and could damage our
reputation, deter current and potential users from using our applications and subject us to fines and damages. User and regulatory
attitudes towards privacy are evolving, and future regulatory or user concerns about the extent to which personal information is used
by, accessible to or shared with customers or others may adversely affect our ability to share certain data with customers, which may
limit certain methods of targeted advertising. Concerns regarding the collection, use or disclosure of personal information or other data
privacy-related matters, even if unfounded, could damage our reputation and results of operations. Negative publicity in relation to our
applications, regardless of its veracity, could seriously harm our reputation, which in turn may deter current and potential users from
using our applications, which could have material adverse effects on our business and results of operations.
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The successful operation of our business depends upon the performance and reliability of the internet infrastructure in China and
the safety of our network and infrastructure.
Our business depends on the performance and reliability of the internet infrastructure in China. Almost all access to the
internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision
of the MIIT. A more sophisticated internet infrastructure may not develop in China. We may not have access to alternative networks
in the event of disruptions, failures or other problems with China’s internet infrastructure. In addition, the internet infrastructure in
China may not support the demands associated with continued growth in internet usage. Although we believe we have sufficient
controls in place to prevent intentional disruptions, we expect our network and infrastructure may experience attacks specifically
designed to impede the performance of our products and services, misappropriate proprietary information or harm our reputation.
Because the techniques used by hackers to access or sabotage networks change frequently and may not be recognized until launched
against a target, we may be unable to anticipate them effectively. The theft, unauthorized use or publication of our trade secrets and
other confidential business information as a result of such an event could adversely affect our competitive position, brand reputation
and user base, and our users and customers may assert claims against us related to resulting losses arising from security breaches. Our
business could be subject to significant disruption and our results of operations may be affected.
Security breaches or hacking incidents could have a material adverse effect on our reputation, business prospects and results of
operations.
Any significant breach of the security of our computer systems could significantly harm our business, reputation and results
of operations and expose us to lawsuits brought by our users and customers and to sanctions by governmental authorities in the
jurisdictions in which we operate and may result in significant damage to our internet security brand. We cannot assure you that our IT
systems will be completely secure from future security breaches or hacking incidents. Anyone who is able to circumvent our security
measures could misappropriate proprietary information, including the personal information of our users, obtain users’ names and
passwords and enable hackers to access users’ other online and mobile accounts, if those users use identical user names and
passwords. They could also misappropriate other information, including financial information, uploaded by our users in a secure
environment. These circumventions may cause interruptions in our operations or damage our brand image and reputation. Our servers
may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could cause system
interruptions, website slowdown or unavailability, delays in communication or transactions, or loss of data. We may be required to
incur significant additional costs to protect against security breaches or to alleviate problems caused by such breaches. Any significant
security breach or attack on our system could result in a material adverse impact on our reputation, business prospects and results of
operations.
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In addition to Chinese laws and regulations, our business is subject to complex and evolving foreign laws and regulations
regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain
interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or
declines in user growth or engagement, or otherwise harm our business.
We face risks and costs overseas as our products and services are increasingly offered in overseas markets and may be
subject to additional foreign laws regulations. In addition to laws and regulations of China, we are subject to a variety of laws and
regulations in foreign jurisdictions that involve matters central to our business, including privacy and data protection, rights of
publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, personal
information, electronic contracts and other communications, competition, protection of minors, consumer protection,
telecommunications, taxation, and economic or other trade prohibitions or sanctions. The introduction of new products or expansion of
our activities in certain jurisdictions may subject us to additional laws and regulations. In addition, foreign data protection, privacy,
and other laws and regulations can be more restrictive than those in the United States.
These foreign laws and regulations are constantly evolving and can be subject to significant change. As a result, the
application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly
evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently
with our current policies and practices. For example, regulatory or legislative actions affecting the manner in which we display content
to our users could adversely affect user growth and engagement. Such actions could affect the manner in which we provide our
services or adversely affect our financial results.
The existing and proposed laws and regulations, as well as any associated inquiries, investigations, or actions, can be costly
to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs,
require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands
or orders that we modify or cease existing business practices.
We may not be able to sustain profitability and may not be able to obtain additional capital in a timely manner or on acceptable
terms, or at all.
Although we had a net loss of RMB30.2 million in 2011, we were able to achieve net income in the subsequent years.
However, we may not remain profitable and we may incur net losses in the future as we continue to develop our mobile business and
expand our markets outside China. Our net income attributable to Cheetah Mobile shareholders increased by 9.6% from RMB 62.0
million in 2013 to RMB 67.9 million in 2014, and further by 159.9% to RMB176.6 million (US$27.3 million) in 2015. The relatively
slow growth of net income in 2014 was primarily due to a significant increase in marketing spending to grow our global mobile user
base, and the expansion of our mobile business team to develop mobile applications and expand our mobile business in the global
market. Although our net income increased more significantly in 2015, and we expect to take a more balanced approach towards user
acquisition and revenue growth in 2016, we may not be able to sustain profitability and we may not be able to raise sufficient capital
to satisfy our anticipated capital expenditures and other cash needs, in which case our business, results of operations and financial
condition may be materially adversely affected.
We have granted, and may continue to grant, options, restricted shares and other types of share-based incentive awards, which
may result in increased share-based compensation expenses.
We adopted a share award scheme, or the 2011 Plan, in May 2011, a 2013 equity incentive plan, or the 2013 Plan, in
January 2014, and a restricted shares plan, or the 2014 Plan, in April 2014, pursuant to which we are authorized to grant options,
restricted shares, restricted share units and other awards to our directors, officers, other employees and consultants, as each plan may
provide. In addition to our share incentive plans, we have also granted share-based incentive awards in connection with certain
investments and acquisitions made by us, and Moxiu Technology (Beijing) Co., Ltd., or Moxiu Technology, our 52.1%-owned
subsidiary, has granted options to purchase its ordinary shares to certain employees. See “Item 6. Directors, Senior Management and
Employees—B. Compensation—Share Incentive Awards.” In 2013, 2014 and 2015, we recorded RMB37.4 million, RMB173.3
million and RMB315.4 million (US$48.7 million), respectively, of share-based compensation expenses. The amount of these expenses
is based on the fair value of the share-based incentive awards we granted, and the recognition of unrecognized share-based
compensation expenses will depend on the forfeiture rate of our unvested share-based awards. Expenses associated with share-based
compensation have affected our net income and may reduce our net income in the future, and any additional securities issued pursuant
to share-based incentive awards will dilute the ownership interests of our shareholders, including holders of the ADSs. We believe the
granting of share-based incentive awards is of significant importance to our ability to attract and retain key personnel, employees and
consultants, and we will continue to grant share-based incentive awards in the future. As a result, our share-based compensation
expenses may increase, which may have an adverse effect on our results of operations.
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We are a “controlled company” within the meaning of the rules of NYSE Listed Company Manual as well as a foreign private
issuer. As a result, we qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not
have the same protections afforded to shareholders of companies that are subject to such requirements.
As of March 31, 2016, Kingsoft Corporation owned 60.8% of the total voting rights in our company. As a result, we are a
“controlled company” under Section 303A of the NYSE Listed Company Manual. As a controlled company, we rely on certain
exemptions that are available to controlled companies from the NYSE corporate governance requirements, including the requirements
that:
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a majority of our board of directors consist of independent directors;
our compensation committee be composed entirely of independent directors; and
our nominating and corporate governance committee be composed entirely of independent directors.
In addition, we currently rely on the home country practice exemption available under NYSE corporate governance rules to
have an audit committee consisting of two instead of three independent directors. The NYSE corporate governance rules permit a
foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices
in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance rules. As we rely on
the controlled company exemptions and a home country practice exemptions as described above, our investors may not have the same
protection afforded to shareholders of companies that fully comply with NYSE corporate governance requirements. We may also opt
to rely on additional controlled company exemptions or home country practice exemptions in the future.
Furthermore, because we qualify as a foreign private issuer under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including
(i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered
under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and
trading activities and liability for insiders who profit from trades made in a short period of time, and (iii) the rules under the Exchange
Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified
information, or current reports on Form 8-K, upon the occurrence of specified significant events. As a result, you may not be provided
with the same benefits as a shareholder of a U.S. issuer.
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We may have conflicts of interest with Kingsoft Corporation and, because of Kingsoft Corporation’s controlling voting interest in
our company, we may not be able to resolve such conflicts on favorable terms for us.
As of March 31, 2016, Kingsoft Corporation owned 60.8% of the total voting rights in our company, and therefore it has
decisive influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant
corporate actions. Without the consent of Kingsoft Corporation, we may be prevented from entering into transactions that could be
beneficial to us. Conflicts of interest may arise between Kingsoft Corporation and us or our other shareholders in a number of areas
relating to our past and ongoing relationships. Potential conflicts of interest that we have identified include the following:
Our board members or executive officers may have conflicts of interest. We have a number of common directors and officers
with Kingsoft Corporation. Mr. Jun Lei, the chairman of our board of directors, is also the chairman and non-executive director of
Kingsoft Corporation. Mr. Sheng Fu, our chief executive officer and director, also serves as a senior vice president at Kingsoft
Corporation. Mr. Hongjiang Zhang, one of our directors, is also the chief executive officer and director of Kingsoft Corporation.
Mr. Yuk Keung Ng, one of our directors, is also the chief financial officer and director of Kingsoft Corporation. Mr. Wei Liu, one of
our directors, is also a vice president of Kingsoft Corporation. A number of our directors and executive officers also own shares and/or
options to purchase shares in Kingsoft Corporation. Kingsoft Corporation may continue to grant incentive share compensation to our
board members and executive officers from time to time. These relationships could create perceived or actual conflicts of interest
when these persons are faced with decisions with potentially different implications for Kingsoft Corporation and us, including any
future disputes that may arise and any decisions that may have to be made under the inter-company agreements between Kingsoft
Corporation and us.
Sale of shares in our company. Kingsoft Corporation may decide to sell all or a portion of our shares that it holds to a third
party, including to our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale
could be contrary to the interests of our employees or our other shareholders.
Allocation of business opportunities. Business opportunities may arise that both Kingsoft Corporation and we find attractive,
and which would complement or strengthen our respective businesses. Pursuant to the non-compete undertaking between Kingsoft
Corporation and us, subject to certain exceptions, we will not compete with Kingsoft Corporation in game development business, and
Kingsoft Corporation will not compete with us in businesses relating to information security software, web browsers, the provision of
information security service across devices and the provision of online advertising services relating to the information security
software business. As to those opportunities not governed by the non-compete undertaking, Kingsoft Corporation may decide to take
up the opportunities itself to our detriment.
Developing business relationships with Kingsoft Corporation’s competitors. So long as Kingsoft Corporation remains as our
controlling shareholder, we may be limited in our ability to do business with its competitors, such as other internet-based software
developers, distributors and service providers in China. This may limit the effectiveness of our online advertisements and may not be
in the best interests of our company and our other shareholders.
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Employee recruiting and retention. Because both Kingsoft Corporation and we are engaged in internet-related businesses in
China, we may compete with Kingsoft Corporation in hiring new employees, in particular employees with expertise in technology.
Although our company is a standalone entity, we expect to operate, for as long as Kingsoft Corporation is our controlling
shareholder, as part of Kingsoft Corporation’s group. Kingsoft Corporation may from time to time make strategic decisions that it
believes are in the best interests of its group as a whole. These decisions may be different from the decisions that we would have made
on our own. Kingsoft Corporation’s decisions with respect to us or our business may be resolved in ways that favor Kingsoft
Corporation and therefore Kingsoft Corporation’s own shareholders, which may not coincide with the interests of our other
shareholders. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us
than if we were dealing with an unaffiliated shareholder. Even if both parties seek to transact business on terms intended to
approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.
We may be the subject of anti-competitive, harassing or other detrimental conduct that could harm our reputation and cause us to
lose users and customers and adversely affect the price of the ADSs.
We may be the target of anti-competitive, harassing or other detrimental conduct by third parties. For example, the APUS
Group, an Android app developer, has published certain negative statements about our company and products, and we have filed a
complaint on May 27, 2015 in the district court of Northern District of California against the APUS Group for defamation and trade
libel, among other things. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal
Proceedings.” Allegations, directly or indirectly against us or any of our executive officers, may be posted on the internet, including in
internet chat-rooms or on blogs or websites by anyone, whether or not well-founded, on an anonymous basis. In addition, third parties
may file complaints, anonymous or otherwise, to regulatory agencies. We may be subject to regulatory or internal investigation as a
result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-
party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period
of time, or at all. Additionally, our reputation could be harmed as a result of the public dissemination of anonymous allegations or
malicious statements about our business, which in turn may cause us to lose users and customers and adversely affect our business and
results of operations.
If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our results of
operations, meet our reporting obligations or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-
Oxley Act of 2002, adopted rules requiring every public company to include a management report on the company’s internal control
over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over
financial reporting. Our management has concluded that our internal control over financial reporting was effective as of December 31,
2015. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” In
addition, our independent registered public accounting firm has issued an attestation report, which concluded that our internal control
over financial reporting was effective in all material aspects as of December 31, 2015.
However, if we fail to maintain effective internal control over financial reporting in the future, our management and our
independent registered public accounting firm, if applicable, may not be able to conclude that we have effective internal control over
financial reporting at a reasonable assurance level. Any failure to achieve and maintain effective internal control over financial
reporting could result in the loss of investor confidence in the reliability of our consolidated financial statements, which in turn could
harm our business and negatively impact the market price of the ADSs. Furthermore, we have incurred and anticipate that we will
continue to incur considerable costs, management time and other resources in an effort to comply with Section 404 and other
requirements of the Sarbanes-Oxley Act.
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We have limited business insurance coverage. Any interruption of our business may result in substantial costs to us and the
diversion of our resources, which could have an adverse effect on our financial condition and results of operations.
Insurance products available in China currently are not as extensive as those offered in more developed economies.
Consistent with customary industry practice in China, our business insurance is limited and we do not carry real property or business
interruption insurance to cover our operations. We have determined that the costs of insuring for related risks and the difficulties
associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any
uninsured damage to our systems or disruption of our business operations could require us to incur substantial costs and divert our
resources, which could have an adverse effect on our financial condition and results of operations.
Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by
a downturn in the Chinese or global economy.
In the past, we have derived substantially all of our revenue from China. As we continue to monetize our international
operations, we have started to generate a significant portion of revenue from overseas markets, primarily including the United States,
Europe and certain emerging markets (other than China). In addition, we may have to obtain financing to support our business
operations and any expansion plans. Therefore, our business and prospect is influenced by the Chinese as well as the global economy.
The global financial markets have experienced significant disruptions since 2008, and the United States, Europe and other economies
have experienced recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including
the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy since 2012. It is unclear
whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the
expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading
economies, including China’s. There have also been concerns over unrest and terrorist activities and attacks in the Middle East,
Africa, Europe, the United States and Asia, which have resulted in volatility in oil and other markets, as well as concerns over the
economic effect of the tensions in Japan’s relationship with China. A prolonged slowdown in the global or Chinese economy may lead
to a reduced amount of online marketing and reduced spending on online games, which could materially and adversely affect our
business, financial condition and results of operations. Moreover, a slowdown or disruption in the global or Chinese economy may
have a material and adverse impact on the financing available to us.
Any catastrophe, including natural catastrophes, outbreaks of health pandemics or other extraordinary events, could disrupt our
business operations.
Our operations may be vulnerable to interruption and damage from natural or other catastrophes, including earthquakes, fire,
floods, hail, windstorms, severe winter weather (including snow, freezing water, ice storms and blizzards), environmental accidents,
power loss, communications failures, explosions, man-made events such as terrorist attacks and similar events. We cannot predict the
incidence, timing and severity of such events. If any catastrophe or extraordinary event occurs in the future, our ability to operate our
business could be seriously impaired. Such events could make it difficult or impossible for us to deliver our services and products to
our users and could decrease demand for our products. Because we do not carry property insurance and significant time could be
required to resume our operations, our financial position and results of operations could be materially and adversely affected in the
event of any major catastrophic event.
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In addition, our business could be adversely affected by the outbreak of health pandemics, including influenza A, such as
H7N9, severe acute respiratory syndrome (SARS) or other pandemics. Any occurrence of these pandemic diseases or other adverse
public health developments in China and other countries where we operate or elsewhere could severely disrupt our staffing or the
staffing of our customers or business partners and otherwise reduce the activity levels of our work force and the work force of our
customers or business partners, causing a material and adverse effect on our business operations.
Risks Relating to Our Corporate Structure
If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC
governmental restrictions on foreign investment in internet businesses, or if these laws or regulations or interpretations of existing
laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and
our business operations.
Foreign ownership of internet-based, including mobile-based, businesses is subject to significant restrictions under current
PRC laws and regulations. The PRC government regulates internet access, distribution of online information, online advertising,
distribution and operation of online games through strict business licensing requirements and other government regulations. These
laws and regulations also limit foreign ownership of PRC companies that provide internet information services. Specifically, foreign
ownership of an internet information provider, except in the case of e-commerce service providers, may not exceed 50%. In addition,
according to the Several Opinions on the Introduction of Foreign Investment in the Cultural Industry promulgated by the MOC, the
SARFT, the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce, or the MOFCOM, in
July 2005, foreign investors are prohibited from investing in or operating, among other things, any internet cultural operating entities.
Companies providing mobile internet services such as ours are governed by these rules and regulations on internet companies in
China.
We are a Cayman Islands company and we conduct our operations in China primarily through our VIEs and a VIE’s
subsidiary. Our VIEs and a VIE’s subsidiary contributed a significant portion of our consolidated revenues in the years ended
December 31, 2013, 2014 and 2015. We exercise effective control over our VIEs and a VIE’s subsidiary through a series of
contractual arrangements that those entities and/or their shareholders signed with two of our wholly-owned PRC subsidiaries, namely,
Beijing Kingsoft Internet Security Software Co., Ltd., or Beijing Security, and Conew Network. Our contractual arrangements with
our VIEs and their shareholders enable us to exercise effective control over our VIEs and a VIE’s subsidiary and give us the obligation
to absorb losses and the right to receive benefits of the VIEs and a VIE’s subsidiary, enabling us to consolidate their operating results.
For a detailed description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure—Contractual Arrangements with Our VIEs.”
On September 28, 2009, the General Administration of Press and Publication, or the GAPP, which later integrated with the
State Administration for Radio, Film and Television to become SARFT effective from March 22, 2013, the National Copyright
Administration and the Office of National Work Group for Combating Pornography and Illegal Publications jointly issued a Notice on
Implementing the Provisions of the State Council on “Three Determinations” and the Relevant Explanations of the State Commission
Office for Public Sector Reform and Further Strengthening the Administration of the Pre-approval of Online Games and Examination
and Approval of Imported Online Games, or Circular 13. Circular 13 restates that foreign investors are not permitted to invest in
online game-operating businesses in China via wholly-owned, equity joint venture or cooperative joint venture investments and
expressly prohibits foreign investors from gaining control over or participating in domestic mobile game operators through indirect
ways such as establishing other joint venture companies or entering into contractual or technical arrangements such as the VIE
structural arrangements we adopted. As no detailed interpretation of Circular 13 has been issued to date, it is not clear how Circular 13
will be implemented. We are not aware of any companies that have adopted a corporate structure that is the same as or similar to ours
having been penalized or having had their arrangements terminated under Circular 13 since the effective date of the circular.
Furthermore, as some other primary government regulators, such as the MOFCOM, the MOC and the MIIT, did not join in issuing
Circular 13, the scope of the implementation and enforcement of Circular 13 remains uncertain. In the event that we, our PRC
subsidiaries, VIEs and a VIE’s subsidiary, are found to be in violation of the prohibition under Circular 13, the SARFT, in conjunction
with the relevant regulatory authorities in charge, may impose applicable penalties, which may include suspension or revocation of
relevant licenses and registrations.
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Based on the advice of our PRC legal counsel, Global Law Office, the contractual arrangements among our PRC subsidiaries,
our VIEs, their shareholders and us, as described in this annual report, are valid, legal and binding on each of the above-mentioned
parties thereto in accordance with the terms of respective contractual arrangements. However, we were further advised by Global Law
Office that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and
regulations, and that these laws or regulations or interpretations of these laws or regulations may change in the future. Furthermore,
the relevant government authorities have broad discretion in interpreting and implementing these laws and regulations. Accordingly,
we cannot assure you that PRC government authorities will not ultimately take a view contrary to that of our PRC legal counsel.
If our corporate structure, contractual arrangements and businesses of our company, or our PRC entities, including our PRC
subsidiaries, VIEs and a VIE’s subsidiary, are found to be in violation of any existing or future PRC laws or regulations, the relevant
governmental authorities would have broad discretion in dealing with such violation, including:
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(cid:120)
levying fines or confiscating our income or the income of our PRC entities;
revoking or suspending the business licenses or operating licenses of our PRC entities;
shutting down our servers or blocking our platform, discontinuing or placing restrictions or onerous conditions on
our operations;
requiring us to discontinue or restrict our operations; and
taking other regulatory or enforcement actions that could be harmful to our business.
Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which
would in turn materially and adversely affect our business, financial condition and results of operations. If the imposition of any of the
above penalties were to cause us to lose the rights to direct the activities of our VIEs and a VIE’s subsidiary or our right to receive
their economic benefits, we would no longer be able to consolidate such entities.
We rely on contractual arrangements with our VIEs and their shareholders for the operation of our business in China, which may
not be as effective as direct ownership.
Because of PRC restrictions on foreign ownership of internet businesses in China, we depend on contractual arrangements
with our VIEs, in which we have no ownership interest, to conduct our business in China. These contractual arrangements are
intended to provide us with effective control over these entities and allow us to obtain economic benefits from them. Our VIEs are
owned directly by Messrs. Sheng Fu, Ming Xu and Wei Liu, who are also our core management and/or director, as well as Ms. Weiqin
Qiu, an affiliate of our company. For additional details on these ownership interests, see “Item 4. Information on the Company—C.
Organizational Structure—Contractual Arrangements with Our VIEs.” However, these contractual arrangements may not be as
effective in providing control as direct ownership. For example, our VIEs and their shareholders could breach their contractual
arrangements with us by, among other things, failing to operate our business in an acceptable manner or taking other actions that are
detrimental to our interests. If we were the controlling shareholder of these VIEs with direct ownership, we would be able to exercise
our rights as shareholders to effect changes to their board of directors, which in turn could implement changes at the management and
operational level. However, under the current contractual arrangements, as a legal matter, if our VIEs or their shareholders fail to
perform their obligations under these contractual arrangements, we may have to incur substantial costs to enforce such arrangements,
and rely on legal remedies under PRC law, including contract remedies, which may be time-consuming, unpredictable and expensive.
If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of
enforcing them, our business and operations could be severely disrupted, which could materially and adversely affect our results of
operations and damage our reputation. See “—Risks Relating to Doing Business in China—Uncertainties in the interpretation and
enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
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Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign
Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business
operations.
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its
enactment, replace the existing laws regulating foreign investment in China. The MOFCOM has solicited comments on this draft and
substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment
Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance, business
operations and financial results.
Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the
principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft
Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as
FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOFCOM, treated
as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. In this connection, “control” is
broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the
subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the
seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the
shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual
or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. Once an entity
is determined to be an FIE and its investment amount exceeds certain thresholds or its business operation falls within a “negative list,”
which is to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local braches would
be required. Otherwise, all foreign investors may make investments on the same terms as Chinese investors without being subject to
additional approval from the government authorities as mandated by the existing foreign investment legal regime.
The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to
obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See “—If
the PRC government finds that the structure we have adopted for our business operations does not comply with PRC governmental
restrictions on foreign investment in internet businesses, or if these laws or regulations or interpretations of existing laws or
regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and our business
operations” and “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Our VIEs.”
Under the draft Foreign Investment Law, VIEs that are controlled via contractual arrangement would also be deemed as FIEs, if they
are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on
the “negative list,” the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality
(either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs
will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance by the
MOFCOM may be considered as illegal.
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It remains uncertain whether the ownership by multiple Chinese persons in a foreign company would be aggregated or
separately counted in determining “control” under the draft Foreign Investment Law. It is likely that we would not be considered as
ultimately controlled by Chinese parties, as our controlling shareholder, Kingsoft Corporation, a Cayman Islands company, holds
approximately 60.8% of our total voting power, and no single Chinese resident person may be deemed to control Kingsoft
Corporation. The draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing
companies with a VIE structure, whether or not these companies are controlled by Chinese parties, although a few possible options
were proposed at the comment solicitation stage. Moreover, it is uncertain whether the internet industry, in which our VIEs and a
VIE’s subsidiary operate, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be
issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, if any, such as
MOFCOM market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies
with existing VIE structure like us, we may face substantial uncertainties as to whether these actions can be timely completed, or at
all, and our business and financial condition may be materially and adversely affected.
The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and
increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information
reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment
amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large
foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with
these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons
directly responsible may be subject to criminal liabilities.
Our contractual arrangements with our VIEs may result in adverse tax consequences to us.
As a result of our corporate structure and the contractual arrangements among our PRC subsidiaries, our VIEs, their
shareholders and us, we are effectively subject to PRC value-added tax and related surcharges on revenues generated by our
subsidiaries from our contractual arrangements with our VIEs. The PRC Enterprise Income Tax Law, or the EIT Law, requires every
enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its affiliates or related
parties to the relevant tax authorities. These transactions may be subject to audit or challenge by the PRC tax authorities within ten
years after the taxable year during which the transactions are conducted. In addition, on March 18, 2015, the State Administration of
Taxation, or the SAT, issued the Bulletin Regarding the Enterprise Income Tax Matter in Relation to Enterprise’s Payment of Fees to
Overseas Affiliated Parties, or the Bulletin 16, to further regulate the transfer pricing issues in relation to the fees payment to affiliated
parties. Among other things, the Bulletin 16 makes it clear that the fees paid to overseas affiliated parties in the following situations
cannot be deducted from the taxable income when determining a PRC company’s enterprise income tax: (a) the fees paid to an
overseas affiliated party which has no substantial operating activities; (b) royalties paid for intangible properties to which the affiliated
party that charges the fees only has legal title but has made no contribution to the creation of the value of such properties; and (c) the
fees paid under arrangements made for listing or financing purposes. We may be subject to adverse tax consequences if the PRC tax
authorities were to determine that the contracts between us and our VIEs were not on an arm’s length basis and therefore constituted
improper transfer pricing arrangements. If this occurs, the PRC tax authorities could request that our VIEs and any of their respective
subsidiaries adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by reducing
expense deductions recorded by such VIEs and thereby increasing these entities’ tax liabilities, which could subject these entities to
late payment fees and other penalties for the underpayment of taxes. Our consolidated net income may be materially and adversely
affected if our VIEs’ tax liabilities increase or if they become subject to late payment fees or other penalties.
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The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our
business.
The shareholders of our VIEs include Messrs. Sheng Fu, Ming Xu and Wei Liu, who are also our core management and/or
director, as well as Ms. Weiqin Qiu, an affiliate of our company. Conflicts of interest may arise between the roles of Messrs. Sheng
Fu, Ming Xu and Wei Liu as shareholders, directors or officers of our company and as shareholders of our VIEs. We rely on these
individuals to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to our company
to act in good faith and in the best interest of our company and not to use their positions for personal gain. Although the shareholders
of our VIEs have executed shareholder voting proxy agreements to irrevocably appoint our applicable PRC subsidiary or a person
designated by such PRC subsidiary to vote on their behalf and exercise voting rights as shareholders of the VIEs, we cannot assure
you that when conflicts arise under those agreements or otherwise, the shareholders of our VIEs will act in the best interest of our
company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these
shareholders, 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.
Our controlling shareholder and founders have substantial influence over our company and their interests may not be aligned with
the interests of our other shareholders, which may discourage, delay or prevent a change in control of our company and could
deprive our shareholders of an opportunity to receive a premium for their securities.
As of March 31, 2016, Kingsoft Corporation, our controlling shareholder, and Messrs. Sheng Fu and Ming Xu, directly or
through their holding vehicles, together beneficially own an aggregate of 58.8% of our total outstanding Class A and Class B shares,
and 72.6% of the total voting power. This concentration of ownership may discourage, delay or prevent a change in control of our
company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of any contemplated
sale of our company and may reduce the price of our ADSs.
We may lose the ability to use and enjoy vital assets held by our VIEs and a VIE’s subsidiary if such entities go bankrupt or
become subject to a dissolution or liquidation proceeding.
Some of our VIEs and a VIE’s subsidiary hold certain assets that are essential to the operations of our platform and important
to the operation of our business in China, such as the ICP licenses, Online Culture Operating Licenses, patent applications and
software copyrights for the proprietary technology. If any of these entities goes bankrupt and all or part of its assets become subject to
liens or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially and
adversely affect our business, financial condition and results of operations. If any of such entities undergoes a voluntary or involuntary
liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability
to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
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Risks Relating to Doing Business in China
Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to
you and us.
The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these
laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since
PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms,
it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some
of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of any
violation of these policies and rules until after such violation. Such unpredictability, including uncertainty as to the scope and effect of
our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and
impede our ability to continue our operations.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our
business and operations.
A great majority of our assets are located in China and a significant number of our users, suppliers, customers and business
partners are from China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a
significant degree by political, economic and social conditions in China generally, and by continued economic growth in China as a
whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the level of
government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Despite the
economic reforms in the past decades, the Chinese government continues to play a significant role in regulating industrial
development through industrial policies. The Chinese government also exercises significant control over the Chinese 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 in recent decades, growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy but may also
have a negative effect on us. The Chinese government has implemented certain measures, including interest rate increases, to control
the pace of economic growth. These measures may cause decreased economic activity in China and, since 2012, Chinese economic
growth has slowed. Any prolonged slowdown in the Chinese economy may reduce the demand for our applications in China and
adversely affect our business, financial condition and results of operations.
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We may be adversely affected by the complexity of, and uncertainties and changes in, PRC regulation on mobile and PC internet
businesses and companies.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and
permit requirements pertaining to, companies in the internet industry, including mobile internet companies. These internet-related laws
and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result,
in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable
laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the internet business include, but are not limited to,
the following:
(cid:120)
(cid:120)
There is uncertainty relating to the evolving licensing practices and the requirement for real-name registrations. For
example, we were previously required under the PRC law to request users to provide their real names and personal
information only in regard to the bulletin board system services that we provide in support of our applications, online
game operations and online lottery business. However, pursuant to the Administrative Measure on Usernames of Internet
Users’ Accounts, which became effective in March 2015, we are required to request users to provide their real names
and personal information for user registration regardless of the kind of internet information services that we provide. We
cannot assure you that PRC regulators would not require us to implement compulsory real-name registration in the
future. Furthermore, we may fail to obtain or renew permits or licenses that are or may be deemed necessary for our
operations. See “—Risks Relating to Our Business and Industry—If we fail to obtain and maintain the requisite licenses
and approvals or otherwise comply with the laws and regulations under the complex regulatory environment applicable
to our businesses in China, or if we are required to take actions that are time-consuming or costly, our business, financial
condition and results of operations may be materially and adversely affected” and “Item 4. Information on the
Company—B. Business Overview—Regulations.”
The evolving PRC regulatory system for the internet industry may lead to establishment of new regulatory agencies. For
example, in August 2014, CAC took over the administrative role to supervise internet content management in China.
Further, new laws, regulations or policies may be promulgated or announced that will regulate internet activities,
including internet publication and online advertising businesses, and we may not be able to fully and timely comply with
such new laws, regulations or policies. If these new laws, regulations or policies are promulgated, additional licenses
may be required for our operations. If our operations do not comply with these new regulations after they become
effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to
penalties.
In July 13, 2006, the MIIT issued the Circular of the Ministry of Information Industry on Strengthening the Administration of
Foreign Investment in Value-added Telecommunications Services. This circular prohibits domestic telecommunication service
providers from leasing, transferring or selling telecommunication business operating licenses to any foreign investor in any form, or
providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunication business in China.
According to this circular, either the holder of a value-added telecommunications business operation license or its shareholders must
directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunications
services. The circular also requires each license holder to have the necessary facilities, including servers, for its approved business
operations and to maintain such facilities in the regions covered by its license.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or
policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, mobile and PC internet businesses in China, including our business. There are also
risks that we may be found to have violated existing or future laws and regulations given the uncertainty and complexity of China’s
regulation of internet business.
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Content posted or displayed on our mobile and PC platforms and applications such as duba.com and 9724.com, including
advertisements, may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe
consequences.
The PRC government has adopted regulations governing internet and wireless access and the distribution of information over
the internet and wireless telecommunication networks. Under these regulations, internet content providers and internet publishers are
prohibited from posting or displaying over the internet or wireless networks content that, among other things, violates PRC laws and
regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory.
Furthermore, internet content providers are also prohibited from displaying content that may be deemed by relevant government
authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply with these requirements may result in
the revocation of licenses to provide internet content or other licenses, the closure of the concerned platforms and reputational harm.
The operator may also be held liable for any censored information displayed on or linked to their platform, and hence we may also be
subject to potential liability for any unlawful actions by our users or customers on our platform. For a detailed discussion, see “Item 4.
Information on the Company—B. Business Overview—Regulations.”
Since our inception, we have worked to monitor the content on our platform and applications and to make the utmost effort to
comply with relevant laws and regulations. However, it may not be possible to determine in all cases the types of content that could
result in our liability as a distributor of such content and, if any of the content posted or displayed on our mobile and PC platforms and
applications is deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such
content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of
required licenses, which could materially and adversely affect our business, financial condition and results of operations. The costs of
monitoring the content on our platform and applications may also continue to increase as a result of more content being made
available by an increasing number of users and customers on our mobile and PC applications.
In addition, under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our
platform and applications to ensure that such content is true, accurate and in full compliance with applicable laws and regulations.
Where a special government review is required for specific types of advertisements prior to internet posting, such as advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such
review has been performed and approval has been obtained. Violation of these laws and regulations may subject us to penalties,
including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an
announcement correcting the misleading information. In circumstances involving serious violations by us, PRC governmental
authorities may force us to terminate our advertising operations or revoke our licenses.
While we have made significant efforts to ensure that the advertisements shown on our mobile and PC platforms and
applications are in full compliance with applicable PRC laws and regulations, we cannot assure you that all the content contained in
such advertisements or offers is true and accurate as required by the advertising laws and regulations, especially given the uncertainty
in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and
regulations, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on our
business, financial condition, results of operations and prospects.
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Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise,” which could result in
unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the
value of your investment.
Under the EIT Law, which became effective on January 1, 2008, an enterprise established outside the PRC with “de facto
management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally
subject to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the SAT issued the Notice
Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis
of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto
management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on
July 27, 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated
Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin
became effective on September 1, 2011. The SAT Bulletin 45 clarified certain issues in the areas of resident status determination,
post-determination administration and competent tax authorities’ procedures.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group
will be considered as a PRC tax resident enterprise by virtue of having its “de facto management body” in China and will be subject to
PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and
core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and
human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting
books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than
half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 specifies that,
when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated
enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the
Chinese controlled offshore incorporated enterprise.
Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC
enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth
therein may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax
resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
If the PRC tax authorities determine that we or any of our non-PRC subsidiaries is a PRC resident enterprise for PRC
enterprise income tax purposes, then we or any such non-PRC subsidiary could be subject to PRC tax at a rate of 25% on its
worldwide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax
reporting obligations.
In that case, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt
income” under the EIT Law, we cannot assure you that dividends by our PRC subsidiaries to our non-PRC holding companies will not
be subject to a 10% withholding tax, as the PRC foreign exchange control authorities and the PRC tax authorities have not yet issued
guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes.
If the PRC tax authorities determine that our company is a PRC resident enterprise for PRC enterprise income tax purposes,
dividends paid by us to non-PRC holders may be subject to PRC withholding tax, and gains realized on the sale or other disposition of
ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-
PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such dividends or gains are deemed to be from
PRC sources. Any such tax may reduce the returns on your investment in the ADSs.
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We face uncertainties with respect to indirect transfer of assets or equity interest in PRC resident enterprises by their non-PRC
holding companies.
We face uncertainties regarding the reporting on and consequences of private equity financing transactions, share exchange
or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or
purchase of shares in other non-PRC resident companies or other taxable assets by us. According to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State
Administration of Taxation on December 10, 2009, with retroactive effect from January 1, 2008, or SAT Circular 698, where a non-
resident enterprise transfers the equity interests in a PRC resident enterprise indirectly through a disposition of equity interests in an
overseas holding company (other than a purchase and sale of shares issued by a PRC resident enterprise in public securities market),
PRC tax reporting and payment obligations may be triggered. On February 6, 2015, SAT issued a new guidance (Bulletin [2015]
No. 7), or SAT Bulletin 7, on the PRC tax treatment of an indirect transfer of assets by a non-resident enterprise. Bulletin 7 is the
latest regulatory instrument on indirect transfers, extending to not only the indirect transfer of equity interests in PRC resident
enterprises but also to assets attributed to an establishment in China and immovable property in China or, collectively, Chinese
Taxable Assets. According to SAT Circular 698 and SAT Bulletin 7, when a non-resident enterprise engages in an indirect transfer of
Chinese Taxable Assets, or Indirect Transfer, through an arrangement that does not have a bona fide commercial purpose in order to
avoid paying enterprise income tax, the transaction should be re-characterized as a direct transfer of the Chinese assets and becomes
taxable in China under the EIT Law, and gains derived from such indirect transfer may be subject to the PRC withholding tax at a rate
of up to 10%. In addition, transferees and transferors in such indirect transfers are subject to tax withholding and reporting obligations,
respectively. SAT Bulletin 7 does not replace SAT Circular 698 in its entirety. Instead, it abolishes certain provisions and provides
more comprehensive guidelines on a number of issues. Among other things, SAT Bulletin 7 substantially changes the reporting
requirements in SAT Circular 698, provides more detailed guidance on how to determine a bona fide commercial purpose, and also
provides for a safe harbor for certain situations, including purchase and sale of shares in an offshore listed enterprise on a public
market by a non-resident enterprise, which may not be subject to the PRC enterprise income tax. There is uncertainty as to the
application of SAT Circular 698 and SAT Bulletin 7. SAT Circular 698 and SAT Bulletin 7 may be determined by the tax authorities
to be applicable to the transfer of shares of our company by non-PRC resident investors, or the sale or purchase of shares in other non-
PRC resident companies or other taxable assets by us, if any of such transactions were determined by the tax authorities to lack any
reasonable commercial purpose. As a result, depending on whether we are the transferor or transferee in such transactions, we or the
non-resident investors may become at risk of being taxed under SAT Circular 698 and SAT Bulletin 7, and we may have to incur
expenses to comply with SAT Circular 698 and SAT Bulletin 7, including the withholding and reporting obligations thereunder, or to
establish that we should not be taxed under the general anti-avoidance rule of the EIT Law, which may have a material adverse effect
on our financial condition and results of operations or such non-resident investors’ investments in us.
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If our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully
challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and
our results of operations could be materially and adversely affected.
The Chinese government has provided various tax incentives to our subsidiaries and VIEs in China. These incentives include
reduced enterprise income tax rates. For example, under the EIT Law and its implementation rules, the statutory enterprise income tax
rate is 25%. However, an enterprise holding a valid certificate of new software enterprise or animation enterprise is entitled to an
exemption of enterprise income tax for the first two years and a 50% reduction of enterprise income tax for the subsequent three years,
commencing from the first profit-making year. In addition, enterprises that are granted the high and new technology enterprises status
shall enjoy a favorable income tax rate of 15%. Certain of our PRC subsidiaries and VIEs were eligible for preferential tax treatments
as new software enterprises, animation enterprise and/or high and new technology enterprises. See “Item 5. Operating and Financial
Review and Prospects—A. Operating Results—Taxation.” Any increase in the enterprise income tax rate applicable to our PRC
entities in China, or any discontinuation or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by
our PRC entities in China, could adversely affect our business, financial condition and results of operations. In addition, in the
ordinary course of our business, we are subject to complex income tax and other tax regulations and significant judgment is required
in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities
successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial
condition and results of operations would be materially and adversely affected.
China’s M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies
by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and other
recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that
could make merger and acquisition activities by foreign investors more time-consuming and complex. For example, the M&A
Rules require that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may
impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a
famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the
National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed
concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover
of all operators participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more
than RMB400 million within China, or (ii) the total turnover within China of all the operators participating in the concentration
exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million within China) must be
cleared by the MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council
promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises
by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review
System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Regulations,
which became effective on September 1, 2011, to implement the Circular 6. Under Circular 6, a security review is required for
mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which
foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM
Security Review Regulations, the MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a
specific merger or acquisition is subject to security review. If the MOFCOM decides that a specific merger or acquisition is subject to
security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the NDRC and the
MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from
bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of
a company engaged in online marketing or mobile games business requires security review, and there is no requirement that
acquisitions completed prior to the promulgation of the Security Review Circular are subject to MOFCOM review.
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We have grown and may continue to grow our business by acquiring complementary businesses. Complying with the
requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and
any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our
ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises “national
defense and security” or “national security” concerns. However, the MOFCOM or other government agencies may publish
explanations in the future determining that our business is in an industry subject to the security review, in which case our future
acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely
scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would
as such be materially and adversely affected.
PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and
Round-trip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014, which repealed SAFE Circular 75
effective from July 4, 2014. SAFE Circular 37 requires PRC residents that directly establish or indirectly control offshore special
purpose vehicles, or SPVs, for the purpose of seeking offshore investment and financing and conducting round trip investment in
China, to register with the SAFE or its local branch in connection with their ownership in the SPVs, and to amend the SAFE
registrations to reflect any subsequent changes thereof.
To our knowledge, Messrs. Jun Lei, Sheng Fu and Ming Xu have completed foreign exchange registration in connection with
our financings and share transfer that were completed before the end of 2013, and Messrs. Fu and Xu have completed foreign
exchange registration in connection with our initial public offering. However, we may not be fully informed of the identities of all our
beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE registration
requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents
have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. If
our shareholders or beneficial owners who are PRC citizens or residents fail to complete their SAFE registration, our PRC subsidiaries
may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we
may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign
exchange restrictions.
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Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share
option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
On February 15, 2012, the SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for
Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which
replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock
Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by the SAFE on March 28, 2007. Under the
Stock Option Rules and other relevant rules and regulations, 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 and complete certain other procedures.
Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of
such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE
registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also
retain an overseas entrusted institution to handle 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, the PRC agent or the overseas entrusted
institution or other material changes. We and our PRC employees who have been granted stock options have been subject to these
regulations upon the completion of the initial public offering in May 2014. Failure of our PRC stock option holders to complete their
SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely
affect our business.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of
currency conversion may restrict or prevent us from loans to our PRC entities or to make additional capital contributions to our
PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC entities, including PRC
subsidiaries, VIEs and a VIE’s subsidiary. We may make loans to our PRC entities, or we may make additional capital contributions
to our PRC subsidiaries, or we may establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or
we may acquire offshore entities with business operations in China in an offshore transaction.
Most of these financing means are subject to PRC regulations and approvals. For example, loans by us to our wholly-owned
PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the
SAFE. If we decide to finance our wholly-owned PRC subsidiaries by means of capital contributions, these capital contributions must
be approved by the MOFCOM or its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any
PRC domestic companies, we are not likely to make such loans to our VIEs or a VIE’s subsidiary, which are PRC domestic
companies. Further, we are not likely to finance the activities of our VIEs or a VIE’s subsidiary by means of capital contributions due
to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in mobile internet services, online
advertising, online games and related businesses.
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On August 29, 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of
the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular
142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how
the converted Renminbi may be used. SAFE Circular 142 provides that Renminbi capital converted from foreign currency registered
capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable
governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight
of the flow and use of the Renminbi capital converted from the foreign currency registered capital of a foreign-invested company. The
use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to
repay Renminbi loans if the proceeds of such loans have not been used. Such requirements are also known as “payment-based foreign
currency settlement system” established under the SAFE Circular 142. Violations of SAFE Circular 142 could result in severe
monetary or other penalties. Furthermore, the SAFE promulgated a circular on November 9, 2010, known as Circular 59, and another
supplemental circular on July 18, 2011, known as Circular 88, which both tighten the examination of the authenticity of settlement of
foreign currency capital or net proceeds from overseas listings. The SAFE further promulgated the Circular on Further Clarification
and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45,
on November 9, 2011, which expressly prohibits foreign-invested enterprises from using registered capital settled in Renminbi
converted from foreign currencies to grant loans through entrustment arrangements with a bank, repay inter-company loans or repay
bank loans that have been transferred to a third party. Circular 142, Circular 59, Circular 88 and Circular 45 may significantly limit
our ability to make loans or capital contributions to our PRC subsidiaries and to convert such proceeds into Renminbi, which may
adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Furthermore, on April 8, 2015, the SAFE promulgated the Circular on the Reform of the Administrative Method of the
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 19, which will become effective as of June 1,
2015. This Circular 19 is to implement the so-called “conversion-at-will” of foreign currency in capital account, which was
established under a circular issued by the SAFE on August 4, 2014, or Circular 36, and was implemented in 16 designated industrial
parks as a reform pilot. The Circular 19 now implements the conversion-at-will of foreign currency settlement system nationally, and
it will abolish the application of Circular 142, Circular 88 and Circular 36 starting from June 1, 2015. Among other things, under
Circular 19, foreign-invested enterprises may either continue to follow the payment-based foreign currency settlement system or elect
to follow the conversion-at-will of foreign currency settlement system. Where a foreign-invested enterprise follows the conversion-at-
will of foreign currency settlement system, it may convert any or 100% amount of the foreign currency in its capital account into
RMB at any time. The converted RMB will be kept in a designated account known as “Settled but Pending Payment Account,” and if
the foreign-invested enterprise needs to make further payment from such designated account, it still needs to provide supporting
documents and go through the review process with its bank. If under special circumstances the foreign-invested enterprise cannot
provide supporting documents in time, Circular 19 grants the banks the power to provide a grace period to the enterprise and make the
payment before receiving the supporting documents. The foreign-invested enterprise will then need to submit the supporting
documents within 20 working days after payment. In addition, foreign-invested enterprises are now allowed to use their converted
RMB to make equity investments in China under Circular 19. However, foreign-invested enterprises are still required to use the
converted RMB in the designated account within their approved business scope under the principle of authenticity and self-use. It
remains unclear whether a common foreign-invested enterprise, other than such special types of enterprises as holding companies,
venture capital or private equity firms, can use the converted RMB in the designated account to make equity investments if equity
investment or similar activities are not within their approved business scope.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by
offshore holding companies as discussed above, we cannot assure you that we will be able to complete the necessary government
registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to our PRC
entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain
such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and
adversely affect our liquidity and our ability to fund and expand our business.
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We may rely on dividends paid by our subsidiaries, including PRC subsidiaries, to fund any cash and financing requirements we
may have. Any limitation on the ability of our subsidiaries to pay dividends to us could have a material adverse effect on our ability
to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.
We are a holding company, and we rely on a significant amount of dividends from our subsidiaries, including our PRC
subsidiaries, for our cash requirements, including the funds necessary to pay dividends and other cash distributions to the holders of
the ADSs and our ordinary shares and service any debt we may incur. If our subsidiaries incur debt on their own behalf in the future,
the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
With respect to our PRC subsidiaries, under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as
Conew Network and Zhuhai Juntian Electronic Technology Co., Ltd., or Zhuhai Juntian, may pay dividends only out of its
accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned
enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if
any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the
discretion of the board of directors of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on
PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not
distributable as cash dividends. Any limitation on the ability of our wholly-owned PRC subsidiaries to pay dividends or make other
distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial
to our business, pay dividends, or otherwise fund and conduct our business.
In addition, the EIT Law and its implementation rules provide that withholding tax rate of 10% will be applicable to
dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident
enterprises are incorporated.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s
political and economic conditions and China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar
over the following three years. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had
been stable and traded within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly
and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate
between the RMB and the U.S. dollar in the future. In addition, the People’s Bank of China regularly intervenes in the foreign
exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals.
Our revenues and costs are partly denominated in Renminbi and partly denominated in foreign currencies, primarily U.S.
dollars. Any significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position,
and the value of, and any dividends payable on, the ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into
Renminbi for capital expenditures and working capital and other business purposes, appreciation of the Renminbi against the U.S.
dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant
depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn
could adversely affect the price of our ADSs.
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Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. As of the date of
this annual report, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be
limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result,
fluctuations in exchange rates may have a material adverse effect on your investment.
Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of
your investment.
The PRC government imposes control on the convertibility of the Renminbi into foreign currencies and, in certain cases, the
remittance of currency out of China. We receive part of our revenues in Renminbi. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, and trade and service-related foreign exchange transactions, can be
made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC
subsidiaries are able to pay dividends in foreign currencies to us without prior approval from the SAFE. However, approval from or
registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may
also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control
system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders, including holders of the ADSs.
Proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public
accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the
Exchange Act.
In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our
independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents
related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law
decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period
of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12,
2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-
based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to
practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to
Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as
suspensions, or it could restart the administrative proceedings.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the
United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC,
which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act,
including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor
uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.
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If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and
we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial
statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange
Act. Such a determination could ultimately lead to our delisting from the NYSE or deregistration from the SEC, or both, which would
substantially reduce or effectively terminate the trading of our ADSs in the United States.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
China has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are
expected to continue to grow. The average wage level for our employees has also increased in recent years.
In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our
employees and paying various statutory employee benefits, including pensions, housing allowance, medical insurance, work-related
injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our
employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, which became effective in January 2008 and its
implementation rules effective as of September 2008, employers are subject to stricter requirements in terms of signing labor
contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor
contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the
Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner,
which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National
People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011.
According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical
insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay
the social insurance premiums for such employees.
We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass
on these increased labor costs to our users by increasing prices for our products or services, our profitability and results of operations
may be materially and adversely affected. Also, as the interpretation and implementation of labor-related laws and regulations are still
evolving, we cannot assure you that our employment practices do not and will not violate labor-related laws and regulations in China,
which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and
regulations, we could be required to provide additional compensation to our employees, and our business, financial condition and
results of operations could be materially and adversely affected.
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If the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals,
fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and
adversely affected.
Under PRC law, legal documents for corporate transactions are executed using the chops or seals of the signing entity, or
with the signature of a legal representative whose designation is registered and filed with the relevant branch of the SAIC.
Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC entities
have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. Some designated
legal representatives of our PRC entities are members of our senior management team who have signed employment undertaking
letters with us or our PRC entities under which they agree to abide by various duties they owe to us. In order to maintain the physical
security of our chops and the chops of our PRC entities, we generally store these items in secured locations accessible only by the
authorized personnel of each of our PRC entities. Although we monitor such authorized personnel, there is no assurance such
procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate
our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience
significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control
over any of our PRC entities, we or our PRC entities would need to pass a new shareholder or board resolution to designate a new
legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant
authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve
significant time and resources and divert management attention away from our regular business. In addition, the affected entity may
not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a
transferee relies on the apparent authority of the representative and acts in good faith.
Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to
inspection by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such
inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the
SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company
Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections
by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in
China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our
auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB. In
May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC
and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit
documents relevant to investigations undertaken by PCAOB, the CSRC or the Ministry of Finance in the United States and the PRC,
respectively. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC
of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit
procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.
The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more
difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be
deprived of the benefits of PCAOB inspections.
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Risks Relating to the ADSs
The trading price of our ADSs has been volatile and may continue to be volatile regardless of our operating performance.
The trading price of our ADSs has been and may continue to be subject to wide and sudden fluctuations due to factors
including the following:
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variations in our revenues, earnings and cash flow;
announcements of new investments, acquisitions, strategic partnerships, or joint ventures by us or our competitors;
announcements of new services and expansions by us or our competitors;
changes in financial estimates by securities analysts;
fluctuations in our user or other operating metrics;
fluctuations in the stock price of our parent company, Kingsoft Corporation, or news about Kingsoft Corporation
that has an impact on us;
failure on our part to realize monetization opportunities as expected;
changes in revenues generated from our top customers;
additions or departures of key personnel;
detrimental negative publicity about us, our management, our competitors or our industry;
short seller reports that make allegations against us or our affiliates, even if unfounded;
regulatory developments affecting us or our industry; and
potential litigation or regulatory investigations.
In addition, the price of the ADSs may fluctuate due to broad market and industry factors, such as the performance and
fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in
China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced
significant volatility since their initial public offerings, including, in some cases, substantial declines in trading price. The trading
performance of these Chinese companies’ securities after their offerings, including the securities of companies in the mobile and PC
internet businesses, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently
may impact the trading performance of the ADSs, regardless of our actual operating performance. In addition, any negative news or
perceptions about inadequate corporate governance practices or fraudulent accounting or other practices at other Chinese companies
may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we
have engaged in such practices. In addition, securities markets may from time to time experience significant price and volume
fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and
other jurisdictions between late 2008 and 2012, which may have a material adverse effect on the market price of the ADSs.
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We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced
reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not
being required to comply with the auditor attestation requirements of Section 404 for so long as we remain as an emerging growth
company. We have voluntarily complied with the requirements of Section 404 and our independent auditor has provided a report that
attests to the effectiveness of our internal control over financial reporting as of December 31, 2015. However, if we elect not to
comply with such auditor attestation requirements in the future, our investors may not have access to certain information they may
deem important. We would cease to be an emerging growth company upon the earliest to occur of (1) the last day of the fiscal year in
which we have more than US$1.0 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least US$700
million of equity securities held by non-affiliates; (3) the issuance, in any three-year period, by us of more than US$1.0 billion in non-
convertible debt securities; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering in
May 2014.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial
accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting
standards. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as
required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is
irrevocable.
If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their
recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
The trading market for the ADSs may be influenced by research or reports that industry or securities analysts publish about
our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or
more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which, in turn, could cause the market price or trading volume for the ADSs to decline.
The sale or perceived sale of substantial amounts of our ADSs or ordinary shares could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, sales of our ordinary shares, or the perception that these sales
could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity
offerings in the future. Ordinary shares held by our pre-IPO shareholders may be sold in the public market subject to the restrictions in
Rule 144 under the Securities Act. In addition, ordinary shares issued pursuant to our share incentive plans are eligible for sale in the
public market subject to restrictions of Rule 144 under the Securities Act or through registration under the Securities Act, as
applicable. In addition, we have granted certain shareholders Form F-3 registration rights and the piggyback registration rights.
Registration of these shares under the Securities Act may result in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration. Any market sales of securities held by our significant
shareholders or any other shareholder may have an adverse impact on the market price of the ADSs.
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Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our
ordinary shares and ADSs.
Our currently effective fourth amended and restated articles of association contain provisions to limit the ability of others to
acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of
depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third
parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has
the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges, and relative participating, optional or special rights, and the qualifications, limitations or restrictions,
including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights associated with our ordinary shares, represented by ADSs or otherwise. Preferred shares could be issued
quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult.
If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders
of our ordinary shares and the ADSs may be materially and adversely affected.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited,
because we are incorporated under Cayman Islands law.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are
governed by our memorandum and articles of association, as amended from time to time, the Companies Law (2013 Revision) of the
Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by
minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the
common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial
precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive
authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in
the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S.
states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In
addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United
States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect
corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing
articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our
shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the
information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in
connection with a proxy contest.
Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from
requirements for companies incorporated in other jurisdictions such as the United States. Currently, we do not plan to rely on home
country practice with respect to any corporate governance matter. However, if we choose to follow home country practice in the
future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S.
domestic issuers.
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As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions
taken by management, members of our board of directors or controlling shareholders than they would as public shareholders of a
company incorporated in the United States.
Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction.
We are a Cayman Islands company and a substantial majority of our assets are located outside of the United States. A
significant percentage of our current operations are conducted in China. In addition, a significant majority of our current directors and
officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in the United States in the event that you believe that your rights have been
infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the
laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors
and officers.
There are uncertainties as to whether Cayman Islands courts would:
(cid:120)
(cid:120)
recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S.
securities laws; and
impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions
of U.S. securities laws that are penal in nature.
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the
Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction
without retrial on the merits.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your
right to vote your Class A ordinary shares.
As a holder of the ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary
shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting
instructions to the depositary. Upon receipt of your voting instructions, the depositary will endeavor to vote the underlying Class A
ordinary shares in accordance with those instructions. You will not be able to directly exercise your right to vote with respect to the
underlying shares unless you withdraw the shares. Under the currently effective fourth amended and restated memorandum and
articles of association, the minimum notice period required for convening a general meeting is 14 calendar days. When a general
meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote
with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will
arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that
you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out
voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your
right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
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The depositary for the ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do
not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our
Class A ordinary shares underlying your ADSs at shareholders’ meetings unless:
(cid:120) we have failed to timely provide the depositary with notice of meeting and related voting materials;
(cid:120) we have instructed the depositary that we do not wish a discretionary proxy to be given;
(cid:120) we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
(cid:120)
(cid:120)
a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
the voting at the meeting is to be made on a show of hands.
The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our Class A
ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more
difficult for shareholders to influence the management of our company. Holders of our Class A and Class B ordinary shares are not
subject to this discretionary proxy.
Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of the ADSs for return on
your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and
growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not
rely on an investment in the ADSs as a source for any future dividend income.
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of
directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other
things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any,
received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board
of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of
the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs.
You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if
it is illegal or impractical to make them available to you.
The depositary of the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on
Class A ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive
these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not
responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it
would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities
Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also
determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be
less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation
to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also
have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of
ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal
or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
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You may not be able to participate in rights offerings and may experience dilution of your holdings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit
agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to
which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are
registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed
rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the
Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to
endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights
offerings and may experience dilution of their holdings as a result.
Our dual-class voting structure will limit your ability to influence corporate matters, and could discourage others from pursuing
any change of control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares
are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. Each Class B ordinary
share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not
convertible into Class B ordinary shares under any circumstances. Save for certain limited exceptions, upon any transfer of Class B
ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall
be automatically and immediately converted into the equal number of Class A ordinary shares. All of the ordinary shares held by our
shareholders prior to the completion of the initial public offering were redesignated as Class B ordinary shares upon completion of the
offering. Kingsoft Corporation, our controlling shareholder, and our founders Mr. Sheng Fu and Mr. Ming Xu, directly or through
their holding vehicles, beneficially own an aggregate of 58.8% of our total outstanding shares, representing 72.6% of our total voting
power as of March 31, 2016, which give them considerable influence over matters requiring shareholders’ approval, including election
of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control
will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or
other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
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 books at any time or from
time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time
to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the
depositary needs to maintain an exact number of ADSs on its books for a specified period. The depositary may also close its books in
emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is
advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to
transfer your ADSs when you wish to.
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We have incurred increased costs as a result of being a public company, and the costs may continue to increase in the future.
As a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission,
or the SEC, and NYSE, impose various requirements on the corporate governance practices of public companies. These rules and
regulations increase our legal and financial compliance costs and some corporate activities more time-consuming and costly. For
example, in comparison with a private company, we need an increased number of independent directors and have to adopt policies
regarding internal controls and disclosure controls and procedures. In addition, we incur additional costs associated with our public
company reporting requirements.
As a company with less than US$1.0 billion in revenues for our last fiscal year, we qualify as an “emerging growth
company” pursuant to the JOBS Act, and may take advantage of specified reduced reporting and other requirements that are otherwise
applicable generally to public companies. See “—We are an emerging growth company within the meaning of the Securities Act and
may take advantage of certain reduced reporting requirements” for details. After we are no longer an emerging growth company, we
expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.
In the past, shareholders of a public company often brought securities class action suits against the company following
periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a
significant amount of our management’s attention and other resources from our business and operations, which could harm our results
of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful,
could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us,
we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of
operations.
There can be no assurance that we will not be passive foreign investment company, or PFIC, for United States federal income tax
purposes for any taxable year, which could subject United States investors in the ADSs or our Class A ordinary shares to
significant adverse United States income tax consequences.
We will be a “passive foreign investment company,” or “PFIC,” if, in the case of any particular taxable year, either (a) 75%
or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly
value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive
income (the “asset test”). Although the law in this regard is unclear, we treat our VIEs and each of their subsidiaries as being owned
by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities
but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of
operations in our consolidated financial statements. Assuming that we are the owner of our VIEs and each of their subsidiaries for
United States federal income tax purposes, and based upon our current and expected income and assets, we do not presently expect to
be a PFIC for the current taxable year or the foreseeable future.
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While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined
by reference to the market price of the ADSs, fluctuations in the market price of the ADSs may cause us to become a PFIC for the
current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the
composition of our income and assets. Under circumstances where we determine not to deploy significant amounts of cash for active
purposes or if we were treated as not owning our VIEs for United States federal income tax purposes, our risk of being a PFIC may
substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination
made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or
any future taxable year.
If we are a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—United
States Federal Income Taxation”) may incur significantly increased United States income tax on gain recognized on the sale or other
disposition of the ADSs or Class A ordinary shares and on the receipt of distributions on the ADSs or Class A ordinary shares to the
extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holders
may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. holder holds the
ADSs or our Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such
U.S. holder holds the ADSs or our Class A ordinary shares. For more information see “Item 10. Additional Information—E.
Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Considerations.”
Item 4.
Information on the Company
A.
History and Development of the Company
Our company is a holding company incorporated in the Cayman Islands in July 2009 as a wholly-owned subsidiary of
Kingsoft Corporation, a Cayman Islands company publicly listed on the Hong Kong Stock Exchange (Stock Code: 3888) since
October 2007. We changed our name from the previous Kingsoft Internet Software Holdings Limited to Cheetah Mobile Inc. in
March 2014.
In August 2009, we established our wholly-owned Hong Kong subsidiary, Cheetah Technology Corporation Limited, or
Cheetah Technology. Following our incorporation in July 2009, we underwent a series of restructuring transactions in 2009 and 2010.
After the restructuring, Zhuhai Juntian, which was originally a wholly-owned subsidiary of Kingsoft Corporation in China, became a
wholly-owned subsidiary of Cheetah Technology in December 2009. Zhuhai Juntian incorporated Beijing Security as its wholly-
owned subsidiary in China in November 2009. Through a series of VIE contractual arrangements established in January 2011, Beike
Internet, an entity previously consolidated in Kingsoft Corporation’s group, became our VIE. Beike Internet was renamed as Beijing
Cheetah Mobile Technology Co., Ltd., or Beijing Mobile, in August 2015. We established Cheetah Mobile America, Inc. in the
United States in November 2012.
In October 2010, we acquired 100% equity interest in Conew.com Corporation, a company incorporated in the British Virgin
Islands in October 2008. As part of the acquisition, we acquired 100% equity interest in Conew Network and obtained effective
control over Beijing Conew through contractual arrangements among Conew Network, Beijing Conew and Beijing Conew’s
shareholders. Beijing Conew offered internet security services starting in May 2010 but has been dormant since our acquisition of
Conew.com Corporation.
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Beijing Kingsoft Network Technology Co., Ltd., or Beijing Network, Beijing Antutu Technology Co., Ltd., or Beijing
Antutu, and Guangzhou Kingsoft Network Technology Co., Ltd., or Guangzhou Network, were incorporated in China in July 2012,
June 2013 and September 2013, respectively, as our VIEs and had been consolidated in our financial statements since their
incorporation. In October 2015, Beijing Network was renamed as Beijing Cheetah Network Technology Co., Ltd. In the same month,
we terminated our VIE contractual arrangements with Beijing Antutu and Guangzhou Network, which these two entities became the
wholly-owned subsidiaries of Beijing Security. We exercise effective control over our current VIEs, including Beijing Mobile, Beijing
Network and Beijing Conew through contractual arrangements among them, their shareholders and our applicable PRC subsidiaries,
Beijing Security and Conew Network. For a detailed description of our contractual arrangements with the VIEs, see “—C.
Organizational Structure—Contractual Arrangements with Our VIEs.”
Beijing Mobile incorporated a subsidiary, Suzhou Jiangduoduo Technology Co., Ltd., in China in January 2014. In
April 2014, we acquired certain assets relating to an online lottery sales business. In April 2014, we started to conduct online lottery
sales. In March 2015, we suspended the online lottery sales in response to the PRC government’s regulatory measures. See “Item 3.
Key Information on the Company—D. Risk Factors—Risks Relating to our Business and Industry—If we fail to obtain and maintain
the requisite licenses and approvals or otherwise comply with the laws under the complex regulatory environment applicable to our
businesses in China, or if we are required to take actions that are time-consuming or costly, our business, financial condition and
results of operations may be materially and adversely affected” and “Item 4. Information on the Company—B. Business Overview—
Regulations—Regulations on Online Lottery Sales.”
In May 2014, we completed our initial public offering, in which we offered and sold 138,000,000 Class A ordinary shares
represented by ADSs. The ADSs are listed on the NYSE under the symbol “CMCM.”
In 2015, we established several wholly-owned subsidiaries, including Hongkong Cheetah Mobile Technology Limited in
Hong Kong, for investment and holding purposes.
We have grown organically and through acquisitions, partnerships and investments in recent years. For example, we acquired
Hongkong Zoom Interactive Network Marketing Technology Limited, or Hongkong Zoom, a mobile advertising company, in
July 2014, and MobPartner S.A.S., or MobPartner, a mobile advertising company based in San Francisco, London, Paris and Beijing,
in April 2015. In May 2015, we started to consolidate Moxiu Technology (Beijing) Co., Ltd., a provider of mobile launchers, upon
acquisition of an aggregate 52.1% equity interest.
Our principal executive offices are located at Hui Tong Times Square, No. 8 Yaojiayuan South Road, Chaoyang District,
Beijing, 100123, People’s Republic of China. Our telephone number at this address is +86-10-6292-7779. Our registered office in the
Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-
1104, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., of 4 Floor,
400 Madison Avenue, New York, New York 10017.
th
B.
Business Overview
We operate a platform that offers mobile and PC applications for our users and global content promotional channels for our
customers, both of which are powered by our proprietary cloud-based data analytics engines. Our mission is to make the mobile and
PC internet experience speedier, simpler and safer for users worldwide.
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For our users, our diversified suite of applications optimizes mobile and PC internet system performance and provides real
time protection against known and unknown security threats. The number of monthly active users of our mobile applications increased
from 166.2 million in 2013 to 395.4 million in 2014, and further to 635.5 million 2015. Our applications had been installed on 346.6
million, 1,089.1 million and 2,340.8 million mobile devices as of December 31, 2013, 2014 and 2015, respectively.
For our customers, our platform provides them multiple user traffic entry points and global content promotional channels
capable of delivering targeted content to hundreds of millions of people. Our customers include direct advertisers and mobile
advertising networks through which advertisers place their advertisements.
Our proprietary cloud-based data analytics engines form the core of our platform. For our users, the data analytics engines
perform real time analysis of mobile applications, program files and websites on their devices for behavior that may impair system
performance or impose security risks. Data analytics also help us present more personalized content and information to our users that
is aimed to increase user engagement. For our customers, the data analytics engines help create user interest graphs according to a
number of dimensions such as online shopping, gaming and frequently used applications, thus facilitating targeted content delivery.
Although substantially all of our applications are free to our users, our large user base presents monetization opportunities for
us and our customers. We generate revenues from our online marketing services primarily by providing mobile advertising services to
advertisers worldwide, and also by selling advertisements and referring user traffic on our mobile and PC platforms. We generated
81.7%, 75.0% and 88.0% of our revenues from online marketing services in 2013, 2014 and 2015, respectively. We also generate
revenues by providing internet value-added services, or IVAS, primarily from online game publishing.
By platform, our revenues generated from our mobile business, or mobile revenues, increased by 741.3% from RMB55.3
million in 2013 to RMB465.0 million in 2014, and further increased by 423.2% to RMB2,433.2 million (US$375.6 million) in 2015.
Mobile revenues accounted for 66.0% of our total revenues in 2015, compared to 26.4% and 7.4% in 2014 and 2013, respectively.
Since we began our overseas monetization efforts in the second quarter of 2014, revenues from overseas markets, primarily the United
States, Europe and certain emerging markets (other than China), have increased significantly. For the years ended December 31, 2014
and 2015, overseas revenues accounted for 12.6% and 50.0% of our total revenues, respectively, and 47.7% and 75.7% of mobile
revenues, respectively.
Our Core Applications for Users
The table below sets forth some basic information of our core mobile and PC applications for users.
Name
Clean Master
CM Security
Battery Doctor
Cheetah Browser / CM Browser*
CM Launcher
Photo Grid
CM Locker
Duba Anti-virus
Operating
System
Android
Android
Android
iOS
Windows
Android
iOS
Android
Android
iOS
Android
Windows
(L)
(L)
(L)
Date of Launch or
Acquisition
September 2012
(L)
January 2014
September 2011
(L)
July 2011
June 2012
June 2013
(L)
June 2013
December 2014
(A)
May 2013
(A)
May 2013
December 2014
November 2000
(L)
(L)
(L)
(L)
Google Play Rating on
December 31, 2015
4.7
4.7
4.5
Number of Languages
Available as of
December 31, 2015
32
20
28
4.6
4.6
4.5
4.7
N/A
26
33
33
40
1
L: date of launch; A: date of acquisition.
* CM Browser was officially launched in June 2014.
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Clean Master
Clean Master is a junk file cleaning, memory boosting and privacy protection tool we launched in September 2012 for mobile
devices. Clean Master also features application management functions.
Clean Master utilizes our cloud-based application behavior library to identify junk files associated with the applications
installed on users’ end devices. Our data analytics engine can also identify junk files generated by unknown applications, which allow
Clean Master to effectively clean these junk files.
As our cloud-based data analytics engines continue to evolve, Clean Master becomes more precise in identifying and
cleaning junk files.
CM Security
CM Security, which we launched in January 2014 on the Android platform, is an anti-virus and security application for
mobile devices. It also features junk file cleanup and unwanted call blocking functions.
Powered by the dual-mode local and cloud-based application behavior library and our security threats library, CM Security is
able to efficiently identify junk files and threats installed on users’ mobile devices. Our data analytics engines also enable CM
Security to identify threats not previously indexed in our application behavior and security threats libraries.
Battery Doctor
Battery Doctor is a power optimization tool for mobile devices we launched in July 2011. Battery Doctor optimizes battery
usage by utilizing our cloud-based application behavior library that contains power consumption characteristics of a number of mobile
applications. Our data analytics engine can also identify power consumption characteristics of unknown applications, which allows
Battery Doctor to effectively manage the power settings for these applications.
Cheetah Browser and CM Browser
Cheetah Browser is our high speed, safe web browser available for both PCs and mobile devices. We launched the PC edition
in June 2012 and the mobile edition in June 2013. Cheetah Browser PC edition is a dual-core web browser, integrating the
functionality of both the Chromium open-source rendering engine and the Internet Explorer rendering engine. The integrated Internet
Explorer rendering engine provides maximum compatibility with pages across the internet, while the Chromium browser kernel
operates at higher speeds. Cheetah Browser’s intelligent core switching engine analyzes each web page visited and selects the fastest
and most compatible rendering engine for that page.
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CM Browser is a light and fast mobile browser that we officially launched in June 2014, targeting overseas markets. CM
Browser can protect users from malicious threats without compromising browsing speed.
CM Launcher
CM Launcher was launched in December 2014 on the Android platform, and is a secure launcher that offers acceleration,
secure protection, stylish wallpapers. It also automatically organizes mobile apps based on personal behavior. It is used to increase the
startup speed of phones and boost their performance. Despite its light weight, CM Launcher enables apps to load quicker. Its anti-virus
engine protects users’ personal info and app data and block viruses and malware. CM Launcher automatically classifies users’ apps
into intelligent folders based on their habits, and recommends apps that are popular with the people in their neighborhood. In addition,
it customizes users’ unique wallpaper to fit their personal style.
Photo Grid
Photo Grid is an easy-to-use photo collage application for mobile devices that we acquired in May 2013. Photo Grid allows
users to quickly create professional looking collages of photos through an intuitive interface. Photos can be selected from users’
phones or from Facebook, Instagram, Flickr, Dropbox, or Google+ and then edited and arranged according to a variety of pre-defined
or self-designed layouts. Users can then apply photo enhancement tools such as filters, backgrounds, stickers and text labels, making
the creation of beautiful collages a simple and enjoyable experience. Users can conveniently save and share their creations through
social networks such as Twitter, Facebook, Instagram or emails.
CM Locker
CM Locker was launched in December 2014 on the Android platform. It is a lightweight lock screen with prompt
notifications and maximum security. CM Locker enables users to access essential phone functions easily and quickly.
Duba Anti-virus
Duba Anti-virus is an internet security application for both PC and mobile devices. The PC edition of Duba Anti-virus was
initially introduced as a paid subscription service, which we changed to a free service in November 2010. It incorporates anti-virus,
anti-malware, anti-phishing, malicious website blocking and secure online shopping in a single lightweight installation package and
leverages the power of our cloud-based data analytics engines to protect our users against known and unknown security threats and
malicious applications.
Anti-virus and anti-malware. Duba Anti-virus can perform periodic or on-demand scan of program files and processes
present on our users’ devices and test them against our cloud-based whitelisted and blacklisted security threats library. Program files
that match the blacklist will be removed or quarantined automatically by Duba Anti-virus.
Program files that do not match any of the samples included in the cloud-based security threats library will be further
analyzed using our cloud-based data analytics engines which can effectively identify unknown threats by employing a heuristic, or
experience-based, approach to analyze the code and behavior of the unknown program files. By functioning as a sensor for our cloud-
based data analytics engines, Duba Anti-virus can leverage the discovery of an unknown security threat on a single user’s device to
protect the devices of our entire user community.
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K+ defense. Duba Anti-virus includes a K+ defense system that integrates with our analytic engines and provides multi-layer
comprehensive protection against a broad range of security threats to users’ computers.
(cid:120)
System protection. The K+ defense system protects against malicious alteration of system configurations, prevents
remote intrusion by hackers, blocks malicious websites, automatically scans downloaded files for malwares and
protects web browsers from unauthorized alternation.
(cid:120) Online shopping protection. The K+ defense system blocks phishing and malicious shopping websites, prevents
online shopping webpages from being altered or login information being intercepted by Trojan horses installed on
users’ computers and provides security module plug-in to enhance browser security. Critical processes such as
online payments can be conducted in a secure virtual environment free of interference by malware.
Vulnerability fixing. Duba Anti-virus provides a one-click solution to scan and fix vulnerabilities in computer configurations
that could create an elevated risk level of system intrusions.
Products and Services for Our Customers
Mobile advertising platform
Cheetah Ad Platform is a platform through which customers primarily purchase advertisements across multiple locations of
our mobile applications, and to a lesser extent, on third-party advertising publishers’ mobile applications. This mobile advertising
platform helps customers reach their target audience through our advertising products. Ads of our customers are integrated into our
mobile products in a manner designed to enhance returns for customers while optimizing user experience. As of December 31, 2015,
we aggregated ads from Facebook, Yahoo, Google, Tencent, Baidu and more than 20 global mobile advertising networks on our
mobile advertising platform. In addition, we have direct sales forces in China and overseas markets. Our ad serving technology helps
to determine the best available ad to show to each user based on the combination of the user’s unique attributes and the real-time
comparison of bids from eligible ads.
Duba.com personal start page
Our duba.com personal start page provides a convenient starting point for the online experience of our users. Duba.com
aggregates a large collection of popular online resources and provides users quick access to most of their online destinations such as
online shopping, video, online game, travel and local information. It also incorporates search functions provided by our customers.
Our large user base has turned our duba.com personal start page into a hub of third party search traffic to e-commerce companies and
search engine providers.
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Users can click on links on the duba.com start page to access our customers’ websites or search information using their
selected search engine. We charge fees to our customers based on different criteria such as cost per sale, cost per click, cost per period
and cost per installation for transactions or other activities that originate from our duba.com start page. The unit price is subject to
negotiation based on the traffic we bring to the customers.
Game publishing
Through our PC game centers and mobile applications, we publish web game and mobile game categories and a wide array
of genres such as MMORPGs, first person shooters, action, adventure, sports, puzzle, children’s and casual games. Substantially all of
these games are free to play and we generate revenues from game players’ purchase and recharge of virtual currencies used in online
games through our user account management system.
We have two types of game publishing arrangements. Under a joint operating arrangement, we jointly operate games with
game developers and publishers without paying license fees or incurring significant promotional expenses. We share user payments
with game developers and publishers. Under an exclusive publishing arrangement, we pay royalty fees and upfront license fees to
developers, share a portion of user payments with certain publishers, and promote and operate the games at our own costs. The
popularity of the games has a larger impact on revenues from exclusive publishing arrangement as we bear higher risks and potentially
receive higher rewards under this arrangement.
Utilizing the distribution capability of our suite of applications, we can quickly promote games to a large number of our users
through multiple channels such as our duba.com start page, Cheetah Browser, Clean Master and Battery Doctor.
Our Cloud-Based Data Analytics Engines
Our cloud-based data analytics engines are critical for the development and enhancement of our mobile and PC applications
serving both our users and customers.
Data analytics engines powering our applications for users
For our users, our data analytics engines enable our applications to access our most up-to-date security threat and application
behavior libraries in the cloud to optimize system performance and to protect against both known and unknown security threats.
(cid:120) Our security threat library contains blacklisted and whitelisted sample program files and blacklisted and whitelisted
sample website addresses, which grows with time.
(cid:120) We have developed a mobile application behavior library encompassing a number of mobile applications. A wide
range of application behavior such as junk file creation, power usage and invasion of privacy is collected in the
library.
(cid:120) We can perform an automatic or on-demand scan to identify known security threats or behavior of known
applications on users’ devices in a fraction of a second.
(cid:120) We can automatically identify abnormal behavior of unknown applications or security threats with a minimal false
identification rate, through performing a heuristic, or experience-based, analysis with our data analytics engines.
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Data analytics engines powering our products and services for customers
Using cloud-based big data analytics, we have created our proprietary Face Mark system to graph our users’ interests
according to a number of dimensions such as online shopping, gaming and frequently used applications. We have also developed
“Cross-over” delivery technology that can identify audience groups across “multi-screens” regardless of what devices or operating
systems these audience groups may use, as long as they have installed any of our applications. With the Face Mark system and Cross-
over delivery technology, we can more precisely help our customers promote their own brands, products and services to target
audiences and achieve a higher return on investments.
Evolution of our data analytics engines
Our security threats and application behavior libraries continuously expand with new samples exchanged with other security
services providers and collected by search spiders. In addition, every device with our applications installed acts as a sensor for our
cloud-based data analytics engines. The behavior of every new third party application installed on these devices is analyzed to
establish a risk profile and enrich our security threats library.
Our Face Mark and Cross-over delivery technologies become more valuable with the expansion of our user base as they help
populate our user interest graph to create larger audience groups for targeted content delivery. This creates a powerful network effect.
The more users install and use our applications, the more information our analytics engines are able to obtain to benefit both our users
and customers.
Our Customers
Our customers primarily comprise customers for our online marketing services. For our mobile platform, our customers
comprise direct advertisers including mobile application developers, mobile game developers and e-commerce companies, and our
partnering mobile advertising networks through which advertisers place their advertisements on our mobile applications, such as
Facebook, Yahoo, Google and Tencent. For our PC platform, our customers primarily comprise e-commerce companies and search
engines, such as Baidu, Alibaba, Sogou and Tencent, who pay us for referring user traffic to them from our platform. In 2013, 2014
and 2015, our five largest customers in aggregate contributed approximately 65.0%, 55.5% and 59.1% of our revenues, respectively.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Because a small number of
customers contribute to a significant portion of our revenues, our revenues and results of operations could be materially and adversely
affected if we were to lose a significant customer or a significant portion of its business.”
Marketing
We remain focused on driving organic growth for our products and services by improving user experience. We use social
networks, online campaigns and offline events to promote our brand, products and services. We promote our brand, products and
services across major social platforms such as Facebook, Weibo and Weixin. Over the past years, our creative team has produced a
number of product and branding videos for video sharing sites such as Youku and YouTube.
We closely track user growth in key countries across the United States, Europe, Latin America, and Southeast Asia. We
currently acquire users through continued online promotion and offline pre-installation. We also grow our traffic organically through
cross-promotion.
We have implemented a number of marketing initiatives designed to promote our brand among potential users and customers
globally. For example, we hosted an event called “Connect: Cross-Pacific Mobile Internet Conference” in San Francisco featuring
former U.S. vice-president Al Gore as a keynote speaker, which attracted over 900 attendees. We also held an international roadshow
featuring our Cheetah ad platform to introduce our advertising services to potential advertisers in some of our most important markets.
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Competition
We face intense competition in all lines of our business. In the mobile internet space, we generally compete with other mobile
application developers, including developers that offer products claiming to perform similar functions as our core applications, such as
Clean Master, CM Security, Battery Doctor, CM Launcher and Cheetah Browser. In the internet space, we mainly compete with
Qihoo in China’s internet security and anti-virus market. In addition, we compete with all major internet companies for user attention
and advertising spend.
Intellectual Property
Our trademarks, patents, copyrights, domain names, proprietary technology, know-how and other intellectual property are
vital to the success of our business. We protect our intellectual property rights through patent, trademark, copyright and trade secret
protection laws in the PRC, Hong Kong, Japan, the United States and other jurisdictions. In addition, we enter into confidentiality and
non-disclosure agreements with our employees and customers. The agreements we enter into with our employees also provide that all
software, inventions, developments, works of authorship and trade secrets created by them during the course of their employment are
our property.
Patents. As of March 31, 2016, we had 770 patents in China and three patents outside China relating to our software and
other proprietary technology. Of such 773 patents, 430 patents were either independently or jointly held by Zhuhai Juntian, Beijing
Security, Conew Network, Beijing Antutu and Guangzhou Network, our wholly-owned PRC subsidiaries, 211 patents were either
independently or jointly held by Beijing Mobile, Beijing Network, Suzhou Jiangduoduo, our VIEs and a VIE’s subsidiary, and 12
patents were jointly owned by our wholly-owned PRC subsidiaries and VIEs. The 773 patents will expire between April 2024 and
September 2033. In addition, as of March 31, 2016, we had a total of 1,673 patent applications in China and 148 patents applications
outside China. In relation to the proprietary technologies that are essential to the operations of our platform and important to our
business, Zhuhai Juntian, Beijing Security, Conew Network, Beijing Antutu and Guangzhou Network, our wholly-owned PRC
subsidiaries, had independently filed 1,430 patent applications, and Beijing Mobile, Beijing Network and Suzhou Jiangduoduo, our
VIEs and a VIE’s subsidiary, had independently or jointly filed 243 patent applications and had jointly filed an additional 122 patent
applications together with Zhuhai Juntian, Beijing Security, Conew Network, Beijing Antutu or Guangzhou Network. The patents that
are in the process of application by our VIEs and a VIE’s subsidiary will expire between May 2024 and March 2036, or 20 years after
the date of application.
Copyrights. As of March 31, 2016, we had registered 230 copyrights, including 210 software copyrights and 20 artwork
copyrights. In relation to our core proprietary technologies, Beijing Mobile, Beijing Network and Suzhou Jiangduoduo, our VIEs and
a VIE’s subsidiary, independently or jointly owned 30 software copyrights, and jointly owned an additional 41 software copyrights
together with Cheetah Technology Corporation Limited, Zhuhai Juntian, Beijing Security, Conew Network or Guangzhou Network.
All the software copyrights owned by our VIEs (excluding Beijing Conew) have been published between September 2009 and
June 2015. Software copyrights are protected until the end of the 50th calendar year starting from the date of first publication.
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Trademarks. As of March 31, 2016, we had registered 781 trademarks in China. In addition, we had filed 543 trademark
applications. We had 526 registered trademarks and had filed a total of 999 trademark applications outside China.
Domain names. As of March 31, 2016, we had registered 162 domain names, including www.cmcm.com, www.duba.com,
www.ijinshan.com, liebao.cn and 9724.com.
As our VIEs and a VIE’s subsidiary hold a significant amount of patents and copyrights essential to our business operations,
if we lose control over any of them or if any of them goes bankrupt, our business operations may be severely interrupted. See “Item 3.
Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We may lose the ability to use and enjoy vital assets
held by our VIEs and a VIE’s subsidiary if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.”
In addition, pursuant to the intellectual property transfer and license framework agreement that we entered into with Kingsoft
Corporation on April 1, 2014, Kingsoft Corporation transferred or licensed to us certain intellectual property, including software
copyrights, registered and pending trademarks and approved and pending patents, including Kingsoft and
, which are important to
the marketing of our applications. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—
Transactions and Agreements with Kingsoft Corporation and its Subsidiaries—Intellectual Property Licensing Arrangements.” We
also license related internet security products from third parties.
We have established policies and procedures to monitor certain key patents and trademarks for infringement or other
unauthorized use, and a team of dedicated employees from the intellectual property, legal and marketing groups conduct daily
searches and monitor our patents, as well as third party patents and distribution platforms, for infringing technology and software. See
“Item 3. Key Information—D. Risk Factors—Risks Relating to our Business and Industry—We may not be able to prevent
unauthorized use of our intellectual property, which could harm our business and competitive position” and “Item 3. Key
Information—D. Risk Factors—Risks Relating to our Business and Industry—We may be subject to intellectual property infringement
lawsuits which could result in our payment of substantial damages or license fees, disruption to our product and service offerings and
reputational harm.”
Regulations
As a significant portion of our business operations are conducted in China, we are materially affected by the laws and
regulations in China. This section summarizes the principal PRC laws and regulations relevant to our current businesses, including
online marketing, online game (including online mobile and PC games) operations, online lottery and advertising agency, as well as
foreign currency exchange and dividend distributions.
Regulations on Telecommunications Services and Foreign Ownership Restrictions
The Telecommunications Regulations, which became effective on September 25, 2000, are the core regulations on
telecommunications services in China. The Telecommunications Regulations set out basic guidelines on different types of
telecommunications business activities, including the distinction between “basic telecommunications services” and “value-added
telecommunications services.” According to the Catalog of Telecommunications Business (2003 Amendment), implemented on
April 1, 2003 and attached to the Telecommunications Regulations, internet information services are deemed a type of value-added
telecommunications services. The Telecommunications Regulations require the operators of value-added telecommunications services
to obtain value-added telecommunications business operation licenses from the Ministry of Industry and Information Technology, or
MIIT, or its provincial delegates prior to the commencement of such services.
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The Regulations on the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which
took effect on January 1, 2002 and were amended on September 10, 2008, are the major rules on foreign investment in
telecommunications companies in China. The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise
is prohibited from holding more than 50% of the equity interest in a foreign-invested enterprise that provides value-added
telecommunications services, including internet information services. Moreover, such foreign investor shall demonstrate a good track
record and experience in operating value-added telecommunications services when applying for the value-added telecommunications
business operation license from the MIIT. In June 2015, the MIIT relaxed control over foreign ownership in certain
telecommunication-related sectors, but in a very limited manner.
On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in Value-added
Telecommunications Services, or the MIIT Circular 2006, which requires that (a) foreign investors can only operate a
telecommunications business in China through establishing a telecommunications enterprise with a valid telecommunications business
operation license; (b) domestic license holders are prohibited from leasing, transferring or selling telecommunications business
operation licenses to foreign investors in any form, or providing any resources, sites or facilities to foreign investors to facilitate the
unlicensed operation of telecommunications business in China; (c) value-added telecommunications service providers or their
shareholders must directly own the domain names and registered trademarks they use in their daily operations; (d) each value-added
telecommunications service provider must have the necessary facilities for its approved business operations and maintain such
facilities in the geographic regions covered by its license; and (e) all value-added telecommunications service providers should
improve network and information security, enact relevant information safety administration regulations and set up emergency plans to
ensure network and information safety. The provincial communications administration bureaus, as local authorities in charge of
regulating telecommunications services, (a) are required to ensure that existing qualified value-added telecommunications service
providers will conduct a self-assessment of their compliance with the MIIT Circular 2006 and submit status reports to the MIIT before
November 1, 2006; and (b) may revoke the value-added telecommunications business operation licenses of those that fail to comply
with the above requirements or fail to rectify such non-compliance within specified time limits. Due to the lack of any additional
interpretation from the regulatory authorities, it remains unclear what impact MIIT Circular 2006 will have on us or the other PRC
internet companies with similar corporate and contractual structures.
To comply with such foreign ownership restrictions, we operate our businesses in China through Beijing Mobile and Beijing
Network, our VIEs, and Suzhou Jiangduoduo, a subsidiary of Beijing Mobile. Our VIEs are owned by PRC citizens. Each of these
entities is controlled by Beijing Security or Conew Network, our wholly-owned subsidiaries, through a series of contractual
arrangements. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Our VIEs.”
Based on our PRC legal counsel, Global Law Office’s understanding of the current PRC laws, rules and regulations, our corporate
structure complies with all applicable PRC laws, and does not violate, breach, contravene or circumvent or otherwise conflict with any
applicable PRC laws. However, we were further advised by our PRC legal counsel that there are substantial uncertainties with respect
to the interpretation and application of existing or future PRC laws and regulations and thus there is no assurance that Chinese
governmental authorities would take a view consistent with the opinions of our PRC legal counsel.
Internet Information Services
The Administrative Measures on Internet Information Services, or the ICP Measures, issued by the State Council on
September 25, 2000 and amended on January 8, 2011, regulate the provision of internet information services. According to the ICP
Measures, “internet information services” refer to services that provide internet information to online users, and are categorized as
either commercial services or non-commercial services. Pursuant to the ICP Measures, internet information commercial service
providers shall obtain an ICP license, a sub-category of the value-added telecommunications business operation license, from the
relevant local authorities before engaging in the provision of any commercial internet information services in China. In addition, if the
internet information services involve provision of news, publication, education, medicine, health, pharmaceuticals, medical equipment
and other services that statutorily require approvals from other additional governmental authorities, such approvals must be obtained
before applying for the ICP license.
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We currently, through Beijing Mobile and Beijing Network, our VIEs, hold valid ICP licenses, covering the provision of
internet information services, issued by the Beijing branch of the MIIT. Besides, the ICP Measures and other relevant measures also
ban the internet activities that constitute publication of any content that propagates obscenity, pornography, gambling and violence,
incite the commission of crimes or infringe upon the lawful rights and interests of third parties, among others. If an internet
information service provider detects information transmitted on their system that falls within the specifically prohibited scope, such
provider must terminate such transmission, delete such information immediately, keep records and report to the governmental
authorities in charge. Any provider’s violation of these prescriptions will lead to the revocation of its ICP license and, in serious cases,
the shutting down of its internet systems.
Internet Publication and Cultural Activities
The Tentative Measures for Internet Publication Administration, or Internet Publication Measures, were jointly promulgated
by the GAPP and the MIIT on June 27, 2002 and became effective on August 1, 2002. The Internet Publication Measures imposed a
license requirement for any company that engages in internet publishing, which means any act by an internet information service
provider to select, edit and process works (including books, newspaper, magazines, audio-video products, or edited literature, art or
works on natural science, social science, engineering etc.) produced by such provider or others, and make such works publicly
available on the internet or send such works to the end users through internet, so that the public can browse, read, use or download
such works. The Internet Publication Measures also require the professional editorial personnel of an Internet publishing entity to
examine the published content to ensure that it complies with applicable laws. Failure to do so may subject us to fines and other
penalties. The provision of online games is deemed an internet publication activity; therefore, an online game operator must (i) obtain
an Internet Publishing License so that it can directly offer its online games to the public in the PRC, or (ii) publish its online games
through a qualified press entity by entering into an entrustment agreement.
The Rules for the Administration of Electronic Publication, or the Electronic Publication Rules, was issued by the GAPP on
February 21, 2008 and became effective on April 15, 2008. Under the Electronic Publication Rules and other regulations issued by the
GAPP, online games are classified as a kind of electronic publication, and publishing of online games is required to be conducted by
licensed electronic publishing entities that have been issued standard publication codes.
In February 2016, the SARFT and the MIIT jointly promulgated the Administrative Measures on Internet Publication, which
took effect in March 2016 and superseded the Internet Publication Measures. The Administrative Measures on Internet Publication
further strengthened and expanded the supervision and management of internet publication activities.
In order to comply with these rules and regulations, we are in the process of applying for Internet Publishing Licenses for the
publication of online games on mobile and PC internet.
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On May 10, 2003, the Ministry of Culture, or the MOC, promulgated the Tentative Measures for the Administration of
Online Culture, or the Online Cultural Measures, which became effective on July 1, 2003 and subsequently amended on July 1, 2004
and on April 1, 2011 respectively. According to the Online Cultural Measures, internet information services providers engaging in
online cultural activities, which include the dissemination and operation of gaming products, shall either obtain a license from the
provincial branches of the MOC if such activities are commercial, or complete a filing of records with the provincial branches of the
MOC if such activities are non-commercial. Specifically, entities are required to obtain online cultural operating licenses from the
provincial branches of the MOC if they intend to commercially engage in any of the following activities: (a) production, duplication,
import, publishing or broadcasting of online cultural products; (b) publishing of online cultural products on the internet or
transmission thereof via the internet or mobile telecommunication networks to computers, fixed-line or mobile phones, television sets,
gaming consoles or Internet café for online users to browse, review, use or download such products; or (c) exhibitions or contests
related to online cultural products. If internet information services providers engage in commercial online cultural activities but fail to
obtain online cultural operating licenses, they may be ordered to shut down their websites and subject to fines and penalties of
confiscating illegal gain. On February 15, 2007, the MOC, the People’s Bank of China and other relevant government authorities
jointly issued the Notice on Internet Cafes. The Notice on Internet Cafes authorizes the People’s Bank of China to strengthen the
administration of virtual currency in web games in order to avoid any adverse impact on the economy and financial system. This
notice strictly limits the total amount of virtual currency that a web game operator can issue and an individual game player can
purchase. It also distinguishes virtual transactions from real transactions through electronic commerce and that specifies virtual
currency should only be used to purchase virtual items.
We, through Beijing Mobile and Beijing Network, have obtained the Internet Culture Operation Licenses from the Beijing
branch of the MOC, which collectively cover the business scope of operating gaming products through the internet (including the
issuance of virtual currency).
Regulations on Online Games and Foreign Ownership Restrictions
On June 3, 2010, the MOC promulgated the Provisional Administration Measures of Online Games, or the Online Game
Measures, which came into effect on August 1, 2010. The Online Game Measures governs the research, development and operation of
online games. It specifies that the MOC is responsible for the censorship of imported online games and the filing of records of
domestic online games. The procedures for the filing of records of domestic online games must be conducted with the MOC within 30
days after the commencement date of the online operation of such online games or the occurrence date of any material alteration of
such online games.
All operators of online games, or Online Game Business Operators, are required by the Online Game Measures to obtain
Internet Culture Operation Licenses. An Internet Culture Operation License is valid for three years and in case of renewal, the renewal
application should be submitted 30 days prior to the expiry date of such license. An Online Game Business Operator should request
the valid identity certificate of game users for registration, and notify the public 60 days ahead of the termination of any online game
operations or the transfer of online game operational rights. Online Game Business Operators are also prohibited from (a) setting
compulsory combat in the online games without game users’ consent; (b) advertising or promoting the online games in a way that
contains prohibited content, such as anything that compromises state security or divulges state secrets; and (c) inducing game users to
input legal currencies or virtual currencies to gain online game products or services, by way of random draw or other incidental
means. Pursuant to the Online Game Measures, the service agreements between the Online Game Business Operators and users shall
contain all the clauses of a standard online game service agreement, which was issued by MOC on July 29, 2010, with no conflicts
with the rest of clauses in such service agreements. We, through Beijing Mobile and Beijing Network, have obtained Internet Culture
Operation Licenses from the Beijing branch of the MOC, which collectively cover the business scope of operating gaming products
through the internet, including the issuance of virtual currency.
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On July 11, 2008, the General Office of the State Council promulgated the Regulation on Main Functions, Internal
Organization and Staffing of the GAPP, or the Regulation on Three Provisions. On September 7, 2009, the Central Organization
Establishment Commission issued the corresponding interpretations, or the Interpretations on Three Provisions. The Regulation on
Three Provisions stipulates that the MOC is authorized to regulate the online game industry, while the State Administration of Press,
Publication, Radio, Film and Television, or SARFT, is authorized to approve the publication of online games before their launch on
the internet. The Interpretation on Three Provisions further provides that once an online game is launched on the internet, it will be
completely under the administration of the MOC, and that if an online game is launched on the internet without obtaining prior
approval from the SARFT, the MOC, instead of the SARFT, is directly responsible for investigation and punishment. On July 11,
2013, the General Office of the State Council promulgated the Provisions on the Main Responsibilities, Internal Institutions and
Staffing of GAPP, or the Three-Decision Provisions, which reiterates the restrictions stipulated in the Regulation on Three Provisions.
On September 28, 2009, the GAPP, the National Copyright Administration, or the NCA, and the Office of the National
Working Group for Combating Pornography and Illegal Publications jointly issued a Notice on Implementing the Provisions of the
State Council on “Three Determinations” and the Relevant Explanations of the State Commission Office for Public Sector Reform and
Further Strengthening the Administration of the Pre-approval of Online Games and Examination and Approval of Imported Online
Games, or Circular 13. Circular 13 explicitly prohibits foreign investors from directly or indirectly engaging in online gaming business
in China, including through variable interest entity structures, or VIE Structures. Foreign investors are not allowed to indirectly
control or participate in PRC operating companies’ online games (including online mobile and PC games) operations, whether (a) by
establishing other joint ventures, entering into contractual arrangements or providing technical support for such operating companies;
or (b) in a disguised form such as by incorporating or directing user registration, user account management or game card consumption
into online gaming platforms that are ultimately controlled or owned by foreign companies. Violations of Circular 13 will result in
severe penalties. However, it is uncertain whether the above prohibitions imposed by SARFT are within its authorization as stipulated
in the Regulation on Three Provisions and its interpretations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
Doing Business in China—We may be adversely affected by the complexity of, and uncertainties and changes in, PRC regulation on
mobile and PC internet businesses and companies.”
Anti-fatigue Compliance System and Real-name Registration System
On April 15, 2007, in order to curb addictive online game-playing by minors, eight PRC government authorities, including
the GAPP, the Ministry of Education, the Ministry of Public Security and the MIIT, jointly issued a circular requiring the
implementation of an anti-fatigue compliance system and a real-name registration system by all PRC online games (including online
mobile and PC games) operators. Under the anti-fatigue compliance system, three hours or less of continuous playing by minors,
defined as game players under 18 years of age, is considered to be “healthy,” three to five hours is deemed “fatiguing,” and five hours
or more is deemed “unhealthy.” Game operators are required to reduce the value of in-game benefits to a game player by half if it
discovers that the amount of a time a game player spends online has reached the “fatiguing” level, and to zero in the case of the
“unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue compliance system, a real-name registration
system should be adopted to require online games (including online mobile and PC games) players to register their real identity
information before playing online games. Pursuant to the Notice on the Commencement of Anti-fatigue and Real-name Registration of
Online Games, issued by the relevant eight government authorities on July 1, 2011, which came into effect on October 1, 2011, online
games (including online mobile and PC games) operators must submit the identity information of game players to the National Citizen
Identity Information Center, a subordinate public institution of the Ministry of Public Security, for verification. In addition, according
to the Tentative Administrative Measures on Internet Lottery Sale promulgated by the PRC Ministry of Finance, or MOF, on
September 26, 2010, individuals who purchase lotteries through online systems must open an online account with their real names and
identity card numbers.
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Pursuant to the Administrative Measures on Usernames of Internet Users’ Accounts promulgated by the CAC, which became
effective in March 2015, users of internet information services are required to have their identity information authenticated in order to
register user accounts. We cannot assure you that PRC regulators would not require us to implement much stricter real-name
registration in the future. See “Item 3. Key Information—Risk Factors—Risks Relating to Doing Business in China—We may be
adversely affected by the complexity of, and uncertainties and changes in, PRC regulation on mobile and PC internet businesses and
companies.” In addition, we require our mobile and PC game developers to comply with the requirements under the PRC law, but we
cannot assure you that such commercial partners will effectively implement the anti-fatigue rules, and any noncompliance on the part
of such commercial partners may cause potential liabilities to us and in turn disrupt our operations. See “Item 3. Key Information—
Risk Factors—Risks Relating to Our Business and Industry—Non-compliance on the part of third parties with whom we conduct
business could disrupt our business and adversely affect our results of operations.”
Regulations on Computer Information System Security Special Products
Pursuant to the Provisions for Security Protection of Computer Information Systems promulgated by the State Council on
February 18, 1994, and the Measures for Administration of Detection and Sales Permits for Computer Information System Security
Special Products promulgated by the MPS on December 12, 1997, producers of security special products, including hardware and
software products, shall have such products detected and recognized by qualified institutions, and obtain a sales license. A new sales
license is required if an approved security product has any functional changes. “Security special products” refers to special hardware
and software that is used for protecting the security of computer information system. The valid term of each sales permit is two years
and the extension application shall be submitted to the competent branches of the Ministry of Public Security 30 days prior to the
expiration of such term.
We believe that we have obtained the applicable permits for offering Duba Anti-virus for download. However, as the
upgrades of our software become more frequent and such examination and approval by the MPS may be time-consuming, we may not
be able to obtain such permits for all upgrades in a timely manner, which may subject us to various penalties and adversely affect our
business and results of operations.
Regulations on Advertising Business
State Administration for Industry and Commerce, or the SAIC, is the primary governmental authority regulating advertising
activities in China. Regulations that apply to advertising business and foreign ownership in advertisement business primarily include:
(cid:120)
Foreign Investment Industrial Guidance Catalog, issued by the former National Development and Reform
Commission and other departments, the latest version of which went effective on April 10, 2015;
(cid:120) Advertisement Law of the People’s Republic of China, promulgated by the Standing Committee of the National
People’s Congress on October 27, 1994 and effective since February 1, 1995, the latest version of which became
effective on September 1, 2015;
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(cid:120) Administrative Regulations for Advertising, promulgated by the State Council on October 26, 1987 and effective
since December 1, 1987; and
(cid:120)
Implementation Rules for the Administrative Regulations for Advertising, promulgated by the State Council on
January 9, 1988 and amended on December 3, 1998, December 1, 2000 and November 30, 2004, respectively.
According to the above regulations, companies that engage in advertising activities including those conducted through the
internet must each obtain, from the SAIC or its local branches, a business license which specifically includes operating an advertising
business in its business scope. An enterprise engaging in advertising business within the specifications in its business scope does not
need to apply for an advertising operation license, provided that such enterprise is not a radio station, television station, newspaper or
magazine publisher or any other entity otherwise specified in the relevant laws or administrative regulations. Enterprises conducting
advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders
to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the
license is suspended or revoked due to a violation of any relevant laws or regulations.
PRC advertising laws and regulations set certain content requirements for advertisements in China, including, among other
things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving
obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisers, advertising agencies, and
advertising distributors are required to ensure that the content of the advertisements they prepare or distribute is true and in complete
compliance with applicable laws. In providing advertising services, advertising operators and advertising distributors must review the
supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with
applicable PRC laws and regulations. Prior to distributing advertisements that are subject to government censorship and approval,
advertising distributors are obligated to verify that such censorship has been performed and approval has been obtained. Violation of
these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading information. Where serious violations occur, the
SAIC or its local branches may revoke such offenders’ licenses or permits for their advertising business operations.
Intellectual Property Rights
Software Registration. The State Council and the NCA have promulgated various rules and regulations and rules relating to
protection of software in China, including the Regulations on Protection of Computer Software promulgated by State Council on
January 30, 2013 and effective since March 1, 2013, and the Measures for Registration of Copyright of Computer Software
promulgated by SARFT on February 20, 2002 and effective since the same date. According to these rules and regulations, software
owners, licensees and transferees may register their rights in software with the NCA or its local branches and obtain software
copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and
transferees are encouraged to go through the registration process and registered software rights may be entitled to better protections.
Patent. The National People’s Congress adopted the Patent Law of the People’s Republic of China in 1984 and amended it in
1992, 2000 and 2008, respectively. A patentable invention, utility model or design must meet three conditions: novelty, inventiveness
and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods
used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent
Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent
is valid for a twenty-year term for an invention and a ten-year term for a utility model or design, starting from the application date.
Except under certain specific circumstances provided by law, any third party user must obtain consent or a proper license from the
patent owner to use the patent, or else the use will constitute an infringement of the rights of the patent holder.
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Copyright. The Copyright Law of the People’s Republic of China, promulgated in 1990 and amended in 2001 and 2010, or
the Copyright Law, and its related implementing regulations, promulgated in 1991 and amended in 2013 are the principal laws and
regulations governing the copyright related matters. The amended Copyright Law covers internet activities, products disseminated
over the internet and software products, among the subjects entitled to copyright protections. Registration of copyright is voluntary,
and is administrated by the China Copyright Protection Center.
On December 20, 2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from
January 1, 2002, which are intended to protect the rights and interests of the computer software copyright holders and encourage the
development of software industry and information economy. In the PRC, software developed by PRC citizens, legal persons or other
organizations is automatically copyright protected immediately after its development, without an application or approval. Software
copyright may be registered with the designated agency and if registered, the certificate of registration issued by the software
registration agency will be the primary evidence of the ownership of the copyright and other registered matters. On February 20, 2002,
the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright Registration, which
outline the operational procedures for registration of software copyright, as well as registration of software copyright license and
transfer contracts. The Copyright Protection Center of China is mandated as the software registration agency under the regulations.
To address the problem of copyright infringement related to content posted or transmitted on the internet, the NCA and the
MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These
measures, which became effective on May 30, 2005, apply to acts of automatically providing services such as uploading, storing,
linking or searching works, audio or video products, or other contents through the internet based on the instructions of internet users
who publish contents on the internet, or the Internet Content Providers, without editing, amending or selecting any stored or
transmitted content.
On May 18, 2006, the State Council issued the Regulations on Protection of the Right of Communication through
Information Network, which took effect on July 1, 2006 and was amended on January 30, 2013.
Since 2005, the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns
specifically aimed to crack down on internet copyright infringement and piracy in China; these campaigns normally last for three to
four months every year. According to the Notice of 2013 Campaign to Crack Down on Internet Infringement and Piracy promulgated
by the NCA, the Ministry of Public Security and the MIIT on July 19, 2013, the 2013 campaign mainly targeted key internet
publications such as literature, music, movies and TV series, games, cartoons, software in key areas, to strengthen the supervision of
audio and video websites and e-commerce platforms and strictly crack down all kinds of internet piracy. The campaign started from
June 20 and lasted for four months.
Domain Name. In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth
detailed rules for registration of domain names, which were amended on May 29, 2012. On November 5, 2004, the MIIT promulgated
the Measures for Administration of Domain Names for the Chinese Internet, or the Domain Name Measures. The Domain Name
Measures regulate the registration of domain names, such as the first tier domain name “.cn.” In February 2006, the CNNIC issued the
Measures on Domain Name Dispute Resolution and relevant implementing rules, pursuant to which the CNNIC can authorize a
domain name dispute resolution institution to decide disputes.
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Trademark. The PRC Trademark Law, adopted in 1982 and amended in 1993, 2001 and 2013, with its implementation
rules adopted in 2002, protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a
protection term of ten years to registered trademarks. Trademark license agreements must be filed with the Trademark Office for
record.
Internet Infringement
On December 26, 2009, the Standing Committee of National People’s Congress promulgated the Tort Law of the People’s
Republic of China, or the Tort Law, which became effective on July 1, 2010. Under the Tort Law, an internet user or an internet
service provider that infringes upon the civil rights or interests of others through using the internet assumes tort liability. If an internet
user infringes upon the civil rights or interests of another through using the internet, the person being infringed upon has the right to
notify and request the internet service provider whose internet services are facilitating the infringement to take necessary measures
including the deletion, blocking or disconnection of an internet link. If, after being notified, the internet service provider fails to take
necessary measures in a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused
by its failure to act. According to the Tort Law, civil rights and interests include the personal rights and rights of property, such as the
right to life, right to health, right to name, right to reputation, right to honor, right of portraiture, right of privacy, right of marital
autonomy, right of guardianship, right to ownership, right to usufruct, right to security interests, copyright, patent right, exclusive right
to use trademarks, right to discovery, right to equity interests and right of heritage, among others.
Regulation of Internet Content
The PRC government has promulgated measures relating to internet content through a number of governmental agencies,
including the MIIT, the MOC and the SARFT. These measures specifically prohibit internet activities, such as the operation of online
games, that result in the publication of any content which is found to contain, among others, propagate obscenity, gambling or
violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise state security or secrets. If
an ICP license holder violates these measures, its ICP license may be revoked and its websites may be shut down by the relevant
government agencies.
Information Security and Censorship
Internet content in China is regulated and restricted from a state security standpoint. Internet companies in China are required
to complete security filing procedures and regularly update information security and censorship systems for their websites with local
public security bureau. The PRC Law on Preservation of State Secrets, which became effective on October 1, 2010 requires an
internet information services providers to immediately stop disseminating any information that may be deemed to be leaked state
secrets and to report such incidents in a timely manner to the state security and public security authorities. Failure to do so in a timely
and adequate manner may subject the internet information services providers to liability and certain penalties given by the Ministry of
State Security, the Ministry of Public Security and/or the MIIT or their respective local branches.
On December 13, 2005, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet
Security Protection, or the Internet Protection Measures, which took effect on March 1, 2006. The Internet Protection Measures
require all internet information services operators to take proper measures including anti-virus, data back-up and other related
measures, and keep records of certain information about their users (including user registration information, log-in and log-out
time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and
regulations.
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The National People’s Congress, China’s national legislative body, enacted the Decisions on the Maintenance of Internet
Security on December 28, 2000, pursuant to which the following types of conduct may subject persons to criminal liabilities in China:
(a) conduct that may pose a threat to security of internet, including gaining improper entry into a computer or system of strategic
importance, or disseminate virus and similar destructive programs; (b) conduct that may adversely affect national security and social
stability, including disseminate politically disruptive information and leaking state secrets; (c) conduct that may disrupt economic and
social administrative order, including spreading false commercial information and infringing upon intellectual property rights; and
(d) conduct that may violate the legal interests of any other person, including infringing upon privacy.
On December 11, 1997, the State Council approved the Measures for Administration of Security Protection of Internet and
Computer Information Network, and the measures took effect on December 30, 1997. The measures require internet service providers
to provide a monthly report of certain user information to the public security authority and assist the public security authority in
investigating incidents involving breach of laws and regulations on the Internet security. In 1997, the Ministry of Public Security
issued the Administration Measures on the Security Protection of Computer Information Network with Internationally Connections,
which prohibits using the internet in ways which, among others, result in a leakage of state secrets or a spread of socially destabilizing
content. The Ministry of Public Security has supervision and inspection powers in this regard, and relevant local security bureaus may
also have jurisdiction. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut
down its websites.
In February 2015, the CAC promulgated the Provisions on the Administration of Usernames of Internet Users’ Accounts,
which require internet operators like us to censor usernames, icons and profiles provided by internet users and to refuse registration of
non-compliant usernames or icons.
To comply with the above laws and regulations, we have implemented measures and regularly updated our information
security and content-filtering systems with newly issued content restrictions as required by the relevant laws and regulations.
Privacy Protection
On July 16, 2013, the MIIT promulgated the Regulations of Protection of Personal Information of Telecommunication Users
and Internet Users, which came into effect on September 1, 2013. The regulations do not prohibit internet content providers from
collecting and analyzing their users’ personal information if appropriate authorizations are obtained and if in a way that is legal,
reasonable and necessary. We require our users to accept a user agreement whereby they agree to provide certain personal information
to us. PRC laws and regulations prohibit internet content providers from disclosing any information transmitted by users through their
networks to any third parties without the users’ authorization unless otherwise permitted by law. If an internet content provider
violates these regulations, the MIIT or its local bureaus may impose penalties and the internet content provider may be liable for
damages caused to its users.
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. The core regulations governing foreign currency exchange in China are the Foreign Exchange
Administration Regulations, as amended in August 2008, or the FEA Regulations. Under the FEA Regulations, the Renminbi is freely
convertible for current account items subject to certain rules and procedures, including the distribution of dividends, and trade- and
service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of
investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange,
or the SAFE, is obtained and prior registration with the SAFE is made.
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On August 29, 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of
the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to
regulate the conversion of foreign currency into Renminbi by a foreign-invested enterprise by restricting the ways in which the
converted Renminbi may be used. Circular 142 stipulates that the registered capital of a foreign-invested enterprise that has been
settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the
applicable governmental authority and cannot be used for equity investments within the PRC. Meanwhile, the SAFE strengthened its
oversight of the flow and use of the registered capital of a foreign-invested enterprise settled in Renminbi converted from foreign
currencies. The use of such Renminbi capital may not be changed without the SAFE’s approval, and may not in any case be
repayment of Renminbi loans if the proceeds of such loans have not been used. Such requirements are also known as “payment-based
foreign currency settlement system” established under the SAFE Circular 142. Violations of Circular 142 may lead to severe penalties
including heavy fines. On November 9, 2010, the SAFE promulgated the Circular on Relevant Issues Concerning the Strengthening
the Administration of Foreign Exchange Operations, or Circular No. 59, and another supplemental circular on July 18, 2011, known as
Circular 88, which both tighten the examination of the authenticity of settlement of foreign currency capital or net proceeds from
overseas offerings like our initial public offering and requires that the settlement of net proceeds shall be in accordance with the
description in the prospectus in connection with the offering. The SAFE further promulgated the Circular on Further Clarification and
Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45, on
November 9, 2011, which expressly prohibits foreign-invested enterprises from using registered capital settled in Renminbi converted
from foreign currencies to grant loans through entrustment arrangements with a bank, to repay inter-company loans or repay bank
loans that have been transferred to a third party. As a result, Circular 142, Circular 59, Circular 88 and Circular 45 may significantly
limit our ability to transfer the net proceeds from our initial public offering to our other PRC subsidiaries through Beijing Kingsoft and
Conew Network, our wholly-owned subsidiaries in China, and thus may adversely affect our business expansion in China. We may
not be able to convert the net proceeds into Renminbi to invest in or acquire any other PRC companies, or establish other VIEs in the
PRC.
Furthermore, on April 8, 2015, the SAFE promulgated the Circular on the Reform of the Administrative Method of the
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 19, which will become effective as of June 1,
2015. This Circular 19 is to implement the so-called “conversion-at-will” of foreign currency in capital account, which was
established under a circular issued by the SAFE on August 4, 2014, or Circular 36, and was implemented in 16 designated industrial
parks as a reform pilot. The Circular 19 now implements the conversion-at-will of foreign currency settlement system nationally, and
it will abolish the application of Circular 142, Circular 88 and Circular 36 since June 1, 2015. Among other things, under Circular 19,
foreign-invested enterprises may either continue to follow the payment-based foreign currency settlement system or select to follow
the conversion-at-will of foreign currency settlement system. Where a foreign-invested enterprise follows the conversion-at-will of
foreign currency settlement system, it may convert any or 100% amount of the foreign currency in its capital account into RMB at any
time. The converted RMB will be kept in a designated account known as “Settled but Pending Payment Account”, and if the foreign-
invested enterprise needs to make further payment from such designated account, it still needs to provide supporting documents and
go through the review process with its bank. If under special circumstances the foreign-invested enterprise cannot provide supporting
documents in time, Circular 19 grants the banks the power to provide a grace period to the enterprise and make the payment before
receiving the supporting documents. The foreign-invested enterprise will then need to submit the supporting documents within 20
working days after payment. In addition, foreign-invested enterprises are now allowed to use their converted RMB to make equity
investments in China under Circular 19. However, foreign-invested enterprises are still required to use the converted RMB in the
designated account within their approved business scope under the principle of authenticity and self-use. It remains unclear whether a
common foreign-invested enterprise, other than such special types of enterprises as holding companies, venture capital or private
equity firms, can use the converted RMB in the designated account to make equity investments if equity investment or the like is not
within their approved business scope.
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Dividend Distribution. The Foreign Invested Enterprise Law, promulgated in 1986 and amended in 2000, and the
Implementation Rules of the Foreign Invested Enterprise Law, promulgated in 1990 and amended in 2001, are the key regulations
governing distribution of dividends of foreign-invested enterprises.
Under these regulations, a wholly foreign-invested enterprise in China, or a WFOE, may pay dividends only out of its
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a WFOE is
required to allocate at least 10% of its accumulated profits each year, if any, to statutory reserve funds unless its reserves have reached
50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends. The proportional ratio for
withdrawal of rewards and welfare funds for employees shall be determined at the discretion of the WFOE. Profits of a WFOE shall
not be distributed before the losses thereof before the previous accounting years have been made up. Any undistributed profit for the
previous accounting years may be distributed together with the distributable profit for the current accounting year.
Circular 37. In July 2014, the SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s
Investment and Financing and Round-trip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014, which
repealed SAFE Circular 75 effective from July 4, 2014. SAFE Circular 37 regulates foreign exchange matters in relation to the use of
special purpose vehicles, or SPVs, by PRC residents to seek offshore investment and financing and conduct round trip investment in
China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents
for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests,
while “round trip investment” refers to the direct investment in China by PRC residents through SPVs, namely, establishing foreign-
invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 requires that, before making
contribution into an SPV, PRC residents are required to complete foreign exchange registration with the SAFE or its local branch.
SAFE Circular 37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or
share incentive tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch.
PRC residents who have contributed legitimate domestic or offshore interests or assets to SPVs but have yet to obtain SAFE
registration before the implementation of the SAFE Circular 37 shall register their ownership interests or control in such SPVs with
the SAFE or its local branch. An amendment to the registration is required if there is a material change in the SPV registered, such as
any change of basic information (including change of such PRC residents, name and operation term), increases or decreases in
investment amount, transfers or exchanges of shares, or mergers or divisions. If the PRC residents fail to complete the SAFE
registration, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share
transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover,
failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws
for evasion of applicable foreign exchange restrictions.
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To our knowledge, Mr. Jun Lei, Mr. Sheng Fu and Mr. Ming Xu have completed foreign exchange registration in connection
with our financings and share transfer that were completed before the end of 2013, and Mr. Fu and Mr. Xu have completed foreign
exchange registration in connection with our initial public offering.
Stock Option Rules. The Administration Measures on Individual Foreign Exchange Control were promulgated by the
People’s Bank of China on December 25, 2006, and their Implementation Rules, issued by the SAFE on January 5, 2007, became
effective on February 1, 2007. Under these regulations, all foreign exchange matters involved in employee stock ownership plans and
stock option plans participated in by onshore individuals, among others, require approval from the SAFE or its authorized branch.
Furthermore, the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, were promulgated by the SAFE on February 15,
2012, that replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in
Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by the SAFE on March 28,
2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options by companies listed on overseas
stock exchanges based on the stock incentive plans are required to register with the SAFE or its local branches, and PRC residents
participating in the stock incentive plans of overseas listed companies shall retain a qualified PRC agent, which could be a PRC
subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the
SAFE registration and other procedures with respect to the stock incentive plans on behalf of these participants. Such participants
must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, purchase and
sale of corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required to amend the SAFE registration
with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agents or the overseas
entrusted 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 the employee share options. The foreign exchange proceeds received by the PRC
residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies
must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition,
the PRC agents shall file each quarter the form for record-filing of information of the Domestic Individuals Participating in the Stock
Incentive Plans of Overseas Listed Companies with the SAFE or its local branches.
We and our PRC citizen employees who have been granted share options, or PRC optionees, have become subject to the
Stock Option Rules after we became a public company in the United States. If we or our PRC optionees fail to comply with the
Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC optionees may be subject to fines and other legal
sanctions. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—PRC regulations relating to
offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute
profits to us or otherwise expose us to liability and penalties under PRC law.”
In addition, the State Administration for Taxation has issued circulars concerning employee share options, under which our
employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have
obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes
of those employees who exercise their share options. If our employees fail to pay or if we fail to withhold their income taxes as
required by relevant laws and regulations, we may face sanctions imposed by the PRC tax authorities or other PRC government
authorities.
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Regulation on Tax
PRC Enterprise Income Tax
The PRC enterprise income tax is calculated based on the taxable income determined under the applicable Enterprise Income
Tax Law, or the EIT Law and its implementation rules. On March 16, 2007, the National People’s Congress of China enacted the EIT
Law, which became effective on January 1, 2008. On December 6, 2007, the State Council promulgated the implementation rules to
the EIT Law, which also became effective on January 1, 2008. The EIT Law imposes a uniform enterprise income tax rate of 25% on
all resident enterprises in China, including foreign-invested enterprises and domestic enterprises, unless they qualify for certain
exceptions, and terminates most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and
regulations. According to the EIT Law and relevant regulations, subject to the approval of competent tax authorities, the income tax of
an enterprise that has been determined to be a high and new technology enterprise shall be reduced to a preferential rate of 15%. An
enterprise holding a valid certificate of new software enterprise is entitled to an exemption of enterprise income tax for the first two
years and a 50% reduction of enterprise income tax for the subsequent three years, commencing from the first profit-making year.
Moreover, under the EIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto
management bodies” located within China may be considered PRC resident enterprises and are therefore subject to PRC enterprise
income tax at the rate of 25% on their worldwide income. Though the implementation rules of the EIT Law define “de facto
management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and
business operations, personnel, accounting, properties, etc. of an enterprise,” the only detailed guidance currently available for the
definition of “de facto management body” as well as the determination of offshore incorporated PRC tax resident status and its
administration are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as
PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or Circular 82, and the Administrative Measures for
Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial) or SAT Bulletin No. 45, both issued
by the SAT, which provide guidance on the administration as well as determination of the tax residency status of a Chinese-controlled
offshore-incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreign country or territory and that
has a PRC company or PRC corporate group as its primary controlling shareholder.
According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by
virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only
if all of the following conditions set forth in Circular 82 are met:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the primary location of the day-to-day operational management and the places where they perform their duties are in
the PRC;
decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval of
organizations or personnel in the PRC;
the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions
are located or maintained in the PRC; and
50% or more of voting board members or senior executives habitually reside in the PRC.
In addition, Bulletin No. 45 provides clarification on the resident status determination, post-determination administration, and
competent tax authorities. It also specifies that when provided with a copy of PRC resident determination certificate from a resident
Chinese-controlled offshore-incorporated enterprise, the payer should not withhold 10% income tax when paying certain PRC-sourced
income such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated enterprise.
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In the event that we are considered a PRC resident enterprise, we would be subject to the PRC enterprise income tax at the
rate of 25% on our worldwide income.
In addition, although the EIT Law provides that dividend income between “qualified resident enterprises” is exempted
income, and the implementation rules refer to “qualified resident enterprises” as enterprises with “direct equity interest,” it is unclear
whether dividends we receive from our PRC subsidiaries are eligible for exemption.
According to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC
Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, with retroactive effect from
January 1, 2008, or SAT Circular 698, where a non-resident enterprise transfers the equity interests in a PRC resident enterprise
indirectly through a disposition of equity interests in an overseas holding company (other than a purchase and sale of shares issued by
a PRC resident enterprise in public securities market), PRC tax reporting and payment obligations may be triggered. On February 6,
2015, SAT issued a new guidance (Bulletin [2015] No. 7), or SAT Bulletin 7, on the PRC tax treatment of an indirect transfer of assets
by a non-resident enterprise. SAT Bulletin 7 is the latest regulatory instrument on indirect transfers, extending to not only the indirect
transfer of equity interests in PRC resident enterprises but also to assets attributed to an establishment in China and immovable
property in China or, collectively, Chinese Taxable Assets. According to SAT Circular 698 and SAT Bulletin 7, when a non-resident
enterprise engages in an indirect transfer of Chinese Taxable Assets, or Indirect Transfer, through an arrangement that does not have a
bona fide commercial purpose in order to avoid paying enterprise income tax, the transaction should be re-characterized as a direct
transfer of the Chinese assets and becomes taxable in China under the EIT Law, and gains derived from such indirect transfer may be
subject to the PRC withholding tax at a rate of up to 10%. In addition, transferees and transferors in such indirect transfers are subject
to tax withholding and reporting obligations, respectively. SAT Bulletin 7 does not replace SAT Circular 698 in its entirety. Instead, it
abolishes certain provisions and provides more comprehensive guidelines on a number of issues. Among other things, SAT Bulletin 7
substantially changes the reporting requirements in SAT Circular 698, provides more detailed guidance on how to determine a bona
fide commercial purpose, and also provides for a safe harbor for certain situations, including purchase and sale of shares in an offshore
listed enterprise on a public market by a non-resident enterprise, which may not be subject to the PRC enterprise income tax. See
“Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—We face uncertainties with respect to
indirect transfer of assets or equity interests in PRC resident enterprises by their non-PRC holding companies.”
Moreover, the PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax
return together with a report on transactions with its affiliates or related parties to the relevant tax authorities. These transactions may
be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are
conducted. In addition, on March 18, 2015, the State Administration of Taxation, or the SAT, issued the Bulletin Regarding the
Enterprise Income Tax Matter in Relation to Enterprise’s Payment of Fees to Overseas Affiliated Parties, or Bulletin 16, to further
regulate the transfer pricing issues in relation to the fees payment to affiliated parties. Among other things, Bulletin 16 makes it clear
that the fees paid to overseas affiliated parties in the following situations cannot be deducted from the taxable income when
determining a PRC company’s enterprise income tax: (a) the fees paid to an overseas affiliated party which has no substantial
operating activities; (b) royalties paid for intangible properties to which the affiliated party that charges the fees only has legal title but
has made no contribution to the creation of the value of such properties; and (c) the fees paid under arrangements made for listing or
financing purposes.
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We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our
VIEs were not on an arm’s length basis and therefore constituted improper transfer pricing arrangements. See “Item 3. Key
Information—D. Risk Factors—Risks Relating to Our Corporate Structure—Our contractual arrangements with our VIEs may result
in adverse tax consequences to us.”
PRC Business Tax and Value-added Tax (“VAT”)
On January 1, 2012, the Chinese State Council officially launched a pilot VAT reform program, or Pilot Program, applicable
to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Industries in
Shanghai included industries involving the leasing of tangible movable property, transportation services, research and development
and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification
and consulting services. Revenues generated by advertising services, a type of “cultural and creative services,” are subject to the VAT
tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing
launched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. On May 24,
2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot
Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the
Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion
of radio and television services. In August 2013, the Pilot Program was implemented throughout China. With respect to all of our PRC
entities for the period prior to the implementation of the Pilot Program, revenues from online marketing services, IVAS and
subscription of internet security services were subject to a 5% PRC business tax. All of our PRC entities were subject to the Pilot
Program as of December 31, 2015, or specifically, VAT of 6% in lieu of business tax for online marketing services, IVAS and
subscription of internet security services that are deemed by the relevant tax authorities to be within the pilot industries.
With respect to revenues from sales of goods, including sales of software products, licensing software without transferring its
copyright and sales of other goods, they are still subject to a 17% VAT pursuant to Chinese tax law. In addition, sales of self-
developed software products or license fees from self-developed software are entitled to a VAT refund with respect to the tax payment
over a tax rate of 3%.
Cultural Development Fee
According to applicable PRC tax regulations or rules, advertising service providers are generally required to pay a cultural
development fee at the rate of 3% on the revenues (a) which are generated from providing advertising services and (b) which are also
subject to the business tax or value-added tax after the Pilot Program.
Dividend Withholding Tax
Under the old EIT Law that was effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested
enterprises, such as dividends paid to us by Zhuhai Juntian and Conew Network, our PRC subsidiaries, were exempt from PRC
withholding tax. Pursuant to the EIT Law and its implementation rules, dividends from income generated after January 1, 2008 and
distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10%, unless non-resident enterprise investor’s
jurisdiction of incorporation has a tax treaty or arrangements with China that provides for a reduced withholding tax rate or an
exemption from withholding tax. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation.”
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As uncertainties remain regarding the interpretation and implementation of the EIT Law and its implementation rules, we
cannot assure you that, if we are deemed a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders
and ADS holders would not be subject to any PRC withholding tax. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to Doing Business in China—Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise,” which
could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations
and the value of your investment.”
Labor Laws and Social Insurance
The principal laws that govern employment include:
(cid:120)
(cid:120)
(cid:120)
Labor Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s
Congress on July 5, 1994, effective since January 1, 1995 and amended on August 27, 2009;
Labor Contract Law of the People’s Republic of China, promulgated by the Standing Committee of the National
People’s Congress on June 29, 2007 and effective since January 1, 2008 and amended on December 28, 2012;
Implementation Rules of the PRC Labor Contract Law, promulgated by the State Council on September 18, 2008
and effective since September 18, 2008;
(cid:120) Work-related Injury Insurance Regulations, promulgated by the State Council on April 27, 2003 and effective since
January 1, 2004 and amended on December 20, 2010;
(cid:120)
(cid:120)
(cid:120)
Interim Provisions on Registration of Social Insurance, promulgated by the Ministry of Human Resources and
Social Security (formerly the Ministry of Labor and Social Security) on March 19, 1999 and effective since
March 19, 1999;
Interim Regulations on the Collection and Payment of Social Insurance Fees, promulgated by the State Council on
January 22, 1999 and effective since January 22, 1999; and
Social Insurance Law promulgated by the National People’s Congress on October 28, 2010, effective since July 1,
2011.
According to the Labor Law and Labor Contract Law, employers must execute written labor contracts with full-time
employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All
employers are required to establish a system for labor safety and workplace sanitation, strictly comply with state rules and standards
and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and the PRC Labor Law may result
in the imposition of fines and other administrative penalties. For serious violations, criminal liability may arise.
In addition, pursuant to the Social Insurance Law promulgated by the National People’s Congress on October 28, 2010,
which came into effect on July 1, 2011, employers in China are required to provide employees with welfare schemes covering pension
insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
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M&A Regulations and Overseas Listings
On August 8, 2006, six PRC governmental agencies jointly promulgated the Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the 2006 M&A Rules, which became effective on September 8, 2006 and amended on
June 22, 2009. The 2006 M&A Rules require offshore special purpose vehicles formed to pursue overseas listing of equity interests in
PRC companies and controlled directly or indirectly by PRC companies or individuals to obtain the approval of the Chinese Securities
Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on any stock
exchange overseas.
The application of the 2006 M&A Rules remains unclear. Based on the understanding on the current PRC laws, rules and
regulations and the 2006 M&A Rules of our PRC legal counsel, Global Law Office, prior approval from the CSRC is not required
under the 2006 M&A Rules for the listing and trading of the ADSs on NYSE because the CSRC approval requirement applies to SPVs
that acquired equity interests of any PRC company that are held by PRC companies or individuals controlling such SPV and seek
overseas listing, and our PRC subsidiaries were incorporated as wholly foreign-owned enterprises by means of direct investment
rather than by merger or acquisition by our company of the equity interest or assets of any “domestic company” as defined under the
2006 M&A Rules, and no provision in the 2006 M&A Rules classifies the contractual arrangements between our company, our PRC
subsidiaries and any of our VIEs, either by each agreement itself or taken as a whole, as a type of acquisition transaction falling under
the 2006 M&A Rules. However, as there has been no official interpretation or clarification of the 2006 M&A Rules, there is
uncertainty as to how this regulation will be interpreted or implemented.
Considering the uncertainties that exist with respect to the issuance of new laws, regulations or interpretation and
implementing rules, the opinion of Global Law Office, summarized above, is subject to change. If the CSRC or another PRC
regulatory agency subsequently determines that prior CSRC approval was required, we may face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies.
Regulations on Online Lottery Sales
The major rules and regulations currently in effect and applicable to online lottery sales include Regulation on
Administration of Lottery, promulgated by the State Council on May 4, 2009 and effective as of July 1, 2009, or the Lottery
Regulation, and the Tentative Administration Measures on Internet Lottery Sale, promulgated by the Ministry of Finance, or the MOF,
on September 26, 2010, or the Lottery Measures, and effective upon the promulgation. Moreover, on January 18, 2012, the
Implementation Rules of the Lottery Administration Regulations, or the Lottery Implementation Rules, were jointly issued by the
MOF, the PRC Ministry of Civil Affairs and the State General Administration of Sports and became effective as of March 1, 2012.
Pursuant to the Tentative Administration Measures on Internet Lottery Sale, lottery sales agents conducting sales online are required
to obtain an approval from the MOF and meet certain criteria, including, among others (i) having a minimum registered capital of
RMB50 million, (ii) adequate organizational, internal control and risk management systems, (iii) together with the senior
management, have no criminal or bad credit record within past five years, and (iv) having obtained an ICP license. Pursuant to the
Lottery Regulation and the Lottery Implementation Rules, welfare lotteries and sports lotteries sold in China must be issued by lottery
issuance authorities and sold through lottery sales offices established by provincial governments. The lottery issuance authorities and
lottery sales offices may authorize other entities or individuals as their lottery sales agents. The Lottery Implementation
Rules explicitly stipulate that the welfare lotteries and sports lotteries sold without the MOF’s approval and an authorization from a
lottery issuance authority or lottery sales office may be categorized as illegal lotteries. Therefore, in addition to MOF’s approval, the
Lottery Implementation Rules further request online lottery sales agents to obtain proper authorization from a lottery issuance
authority or lottery sales office to conduct lottery business. In December 2012, the MOF issued the Lottery Distribution and Sale
Administration Measures, which became effective on January 1, 2013. These new measures expressly allow qualified lottery sales
agents service providers cooperating with lottery issuance authorities or lottery sales offices that meet the eligibility criteria mentioned
above to engage in online lottery sales as approved by the MOF. However, there are no associated implementation rules. Lottery sales
agents and service providers will act as agents or cooperating entities for the relevant lottery issuance authorities and/or authorized
lottery sales offices and must enter into lottery agency agreements or cooperation agreements with the competent lottery issuance
authorities and/or authorized lottery sales offices before engaging in lottery sales on their behalf. On January 15, 2015, the MOF, the
State General Administration of Sports and the Ministry of Civil Affairs jointly issued the Notice on Issues Related to Self-Inspection
and Self-Remedy of Unauthorized Online Lottery Sales to order their provincial and municipal branches to conduct inspection and
take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes,
among other things, commercial contract arrangements, online lottery products, lottery sales data exchange, online lottery sales
channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery administration
centers. The Notice is aimed at sanctioning unauthorized online lottery sales. The provincial and municipal branches are required to
submit a formal report on the result of self-inspection and self-remedy by March 1, 2015 to the authorities for further review.
Furthermore, on April 3, 2015, eight competent government authorities, namely, the MOF, the Ministry of Public Security, the SAIC,
the MIIT, Ministry of Civil Affairs, People’s Bank of China, the General Administration of Sports of China and China Banking
Regulatory Commission, jointly released a public bulletin with regard to online lottery sales in China, or Bulletin 18. The Bulletin 18
mandates, among other things, that (i) all institutions, online entities, or individuals which provide unauthorized online lottery sales
services, either directly or through agents, shall immediately cease such services and all provincial governmental authorities of
finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions
according to relevant laws and regulations; and (iii) lottery issuance authorities that plans to sell lottery products online shall obtain a
consent from the Ministry of Civil Affairs or the General Administration of Sports of China in order to submit an application for
written approval by the MOF.
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C.
Organizational Structure
Foreign ownership of internet-based and mobile-based businesses is subject to significant restrictions under current PRC laws
and regulations. The PRC government regulates internet access, distribution of online information, online advertising, distribution and
operation of online games and online lottery services through strict business licensing requirements and other government regulations.
These laws and regulations also limit foreign ownership of PRC companies that provide internet information services to no more than
50%. In addition, foreign investors are prohibited from investing in or operating, among other things, any entities that operate internet
cultural activities such as online games.
As a Cayman Islands company, in order for us to be able to carry on our business in China, we conduct our operations in
China primarily through our VIEs including Beijing Mobile and Beijing Network and a subsidiary of Beijing Mobile. Each of Beijing
Mobile (which is owned as to 35% by Mr. Sheng Fu and 65% by Ms. Weiqin Qiu) and Beijing Network (which is owned as to 50% by
Mr. Ming Xu and 50% by Mr. Wei Liu) holds the requisite ICP licenses. We have been and are expected to continue to be dependent
on our VIEs to operate our business if the then PRC law does not allow us to directly operate such business in China. We believe that
under these contractual arrangements, we have sufficient control over our VIEs and their respective shareholders to renew, revise or
enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable us to continue
to operate our business in China validly and legally.
Our contractual arrangements with each of our VIEs and their shareholders enable us to:
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(cid:120)
(cid:120)
(cid:120)
exercise effective control over our VIEs and a VIE’s subsidiary;
receive substantially all of the economic benefits of our VIEs and a VIE’s subsidiary in consideration for the
services provided by Beijing Security and Conew Network, our wholly-owned subsidiaries in China; and
have an exclusive option to purchase all of the equity interests in our VIEs and a VIE’s subsidiary, when and to the
extent permitted under PRC law, regulations or legal proceedings.
The following diagram illustrates our corporate structure, including our significant subsidiaries, VIEs and a VIE’s subsidiary
as of the date of this annual report.
Notes:
(1) See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” for the other beneficial owners of our
company.
(2) We exercise effective control over Beijing Network through contractual arrangements with Beijing Network and Mr. Ming Xu
and Mr. Wei Liu, who owns 50% and 50% equity interests in Beijing Network, respectively. Beijing Network was previously
named as Beijing Kingsoft Network Technology Co., Ltd.
(3) We exercise effective control over Beijing Conew through contractual arrangements with Beijing Conew and Mr. Sheng Fu and
Mr. Ming Xu, who owns 62.73% and 37.27% equity interests in Beijing Conew, respectively. Beijing Conew has remained
dormant since October 2010.
(4) We exercise effective control over Beijing Mobile through contractual arrangements with Beijing Mobile and Mr. Sheng Fu and
Ms. Weiqin Qiu, who owns 35% and 65% equity interests in Beijing Mobile, respectively. Beijing Mobile was previously named
as Beike Internet (Beijing) Security Technology Co., Ltd.
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Pursuant to the latest version of Catalogue for the Guidance of Foreign Investment Industries, Zhuhai Juntian is currently
engaged in the business of (i) development of system software, which is an encouraged foreign investment industry, and (ii) sale of
system software, which is a permitted foreign investment industry.
Beijing Security is currently engaged in the business of technology promotion, technology development, technology service
and technology consultancy, sale of computers, software, auxiliary devices and electronic products, computer animation design,
investment consultancy and advertisement design, production, agency and publication, all of which are permitted foreign investment
industries under the latest version of Catalogue for the Guidance of Foreign Investment Industries.
Conew Network is currently engaged in the business of research and development of digital technology, telecommunication
technology and relevant products, self-technology transfer, technology service, technology consultancy and computer technology
training, sale of self-developed products, graphic design, business consultancy and investment consultancy, all of which are permitted
foreign investment industries under the latest version of Catalogue for the Guidance of Foreign Investment Industries.
Contractual Arrangements with Our VIEs
The following is a summary of the currently effective contracts among our subsidiary Beijing Security, our VIE Beijing
Mobile, and the shareholders of Beijing Mobile. We have entered into substantially similar contractual arrangements with our other
VIE, namely, Beijing Network.
Agreements that provide us with effective control over Beijing Mobile
Business operation agreement. Pursuant to the business operation agreement by and among Beijing Security, Beijing Mobile
and its shareholders, Beijing Mobile and its shareholders agreed to accept and follow Beijing Security’s suggestions on their daily
operations and financial management. The shareholders of Beijing Mobile must appoint candidates designated by Beijing Security to
its board of directors and appoint candidates designated by Beijing Security as senior executives of Beijing Mobile. In addition, the
shareholders of Beijing Mobile confirm, agree and jointly guarantee that Beijing Mobile shall not engage in any transaction that may
materially affect its assets, business, employment, obligations, rights or operations without the prior written consent of Beijing
Security. The shareholders of Beijing Mobile also agree to unconditionally pay or transfer to Beijing Security any bonus, dividends, or
any other profits or interests (in whatever form) that they are entitled to as shareholders of Beijing Mobile, and waives any
consideration connected therewith. The agreement has a term of ten years, unless terminated at an earlier date by Beijing Security.
Neither Beijing Mobile nor its shareholders may terminate this agreement.
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Shareholder voting proxy agreement. Under the shareholder voting proxy agreement by and among Beijing Security, Beijing
Mobile and its shareholders, each of Beijing Mobile’s shareholders irrevocably nominates, appoints and constitutes any person
designated by Beijing Security as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder
has in respect of its equity interests in Beijing Mobile (including but not limited to the voting rights and the right to nominate
executive directors of Beijing Mobile). This proxy agreement has a term of ten years unless terminated at an earlier date by a written
agreement among the signing parties. Unless Beijing Security notifies the other parties to this agreement not to renew this agreement,
the term of this agreement will automatically extend on a yearly basis.
Equity pledge agreement. Under the equity pledge agreement between Beijing Security, Beijing Mobile and its shareholders,
the shareholders of Beijing Mobile have pledged all of their respective equity interests in Beijing Mobile to Beijing Security to
guarantee (i) the performance of all the contractual obligations of Beijing Mobile and its shareholders under this agreement, the
exclusive technology development, support and consultancy agreement, business operation agreement, loan agreement, exclusive
equity option agreement, and the shareholder voting proxy agreement, and (ii) the repayment of all liabilities that may be incurred
under all of the aforementioned agreements. Beijing Security has the absolute right to appoint any attorney-in-fact to exercise its rights
and powers under this agreement. In the event of default, Beijing Security has the first priority to be compensated through the sale or
auction of the equity interests pledged. The shareholders of Beijing Mobile agreed to waive their dividend rights in relation to all of
the equity interests pledged until such pledge has been lawfully discharged. This pledge will remain effective until all the guaranteed
obligations have been performed or all the guaranteed liabilities have been repaid. We have completed the registration of equity
pledge relating to each of our VIEs with the relevant government authorities in China.
Agreement that transfers economic benefits to us
Exclusive technology development, support and consultancy agreement. Under the exclusive technology development,
support and consultancy agreement between Beijing Security and Beijing Mobile, Beijing Security has the exclusive right to provide
Beijing Mobile with services related to Beijing Mobile’s business, including but not limited to technology development, support and
consulting services. Beijing Security has the sole right to determine the service fees and settlement cycle, and the service fees shall in
no event be less than 30% of the pre-tax revenue of Beijing Mobile in relation to the relevant service. Beijing Security will exclusively
own any intellectual property arising from the performance of this agreement. This agreement will be effective unless terminated
according to the terms of the agreement or otherwise terminated by mutual agreement of the signing parties.
Agreements that provide us with the option to purchase the equity interest in Beijing Mobile
Loan agreements. Under the loan agreements by and among Beijing Security and the shareholders of Beijing Mobile, Beijing
Security will make interest-free loans in an aggregate amount of RMB7.2 million to the two individual shareholders of Beijing
Mobile, for the sole purpose of contributing to the registered capital of Beijing Mobile. The loans have no definite maturity date.
Beijing Security may request repayment at any time, and either shareholder of Beijing Mobile may offer to repay part or all of the loan
at any time. The shareholders of Beijing Mobile shall, subject to the PRC laws, repay the loans by transferring the equity interest they
hold in Beijing Mobile to Beijing Security or a third party that it designates.
Exclusive equity option agreement. Under the exclusive equity option agreement by and among Beijing Security, Beijing
Mobile and its shareholders, Beijing Security was granted an irrevocable exclusive option to acquire, or designate a third party to
acquire, all or part of the equity interest owned by the shareholders in Beijing Mobile at any time at an exercise price that is equal to
the minimum price permitted under the PRC laws. Any amount in excess of the corresponding loan amount shall be refunded by the
shareholders of Beijing Mobile to Beijing Security, or Beijing Security may deduct the excess amount from the consideration to be
paid. The agreement will remain effective until all the equity interests in Beijing Mobile has been lawfully transferred to Beijing
Security or a designated third party pursuant to the terms of this agreement.
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Financial support undertaking letter. Beijing Security has executed a financial support undertaking letter addressed to
Beijing Mobile, pursuant to which Beijing Security irrevocably undertakes to provide unlimited financial support to Beijing Mobile to
the extent permissible under the applicable PRC laws and regulations, regardless of whether Beijing Mobile has incurred an
operational loss. The form of financial support includes but is not limited to cash, entrusted loans and borrowings. Beijing Security
will not request repayment of any outstanding loans or borrowings from Beijing Mobile if Beijing Mobile or its shareholders do not
have sufficient funds or are unable to repay such loans or borrowings. The letter is effective from the date of full execution of the
other agreements in connection with the VIE structure until the earlier of (i) the date on which all of the equity interests of Beijing
Mobile have been acquired by Beijing Security or its designated representative(s), and (ii) the date on which Beijing Security in its
sole and absolute discretion unilaterally terminates this letter.
In addition to the above contracts, the spouses of certain shareholders of our VIEs have executed spousal consent letters.
Pursuant to the spousal consent letters, the spouses acknowledged that certain equity interests in the respective VIEs held by and
registered in the name of his or her spouse will be disposed of pursuant to relevant arrangements under the shareholder voting proxy
agreement, the exclusive equity option agreement, the equity pledge agreement and the loan agreement. These spouses undertake not
to take any action to interfere with the disposition of such equity interests, including, without limitation, claiming that such equity
interests constitute communal marital property.
As a result of these contractual arrangements, we are considered the primary beneficiary of the VIEs as we have the power to
direct activities of these entities and can receive substantially all economic interests in these entities even though we do not necessarily
receive all of the VIEs’ revenues. Accordingly, we treat them as our VIEs under U.S. GAAP and have consolidated the results of
operation of the VIEs and a VIE’s subsidiary in our consolidated financial statements in accordance with U.S. GAAP. The VIEs and a
VIE’s subsidiary together contributed 91.0%, 87.1% and 49.3% of our revenues for the years ended December 31, 2013, 2014 and
2015, respectively.
In the opinion of our PRC legal counsel, Global Law Office:
(cid:120)
(cid:120)
(cid:120)
the corporate structure of our PRC subsidiaries, VIEs and a VIE’s subsidiary does not result in any violation of all
existing PRC laws and regulations;
each of the VIE agreements among either Beijing Security or Conew Network, each of our VIEs and its respective
shareholders (as the case may be) governed by PRC law is valid and binding, and does not result in any violation of
PRC laws or regulations currently in effect; and
each of our PRC subsidiaries, VIEs and a VIE’s subsidiary has all necessary corporate power and authority to
conduct its business as described in its business scope under its business license. The business licenses of each of
our PRC subsidiaries, VIEs and a VIE’s subsidiary are in full force and effect. Each of our PRC subsidiaries, VIEs
and a VIE’s subsidiary is capable of suing and being sued and may be the subject of any legal proceedings in PRC
courts. To the best of our PRC legal counsel’s knowledge after due inquiries, none of our PRC subsidiaries, VIEs
and a VIE’s subsidiary or their respective assets is entitled to any immunity, on the grounds of sovereignty, from any
action, suit or other legal proceedings, or from enforcement, execution or attachment.
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We have been advised by our PRC legal counsel, Global Law Office, however, that there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory
authorities may take a view that is contrary to the above opinion 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 establish the structure for operating our business do not
comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe
penalties including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
Our Corporate Structure” for “—If the PRC government finds that the structure we have adopted for our business operations does not
comply with PRC governmental restrictions on foreign investment in internet businesses, or if these laws or regulations or
interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting
down of our platform and our business operations” and “—Substantial uncertainties exist with respect to the enactment timetable,
interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate
structure, corporate governance and business operations.”
D.
Property, Plants and Equipment
As of March 31, 2016, our principal executive offices were located on leased premises comprising approximately 30,000
square meters in Beijing, China. This facility accommodates our management headquarters, principal development, engineering, legal,
finance and administrative activities. We also have offices and research and development centers in Zhuhai, Guangzhou, Zhengzhou,
Suzhou, Chongqing and Hangzhou of China, and offices in Mexico, India, Indonesia, Russia, Hong Kong, Singapore, Brazil, Taiwan,
Japan and the United States.
Our servers are hosted in leased internet data centers in different areas of China as well as in other Asian countries, the
United States, Europe, Australia and Brazil. These data centers are primarily owned and maintained by third party data center
operators. We believe that our existing facilities are sufficient for our current needs and we will obtain additional facilities, principally
through leasing, to accommodate our future expansion plans.
Item 4A.
Unresolved Staff Comments
None.
Item 5.
Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon, and should be read in conjunction
with, our audited consolidated financial statements and the related notes included in this annual report. This report contains forward-
looking statements. See “Forward-Looking Statements.” In evaluating our business, you should carefully consider the information
provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and
financial performance are subject to substantial risks and uncertainties.
A.
Operating Results
Overview
We operate a platform that offers mobile and PC applications for our users and global content promotional channels for our
customers, both of which are powered by our proprietary cloud-based data analytics engines. Our mission critical applications,
including Clean Master, CM Security, Battery Doctor and Duba Anti-virus, help make the internet and mobile experience speedier,
simpler and safer for users worldwide.
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Although substantially all of our applications are free to our users, our large user base presents monetization opportunities for
us and our customers. We generate revenues from our online marketing services primarily by providing mobile advertising services to
our advertising customers worldwide, as well as selling advertisements and referring user traffic on our mobile and PC platforms. We
generated 81.7%, 75.0% and 88.0% of our revenues from online marketing services in 2013, 2014 and 2015, respectively. We also
generate revenues by providing internet value-added services, currently mainly from online games.
We have achieved significant growth in recent years. Our revenues increased from RMB749.9 million in 2013 to
RMB1,763.6 million in 2014, representing a 135.2% growth, and further to RMB3,684.4 million (US$568.8 million) in 2015,
representing a 108.9% growth. Our net income attributable to Cheetah Mobile shareholders increased from RMB62.0 million in 2013
to RMB67.9 million in 2014, representing a 9.6% growth, and further to RMB176.6 million (US$27.3 million) in 2015, representing a
159.9% growth.
We believe mobile presents massive opportunities and we have made significant investments in mobile internet to capitalize
on these opportunities. We had 635.5 million monthly active users in December 2015. Our mobile strategy has been focusing on the
development of applications for the Android platform. As of December 31, 2015, we had 26 core mobile applications for Android,
compared to 7 for iOS. Accordingly, the popularity of the Android ecosystem and the use of Android devices have, and will continue
to have, material impacts on our overall results of operations. Although we are still in the early stage of monetizing our mobile
applications, our revenues generated from our mobile applications have increased significantly, accounting for 7.4%, 26.4% and
66.0% of our total revenues in 2013, 2014 and 2015, respectively.
Our business has rapidly expanded internationally since we released our Clean Master overseas version in September 2012.
As of December 31, 2015, approximately 78.6% of our mobile monthly active users were from overseas markets, mostly the United
States, Europe and certain emerging markets, compared to 68.8% and 53.2% as of December 31, 2014 and 2013, respectively. Since
we began to monetize our overseas operations in the second quarter of 2014, overseas revenues have increased significantly,
accounting for 12.6% and 50.0% of our total revenues, and 47.7% and 75.7% of our mobile revenues for the years ended
December 31, 2014 and 2015, respectively. As we continue to deepen our global penetration and increase the level of monetization in
overseas markets, we expect that our overseas revenues will continue to increase and remain a major growth driver for both our
mobile and total revenues.
We have invested heavily in research and development and selling and marketing to grow our mobile business. Operating
expenses as a percentage of our revenues were 68.9%, 72.4% and 69.0% in 2013, 2014 and 2015, respectively. In 2016, we expect to
further increase our marketing spending to grow our user base and enhance user engagement. In addition, we expect to make further
investments in expanding our mobile business team to develop mobile applications, improving our data analytics capabilities and
expanding our mobile advertising business in the global market. Although we expect our operating expenses will continue to increase
in absolute amount in 2016, we expect to take a more balanced approach towards user acquisition and revenue growth, building a
profitable and sustainable growth model for the long term.
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Selected Statement of Operations Items
Revenues
We generate revenues from online marketing services, IVAS, and internet security services and others. The following table
sets forth the principal components of our revenues by amount and as a percentage of our revenues for the periods presented.
2013
2014
Year Ended December 31,
Online marketing services
IVAS
Internet security services and others
Revenues
Online Marketing Services
RMB
612,565
83,155
54,191
749,911
% of
Revenues
RMB
% of
Revenues
(in thousands, except percentages)
RMB
81.7
11.1
7.2
100.0
1,322,612
400,671
40,296
1,763,579
75.0
22.7
2.3
100.0
3,244,130
395,312
44,987
3,684,429
2015
US$
500,807
61,026
6,945
568,778
% of
Revenues
88.0
10.7
1.3
100.0
Revenues from our online marketing services accounted for 81.7%, 75.0%, and 88.0% of our revenues in 2013, 2014 and
2015, respectively. We generate online marketing revenues primarily by providing mobile advertising services to advertisers
worldwide, as well as referring user traffic and selling advertisements on our mobile and PC platforms. The fee arrangements
generally include cost per click, cost per installation, cost per activation and cost per sale that originate from our platform, and cost per
period. We believe that the most significant factors affecting revenues from online marketing include:
(cid:120) User base and user engagement. We believe a large, loyal and engaged user base would help us retain existing
customers and attract more customers and business partners seeking online marketing services and at the same time gives
us more pricing power. It also results in more user impressions, clicks, sales or other actions that generate more fees for
performance-based marketing. In particular, a large and engaged mobile user base is crucial for the long-term growth of
our online marketing services. We plan to introduce more products to increase our mobile users’ engagement and amount
of time spent on our products.
(cid:120)
(cid:120)
Revenue sharing and fee arrangements with our significant customers. A small number of customers have contributed a
majority of our online marketing service revenues. Changes in the revenue sharing or fee arrangements with these
significant customers may materially affect our online marketing services revenues. For example, changes from pay per
click to pay per sale arrangements may result in a smaller percentage of revenue-generating traffic. Likewise, changes in
the fee rate we receive per click or per sale may affect our online marketing services revenues. Although changes in the
revenue sharing and fee arrangements with our individual customer may affect our revenues positively or negatively, our
array of choices helps to increase our overall customer base and our ability to tailor fee arrangements to the needs of our
customers.
Ability to increase the number of advertisers engaging our online marketing services and business partners. Advertisers
purchase advertising services directly from us or through our partnering mobile advertising platforms. Our ability to
increase the number of advertisers engaging our online marketing services depends on whether we can provide integrated
marketing services and help the advertisers more precisely reach their targeted audience, the effectiveness of our direct
sales efforts, our ability to successfully acquire additional customer base through acquisition of complementary
businesses, and our ability to increase our range of cooperation with our partnering mobile advertising networks, such as
Facebook, Yahoo, Tencent and Google.
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Table of Contents
(cid:120) Optimal utilization of advertising inventory. Certain categories of customers are willing to offer higher rates for our
online marketing services due to the high return on investment they can achieve on our platform. Our ability to source
high quality customers within the appropriate categories that our users are interested in and our ability to optimize the
allocation of our advertising inventory to these customers can help improve our online marketing services revenues.
(cid:120)
Ability to provide targeted advertising. We believe that data analytics is a key factor affecting our online marketing
revenues. Data analytics enable us to map our users’ interests and distribute targeted advertising to our users. Our ability
to effectively conduct user profiling and provide targeted advertising affects advertising engagement and conversion,
which affects our online marketing revenues.
IVAS
Revenues from IVAS accounted for 11.1%, 22.7% and 10.7% of our revenues in 2013, 2014 and 2015, respectively. IVAS in
these periods mainly include publishing online games.
We believe that the most significant factors affecting our IVAS revenues include:
(cid:120)
Popularity of games on our platform. Our revenues from game publishing depend on our ability to select and
publish popular and engaging games. The popularity of the games we publish directly affects the number of users
we attract and the revenues generated from such games.
(cid:120) Game publishing arrangements. We have two types of game publishing arrangements. Under a joint operating
arrangement, we jointly operate games with game developers and publishers without paying license fees or incurring
significant promotional expenses. We share user payments with game developers and publishers. Under an exclusive
publishing arrangement, we pay royalty fees and upfront license fees to developers, share a portion of user payments
with certain publishers, and promote and operate the games at our own costs. The popularity of the games has a
larger impact in revenues for exclusive publishing arrangement as we bear higher risks and potentially receive
higher rewards under this arrangement.
(cid:120)
Number of paying users for games. Games published on our platform are free to play and we generate revenues from
users’ purchase of in-game virtual items. Revenues from online game publishing are affected by the number of
paying users.
Internet Security Services and Others
Revenues from internet security services and others accounted for 7.2%, 2.3% and 1.3% of our revenues in 2013, 2014 and
2015, respectively. Internet security services and others revenues mainly include subscription services such as game acceleration and
instant data recovery for our paying members, and license fees from Kingsoft Japan, which was one of Kingsoft Corporation’s
subsidiaries until it became our subsidiary in February 2016. In 2013, this revenue item also included revenues from enterprise
security services that were subsequently transferred from our company to an equity investee. We expect revenues from internet
security services to continue to decline as we continue to remodel our business into a mobile-oriented platform.
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Cost of Revenues
Cost of revenues primarily consist of bandwidth costs, server custody fees and depreciation of servers and other equipment
(collectively, bandwidth and IDC costs), traffic acquisition costs associated with our Cheetah ad platform, personnel costs, content and
channel costs, amortization of acquired intangible assets, cost of air purifiers and VAT, business tax, and related surcharges.
Bandwidth and IDC costs consist of fees that we pay to telecommunication carriers and other service providers for hosting
our servers at their internet data centers and purchasing bandwidth as well as depreciation of our servers and other equipment that are
directly related to our business operations and technical support. Bandwidth and IDC costs are affected by the amounts of our user
traffic worldwide and data analytics. We expect our bandwidth and IDC costs to increase as we expect our user traffic to continue to
grow and as we continue our efforts in improving data analytics.
Traffic acquisition costs represent the amounts paid or payable to third-party advertising publishers who distribute our
customers’ paid links through their advertisement products. We expect our traffic acquisition costs to increase as we continue to
expand our third-party advertising publishing business on the Cheetah ad platform.
Personnel costs include salaries and benefits, including share-based compensation, for our employees involved in the
operation of our online marketing business, game publishing business and maintenance of servers. We expect personnel costs to
increase as we hire additional operational employees in line with the expansion of our business.
Content and channel costs consist primarily of the fees shared by the third-party game developers, commission fees paid to
distribution platforms and payment channels, and amortization of license fees paid for exclusively licensed games. As we plan to
increasingly focus on advertising services, especially mobile advertising services, we expect that content and channel costs associated
with game publishing business will become a less significant component of cost of revenues.
Amortization of acquired intangible assets primarily represents amortization of intangible assets through acquisitions or
business combinations. As we continue to conduct business combinations and acquisitions, we expect that amortization of acquired
intangible assets will continue to increase.
Operating Income and Expenses
Our operating income and expenses consist of (i) research and development expenses, (ii) selling and marketing expenses and
(iii) general and administrative expenses, (iv) impairment of goodwill and intangible assets and (v) other operating income. The
following table sets forth the components of our operating income and expenses for the periods indicated, both in absolute amounts
and as percentages of our revenues.
2013
RMB
% of
Revenues
Year Ended December 31,
2014
% of
Revenues
RMB
RMB
(in thousands, except percentages)
2015
US$
% of
Revenues
Operating income and expenses
Research and development
Selling and marketing
General and administrative
Impairment of goodwill and
intangible assets
Other operating income
Total operating income and
expenses
(217,846)
(201,504)
(97,817)
(29.0)
(26.9)
(13.0)
(436,840)
(580,610)
(251,743)
—
—
—
—
(8,304)
—
(24.8)
(32.9)
(14.3)
(0.4)
—
(687,235)
(1,479,441)
(423,248)
(106,091)
(228,386)
(65,338)
(49,882)
97,468
(7,700)
15,046
(18.7)
(40.2)
(11.5)
(1.4)
2.6
(517,167)
(68.9)
(1,277,497)
(72.4)
(2,542,338)
(392,469)
(69.0)
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Research and Development Expenses. Research and development expenses consist primarily of salaries and benefits,
including share-based compensation expenses, for our research and development employees. These expenditures are generally
expensed as incurred. We expect our research and development expenses to increase as we continue to expand our research and
development team to develop better applications for our users and a sophisticated mobile advertising platform.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of general marketing and promotion
expenses and salaries and benefits, including share-based compensation expenses, related to personnel involved in our selling and
marketing efforts. We expect our selling and marketing expenses to increase significantly as we plan to expand our mobile business
and deepen our global penetration.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and benefits,
including share-based compensation expenses, related to our general and administrative personnel, professional service fees, and other
administrative expenses. We expect our general and administrative expenses to increase as our business grows and as we incur
increased expenses related to complying with our reporting obligations under the U.S. securities laws as a public company.
Impairment of Goodwill and Intangible Assets. Impairment of goodwill and intangible assets consist primarily of impairment
of goodwill associated with business acquisition and intangible assets relating to our licensed games.
Other Operating Income. Other operating income consist primarily of government grants, subsidies and financial incentives
that we received in connection with our operations not related to research and development projects.
Taxation
Taxation in Different Jurisdictions
Cayman Islands. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income,
gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments
executed in, or after execution brought within the jurisdiction of, the Cayman Islands. Additionally, upon payments of dividends by
our company to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands. We are not subject to income or capital gain tax under the current laws of the British Virgin Islands.
Additionally, the British Virgin Islands do not impose a withholding tax on dividends.
United States. Our subsidiaries incorporated in the United States were subject to federal income tax rate of 35% for the years
ended December 31, 2013, 2014 and 2015.
Hong Kong. Our subsidiaries incorporated in Hong Kong were subject to Hong Kong profits tax rate of 16.5% for the years
ended December 31, 2013, 2014 and 2015.
Singapore. Our subsidiary incorporated in Singapore is subject to corporate income tax rate of 17%. In 2015, our subsidiary
in Singapore has obtained the Development and Expansion Incentive from the Singapore Economic Development Board, and will be
subject to 5% corporate income tax rate on qualifying income from 2016 to 2025.
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France. Our subsidiary incorporated in France is subject to corporate tax rate of 33.33%.
United Kingdom. Our subsidiary incorporated in the United Kingdom is subject to corporate income tax rate of 20%.
PRC.
Enterprise income tax. Our subsidiaries, VIEs and a VIE’s subsidiary are subject to the statutory rate of 25% in accordance
with the EIT Law, with exceptions for certain preferential tax treatments. Under relevant government policies, enterprises qualified as
“new software enterprise” are entitled to a two-year exemption and three-year 50% reduction on enterprise income tax commencing
from the first profit-making year. Enterprises qualified as “high and new technology enterprise” are entitled to a preferential rate of
15%. A PRC subsidiary and two of our VIEs, including Beijing Mobile, Beijing Network and Conew Network, are qualified as “new
software enterprises.” In addition, some of our PRC subsidiaries and VIEs, including Zhuhai Juntian, Beijing Security, Beijing
Mobile, Beijing Network and Conew Network, have obtained “high and new technology enterprise” certificates. Zhuhai Juntian was
eligible for a preferential tax rate of 12.5%, 15% and 15% for the years ended December 31, 2013, 2014 and 2015, respectively.
Beijing Security was eligible for a preferential tax rate of 12.5%, 12.5% and 15% for the years ended December 31, 2013, 2014 and
2015, respectively. Each of Beijing Mobile and Conew Network was eligible for a preferential tax rate of 0%, 0% and 12.5% for the
years ended December 31, 2013, 2014 and 2015, respectively. Beijing Network was still in a loss position for the years ended
December 31, 2013, 2014 and 2015, and will be eligible for a preferential tax rate of 0% commencing from its first profit-making
year. Our remaining subsidiaries, a VIE and a VIE’s subsidiary were subject to enterprise income tax at a rate of 25% for the years
ended December 31, 2013, 2014 and 2015.
Withholding tax. Under the EIT Law and its implementation rules, dividends, interests, rent or royalties payable by a foreign-
invested enterprise, such as our PRC subsidiaries, to any of its non-resident enterprise investors, and proceeds from any such non-
resident enterprise investor’s disposition of assets (after deducting the net value of such assets) shall be subject to 10% EIT, namely
withholding tax, unless non-resident enterprise investor’s jurisdiction of incorporation has a tax treaty or arrangements with China that
provides for a reduced withholding tax rate or an exemption from withholding tax. The Cayman Islands, where our company is
incorporated, and the British Virgin Islands, where our subsidiary Conew.com Corporation was incorporated, do not have such tax
treaties with China. None of our U.S. subsidiaries is an immediate holding company of our PRC subsidiaries. Under the Arrangement
Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital, the dividend withholding tax rate may be reduced to 5%, if a Hong Kong
resident enterprise that receives a dividend is considered a non-PRC tax resident enterprise and holds at least 25% of the equity
interests in the PRC enterprise distributing the dividends, subject to approval of the PRC local tax authority. However, if the Hong
Kong resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such
dividends may remain subject to withholding tax at a rate of 10%. Accordingly, our Hong Kong subsidiaries may be able to enjoy the
5% withholding tax rate for the dividends they receive from our PRC subsidiaries if they satisfy the relevant conditions under tax
rules and regulations, and obtain the approvals as required.
PRC business tax and VAT. On January 1, 2012, the Chinese State Council officially launched a pilot VAT reform program,
or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business
tax. The Pilot Program imposes VAT in lieu of business tax for certain “modern service industries” in certain regions and eventually
expands to nation-wide in August 2013. According to the implementation circulars released by the Ministry of Finance and the State
Administration of Taxation on the Pilot Program, the “modern service industries” include industries involving the leasing of tangible
movable property, research and development and technical services, information technology services, cultural and creative services,
logistics and ancillary services, certification and consulting services, and radio and television services. With respect to all of our PRC
entities for the period prior to the implementation of the Pilot Program, revenues from online marketing services, IVAS and
subscription of internet security services were subject to a 5% PRC business tax. All of our PRC entities were subject to the Pilot
Program as of December 31, 2014 and 2015, or specifically, VAT of 6% in lieu of business tax for online marketing services, IVAS
and subscription of internet security services that are deemed by the relevant tax authorities to be within the pilot industries. In
addition, cultural business construction fee is imposed at the rate of 3% on revenues derived from our online marketing services.
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With respect to revenues from sales of goods, including sales of software products, licensing software without transferring its
copyright and sales of other goods, they are still subject to a 17% VAT pursuant to Chinese tax law. In addition, sales of self-
developed software products or license fees from self-developed software are entitled to a VAT refund with respect to the tax payment
over a tax rate of 3%. With the adoption of the Pilot Program, our revenues subject to VAT payable on goods sold or taxable services
provided by a general VAT taxpayer for a taxable period is the net balance of the output VAT for the period after crediting the input
VAT for the period. Hence, the amount of VAT payable does not result directly from output VAT generated from goods sold or
taxable services provided. Therefore, we have adopted the net presentation of VAT.
Effect of Different Tax Rates in Different Jurisdictions
The following table sets forth our income (loss) before income tax and the effect of differing tax rates in different
jurisdictions on our income tax expenses in each applicable jurisdiction, for the years ended December 31, 2013, 2014 and 2015.
2013
RMB
Year Ended December 31,
2014
RMB
RMB
(in thousands)
2015
US$
Cayman
Islands
Income (loss) before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at Cayman Islands
statutory tax rate of 0%
Effect of differing tax rates in different jurisdictions
Income (loss) before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the U.S. statutory
USA
tax rate of 35%
Effect of differing tax rates in different jurisdictions
Hong
Kong
Income (loss) before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the Hong Kong
statutory tax rate of 16.5%
Effect of differing tax rates in different jurisdictions
Income before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the PRC statutory
PRC
tax rate of 25%
Effect of differing tax rates in different jurisdictions
Loss before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the French statutory
tax rate of 33.33%
Effect of differing tax rates in different jurisdictions
Loss before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the statutory tax
rates of such other jurisdictions
Effect of differing tax rates in different jurisdictions
France
Others
Total
(13,903)
(30,183)
(3,476)
(7,546)
—
7,546
52,834
13,209
—
(13,209)
918
(1)
(8,393)
230
322
92
(2,098)
(2,937)
(839)
—
3,476
(5,897)
(1,474)
(2,064)
(590)
6,346
1,586
1,047
(539)
(98,381)
75,040
11,584
(24,595)
18,760
(16,233)
8,362
12,382
(6,378)
2,896
1,911
(985)
124,154
218,060
154,095
23,788
31,039
31,039
—
54,515
54,515
—
—
—
—
—
(12)
(3)
—
3
—
—
—
—
490
123
—
(123)
38,524
38,524
—
(38,114)
(9,529)
(12,703)
(3,174)
(4,087)
(1,022)
(706)
316
8,156
2,039
—
(2,039)
(1,296)
(324)
(453)
(129)
5,947
5,947
—
(5,884)
(1,471)
(1,961)
(490)
(631)
(158)
(109)
49
35,717
8,929
5,335
(3,594)
Income before income tax
Income tax expenses computed at the PRC statutory
tax rate of 25%
Income tax expenses computed at the statutory tax rate
of different jurisdictions
Effect of differing tax rates in different jurisdictions
110,688
90,904
231,375
27,672
30,022
2,350
22,727
38,604
15,877
57,844
34,560
(23,284)
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Notes:
(1)
Our U.S. subsidiary, Cheetah Mobile America, Inc., recorded an income before tax for the year ended December 31, 2014 but did
not have assessable profit for the same year due to losses carried forward from previous years.
The comparatives were revised to conform with the current year presentation. The revised presentation in prior years had no
impact on any line items within the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of
comprehensive income, cash flows and shareholders’ equity for the years ended December 31, 2013 and 2014.
The following table sets forth the effect of tax holiday and preferential tax treatments on our income tax expenses in each
applicable jurisdiction for the years ended December 31, 2013, 2014 and 2015.
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Table of Contents
Cayman Islands
USA
Hong Kong
(1)
PRC
France
Others
Total
Note:
2013
RMB
—
—
—
(4,885)
—
—
(4,885)
Year Ended December 31,
2014
RMB
RMB
(In thousands)
2015
US$
—
—
—
(54,944)
—
—
(54,944)
—
—
—
(35,434)
—
—
(35,434)
—
—
—
(5,470)
—
—
(5,470)
(1)
Certain of our PRC entities are entitled to tax holiday as new software development enterprise or to the preferential income tax rate
of 15% as high new technology enterprise. For details, see “Item 5. Operating and Financial Review and Prospects—A. Operating
Results—Taxation—Taxation in Different Jurisdictions—PRC—Enterprise Income Tax.”
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. The period-to-
period comparisons of results of operations should not be relied upon as indicative of our future performance.
Consolidated Statements of Comprehensive Income
(Loss) Data:
Revenues
Online marketing services
Internet value-added services
Internet security services and others
(1)
Cost of revenues
Gross profit
Operating income and expenses
(1)
Research and development
Selling and marketing
General and administrative
Impairment of goodwill and intangible assets
Other operating income
(1)
(1)
Operating profit
Other income (expenses)
Interest income, net
Changes in fair value of redemption right and put
options granted
Settlement and changes in fair value of contingent
consideration
Foreign exchange gain (loss), net
Impairment of investments
Losses from equity method investments
Other income, net
Income before taxes
Income tax expenses
Net income
Less: net loss attributable to noncontrolling interests
Net income attributable to Cheetah Mobile Inc.
2013
RMB
Year Ended December 31,
2014
RMB
RMB
2015
US$
(In thousands except for shares, per share and per ADS data)
749,911
612,565
83,155
54,191
(140,526)
609,385
(217,846)
(201,504)
(97,817)
—
—
(517,167)
92,218
7,077
11,146
(1,067)
920
—
(1,849)
2,243
110,688
(48,670)
62,018
—
62,018
1,763,579
1,322,612
400,671
40,296
(403,412)
1,360,167
(436,840)
(580,610)
(251,743)
(8,304)
—
(1,277,497)
82,670
28,216
4,375
(13,749)
16
(9,136)
(5,447)
3,959
90,904
(23,993)
66,911
(1,030)
67,941
3,684,429
3,244,130
395,312
44,987
(935,154)
2,749,275
(687,235)
(1,479,441)
(423,248)
(49,882)
97,468
(2,542,338)
206,937
14,545
22
7,010
(250)
(34,728)
(9,334)
47,173
231,375
(60,097)
171,278
(5,318)
176,596
568,778
500,807
61,026
6,945
(144,363)
424,415
(106,091)
(228,386)
(65,338)
(7,700)
15,046
(392,469)
31,946
2,245
3
1,082
(39)
(5,361)
(1,441)
7,282
35,717
(9,277)
26,440
(821)
27,261
(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:
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Table of Contents
Cost of revenues
Research and development
Selling and marketing
General and administrative
Total
2013
RMB
10
14,520
2,835
20,031
37,396
Year Ended December 31,
2014
RMB
RMB
2015
US$
(In thousands)
1,393
51,176
7,407
113,298
173,274
1,523
142,682
18,068
153,134
315,407
235
22,026
2,789
23,640
48,690
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues. Our revenues increased by 108.9% from RMB1,763.6 million in 2014 to RMB3,684.4 million (US$568.8 million)
in 2015. This increase was primarily due to increases in revenues from online marketing services and internet security services and
others, partially offset by a decrease in revenues from IVAS. Our mobile revenues increased from RMB465.0 million in 2014 to
RMB2,433.2 million (US$375.6 million) in 2015, primarily due to our expanded mobile user base and an increased demand for our
mobile advertising services in overseas markets and China.
Online marketing services. Revenues from online marketing services increased by 145.3% from RMB1,322.6 million in 2014
to RMB3,244.1 million (US$500.8 million) in 2015. The increase was primarily due to the growth of our global mobile user base, and
increased demand from advertisers for our mobile advertising services worldwide. Our mobile advertising revenues increased by
621.5% from RMB313.0 million in 2014 to RMB2,243.1 million (US$346.3 million) in 2015. Mobile advertising revenues
represented 69.1% of online marketing revenues in 2015, compared to 23.7% in 2014.
IVAS. Revenues from IVAS was RMB395.3 million (US$61.0 million) in 2015, a 1.3% decrease from RMB400.7 million in
2014. The decrease was primarily due to the suspension of our online lottery operation in response to regulatory changes in China, and
moderating trends in web games business in China due to shift of user traffic from PC to mobile internet.
Internet security services and others. Revenues from internet security services and others increased by 11.6% from RMB40.3
million in 2014 to RMB45.0 million (US$6.9 million) in 2015. This increase was primarily due to an increase in revenues from the
sale of the Company’s air purifier product.
Cost of revenues. Our cost of revenues increased by 131.8% from RMB403.4 million in 2014 to RMB935.2 million
(US$144.4 million) in 2015. The increase in our cost of revenues was mainly due to an increase in traffic acquisition costs associated
with our third-party advertising publishing business on the Cheetah ad platform, an increase in the cost of sales of air purifiers, an
increase in bandwidth and internet data center (IDC) costs associated with increased user traffic worldwide and data analytics, and an
increase in amortization costs associated with acquired intangible assets.
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Gross profit. As a result of the foregoing, our gross profit increased by 102.1% from RMB1,360.2 million in 2014 to
RMB2,749.3 million (US$424.4 million) in 2015.
Gross margin. Our gross margin decreased from 77.1% for the year ended December 31, 2014 to 74.6% for the year ended
December 31, 2015, primarily due to the traffic acquisition cost associated with our third-party advertising publishing business on the
Cheetah ad platform, which has a lower gross margin compared to our other businesses.
Operating expenses. Our operating expenses increased by 99.0% from RMB1,277.5 million in 2014 to RMB2,542.3 million
(US$392.5 million) in 2015, primarily due to increases in selling and marketing expenses, research and development expenses and
general and administrative expenses.
Research and development expenses. Our research and development expenses increased by 57.3% from RMB436.8 million in
2014 to RMB687.2 million (US$106.1 million) in 2015. This increase was primarily due to an increase in the number of research and
development personnel from 1,268 as of December 31, 2014 to 1,405 as of December 31, 2015 mainly to further develop our mobile
applications, strengthen our data analytics capabilities and enhance our mobile advertising technology. The increase was also due to an
increase in share-based compensation expenses included in our research and development expenses from RMB51.2 million in 2014 to
RMB142.7 million (US$22.0 million) in 2015.
Selling and marketing expenses. Our selling and marketing expenses increased by 154.8% from RMB580.6 million in 2014
to RMB1,479.4 million (US$228.4 million) in 2015. The increase was primarily due to an increased spending on marketing and
promotional activities to expand our global mobile user base. The increase was also due to an increase in the number of sales and
marketing personnel from 211 as of December 31, 2014 to 446 as of December 31, 2015 mainly to further enhance our mobile
monetization capabilities and global sales efforts.
General and administrative expenses. Our general and administrative expenses increased by 68.1% from RMB251.7 million
in 2014 to RMB423.2 million (US$65.3 million) in 2015. This increase was primarily due to an increase in share-based compensation
expenses from RMB113.3 million in 2014 to RMB153.1 million (US$23.6 million) in 2015, an increase in the number of general and
administrative personnel from 153 as of December 31, 2014 to 201 as of December 31, 2015, and an increase in professional service
fees.
Impairment of goodwill and intangible assets. We recognized an impairment loss of goodwill and intangible assets of
RMB49.9 million (US$7.7 million) in 2015, which was primarily associated with the suspension of our online lottery business in 2015
in response to regulatory changes in China and the impairment of licensed games. We recognized an impairment loss of goodwill and
intangible assets of RMB8.3 million in 2014, which was primarily due to impairment of licensed games.
Other operating income. Other operating income was RMB97.5 million (US$15.0 million) in 2015, which primarily
consisted of government grants, subsidies and financial incentives that we received in connection with our operations not related to
research and development projects.
Operating profit. As a result of the foregoing, our operating profit increased 150.3% from RMB82.7 million in 2014 to
RMB206.9 million (US$31.9 million) in 2015.
Operating margin. Our operating margin increased from 4.7% in 2014 to 5.6% in 2015.
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Income tax expense. Our income tax expense increased from RMB24.0 million in 2014 to RMB60.1 million (US$9.3
million) in 2015, primarily due to changes in preferential tax rates applicable to some of our PRC subsidiaries and increase of profit
before income tax.
Net income attributable to Cheetah Mobile shareholders. Primarily as a result of the foregoing, our net income attributable
to Cheetah Mobile shareholders increased from RMB67.9 million in 2014 to RMB176.6 million (US$27.3 million) in 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues. Our revenues increased by 135.2% from RMB749.9 million in 2013 to RMB1,763.6 million in 2014. This
increase was primarily due to the increase in revenues from online marketing services and IVAS, partially offset by decrease in
internet security services and others. Our mobile revenues increased from RMB55.3 million in 2013 to RMB465.0 million in 2014,
resulting from the increased demand for our mobile advertising services in China and overseas markets, our expanded mobile user
base and the growth of our mobile game publishing business.
Online marketing services. Revenues from online marketing services increased by 115.9% from RMB612.6 million in 2013
to RMB1,322.6 million in 2014. This increase was primarily due to the growth of our user traffic and increased monetization of our
PC platform. The increase in revenues from online marketing services was also due to a significant growth of our mobile advertising
revenues from RMB40.0 million in 2013 to RMB313.0 million in 2014, driven by the increased acceptance of our mobile advertising
services in China and overseas markets, and increased mobile monetization.
IVAS. Revenues from IVAS was RMB400.7 million in 2014, a 381.8% increase from RMB83.2 million in 2013. The increase
was primarily due to an increase in the number of mobile and PC games that we published, and an increase in the number of monthly
paying users from 2013 to 2014.
Internet security services and others. Revenues from internet security services and others decreased by 25.6% from
RMB54.2 million in 2013 to RMB40.3 million in 2014. This decrease was primarily due to our ceasing to promote subscriptions
services to paying users in a strategic reorientation, resulting in a decrease in the number of paying customers.
Cost of revenues. Our cost of revenues increased by 187.1% from RMB140.5 million in 2013 to RMB403.4 million in 2014.
The increase in our cost of revenues was mainly due to increased content and channel costs associated with the growth of our mobile
game business, higher costs of value-added tax associated with the growth of our revenues, higher bandwidth and IDC costs due to
increased user traffic, and higher amortization costs due to newly acquired intangible assets related to business acquisitions.
Gross profit. As a result of the foregoing, our gross profit increased by 123.2% from RMB609.4 million in 2013 to
RMB1,360.2 million in 2014.
Gross margin. Our gross margin decreased from 81.3% for the year ended December 31, 2013 to 77.1% for the year ended
December 31, 2014, primarily due to increased revenue contribution from mobile games publishing, which has a lower margin, as
well as an increase in amortization of acquired intangible assets.
Operating expenses. Our operating expenses increased by 147.0% from RMB517.2 million for the year ended December 31,
2013 to RMB1,277.5 million for the year ended December 31, 2014, primarily due to increases in research and development expenses,
selling and marketing expenses and general and administrative expenses.
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Research and development expenses. Our research and development expenses increased by 100.5% from RMB217.8 million
in 2013 to RMB436.8 million in 2014. This increase was primarily due to our expanded team of research and development personnel,
increasing from 842 as of December 31, 2013 to 1,268 as of December 31, 2014 mainly to further develop our mobile applications.
The increase was also due to an increase in share-based compensation expenses included in our research and development expenses
from RMB14.5 million in 2013 to RMB51.2 million in 2014.
Selling and marketing expenses. Our selling and marketing expenses increased by 188.1% from RMB201.5 million in 2013
to RMB580.6 million in 2014. The increase was primarily due to an increased spending on marketing and promotional activities to
expand our global mobile user base. The increase was also due to our expanded team of sales and marketing personnel, which
increased from 81 as of December 31, 2013 to 221 as of December 31, 2014 mainly to further enhance our mobile monetization
capabilities and global sales efforts.
General and administrative expenses. Our general and administrative expenses increased by 165.9% from RMB97.8 million
in 2013 to RMB251.7 million in 2014. This increase was primarily due to an increase in share-based compensation expenses from
RMB20.0 million in 2013 to RMB113.3 million in 2014, an increase in professional service fees, and an increase in the headcount of
general and administrative personnel from 79 as of December 31, 2013 to 153 as of December 31, 2014.
Impairment of goodwill and intangible assets. We recognized an impairment loss of intangible assets of RMB8.3 million for
2014, which was related to impairment of licensed games.
Operating profit. As a result of the foregoing, our operating profit decreased from RMB92.2 million in 2013 to RMB82.7
million in 2014.
Operating margin. Our operating margin decreased from 12.3% in 2013 to 4.7% in 2014 primarily due to increases in share-
based compensation expenses, selling and marketing expenses and headcount increase.
Income tax expense. Our income tax expense decreased from RMB48.7 million in 2013 to RMB24.0 million in 2014,
primarily due to preferential tax treatment to a number of our PRC subsidiaries and VIEs, and a slowdown in the increase of the
unremitted retained earnings and reserves of our VIEs in 2014, resulting in a decrease in outside basis difference on investment in our
VIEs.
Net income attributable to Cheetah Mobile shareholders. Primarily as a result of the foregoing, our net income attributable
to Cheetah Mobile shareholders increased from RMB62.0 million in 2013 to RMB67.9 million in 2014.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations. According to the National
Bureau of Statistics of China, the consumer price index in China increased by 2.5%, 1.5% and 1.6% in 2013, 2014 and 2015,
respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance
that we will not be affected in the future by higher rates of inflation in China or elsewhere in the world.
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Critical Accounting Policies
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments,
estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information,
our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use
of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of
changes in our estimates.
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time such estimate is made and if different accounting estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated
financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue recognition
We generate revenues primarily through online marketing services, internet value-added services, and internet security
services and others. We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price
is fixed or determinable, and collectability is reasonably assured.
Online marketing services
Online marketing services contributed 81.7%, 75.0% and 88.0% of our revenues in 2013, 2014 and 2015, respectively. The
online marketing services are provided through our online platforms including duba.com and other websites, browsers, PC and mobile
applications, and to a lesser extent, on third-party advertising publishers’ websites or mobile applications. We have three general
pricing models for our advertising products: cost over a time period, cost for performance basis and cost per impression basis. For
advertising contracts over a time period, we generally recognize revenue ratably over the period the advertising is displayed. For
contracts that are charged on the cost for performance basis, we charge an agreed-upon fee to our customers determined based on the
effectiveness of advertising links, which is typically measured by clicks, transactions, installations, user registrations, and other
actions originating from our online platforms. For contracts that are charged on the cost per impression basis, we charge an agreed-
upon fee to our customers based on the number of impressions in the contracted period in which impressions are delivered.
Impressions are considered delivered when an advertisement is displayed to users. Online marketing services revenue charged on the
cost for performance basis and the cost per impression basis is generally recognized upon receiving monthly statements from our
customers either in the current month or in the following month in which the service is provided. For online marketing services
arrangement involving third-party advertising publishers’ websites or mobile publications, we recognize gross revenue for the amount
of fees received or receivable from customers as we are the primary obligor. Payments made to the third-party advertising publishers
are included in cost of revenues as traffic acquisition costs.
In addition, we provide advertising agency services by arranging advertisers to purchase various advertisement products from
certain online network, primarily Facebook and Google. We receive from the online network performance-based commissions, which
are determined based on a pre-specified percentage of the payment by the advertisers for the online network’s various advertisement
products. We act as an agent in the advertising agency arrangement as we are neither the primary obligor to provide advertisement
product nor to assume inventory risk. Revenue from advertising agency services is recognized on a net basis when the advertisement
products are delivered by the online network.
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IVAS
We enter into agreements with online and mobile game developers to provide online and mobile distribution and payment
collection services, in order for game players to purchase and recharge virtual currencies used in the online and mobile games. Most
games are developed and hosted by game developers and accessed by game players through links on our online, mobile platform or
third-party mobile platforms. The payment collection services are mainly provided through third-party professional payment and
settlement institutions. We generally charge commission as a percentage of the gross proceeds or collection amount from the
settlement institutions, and pay the remaining proceeds to the game developers. We act as an agent to the game developers in these
arrangements and therefore recognize revenue net of remittances to the developer as they are considered the primary obligor. We
estimate revenues based on our internal system, which is confirmed with the respective settlement institutions, and recognized such
revenues periodically when accepted by the game developer.
For certain mobile games that we believe we act as the principal in the arrangements, we are considered the primary obligor
and take fulfillment responsibilities of game operations, including determining distribution and promotion, providing customer
services, setting up game and services specifications, and pricing of in-game virtual currencies and virtual items. We record such
mobile game revenues on a gross basis. Commission fees paid to the third-party mobile platform and royalty fees paid to third party
game developers are recorded as cost of revenues. We have determined that an implied obligation exists to the paying players over
their estimated average playing life, and accordingly, recognize the revenues ratably over the estimated average paying player life, i.e.
from the time when the players’ accounts are first recharged with in-game virtual currency to when the players’ becoming inactive
when all other revenue recognition criteria are met. The average paying player life is estimated based on the historical data of paying
players’ behavior. While we believe the estimate to be reasonable based on available game player information, we may revise such
estimates in the future as more game data become available and playing patterns of the paying players of the game change. Any
adjustments arising from changes in the estimates of the average paying player life are applied prospectively on the basis that such
changes are caused by new information indicating a change in game player behavior patterns.
Purchases of in-game currency are not refundable after they have been sold.
Historically, we received online lottery purchase orders from the end users through our website or mobile application and
processed the orders either with other entities or individuals who were authorized agents of lottery sales offices established by
provincial governments, or Authorized Distributors. We received service fees from the Authorized Distributors based on the pre-
determined rate and the total amount of the processed orders. Upon fulfilling our service obligations to the Authorized Distributors,
we recorded the revenue on a net basis because we acted as an agent of the Authorized Distributors in the distribution and
administration of the lottery products. The online lottery business was suspended in early 2015.
Internet security services and others
We market and distribute our off-the-shelf anti-virus security solutions to enterprise and individual users. The enterprise
solutions are distributed through re-sellers. The individual solutions are directly sold to the individual end-users.
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Upon the customers’ initial purchase of the enterprise solutions, the arrangements include multiple elements, generally
comprising of software and post-contract customer services, or PCS. When vendor-specific objective evidence, or VSOE, of the fair
value of the PCS exists, we allocate and defer revenues for the PCS based on its fair value, and recognize the difference between the
total arrangement fee and the amount deferred as software license revenues. When VSOE of the fair value of the PCS does not exist,
the entire arrangement fee is recognized ratably over the PCS period. The arrangement fee of the PCS purchased on a stand-alone
basis is recognized into revenues ratably over the PCS period.
The software, including unspecified upgrades, for the individual solutions are provided to users free of charge via downloads
from our online platform at any time. We also provide the individual users the option to purchase additional value added services,
which are non-essential to the functionality of the software, either concurrent with the download of software, or separately as a
renewal. The value added services are provided over the period of time as determined and purchased by the respective users. The fees
for value-added services are recognized into revenues ratably over the term of such services.
Other revenue primarily include the sale of air purifier products. We recognize revenue for the sale of such products after a
sales agreement is signed, the price is fixed or determinable, products are delivered to customers, and collection of the resulting
receivables is assured. Product is considered delivered to the customers once it has been shipped, and risk of loss and rewards of
ownership have been transferred.
Consolidation of VIEs
PRC law currently restricts foreign ownership of internet-based and mobile-based businesses and regulates internet access,
distribution of online information, online advertising, distribution and operation of online games through strict business licensing
requirements and other government regulations. We are a Cayman Islands company and to comply with these foreign ownership
restrictions, we operate our website and conduct substantially the majority of our online advertising and the distribution and operation
of internet value-added services and internet security services businesses in the PRC through the VIEs.
Beijing Mobile and Beijing Network hold the requisite ICP licenses required to operate our internet-based, including mobile-
based, businesses in China. We have been and are expected to continue to be dependent on our VIEs to operate our business if PRC
laws do not allow us to directly operate such business in China. Beijing Security and Conew Network, our wholly-owned subsidiaries,
as the case may be, have entered into a series of contractual arrangements with the VIEs and their respective shareholders. Despite the
lack of technical majority ownership, there exists a parent-subsidiary relationship between our wholly-owned subsidiaries and the
VIEs through the irrevocable shareholder voting proxy agreements, whereby the shareholders of the VIEs effectively assign all of the
voting rights underlying their equity interests in the VIEs to our wholly-owned subsidiaries. Furthermore, pursuant to the exclusive
equity option agreements, which include a substantive kick-out right, our wholly-owned subsidiaries have the power to control the
shareholders of the VIEs, and therefore, the power to govern the activities that most significantly impact the economic performance of
the VIEs. In addition, through the contractual arrangements, our wholly-owned subsidiaries demonstrate their ability and intention to
continue to exercise the ability to absorb substantially all of the expected losses and the majority of the profits of the VIEs, and
therefore, have the rights to the economic benefits of the VIEs. As a result of these contractual arrangements, we consolidate the VIEs
as required by ASC 810-10, Consolidation: Overall.
Goodwill
Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the
liabilities assumed of an acquired business. In accordance with ASC 350, Goodwill and Other Intangible Assets, recorded goodwill
amounts are not amortized, but rather are tested for impairment annually or more frequently if there are indicators of impairment
present.
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We adopted Accounting Standards Update 2011-08, or ASU 2011-08, Testing Goodwill for Impairment, to test goodwill for
impairment by performing a qualitative assessment before calculating the fair value of a reporting unit in step one of the goodwill
impairment test. If we determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not to be
less than the carrying amount, a two-step impairment test is required. Otherwise, further testing is not needed. We have an
unconditional option to bypass the qualitative assessment in any period and proceed directly to performing the first step of the
goodwill impairment test. We may resume performing the qualitative assessment in any subsequent period. Under the two-step
impairment test, the first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount,
including goodwill. Fair value is primarily determined by computing the future undiscounted cash flows expected to be generated by
the reporting unit. If the reporting unit’s carrying value exceeds its fair value, goodwill may be impaired. If this occurs, we perform
the second step of the goodwill impairment test to determine the amount of impairment loss.
The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in
order to determine the implied fair value of the reporting unit’s goodwill. If the implied goodwill’s fair value is less than its carrying
value, the difference is recognized as an impairment loss.
If we reorganize our reporting structure in a manner that changes the composition of one or more of our reporting units,
goodwill is reassigned based on the relative fair value of each of the affected reporting units. We have one reporting unit and use the
discounted cash flow method to derive enterprise value as a basis of our impairment test.
Business Combinations
We account for our business combinations using the purchase method of accounting in accordance with ASC topic 805, or
ASC 805, Business Combinations. The purchase method of accounting requires that the consideration transferred to be allocated to the
assets, including separately identifiable assets and liabilities we acquired, based on their estimated fair values. The consideration
transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities
incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition
date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities
acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any
noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date
fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is
recognized directly in earnings.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various
assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these
valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the
assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk
inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of
assets, forecasted life cycle and forecasted cash flows over that period.
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Impairment of Investments
Our investments mainly consist of cost method investments and equity method investments in privately held companies,
fixed-rate time deposits and available-for-sale securities.
We periodically review our cost method investments and equity method investments for impairment. If we conclude that any
of such investments is impaired, we will assess whether such impairment is other-than-temporary. Factors we consider in making such
determination include the performance and financial position of the investee as well as other evidence of market value. Such
evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial
performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the
investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value
would then become the new cost basis of investment. When we intend to sell an impaired debt security or it is more-likely-than-not
that we will be required to sell prior to recovery of our amortized cost basis, an other-than-temporary impairment is deemed to have
occurred. In these instances, the other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt
security’s amortized cost basis over its fair value at the balance sheet date of the reporting period for which the assessment is made.
When we do not intended to sell an impaired debt security and it is more-likely-than-not that we will not be required to sell prior to
recovery of its amortized cost basis, we must determine whether or not it will recover our amortized cost basis. If we conclude that we
will not, an other-than-temporary impairment exists and that portion of the credit-loss is recognized in earnings, while the portion of
loss related to all other factors is recognized in other comprehensive income.
As available-for-sale securities is reported at fair value, an impairment loss on the available-for-sale securities would be
recognized in the consolidated statements of comprehensive income when the decline in value is determined to be other-than-
temporary.
The fair value determination, particularly for investments in privately-held companies, requires significant judgment in
determining appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair
value of the investments and the determination of whether any identified impairment is other-than-temporary. If impairment is
considered other-than-temporary, we will write down the asset to its fair value and take the corresponding charge to the consolidated
financial statements.
Impairment of Long-Lived Assets and Intangible Assets
We evaluate our long-lived assets or asset group, including intangible assets with finite lives, for impairment whenever
events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the
assets) indicate that the carrying amount of an asset or a group of long-lived assets may not be recoverable. When these events occur,
we evaluate impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from
the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount
of the assets, we would recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value.
Government Subsidies
Government subsidies primarily consist of financial subsidies received from provincial and local governments for operating a
business in their jurisdictions or conducting research and development projects pursuant to specific policies promoted by the local
governments. There are no defined rules and regulations that govern the criteria necessary for companies to receive such benefits, and
the amount of financial subsidy is determined at the discretion of the relevant government authorities. For government subsidies with
non-operating feature and with no further conditions to be met, the amounts are recorded in “other income” when received. For
government subsidies with operating feature and with no further conditions or specific use requirements to be met, the amounts are
recorded in “other operating income” when received. For government subsidies related to research and development projects, the
amounts are recorded in “deferred revenue” when received and will be offset against “research and development” expenses over the
project period when no further conditions are to be met.
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Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in
effect in the period in which the differences are expected to reverse. We record a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be
realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Share-based Compensation
We account for share-based compensation following the provision of ASC 718, or ASC 718, Compensation—Stock
Compensation, under which we determine whether an award should be classified and accounted for as a liability award or equity
award. All grants of share-based awards to employees classified as equity awards are recognized in the consolidated financial
statements based on their grant date fair values and the related cost is recognized over the period the employee is required to provide
service in exchange for the award, which generally is the vesting period. All grants of share-based awards to employees classified as
liability awards are recognized in the consolidated financial statements based on their grant date fair values and re-measured to fair
value at the end of each reporting period. The liability recorded considers the fair value of the award and the number of awards that
have vested to date. Re-measurement of the fair value of the liability awards is recorded as share-based compensation expenses. We
have no liability awards for the years ended December 31, 2014 and 2015, and have issued restricted shares with redemption features
to two employees that are considered tandem awards, having both equity and liability components, for the year ended December 31,
2013.
We have elected to recognize share-based compensation using the accelerated method, for all share-based awards granted
with graded vesting based on service conditions. Forfeiture rates are estimated based on historical experience and future expectations
of employee turnover rates and are periodically reviewed. If required vesting conditions are not met resulting in the forfeiture of the
share-based awards, previously recognized compensation expense related to those awards are reversed. ASC 718 requires forfeitures
to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates.
To the extent we revise these estimates in the future, the share-based payments could be materially impacted in the period of revision,
as well as in following periods. Share-based compensation expense is recorded net of estimated forfeitures such that expense is
recorded only for those share-based awards that are expected to vest. We have determined the fair value of share-based awards with
the assistance of an independent third party valuation firm.
We have accounted for equity instruments issued to non-employees in accordance with the provisions of ASC 718-10 and
ASC 505-50, Equity: Equity-based Payments to Non-Employees. We record compensation expenses equal to the fair value of the
shares at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion
date.
Fair Value of Our Ordinary Shares
Prior to the completion of our initial public offering, as a private company with no quoted market in our ordinary shares, we
estimated the fair value of our ordinary shares at the relevant grant dates for employee restricted shares and at each reporting date for
non-employee options in order to determine the fair value of our share-based awards and the associated share-based compensation
expenses. The determination of the fair value of our ordinary shares requires complex and subjective judgments.
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In determining the estimated fair value of restricted shares granted to executive officers and certain employees, we
considered the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity
Securities Issued as Compensation, or the Practice Aid, which sets forth the preferred types of valuation that should be used. We have
followed the ‘‘Level B’’ recommendation, and established the fair value of our ordinary shares at the dates of grant using a
retrospective valuation with the assistance of an independent appraiser.
In determining the fair value of our ordinary shares prior to the completion of our initial public offering in May 2014, we
followed a two-step process. In the first step, the equity value of our company prior to 2013 was determined by taking into
consideration the income approach, or the discounted cash flow method. Due to lack of consistencies in the guideline companies’
valuation ratios, we did not apply any weight for the market approach to arrive at the equity value of our company. Instead, the market
approach is only used to corroborate the valuation results based on the income approach.
The discounted cash flow, or DCF, method, which incorporates the projected cash flow of our management’s best estimation
as of each measurement date. The projected cash flow estimation includes, among others, analysis of projected revenue growth, gross
margins and terminal value. The assumptions used in deriving the fair value of ordinary shares were consistent with our business plan.
The key assumptions used in developing the cash flow forecasts included: (i) compounded annualized growth rates of
revenue over the forecasted period; (ii) gross margin forecast to improve with increasing economies of scale; and (iii) a terminal
growth rate after the projection period.
The DCF method of the income approach involves applying appropriate weighted average cost of capital, or WACC, to
discount the future cash flows forecast to present value. WACC comprises a required rate of return on equity plus the current tax-
effected rate of return on debt, weighted by the relative percentages of equity and debt in the capital structure of comparable public
companies whose business operations are similar to that of ours. The required rates of return on equity were based on an estimation of
the market required rate of return for investing in business similar to ours, which were derived by using the capital asset pricing
model, or CAPM. Under CAPM, the discount rate was determined with consideration of the risk-free rate, industry-average correlated
relative volatility coefficient beta, equity risk premium, size of our company, the scale of our business and our ability in achieving
forecasted projections.
The risks associated with achieving the forecasts were assessed in selecting the appropriate WACC. In estimating the fair
value of our ordinary shares by the DCF method, our management did not think there would be disproportionate returns of cash flows
to different shareholders. Therefore, neither control premium nor a lack of control discount was considered in our valuations.
The guideline company method of the market approach provides an indication of value with reference to the market value of
publicly traded guideline companies and various measures of their operating results, then applying such multiples to the business
being valued. For the market approach, we and the independent appraiser considered the market profile and performance of the five
publicly traded companies in the Chinese internet and mobile services sector, and used such information to derive market multiples.
We and the independent appraiser then calculated the three multiples for the guideline companies: enterprise value (“EV”) to 2014
earnings before interest, tax, depreciation and amortization, (“EBITDA”) multiple, EV to 2014 earnings before interest and tax
(“EBIT”) and price to 2014 earning (“P/E”) multiple. The median of the guideline companies’ multiples were then multiplied by our
estimated EBITDA, EBIT and earning in 2014 to arrive at the fair value of our company.
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We also applied a discount for lack of marketability, or DLOM, to reflect the fact that there was no ready market for shares in
a closely-held company like us. When determining the DLOM, the Black-Scholes option pricing model was used. Under this option-
pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was
considered as a basis to determine the discount for lack of marketability.
The above assumptions used in determining the fair values were consistent with our business plan and major milestones we
achieved. We also applied general assumptions, such as absence of major changes in existing conditions or current taxation law in
countries in which we carry on our business, availability of financing, and no significant change of industry trends and market
conditions from economic forecasts.
In the second step, since our capital structure comprised convertible preferred shares and ordinary shares at each grant date,
we allocated our equity value among each class of equity securities using the option-pricing method. The option-pricing method treats
ordinary shares and preferred shares as call options on our company’s equity value and liquidation preference of the preferred shares.
Since our initial public offering in May 2014, the determination of the fair value of the ordinary shares is based on the market
price of our ADSs, each representing ten Class A ordinary shares, traded on the NYSE.
In determining the fair value of restricted shares with an option feature granted in and after 2014, we use the binomial tree
model for an option pricing applied. As the grantees were required to pay purchase price for their restricted shares, the restricted
shares are treated as an option for the purpose of determining the fair value of such restricted shares. The key assumptions used to
determine the fair value of the restricted shares with the option feature at the relevant grant dates include the fair value of our ordinary
shares and the factors set forth in the table below. Changes in these assumptions could significantly affect the fair value of the
restricted shares and hence the amount of share-based compensation expense we recognize in our consolidated financial statements.
The following table presents the key assumptions (other than the fair value of our ordinary shares, which is discussed above)
used to estimate the fair values of the restricted shares with the option feature granted in the years indicated:
(1)
Risk-free interest rates
Expected volatility range
(3)
Expected dividend yield
Expected exercise multiple
(2)
(4)
2014
2.65%~3.22%
64.5%~66.2%
0%
2.2~2.8
2015
2.68%~2.97%
53.1%~63.3%
0%
2.2
(1) The risk-free interest rate for periods within the contractual life of the restricted shares with the option feature is based on the U.S.
Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards.
(2) Expected volatility is estimated based on the historical volatility ordinary shares of several comparable companies in the same
industry.
(3) The dividend yield was estimated based on our expected dividend policy over the expected term of the restricted shares with the
option feature.
(4) The expected exercise multiple was based on research study regarding exercise pattern and historical statistic data, including
Carpenter, J. 1998. “The Exercise and Valuation of Executive Stock Options.” Journal of Financial Economics, vol. 48, no. 2
(May): 127-158 and Huddart and Lang in Huddart, S., and M. Lang. 1996. “Employee Stock Option Exercises: An Empirical
Analysis.”
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If factors change and we employ different assumptions for estimating share-based compensation expenses in future periods or
if we decide to use a different valuation model, our share-based compensation expenses in future periods may differ significantly from
what we have recorded in prior periods and could materially affect our operating profit, net income and net income per share.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2014-09, Revenue from Contracts
with Customers, or ASU 2014-09, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The
core principle of the guidance is that an entity should recognize revenue to depict the transfer of the promised goods or services to
customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The
amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period
within that reporting period. Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers-Deferral of the effective date, or ASU 2015-14. The amendments in ASU 2015-14 defer the effective date
of ASU 2014-09 issued in May 2014. According to ASU 2015-14, the new revenue guidance ASU 2014-09 is effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. We are in the process of evaluating our contracts with customers under the new standard and cannot
currently estimate the impact of adopting this standard on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-
40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. The guidance requires
an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to
continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote
disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual
and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a significant
impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) —Amendments to the Consolidation
Analysis. The amendments in Topic 810 respond to stakeholders’ concerns about the current accounting for consolidation of variable
interest entities, by changing aspects of the analysis that a reporting entity must perform to determine whether it should consolidate
such entities. Under the amendments, all reporting entities are within the scope of Subtopic 810-10, Consolidation—Overall, including
limited partnerships and similar legal entities, unless a scope exception applies. The amendments are intended to be an improvement
to current U.S. GAAP, as they simplify the codification of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R),
with changes including reducing the number of consolidation models through the elimination of the indefinite deferral of Statement
167 and placing more emphasis on risk of loss when determining a controlling financial interest. The amendments are effective for
publicly-traded companies for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years.
Earlier adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial
statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments,
which eliminates the requirement for acquirers in a business combination to account for measurement-period adjustments
retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the
amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had
been completed at the acquisition date. This update is effective for interim and annual periods beginning after December 15, 2015,
with early adoption permitted. The implementation of this update is not expected to have any material impact on our condensed
consolidated financial statements.
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In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as
noncurrent on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. All short-term deferred tax assets and liabilities
will be reclassified to long-term assets and liabilities upon adoption of this update. We are currently evaluating the impact of adopting
this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, or ASU 2016-02. ASU 2016-02 specifies the accounting for
leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost,
calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for
public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early
adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to retrospectively apply the equity
method in previous periods. Instead, the investor must apply the equity method prospectively from the date the investment qualifies
for the equity method. The amendments in this update are effective for financial statements issued for annual periods beginning after
December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the
impact of adopting this guidance on our consolidated financial statements.
B.
Liquidity and Capital Resources
Cash Flows and Working Capital
To date, we have financed our operations from our operating profit, private issuances and sales of preferred and ordinary
shares and the net proceeds from our initial public offering. As of December 31, 2015, we had RMB1,809.3 million (US$279.3
million) in cash and cash equivalents. We believe that our cash and the anticipated cash flow from operations will be sufficient to meet
our anticipated cash needs for the next 12 months. However, we may require additional cash resources due to changing business
conditions or other future developments, including any investments or acquisitions we may decide to selectively pursue. If our existing
cash resources are insufficient to meet our requirements, we may seek to sell equity or equity-linked securities, debt securities or
borrow from banks.
Under PRC regulations, prior approval from and prior registration with the SAFE is required for Renminbi conversion for
capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China.
Subject to certain rules and procedures, the Renminbi is freely convertible for current account items, including the distribution of
dividends, and trade- and service-related foreign exchange transactions. The PRC government may also at its discretion restrict access
to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends to our shareholders.
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The table below sets forth a breakdown of our cash by currency and location as of December 31, 2013, 2014 and 2015:
Cash located outside of the PRC
- in US dollars
- in RMB
- in HK dollars
- in Euro
- in other currencies
Cash located in the PRC
- held by subsidiaries, in RMB
- held by subsidiaries, in US dollars
- held by VIEs in RMB
- held by VIEs in US dollars
Total cash and cash equivalents
2013
As of December 31,
2014
(In thousands of RMB)
2015
287,698
4,795
965
—
—
95,293
—
140,474
1,311
530,536
713,716
8,970
12,914
61
392
287,531
—
67,434
2,267
1,093,285
1,118,752
5,175
56,955
4,830
2,466
463,894
9,055
130,195
17,966
1,809,288
The table below sets forth a breakdown of our short-term investments by location as of December 31, 2013, 2014 and 2015:
Short-term investments located outside of the PRC
- Fixed-rate time deposits located outside the PRC
- Available-for-sale equity securities located outside the PRC
- Available-for-sale debt securities located outside the PRC
Short-term investments located in the PRC
- Fixed-rate time deposits located in the PRC
Total short-term investments
2013
As of December 31,
2014
(In thousands of RMB)
2015
—
55,780
—
—
55,780
428,330
6,913
78,378
—
513,621
18,831
—
—
10,403
29,234
The following table sets forth a summary of our cash flows for the years indicated:
Net cash provided by operating activities
Net cash used for investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Cash and cash equivalents at the beginning of year
Net increase in cash and cash equivalents
Cash and cash equivalents at the end of year
Year Ended December 31,
2014
RMB
RMB
(In thousands)
2015
US$
361,442
(1,175,295)
1,380,889
(4,287)
530,536
562,749
1,093,285
936,976
(340,629)
81,627
38,029
1,093,285
716,003
1,809,288
144,644
(52,585)
12,602
5,871
168,774
110,532
279,306
2013
RMB
198,181
(100,787)
304,272
(5,506)
134,376
396,160
530,536
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Operating Activities
Net cash provided by operating activities for the year ended December 31, 2015 was RMB937.0 million (US$144.6 million).
This amount was primarily attributable to net income of RMB171.3 million (US$26.4 million), (i) adjusted for certain non-cash
expenses, primarily share-based compensation expenses of RMB315.4 million (US$48.7 million), amortization of intangible assets of
RMB120.5 million (US$18.6 million), impairment of goodwill and intangible assets of RMB49.9 million (US$7.7 million) and
impairment of investments of RMB34.7 million (US$5.4 million); (ii) adjusted for changes in operating assets and liabilities that
positively affected operating cash flow, primarily an increase in accrued expenses and other current liabilities of RMB636.7 million
(US$98.3 million); and (iii) partially offset by changes in operating assets and liabilities that negatively affected operating cash flow,
primarily due to an increase in accounts receivable of RMB316.2 million (US$48.8 million) and an increase in prepayments and other
current assets of RMB162.1 million (US$25.0 million). The amortization of intangible assets was mainly related to technology,
license fee, customer relationship and user base that were acquired through business acquisition and prepaid license fees for games.
The increase in accrued expenses and other current liabilities was mainly attributable to (i) the increase in accrued advertising,
marketing and promotional expenses, which primarily resulted from unpaid expenses incurred in promoting our mobile applications,
and (ii) the increase in labor and welfare payable relating to our increased headcount and increased salary levels. The increase in
accounts receivable was in line with the rapid growth of our business.
Net cash provided by operating activities for the year ended December 31, 2014 was RMB361.4 million. This amount was
primarily attributable to net income of RMB66.9 million, (i) adjusted for certain non-cash expenses, primarily share-based
compensation expenses of RMB173.3 million, amortization of intangible assets of RMB57.1 million, depreciation of property and
equipment of RMB21.7 million and changes in fair value of contingent consideration of RMB13.7 million; (ii) adjusted for changes in
operating assets and liabilities that positively affected operating cash flow, primarily an increase in accrued expenses and other current
liabilities of RMB225.4 million; and (iii) partially offset by changes in operating assets and liabilities that negatively affected
operating cash flow, primarily an increase in accounts receivable of RMB152.0 million and an increase in prepayments and other
current assets of RMB85.5 million. The amortization of intangible assets was mainly related to technology, customer relationship and
user base that were acquired through business acquisition and prepaid license fees for games. The increase in accrued expenses and
other current liabilities was mainly attributable to (i) the increase in accrued advertising, marketing and promotional expenses, which
primarily resulted from unpaid expenses incurred in promoting our mobile applications, and (ii) the increase in labor and welfare
payable relating to our increased headcount and increased salary levels. The increase in accounts receivable was in line with the rapid
growth of our business.
Net cash provided by operating activities for the year ended December 31, 2013 was RMB198.2 million. This amount was
primarily attributable to net income of RMB62.0 million, (i) adjusted for certain non-cash expenses, primarily share-based
compensation expenses of RMB37.4 million, deferred income tax expense of RMB33.9 million, deemed employee compensation
attributable to redemption right granted to a noncontrolling shareholder of RMB14.7 million and amortization of intangible assets of
RMB14.2 million, (ii) adjusted for changes in operating assets and liabilities that positively affected operating cash flow, primarily an
increase in accrued expenses and other current liabilities of RMB97.1 million, and (iii) partially offset by changes in operating assets
and liabilities that negatively affected operating cash flow, primarily an increase in prepayments and other current assets of RMB45.4
million. The deferred income tax expenses mainly resulted from the outside basis difference arising from the retained earnings in
Beijing Mobile, our VIE, and the deferred tax liability related to the non-deductible share-based compensation expense, which
primarily resulted from the difference between PRC tax regulations and their practical implementation by PRC tax authorities. The
increase in accrued expenses and other current liabilities was mainly attributable to (i) the increase in accrued advertising, marketing
and promotional expenses, which primarily resulted from unpaid expenses incurred in promoting our mobile applications, and
(ii) increase in labor and welfare payable relating to our increased headcount and increased salary levels. The increase in prepayments
and other current assets was mainly attributable to receivable from employees related to the individual income tax arising from the
vested restricted shares of our company.
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Investing Activities
Net cash used in investing activities was RMB340.6 million (US$52.6 million) for the year ended December 31, 2015,
primarily attributable to purchase of fixed-rate time deposits of RMB481.2 million (US$74.3 million), purchase of cost method
investments of RMB399.5 million (US$61.7 million), acquisition of business (net of cash acquired) of RMB249.4 million (US$38.5
million), purchase of equity method investments of RMB107.1 million (US$16.5 million), purchase of property and equipment of
RMB61.1 million (US$9.4 million), purchase of intangible assets of RMB34.6 million (US$5.3 million), partially offset by sales and
maturity of fixed-rate time deposits of RMB901.4 million (US$139.1 million) and proceeds from maturity of available-for-sale
investments of RMB68.2 million (US$10.5 million).
Net cash used in investing activities was RMB1,175.3 million for the year ended December 31, 2014, primarily attributable
to fixed-rate time deposits of RMB1,388.2 million, acquisition of business (net of cash acquired) of RMB195.2 million, purchase of
cost method investments of RMB151.3 million, purchase of equity method investments of RMB125.7 million, purchase of intangible
assets of RMB120.4 million and purchase of available-for-sale securities of RMB110.8 million, partially offset by maturity of fixed-
rate time deposits of RMB959.8 million.
Net cash used in investing activities was RMB100.8 million for the year ended December 31, 2013, primarily attributable to
payments to purchase short-term investments of RMB141.6 million, payments for acquisition of business (net of cash acquired)
RMB52.8 million, purchase of property and equipment of RMB27.6 million, entrusted loan to investors of an investee of RMB14.0
million, partially offset by sales and maturity of short-term investments of RMB145.4 million.
Financing Activities
Net cash generated from financing activities was RMB81.6 million (US$12.6 million) in 2015, primarily due to proceeds
from bank loans of RMB101.9 million (US$15.7 million), partially offset by settlement of contingent consideration of RMB27.7
million (US$4.3 million) in connection with the acquisition of Suzhou Jiangduoduo, Hongkong Zoom, Photo Grid and MobPartner.
Net cash generated from financing activities was RMB1,380.9 million in 2014, compared to net cash of RMB304.3 million
generated from financing activities in 2013. This increase was primarily due to the net proceeds of RMB1,409.2 million from our
initial public offering and the concurrent private placement completed in May 2014.
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Net cash provided by financing activities was RMB304.3 million for the year ended December 31, 2013, primarily
attributable to proceeds from issuance of series B preferred shares (net of issuance costs) of RMB322.0 million, partially offset by
payment of dividend of RMB17.7 million.
Holding Company Structure
Cheetah Mobile Inc. is a holding company. We conduct our operations through our subsidiaries incorporated in and outside
China, as well as our VIEs and a VIE’s subsidiary in China. As a result, although other means are available for us to obtain financing
at the holding company level, Cheetah Mobile Inc.’s ability to pay dividends to the shareholders and to service any debt it may incur
depends on dividends paid by our subsidiaries and service fees paid by our PRC VIEs to our PRC subsidiaries under the exclusive
technology development, support and consultancy agreements. If any of our subsidiaries incurs debt on its own behalf in the future,
the instruments governing such debt may restrict its ability to pay dividends to us.
Each of our PRC entities is required to make appropriations to certain statutory reserve funds, which are not distributable as
cash dividends except in the event of a solvent liquidation of the companies. Specifically, each of our PRC entities is required to
allocate at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50%
of its registered capital. In addition, each of our PRC entities may allocate a portion of its after-tax profits based on PRC accounting
standards to staff welfare and bonus funds, enterprise expansion fund and discretionary surplus fund, as the case may be, at the
discretion of its board of directors.
Loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits, which is the difference between
the registered capital of such PRC subsidiary and the amount of total investment as approved by the PRC government. In addition, if
we decide to finance our PRC subsidiaries by means of capital contributions, these capital contributions must be approved by the PRC
government. Therefore, any failure or delay in receiving such registrations or approvals may limit our ability to fund our PRC
subsidiaries using funds we have, hence materially and adversely affecting our liquidity and our ability to fund and expand our
business.
Capital Expenditures
We incurred capital expenditures of RMB30.0 million, RMB156.6 million, and RMB95.7 million (US$14.8 million) in 2013,
2014 and 2015, respectively. Our capital expenditures were primarily attributable to purchase of intangible assets, including
intellectual property, game copyrights and tools applications, computers and servers, and improvement works made to our office in
Beijing and other equipment. As our business expands, we may purchase more intangible assets, new servers and other equipment in
the future.
C.
Research and Development
We seek to be at the forefront of our industry by meeting and anticipating user needs through the development of innovative
products and services. Our R&D and innovation are driven by our user centric culture. From our line engineers to our chief executive
officer, everyone involved in our interactive product development process focuses on developing and enhancing products and services
to anticipate, meet and exceed our users’ expectations. Through various channels such as pre-release trial events among our fans in
various countries, feedback from closed beta testing and user comments and ratings on application distribution platforms, our global
users provide us with information about our products and services and the evolution of the mobile industry. We innovate and enhance
our products and services based on our users’ feedbacks and ideas.
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As of December 31, 2015, our engineering team consisted of 1,405 employees, approximately 83% of whom held bachelor’s
or more advanced degrees. In addition, we have a dedicated customer service team capable of operating in multiple languages that
interacts with users and receives users’ input and advice regarding further product development.
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 year ended December 31, 2015 that are reasonably likely to have a material and adverse effect on our net revenues,
income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily
indicative of future results of operations 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 entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that
are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity for such assets. We do not
have any obligation, including a contingent obligation, arising out of a variable interest in any unconsolidated entity that we hold and
material to us, where such entity provides financing, liquidity, market risk or credit risk support to us or engages in leasing, hedging or
research and development services with us.
F.
Contractual Obligations
The following table sets forth our contractual obligations by specified categories as of December 31, 2015.
(1)
Operating lease obligations
(2)
Long-term debt obligation
License fees commitments
Total
(3)
Total
373,434
11,860
2,222
387,516
Payment Due by Period
Less Than
1 Year
163,683
678
2,222
166,583
1-3 Years
(In RMB thousands)
3-5 Years
118,912
4,907
—
123,819
89,009
4,418
—
93,427
More Than
5 Years
1,830
1,857
—
3,687
(1) Mainly include operating lease for our office building, rental for employees and bandwidth and internet data center.
(2) Long-term debt obligation represents the long-term loans of MobPartner from Bpifrance Financement and Hongkong and
Shanghai Banking Corporation Limited (France branch). The total interest to be paid for these loans is RMB960,000
(US$148,000). Please see “loans payable” under Note 10 to our audited consolidated financial statements.
(3) Represent contractual obligation with a third party that was signed in 2013 with terms of three years, and contractual obligation
with a third party that was signed in 2015 with terms of two years.
G.
Safe Harbor
See “Forward-Looking Statements” on page 2 of this annual report.
Item 6.
Directors, Senior Management and Employees
A.
Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
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Directors and Executive Officers
Jun Lei
Sheng Fu
Hongjiang Zhang
Yuk Keung Ng
David Ying Zhang
Ke Ding
Jeffrey Zhaohui Li
Wei Liu
Richard Weidong Ji
Ming Xu
Ka Wai Andy Yeung
Charles Chenggong Fan
Xinhua Liu
Jie Xiao
Yong Chen
Age
46
38
55
52
42
43
40
39
48
37
43
44
42
41
37
Position/Title
Chairman of Board of Directors
Chief Executive Officer and Director
Director
Director
Independent Director
Director
Director
Director
Independent Director
President
Chief Financial Officer
Chief Technology Officer
Chief Marketing Officer
Senior Vice President
Senior Vice President
Jun Lei has been our director since October 2010 and the chairman of our board since September 2011. Mr. Lei was
appointed to be a director of our company by Kingsoft Corporation, a company listed on the Hong Kong Stock Exchange (Stock
Code: 3888). Mr. Lei is a co-founder and is currently the chairman and the chief executive officer of Kingsoft Corporation. From
October 1998 to December 2007, Mr. Lei served as the chief executive officer of Kingsoft Corporation. In 2010, Mr. Lei co-founded
and has since then served as the chairman of Xiaomi Corporation, a smartphone and mobile internet company in China. From
April 2000 to March 2005, Mr. Lei co-founded and served as the chairman of Joyo.com, which was later acquired by
Amazon.com, Inc. in 2004 and became Amazon China. Mr. Lei also serves as the chairman of YY Inc. (NASDAQ: YY), which is a
rich communication social platform. In addition, Mr. Lei is an active private equity investor and currently serves as a director or
advisor in several privately held companies that he founded or invested in. Mr. Lei received his bachelor’s degree in computer science
from Wuhan University in China in 1991.
Sheng Fu has been our chief executive officer and director since December 2010. Mr. Fu has also been a senior vice president
of Kingsoft Corporation since March 2011. Since September 2009, Mr. Fu has been the chief executive officer and chairman of
Conew Network. Prior to that, Mr. Fu was the vice president of Matrix Partners China from November 2008. Between
November 2005 and August 2008, Mr. Fu worked at Qihoo serving various management roles at its 360 department, a division then in
charge of developing 360 products. From March 2003 to October 2005, Mr. Fu was the product manager of 3721 Internet Real Name
and 3721 Internet Assistant. Mr. Fu received a bachelor’s degree in economics from Shandong Institute of Business and Technology
in China in 1999.
Hongjiang Zhang has been our director since December 2011. Dr. Zhang was appointed to be our director by Kingsoft
Corporation, at which Dr. Zhang currently serves as an executive director and the chief executive officer. Dr. Zhang also serves as an
executive director and the chief executive officer of Kingsoft Cloud Holdings Limited, a subsidiary of Kingsoft Corporation.
Dr. Zhang is also a director of 21Vianet Group, Inc. (NASDAQ: VNET) and Xunlei Limited (NASDAQ: XNET). Prior to joining
Kingsoft Corporation in October 2011, since January 2004, Dr. Zhang was the chief technology officer of Microsoft Asia-Pacific
Research and Development Group and the managing director of the Microsoft Advanced Technology Center and a Distinguished
Scientist. In his dual role, Dr. Zhang led Microsoft’s research and development initiatives in China, including strategy and planning,
research and development, as well as incubation of products, services and solutions. Dr. Zhang was also a member of the executive
management committee of Microsoft (China) Limited. Dr. Zhang was the deputy managing director and a founding member of
Microsoft Research Asia. Dr. Zhang has authored four books, over 400 scientific papers and holds nearly 200 US and international
patents. Dr. Zhang received a Ph.D. in electrical engineering from the Technical University of Denmark in 1991, and a bachelor of
science degree from Zhengzhou University, China, in 1982.
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Yuk Keung Ng has been our director since July 2012. Mr. Ng was appointed to be our director by Kingsoft Corporation, at
which Mr. Ng serves as an executive director and the chief financial officer. Mr. Ng has more than twenty years of experience in
financial management, corporate finance and merger and acquisition. Before joining Kingsoft Corporation, from 2006 to 2012, Mr. Ng
was the chief financial officer of two companies listed on the Hong Kong Stock Exchange, including China NT Pharma Group
Company Limited (Stock Code: 1011) and China Huiyuan Juice Group Ltd. (Stock Code: 1886). Prior to that, Mr. Ng had worked for
over 12 years with PricewaterhouseCoopers from 1988 to 2001. Mr. Ng is currently an independent director of various companies
listed on the Hong Kong Stock Exchange, including Sany Heavy Equipment International Holdings Company Limited (Stock Code:
631), Beijing Capital Land Limited (Stock Code: 2868), Winsway Coking Coal Holdings Limited (Stock Code: 1733) and
Zhongsheng Group Holdings Limited (Stock Code: 881). Mr. Ng is a professional accountant and a fellow member of both the Hong
Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants and a member of the Institute
of Chartered Accountants in England and Wales. Mr. Ng obtained a master’s degree in global business management and e-commerce
in 2002 and graduated from the University of Hong Kong with a bachelor’s degree in social sciences in 1988.
David Ying Zhang has been our director since October 2010. Mr. Zhang was appointed to be our director by Matrix Partners
China. Our board of directors has determined that Mr. Zhang meets the independence standards under Rule 10A-3 under the Exchange
Act and applicable NYSE corporate governance rules. Mr. Zhang is a founding managing partner of Matrix Partners China, where he
oversees all of private equity investment firm’s operations. Mr. Zhang is currently also a director of Momo Inc. (NASDAQ: MOMO).
Prior to joining us, since 2002, Mr. Zhang established and expanded WI Harper Group’s Beijing operations and co-managed its China
portfolios. Prior to joining WI Harper Group, Mr. Zhang worked at Salomon Smith Barney, where he was responsible for analyzing,
structuring and marketing companies in the internet, software and semiconductor sectors. Before then, Mr. Zhang worked at ABN
AMRO Capital as a senior venture associate. Mr. Zhang received a master of science degree in biotechnology and business from
Northwestern University in 1999 and a bachelor of science degree in clinical science with minor in chemistry from California State
University in 1997.
Ke Ding has been our director since June 2013. Mr. Ding was appointed to be our director by TCH Copper Limited, an
affiliate of Tencent Holdings Limited, a Hong Kong-listed company (Stock Code: 0700), or Tencent, and one of our major
shareholders. Since March 2011, Mr. Ding has been the vice president in charge of mobile internet business at Tencent. Prior to that,
Mr. Ding had been the general manager in charge of Tencent’s 3G products center since May 2009. Mr. Ding received a master’s
degree in theoretical and applied automated control from Lanzhou University of Technology, China, in 1997, and a bachelor’s degree
of science from Xidian University, China, in 1994.
Mr. Jeffrey Zhaohui Li has been our director since November 2015. Mr. Li currently serves as the managing partner of
investment and general manager of mergers & acquisitions (M&A) at Tencent, focusing on Tencent’s global investment and M&A
activities in interactive entertainment and gaming, social networking service, O2O (“online-to-offline”), and internet finance, among
other areas. He leads Tencent’s investment strategy in worldwide gaming industry. Mr. Li is also responsible for Tencent’s early stage
and growth stage investment strategy in China and multiple countries. In recent years, he launched and led Tencent’s ongoing
investment efforts to penetrate key O2O sectors, including social commerce, automotive, education and healthcare, among others. He
was responsible for Tencent’s investments in Huayi Brothers Media Corp., Zhihu.com, Netmarble Games, Howbuy.com and many
others around the world. Before joining Tencent, Mr. Li was the investment principal at Bertelsmann Asia Investment, where he led
the investment in BitAuto (NYSE: BITA) and Phoenix New Media (NYSE: FENG). Before that, he worked for Google and Nokia in
various product and business roles, where he gained substantial experience in the internet and mobile arenas. Mr. Li holds a bachelor’s
degree from Peking University and an M.B.A. degree from Duke University’s Fuqua School of Business.
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Wei Liu has been our director since May 2013. Mr. Liu was appointed to be our director by Kingsoft Corporation, at which
Mr. Liu serves as a vice president. Mr. Liu joined Kingsoft Corporation in 2000 as a manager, and was promoted to be the director of
human resources in 2007, an assistant president in April 2012 and then the current position of vice president. Mr. Liu graduated from
China University of Mining and Technology in 1999 with a bachelor’s degree in economics.
Richard Weidong Ji has been our director since May 7, 2014. Our board of directors has determined that Mr. Ji meets the
independence standards under Rule 10A-3 under the Exchange Act and applicable NYSE corporate governance rules. Mr. Ji is the
founding partner of All-Star Investment Limited, which aims to invest in internet technology leaders and consumer brands that help
enhance the lives of Chinese consumers. Mr. Ji is also an independent director and a member of the audit committee of the board of
the NASDAQ-listed YY Inc. Mr. Ji served as managing director and head of Asia-Pacific internet/media investment research at
Morgan Stanley Asia Limited from 2005 to 2012, during which period he had won recognitions from publications and research groups
such as Institutional Investor, Greenwich Associates, Asiamoney and Financial Times. Mr. Ji holds a doctor of science degree in
biological science from Harvard University, an MBA from the Wharton School of Business at the University of Pennsylvania and a
bachelor of science from Fudan University in China.
Ming Xu has been our president since November 2014. Mr. Xu had served as our chief technology officer from October 2010
to February 2016. Mr. Xu has more than ten years of experience in the research and development of anti-virus and internet security.
Prior to joining us, between September 2008 and October 2010, Mr. Xu served as the chief technology officer of Conew.com
Corporation. Between 2005 and August 2008, Mr. Xu worked at Qihoo, where he was the technical director of 360 department, a
division then in charge of developing 360 products. Between 2003 and 2005, Mr. Xu worked in various Internet companies, including
Yahoo! Inc. and Beijing 3721 Technology Co., Ltd. as a software engineer. Mr. Xu received a master’s degree and a bachelor’s degree
in engineering from Harbin Institute of Technology, China, in 2002 and 1999, respectively.
Ka Wai Andy Yeung has been our chief financial officer since January 2014. Prior to joining us, from 2009 to 2013,
Mr. Yeung worked at Oppenheimer & Co. Inc. as director, executive director, and then managing director, responsible for research
coverage of China’s internet and media sectors. Between 2004 and 2009, Mr. Yeung was an associate in equity research at Thomas
Weisel Partners. Prior to that position, Mr. Yeung was a senior consultant at Wells Fargo Bank. From 1999 to 2002, he was an
associate and then senior associate at Mitchell Madison Group and Silver Oak Partners. Mr. Yeung has been a Chartered Financial
Analyst charterholder since 2001. He received his MBA degree from Yale University in 1999 and his bachelor’s degrees in
mechanical engineering and applied mathematics from the University of California, Berkeley, in 1995.
Charles Chenggong Fan has been our chief technology officer since February 2016. Prior to joining us, Mr. Fan served as the
senior vice president of VMware Inc., or VMware, a leading cloud computing company, where he led its storage and big data
businesses. Mr. Fan was also the founder of the China research and development centers of VMware and EMC Corporation. Mr. Fan
started his career as an entrepreneur, co-founding file virtualization startup Rainfinity, which was acquired by EMC Corporation in
2005. He has rich experience in distributed systems, cloud infrastructure and big data. He received his Ph.D. in 2001, a master of
science degree in Electrical Engineering from the California Institute of Technology in 1996 and a bachelor’s degree in electrical
engineering from Cooper Union in 1995.
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Xinhua Liu has been our chief marketing officer since November 2011. Mr. Liu is currently in charge of our global sales and
marketing, business operation, strategic business development, as well as legal and public affairs. Mr. Liu has over 16 years of
working in marketing and public relations. Prior to joining us, between October 2007 and October 2011, Mr. Liu served as the chief
strategy officer of Shunya Communications Group, where he was responsible for strategic account management, business
development, partner sourcing, as well as strengthening the group’s digital capabilities in branding strategy, among others. Between
2005 to 2007, Mr. Liu was a national technology practice leader at Burson-Marsteller, where he was in charge of clientele sourcing in
the technology industry in greater China. Mr. Liu received an MBA degree from the Beijing International MBA program of Peking
University, China, in 2003 and a bachelor’s degree in international economics from the University of International Relations, China, in
1996.
Jie Xiao has been our senior vice president since November 2014, after having served as our vice president since
October 2010. Ms. Xiao is in charge of business development, marketing, and commercial products. From 2008 to 2010, she was a
senior manager at the enterprise marketing department of Baidu, Inc. (NASDAQ: BIDU), focusing on public relations. Prior to that,
she worked as a public relations director at Qihoo and a communications manager for Yahoo! China. She received a bachelor’s degree
in accounting from Renmin University in 1999.
Yong Chen has been our senior vice president since November 2014, after having served as our vice president since
October 2010. Mr. Chen is in charge of the development of Duba Anti-virus, our core anti-virus product, and some other products.
Between 2001 and 2010, Mr. Chen held various positions at Kingsoft Corporation’s subsidiaries responsible for research and
development, including the development of Duba Anti-virus. Mr. Chen has won several awards for innovation and is the inventor of
five issued patents. He received a bachelor of engineering degree from Jingdezhen Ceramic Institute, China, in 2001.
B.
Compensation
Compensation of Directors and Officers
For the fiscal year ended December 31, 2015, we paid an aggregate of approximately RMB10.4 million (US$1.6 million) in
cash to our executive officers, including our executive director, and an aggregate of approximately RMB680,000 (US$105,000) in
cash to our non-executive directors. Our PRC entities are required by law to make contributions equal to certain percentages of each
employee’s salary for his or her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory
benefits. For the fiscal year ended December 31, 2015, we contributed an aggregate of approximately RMB691,000 (US$107,000) for
pension, retirement benefits or other similar benefits for our executive officers, including our executive director.
Share Incentive Awards
Share Incentive Plans
We adopted a share award scheme in May 2011, as amended in September 2013, or the 2011 Plan, a 2013 equity incentive
plan in January 2014, or the 2013 Plan, and a 2014 restricted shares plan, or the 2014 Plan. The purpose of our share incentive plans is
to recruit and retain key employees, directors or consultants of outstanding ability and to motivate them to deliver the best
performance for the benefit of our company.
The 2011 Plan
Under the 2011 Plan, the maximum number of shares in respect of which awards that may be granted is 100,000,000 ordinary
shares of our company as at the date of such grant, excluding any shares awarded that have lapsed or have been forfeited. In
May 2011, we issued 100,000,000 ordinary shares that were put on trust for the benefit of participating employees in the 2011 Plan.
As of March 31, 2016, 97,893,660 restricted shares (excluding those that have been forfeited) had been granted under the 2011 Plan.
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The following paragraphs summarize the key terms of the as amended 2011 Plan.
Types of Awards. The 2011 Plan provides for the award of our ordinary shares subject to certain terms and conditions that
our board of directors may determine in its absolute discretion.
Plan Administration. Our board or a committee of our board duly authorized for the purpose of the 2011 Plan shall
administer the 2011 Plan. The plan administrator will determine in its absolute discretion the employees to receive the awards, the
number of awards to be granted to each selected grantee, and the terms and conditions of each award grant. We have set up a trust
pursuant to a trust deed to facilitate the administration of the 2011 Plan.
Award Notice. Share awards granted under the 2011 Plan are evidenced by an award notice that sets forth the terms and
conditions for each grant, which relate to vesting, forfeiture or lapse of unvested awarded shares, and repurchase of vested awarded
shares.
Eligibility. We may grant awards to any employee of our company, including without limitation an employee who is also a
director of our company or subsidiaries.
Lapse of the Awards. An award will lapse if (i) the grantee of an award ceases to be an employee of our company or
subsidiaries, (ii) the company which employs the selected employee ceases to be a subsidiary of our company, or (iii) there is an
ordinary for involuntary wind-up of our company or a resolution is passed for the voluntary wind-up of our company, save for the
purposes of an amalgamation, reconstruction or scheme of arrangement.
Vesting Schedule. The plan administrator determines the vesting schedule, which is set forth in the award notice.
Transfer Restrictions. Each award granted under the 2011 Plan are personal to respective grantees and may not be sold,
transferred, assigned, charged, mortgaged, or encumbered with any interests in favor of any other third party.
Termination. The 2011 Plan will terminate in May 2021, unless terminated at an earlier date by our board of directors.
The 2013 Plan
Under the 2013 Plan, the maximum number of our ordinary shares that may be issued is 64,497,718 ordinary shares. As of
March 31, 2016, 62,603,131 restricted shares with a purchase price (excluding those that have been forfeited) had been granted under
the 2013 Plan.
The following is a summary of the key terms of the 2013 Plan.
Types of Awards. The 2013 Plan provides for the grant of share options and share appreciation rights, in addition to the grant
or sale of other share-based awards, such as our ordinary shares, restricted shares and awards that are valued in whole or in part by
reference to or based on the fair market value of our ordinary shares.
Plan Administration. Our board, our compensation committee, or a subcommittee thereof duly authorized for the purpose of
the Plan will be the plan administrator of our 2013 Plan. The plan administrator has the sole discretion to determine the participants to
receive the awards, the number and types of awards to be granted to each participant, and the terms and conditions of each award
grant.
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Award Agreement. Awards under the 2013 Plan are evidenced by an award agreement that sets forth the terms and
conditions for each grant.
Exercise Price. The exercise price, grant price, or purchase price of any award shall be determined by the plan administrator
at its sole discretion.
Eligibility. We may grant awards to the employees, director or consultant of our company, Kingsoft Corporation or its
affiliates.
Term of Awards. The term of options and share appreciation rights awarded under the 2013 Plan shall be determined by the
plan administrator, subject to a maximum term of ten years after the date of grant. The term of other share-based awards shall be
determined by the plan administrator.
Lapse of Option Awards. An option award will lapse if (i) the option has expired, (ii) the participant’s relationship or
employment with our company and/or affiliates has been terminated with or without cause pursuant to any applicable laws or under
the participant’s service contract with our company and/or affiliates, (ii) winding-up of our company has been commenced, or
(iii) otherwise provided for in the award agreement.
Vesting Schedule. The plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions. An award may not be transferred or assigned by the participant in any manner other than by will or by
the laws of descent and distribution, unless otherwise determined by the plan administrator.
Termination. The 2013 Plan will terminate automatically in January 2024, unless terminated at an earlier date by a resolution
of our shareholders.
The 2014 Plan
We adopted the 2014 Plan in April 2014. The maximum aggregate number of shares which may be issued pursuant to all
awards under the 2014 Plan is 122,545,665 Class A ordinary shares. As of March 31, 2016, 34,282,530 restricted shares with a
purchase price (excluding those that have been forfeited) had been granted under the 2014 Plan.
The following is a summary of the key terms of the 2014 Plan.
Types of Awards. The 2014 Plan permits the awards of restricted shares and restricted share units.
Plan Administration. Our board, our compensation committee, or a subcommittee thereof duly authorized for the purpose of
the Plan will be the plan administrator of our 2014 Plan. The plan administrator has the sole discretion to determine the participants to
receive the awards, the number and types of awards to be granted to each participant, and the terms and conditions of each award
grant.
Award Agreement. Awards granted under the 2014 Plan are evidenced by an award agreement that sets forth terms,
conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the
grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind
the award.
Eligibility. We may grant awards to the employees, directors and consultants of our company.
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Acceleration of Awards upon Change in Control. If a change in control of our company occurs, the plan administrator may,
in its sole discretion, provide for (i) all awards outstanding to terminate at a specific time in the future and give each participant the
right to exercise the vested portion of such awards during a specific period of time, or (ii) the purchase of any award for an amount of
cash equal to the amount that could have been attained upon the exercise of such award, or (iii) the replacement of such award with
other rights or property selected by the plan administrator in its sole discretion, or (iv) payment of award in cash based on the value of
ordinary shares on the date of the change-in-control transaction plus reasonable interest.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award
agreement.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent
and distribution, except as otherwise provided by the plan administrator.
Termination of the 2014 Plan. Unless terminated earlier, the 2014 Plan will terminate automatically in 2024. Our board of
directors has the authority to amend or terminate the plan subject to shareholder approval or home country practice.
The following table summarizes, as of March 31, 2016, the restricted shares that we granted to our current directors and
executive officers and to other individuals as a group under our 2011 Plan, 2013 Plan and 2014 Plan, and which remained outstanding.
Sheng Fu
David Ying Zhang
Richard Weidong Ji
Ming Xu
Ka Wai Andy Yeung
Charles Chenggong Fan
Xinhua Liu
Yong Chen
Jie Xiao
Other individuals as a group
Total
Number of
Restricted Shares
Outstanding
Purchase Price
(US$/Share)
2,929,000
19,307,951
*
*
*
*
*
*
*
*
*
*
*
*
*
60,562,350
105,273,964
N/A
0.34
N/A
N/A
N/A
0.34
N/A
0.34
0.34
0.34
N/A
N/A
0.34
N/A
0.34
N/A
Date of Grant
March 21, 2014
March 21, 2014
May 8, 2015
May 8, 2015
March 21, 2014
March 21, 2014
January 1, 2014
January 2, 2014
July 1, 2015
April 1, 2016
January 1,2012
June 1, 2011
January 31, 2016
January 1, 2012
January 31, 2016
Expiration Date
May 25, 2021
January 1, 2024
May 25, 2021
May 25, 2021
May 25, 2021
January 1, 2024
May 25, 2021
January 1, 2024
April 22, 2024
April 24, 2024
May 25, 2021
May 25, 2021
April 24, 2024
May 25, 2021
April 24, 2024
*
Less than 1% of our total outstanding Class A and Class B ordinary shares.
All restricted shares granted prior to the completion of our initial public offering under our share incentive plans entitle the
holders to our Class B ordinary shares, while all restricted shares granted thereafter entitle the holders to Class A ordinary shares.
Other Share Incentive Awards
In addition to awards granted pursuant to our share incentive plans, in 2015, we granted an aggregate of 4,627,940 restricted
shares to certain individuals for their employment with us in connection with certain investments and acquisitions made by us. Such
awards are subject to such employees’ continued employment with us for specified terms.
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Moxiu Technology, our 52.1%-owned subsidiary, has granted certain options to purchase its ordinary shares to certain of its
employees.
Employment Agreements
We have entered into employment agreements with our senior executive officers. We may terminate a senior executive
officer’s employment for cause at any time without remuneration for certain acts of the officer, such as being convicted of or pleads
guilty to a felony or to an act of fraud, misappropriation or embezzlement, any negligence or dishonest acts to the detriment of our
company, or any misconduct or failure to perform his/her duties after afforded a reasonable opportunity to cure such failure. We may
also terminate a senior executive officer’s employment without cause at any time by giving one month’s prior written notice, and we
shall provide severance payments to the officer as expressly required by the applicable law of the jurisdiction where the officer is
based. A senior executive officer may terminate his or her employment at any time by giving one month’s prior written notice.
In connection with the employment agreement, each senior executive officer has agreed to hold all proprietary or confidential
information of our company and our affiliates or the respective clients, customers or partners, including, without limitation, all
software and computer formulae, designs, specifications, drawings, data, manuals and instructions and all customer and supplier lists,
sales and financial information, business plans and forecasts, all technical solutions and the trade secrets of our company, in strict
confidence perpetually. Each officer also agrees that we shall own all the intellectual property developed by such officer during his or
her employment.
C.
Board Practices
Board of Directors
Our board of directors currently consists of nine directors. A director is not required to hold any shares in our company to
qualify to serve as a director. A director may vote with respect to any contract or transaction in which he or she is interested provided
the nature of the interest is disclosed prior to its consideration and any vote thereon. Our directors may exercise all the powers of our
company to borrow money, mortgage or charge our undertaking, property and uncalled capital, and to issue debentures, debenture
stock and other securities whether outright or as security for any debt, liability or obligation of our company or of any third party.
Committees of the Board of Directors
We have established an audit committee, a compensation committee and a nominating and corporate governance committee
under the board of directors. 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 Richard Weidong Ji and David Ying Zhang, and is chaired by Richard Weidong Ji. Our
board of directors has determined that Richard Weidong Ji and David Ying Zhang both meet the “independence” requirements of
NYSE and the independence standards under Rule 10A-3 under the Exchange Act. We have determined that Richard Weidong Ji
qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and
the audits of the financial statements of our company. The audit committee is responsible for, among other things:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services
permitted to be performed by the independent registered public accounting firm;
reviewing with the independent registered public accounting firm any audit problems or difficulties and
management’s response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the
Securities Act;
discussing the annual audited financial statements with management and the independent registered public
accounting firm;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of any
material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
(cid:120) meeting separately and periodically with management and the independent registered public accounting firm; and
(cid:120)
reporting regularly to the board.
Compensation Committee
Our compensation committee consists of Jun Lei, Richard Weidong Ji and David Ying Zhang, and is chaired by Jun Lei. Our
board of directors has determined that David Ying Zhang and Richard Weidong Ji both satisfy the “independence” standards under
applicable NYSE corporate governance rules. The compensation committee assists the board in reviewing and approving the
compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive
officer may not be present at any committee meeting during which his compensation is deliberated upon. The compensation
committee is responsible for, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive
officer and other executive officers;
reviewing and recommending to the board for determination with respect to the compensation of our non-employee
directors;
reviewing periodically and approving any incentive compensation or equity plans, programs or similar
arrangements; and
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors
relevant to that person’s independence from management.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Jun Lei, Sheng Fu and David Ying Zhang, and is chaired by
David Ying Zhang. Our board of directors has determined that David Ying Zhang satisfies the “independence” standards under
applicable NYSE corporate governance rules. The committee assists the board in selecting individuals qualified to become our
directors and in determining the composition of the board and its committees. The committee is responsible for, among other things:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy
on the board;
reviewing annually with the board the current composition of the board with regard to characteristics such as
independence, skills, experience, expertise, diversity, and availability of service to us;
selecting and recommending to the board the directors to serve as members of each standing committee of the board;
and
developing and reviewing periodically the corporate governance principles adopted by the board to ensure
appropriateness and compliance with the requirements of the NYSE, and to recommend any desirable changes to the
board.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best
interests. Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not
exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and
experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill
and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must
ensure compliance with our memorandum and articles of association, as amended and restated from time to time.
Terms of Directors and Executive Officers
Our officers are elected by and serve at the discretion of the board. Our directors are not subject to a term of office and hold
office until such time as they resign or are removed from office by ordinary resolution or the unanimous written resolution of all
shareholders. A director will be removed from office automatically if, among other things, the director (1) becomes bankrupt or makes
any arrangement or composition with his creditors; (2) dies or is found to be or becomes of unsound mind; or (3) without special leave
of absence from the board of directors, is absent from meetings of the board for three consecutive meetings and the board resolves that
his office be vacated.
D.
Employees
We had 1,178, 1,809 and 2,151 employees as of December 31, 2013, 2014 and 2015, respectively. The following table sets
forth the number of our employees, categorized by function, as of December 31, 2015:
Function
Operations
Research and development
Sales and marketing
General and administrative
Total
E.
Share Ownership
Number of Employees
99
1,405
446
201
2,151
For information regarding the share ownership of our directors and officers, see “Item 7. Major Shareholders and Related
Party Transactions—A. Major Shareholders.” For information as to share awards granted to our directors, executive officers and other
employees, see “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Awards—Share
Incentive Plans.”
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Item 7.
Major Shareholders and Related Party Transactions
A.
Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2016 by:
(cid:120)
(cid:120)
each of our current directors and executive officers; and
each person known to us to own beneficially more than 5% of our shares.
Percentage of beneficial ownership is based on 1,424,588,645 total outstanding ordinary shares as of March 31, 2016,
representing the sum of 369,074,493 Class A ordinary shares and 1,055,514,152 Class B ordinary shares of our company.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. These rules generally provide
that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting of securities, or to
dispose or direct the disposition of securities or has the right to acquire such powers within 60 days. In computing the number of
shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the
right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other
security, in both the numerator and the denominator. These shares, however, are not included in the computation of the percentage
ownership of any other person.
(9)
(4)
(5)
(7)
(11)
Directors and Executive Officers**:
(3)
Jun Lei
Sheng Fu
Hongjiang Zhang
(6)
Yuk Keung Ng
David Ying Zhang
(8)
Ke Ding
Jeffrey Zhaohui Li
(10)
Wei Liu
Richard Weidong Ji
(12)
Ming Xu
Ka Wai Andy Yeung
Charles Chenggong Fan
Xinhua Liu
Jie Xiao
Yong Chen
All directors and executive officers as a group
Principal Shareholders:
Kingsoft Corporation Limited
(14)
Tencent Holdings Limited
Sheng Global Limited
(13)
(15)
Shares Beneficially Owned
Class A
Ordinary Shares
17,660,294
38,867,334
—
*
4,621,396
—
—
—
*
13,183,666
*
—
—
—
*
77,786,226
Class B
Ordinary Shares
—
78,119,634
—
—
22,168,675
—
—
—
—
46,309,800
*
—
*
*
*
168,127,649
11,800,547
15,031,120
38,867,334
662,806,049
220,481,928
70,581,063
Ordinary Shares
Beneficially
Owned
%
(1)
Voting Power
%
(2)
1.2
8.2
—
*
1.9
—
—
—
*
4.2
*
—
*
*
*
17.1
47.4
16.5
7.7
0.2
7.5
—
*
2.1
—
—
—
*
4.4
*
—
*
*
*
16.1
60.8
20.3
6.8
*
Less than 1% of our total outstanding Class A and Class B ordinary shares.
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** Unless otherwise indicated in the footnotes, the business address for our directors and officers is Hui Tong Times Square, No.1
Yaojiayuan South Road,Chaoyang District, Beijing, 100123, People’s Republic of China.
(1) Percentage ownership is calculated by dividing the number of Class A and Class B ordinary shares beneficially owned by a given
person or group by the sum of (i) 1,424,588,645 ordinary shares and (ii) the number of Class A and Class B ordinary shares that
such person or group has the right to acquire upon exercise of option, warrant or other right within 60 days after March 31, 2016.
(2) Percentage of total voting power represents voting power based on both Class A and Class B ordinary shares held by a given
person or group with respect to the sum of all outstanding shares of our Class A and Class B ordinary shares. The holders of our
Class B ordinary shares are entitled to ten votes per share, and holders of our Class A ordinary shares are entitled to one vote per
share.
(3) Represents (i) 14,285,714 Class A ordinary shares held by Xiaomi Ventures Limited and beneficially owned by Mr. Lei, and
(ii) 3,374,580 Class A ordinary shares represented by ADSs held by Go Corporate Limited and beneficially owned by Mr. Lei.
The business address of Mr. Lei is c/o Kingsoft Corporation Limited, Kingsoft Tower, No.33, Xiaoying West Road, Haidian
District, Beijing 100085, People’s Republic of China.
(4) Represents (i) 32,500,000 Class A ordinary shares represented by restricted ADSs and 48,281,063 Class B ordinary shares held
by Sheng Global Limited, a British Virgin Islands company wholly owned by Mr. Fu, (ii) 6,367,334 Class A ordinary shares and
22,300,000 Class B ordinary shares, or 66.7% of the 9,551,000 Class A ordinary shares (represented by restricted ADSs) and
33,450,000 Class B ordinary shares, respectively, held by FaX Vision Corporation, a BVI company 66.7%-owned by Sheng
Global Limited, (iii) 781,073 Class B ordinary shares that have vested to Mr. Fu under our 2011 Share Award Scheme, and
(iii) 6,757,498 Class B ordinary shares that Mr. Fu may purchase upon vesting of restricted shares granted to him under our 2013
Equity Incentive Plan within 60 days after March 31, 2016.
(5) The business address of Mr. Zhang is c/o Kingsoft Corporation Limited, Kingsoft Tower, No.33, Xiaoying West Road, Haidian
District, Beijing 100085, People’s Republic of China.
(6) The business address of Mr. Ng is c/o Kingsoft Corporation Limited, Kingsoft Tower, No.33, Xiaoying West Road, Haidian
District, Beijing 100085, People’s Republic of China.
(7) Represents (i) an aggregate of 4,552,090 Class A ordinary shares and 22,168,675 Class B ordinary shares held by Matrix Partner
China I, L.P. and Matrix Partner China I-A, L.P., or collectively, the Matrix Partners Funds, as reported on the amendment to
Schedule 13G jointly filed by the Matrix Partners Funds and other persons on February 5, 2016, (ii) 34,653 Class A ordinary
shares that have vested to Mr. Zhang under our share incentive plans, and (iii) 34,653 Class A ordinary shares that Mr. Zhang
may receive or purchase, where applicable, upon vesting of restricted shares under our share incentive plans within 60 days after
March 31, 2016. Mr. Zhang is the managing partner of Matrix Partner Funds and may therefore be deemed to be a beneficial
owner of the shares owned by Matrix Partner Funds. The business address of Mr. Zhang is Suite 2601, Taikang Financial Tower,
Yard No. 38, 3rd East Ring Road North, Chaoyang District, Beijing, People’s Republic of China.
(8) The business address of Mr. Ding is c/o Tencent Holdings Limited, Tencent Building, Kejizhongyi Avenue, Hi-tech Park,
Nanshan District, Shenzhen, 518057, People’s Republic of China.
(9) The business address of Mr. Li is c/o Tencent Holdings Limited, Tencent Building, Kejizhongyi Avenue, Hi-tech Park, Nanshan
District, Shenzhen, 518057, People’s Republic of China.
(10) The business address of Mr. Liu is c/o Kingsoft Corporation Limited, Kingsoft Tower, No.33, Xiaoying West Road, Haidian
District, Beijing 100085, People’s Republic of China.
(11) The business address of Mr. Ji is Suite 2103 21/F, Two Exchange Square, 8 Connaught Place, Central, Hong Kong.
(12) Represents (i) 10,000,000 Class A ordinary shares represented by restricted ADSs and 30,390,531 Class B ordinary shares held
by XaDvision Global Limited, a BVI company wholly owned by Mr. Xu, (ii) 3,183,666 Class A ordinary shares and 11,150,000
Class B ordinary shares, or 33.3% of the 9,551,000 Class A ordinary shares (represented by restricted ADSs) and 33,450,000
Class B ordinary shares, respectively, held by FaX Vision Corporation, a BVI company 33.3%-owned by XaDvision Global
Limited, (iii) 585,869 Class B ordinary shares that have vested to Mr. Xu under our 2011 Share Award Scheme, and
(iv) 4,183,400 Class B ordinary shares that Mr. Xu may purchase upon vesting of restricted shares granted to him under our 2013
Equity Incentive Plan within 60 days after March 31, 2016.
(13) Represents (i) 5,040,877 Class A ordinary shares, (ii) 6,759,670 Class A ordinary shares represented by ADSs, and
(iii) 662,806,049 Class B ordinary shares held by Kingsoft Corporation Limited. Kingsoft Corporation Limited is a company
incorporated in Cayman Islands listed on the Hong Kong Stock Exchange (Stock Code: 3888). Its business address is Kingsoft
Tower, No. 33, Xiaoying West Road, Haidian District, Beijing 100085, People’s Republic of China.
(14) Represents (i) 745,410 Class A ordinary shares and 14,285,710 Class A ordinary shares represented by ADSs held by THL E
Limited, a British Virgin Islands company wholly owned by Tencent Holdings Limited, and (ii) 220,481,928 Class B ordinary
shares held by TCH Copper Limited, a British Virgin Islands company wholly owned by Tencent Holdings Limited, as reported
on the Schedule 13D jointly filed by TCH Copper Limited, Tencent Holdings Limited and THL E Limited on May 19, 2014.
Tencent Holdings Limited is a Cayman Islands company listed on the Hong Kong Stock Exchange (Stock Code: 700). The
business address of Tencent Holdings Limited is 29/F, Three Pacific Place, No.1 Queen’s Road East, Wan Chai, Hong Kong.
(15) Represents (i) 32,500,000 Class A ordinary shares represented by restricted ADSs and 48,281,063 Class B ordinary shares held
by Sheng Global Limited and (ii) 6,367,334 Class A ordinary shares and 22,300,000 Class B ordinary shares, or 66.7% of the
9,551,000 Class A ordinary shares (represented by restricted ADSs) and 33,450,000 Class B ordinary shares, respectively, held by
FaX Vision Corporation, a BVI company 66.7%-owned by Sheng Global Limited. The registered address of Sheng Global
Limited is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands.
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As of March 31, 2016, to our knowledge, on the same basis of calculation as above, 343,558,690 Class A ordinary shares
represented by ADSs, or approximately 24.1% of our total outstanding ordinary shares were held by one record shareholder in the
United States, namely The Bank of New York Mellon, the depositary 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 record holders of our ordinary shares in the United States.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares
are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. We are not aware of any
arrangement that may, at a subsequent date, result in a change of control of our company. None of our major shareholders have
different voting rights apart from any Class B ordinary shares that they may hold in our company.
B.
Related Party Transactions
Contractual Arrangements with VIEs
Due to certain restrictions under PRC law on foreign ownership and investment in value-added telecommunications services
in China, we conduct our operations in China principally through contractual arrangements with our VIEs in China and their
respective shareholders. For a description of these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure—Contractual Arrangements with Our VIEs.”
Transactions and Agreements with Kingsoft Corporation and its Subsidiaries
Kingsoft Corporation is our controlling shareholder, with beneficial ownership and voting power of 47.4% and 60.8%,
respectively, of our outstanding Class A and Class B ordinary shares on an as-converted basis as of March 31, 2016. Kingsoft
Corporation has the power acting alone to approve any action requiring a vote of the majority of our ordinary shares.
Our company has certain common directors and officers with Kingsoft Corporation. As of the date of this annual report,
Mr. Jun Lei, the chairman of our board of directors, also serves as the chairman and non-executive director of Kingsoft Corporation.
Mr. Hongjiang Zhang, one of our directors, is also the chief executive officer and director of Kingsoft Corporation. Mr. Yuk Keung
Ng, one of our directors, is also the chief financial officer and director of Kingsoft Corporation. Mr. Wei Liu, one of our directors, is
also a vice president of Kingsoft Corporation. Mr. Sheng Fu, our chief executive officer and director, also serves as a senior vice
president at Kingsoft Corporation.
Kingsoft Corporation is a company with shares listed on the Hong Kong Stock Exchange, and is accordingly subject to the
requirements of the Hong Kong Listing Rules. Under the Hong Kong Listing Rules, we are a “connected person” of Kingsoft
Corporation. Accordingly, transactions between us, our subsidiaries, our VIEs, or a VIE’s subsidiary, on the one hand, and Kingsoft
Corporation or any of its subsidiaries (excluding us and our subsidiaries, VIEs and a VIE’s subsidiary), on the other hand, are
“connected transactions.” Under the Hong Kong Listing Rules, all connected transactions must be carried out on normal commercial
terms, and if the value of a connected transaction exceeds the applicable thresholds, it is subject to the approval of the independent
shareholders of Kingsoft Corporation.
Non-compete undertaking
In connection with our initial public offering, we entered into a non-compete undertaking with Kingsoft Corporation in
May 2014 on the following terms:
(cid:120) We will not develop games and will only operate games that have been developed by third party developers, except
that we may acquire a majority interest in a third party game developer if Kingsoft Corporation chooses not to
acquire such interest following our referral of the opportunity to it. We may operate games developed by Kingsoft
Corporation and its remaining subsidiaries subject to the relevant requirements under Chapter 14A of the Hong
Kong Listing Rules, which governs connected transactions.
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(cid:120) Kingsoft Corporation and its remaining subsidiaries will use their best efforts to limit their revenue from the
operation of third party-developed games through dedicated websites and platforms to less than 5% of their total
revenue derived from the operation of self-developed and third party-developed games. If this threshold is exceeded
in any financial year, Kingsoft Corporation is required to refer to us certain new opportunities relating to the
operation of third party-developed games in the next financial year.
(cid:120) We will refer all new opportunities relating to the development of games to Kingsoft Corporation and its remaining
subsidiaries, except that we may continue to acquire minority interests (i.e., less than 50% interest) in third party
game developers. If, following the acquisition of a minority interest in a game developer, we are able to acquire
additional interests in such developer such that we will have an aggregate interest exceeding 50%, we will first offer
the right to acquire such additional interests to Kingsoft Corporation. If Kingsoft Corporation chooses not to take up
such right, we may do so.
(cid:120) All decisions by Kingsoft Corporation with respect to whether to take up the right of first offer will be made by the
directors of Kingsoft Corporation that do not hold positions at our company.
(cid:120) Kingsoft Corporation and its remaining subsidiaries will refer all new opportunities relating to information security
software, web browsers, the provision of information security service across devices and the provision of online
advertising services relating to the information security software business (other than an opportunity relating to such
business in Japan) to us. If we choose not to take up such opportunities, Kingsoft Corporation and its remaining
subsidiaries may do so.
Cooperation framework agreement
Historically, we have entered into various transactions from time to time with Kingsoft Corporation and its subsidiaries. In
order to regulate such ongoing transactions, we entered into a cooperation framework agreement with Kingsoft Corporation on
December 27, 2013, which became effective from January 1, 2014 and will expire on December 31, 2016. The agreement was
amended on April 1, 2014. Until its expiration date, this framework agreement governs the following transactions between our
company and Kingsoft Corporation:
(cid:120)
(cid:120)
(cid:120)
Promotion services. We and Kingsoft Corporation will mutually provide promotion services through their own
products and websites for the sale of the other party’s products, including but not limited to pre-installation, bundle
promotion, joint operation and publishing online advertisements;
Licensing services. We and Kingsoft Corporation will grant licenses to each other to use, among others, certain
technologies, trademarks and software products;
Leasing transactions. Kingsoft Corporation will provide property leasing and asset leasing to our company; and
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(cid:120) Miscellaneous services. Kingsoft Corporation will provide miscellaneous services to our company, including but not
limited to, administration assistance services and technology support services.
We and Kingsoft Corporation may enter into individual contracts from time to time when necessary according to the
principles and scope provided for under the framework agreement. Pursuant to the framework agreement, the transactions between us
and Kingsoft Corporation will be priced based on: (i) the prevailing fair market pricing rules adopted in the same industry; (ii) a price
calculated based on costs plus reasonable profit margin; or (iii) a price with reference to the price or reasonable profit margin of an
independent third party.
For the years ended December 31, 2014 and 2015, we recognized aggregate fees of RMB6.1 million and RMB5.6 million
(US$0.9 million), respectively, to Kingsoft Corporation and its subsidiaries for leasing and miscellaneous services they provided to us,
in addition to the licensing fees recognized pursuant to separate licensing agreements. See “—Intellectual property licensing
arrangements.” For the years ended December 31, 2014 and 2015, we recognized aggregate revenue of RMB1.7 million and RMB8.1
million (US$1.2 million), respectively, from Kingsoft Corporation and its subsidiaries for promotion services and online marketing
services that we provided to Kingsoft Corporation and its subsidiaries, in addition to the licensing revenues recognized pursuant to
separate licensing agreements. See “Exclusive technologies licensing agreement and framework licensing agreement.”
Exclusive technologies licensing agreement and framework licensing agreement
On December 1, 2009, Beijing Security entered into an exclusive licensing agreement with Kingsoft Japan Inc., or Kingsoft
Japan, which was one of Kingsoft Corporation’s subsidiaries until it became our subsidiary in February 2016. Pursuant to this
agreement, Beijing Security granted Kingsoft Japan the exclusive right to use certain internet security software within Japan and to
sub-license such software to original equipment manufacturers in Japan solely for their self-use and sale of products and services.
Pursuant to this agreement, which was later amended in March 2012, Beijing Security will charge 12% of the revenues (net of cost of
sales such as agents’ and distributors’ commission) derived from the sale and manufacture of products and services. This agreement,
as amended, will expire on December 31, 2016.
On November 12, 2013, our company, in our own capacity and on behalf of Beijing Security, entered into a framework
licensing agreement with Kingsoft Japan, which supplies detailed provisions to the exclusive licensing agreement dated December 1,
2009. Pursuant to this framework agreement, with regard to software on mobile products, our company will develop and provide
continuous technology upgrade services. As a consideration, Kingsoft Japan agreed to raise the share of revenue by our company from
12% to 33%, unless otherwise agreed based on fair and customary commercial terms. The increased share of revenue is retroactively
effective from January 1, 2013. With respect to Duba Anti-virus on PCs, our company will provide upgrade and service maintenance
to Kingsoft Japan effective from January 1, 2014. As a consideration, Kingsoft Japan agreed to raise the share of revenue by our
company from 12% to 20%, and to 33% of revenue derived from Duba Anti-virus on PCs that surpasses a stipulated threshold.
For the years ended December 31, 2014 and 2015, we recognized aggregate revenue of RMB4.0 million and RMB5.8 million
(US$0.6 million), respectively, from Kingsoft Japan pursuant to the exclusive licensing agreement dated December 1, 2009, as
amended, and the framework licensing agreement.
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Intellectual property licensing arrangements
On January 14, 2011, Beijing Security, Zhuhai Juntian and Conew Network, or collectively, the Licensees, entered into an
authorization and licensing agreement with Beijing Kingsoft Digital Entertainment Technology Co., Ltd., Beijing Kingsoft Software
Co., Ltd., and Zhuhai Kingsoft Software Co., Ltd., or collectively, the Licensors, which are subsidiaries of Kingsoft Corporation. The
agreement was further amended on February 14, 2011 and December 3, 2012 and took effect retroactively from October 1, 2010.
According to the agreement, as amended, the Licensors grants to the Licensees, for a consideration of RMB42.0 million, a global
license (except in Japan) to use for a duration of five years certain approved or pending software copyrights, patents and trademarks,
or collectively, the Products, a right to redevelop the Products, and a right to sub-license all those Products to its affiliates without
additional consideration. Any rights and interests redeveloped by the Licensees based on the Products belong to the Licensees. This
authorization and licensing agreement has been terminated and superseded by the intellectual property transfer and license framework
agreement, or the Transfer and License Agreement, effective from April 1, 2014. The total licensing fee payable in 2014 under the
authorization and licensing agreement shall be calculated pro-rata based on the actual term performed.
Pursuant to the Transfer and License Agreement, Kingsoft Corporation agreed to transfer and license to us certain intellectual
property it owns that is related to our business, for a total consideration of RMB13.6 million (US$2.2 million), tax inclusive. The
intellectual property transferred includes software copyrights, registered and pending trademarks and approved and pending patents. In
addition, we agreed to grant Kingsoft Corporation the right to use the patents and trademarks it transferred to us to promote Kingsoft
Corporation and our company, for an aggregate consideration of RMB0.4 million (US$0.1 million), tax inclusive. Kingsoft
Corporation also agreed to license to us certain patents and trademarks it did not transfer to us that are related to our business.
However, these licenses do not allow us to use such patents and trademarks in Japan or to promote lines of business in competition
with Kingsoft Corporation. These licenses will terminate upon expiration or rejection of application of the relevant patents and
trademarks, and will terminate automatically when Kingsoft Corporation ceases to be our major shareholder, as such term is defined in
the Hong Kong Listing Rules.
For the years ended December 31, 2014 and 2015, we incurred an aggregate license fee of RMB2.1 million (US$0.3 million)
and nil, respectively, pursuant to the authorization and licensing agreement and the Transfer and License Agreement.
Corporation Promotion Agreement
We entered into corporation promotion agreements with Zhuhai Kingsoft Office Software, a subsidiary of Kingsoft
Corporation in 2014 and 2015. Under the agreements, Zhuhai Kingsoft Office Software agreed to promote our products on its
platforms. The promotion fee was priced based on effective IP click. For the years ended December 31, 2014 and 2015, we incurred
an aggregate promotion fee of RMB24.5 million and RMB28.2 million (US$4.4 million), respectively.
Non-exclusive game operation framework agreements
We entered into a joint game operation framework agreement with Kingsoft Corporation on October 15, 2014. Pursuant to
the agreement, Kingsoft Corporation and its remaining subsidiaries grant us the license to, among others, distribute, operate and
promote certain games, and we provide the platforms, including but not limited to the website, software, PC products and mobile
platform, together with ancillary services, for operating such licensed games. We will share with Kingsoft Corporation and its
remaining subsidiaries the revenues generated from users under the joint game operation based on the prevailing fair market price in
the same industry. We will pay Kingsoft Corporation and its remaining subsidiaries (i) 20% to 50% of the revenue generated, and
(ii) licensing fees ranging from RMB2 million to RMB15 million depending on the game quality, licensing scope and mobile platform
operating the licensed game. Transactions under the framework agreement are subject to annual caps of RMB42 million and RMB78
million in total for 2014 and 2015, respectively. The agreement has expired on December 31, 2015.
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For the years ended December 31, 2014, we recognized licensing fees of RMB13.9 million pursuant to the framework
agreement and we paid a total of RMB2.3 million and RMB1.8 million (US$0.3 million) for the years ended December 31, 2014 and
2015, respectively, to the subsidiaries of Kingsoft Corporation as their share of revenues.
In the future, for so long as Kingsoft Corporation remains our controlling shareholder, we intend to enter into new
agreements, or make amendments to existing agreements, between us and Kingsoft Corporation that involve significant expenditures
or commitments with reference to the terms of similar agreements between unrelated third parties. We will also submit such
agreements and amendments for review by the audit committee of our board of directors, which will assess such agreements and
amendments for potential conflicts of interest in accordance with NYSE rules and seek to ensure that terms of such agreements and
amendments are no less favorable than would be comparable agreements between us and an unaffiliated third party. In assessing a
related party transaction, the audit committee will be required to consider such factors as (i) the benefits to us of the transaction;
(ii) whether such transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same
or similar circumstances; (iii) the materiality of the transaction to us; and (iv) the extent of the related party’s interest in the
transaction.
Transactions with Other Affiliates
Transactions with Beijing Starsinhand Technology Company Limited
In December 2014, we acquired an additional 22.2% equity interest in Moxiu Technology from Beijing Starsinhand
Technology Company Limited, for a consideration of RMB30 million in cash, resulting in a total of 50.5% equity interest in Moxiu
Technology. In May 2015, we acquired an additional 1.6% equity interest in Moxiu Technology from Beijing Starsinhand Technology
Company Limited for a cash consideration of RMB25.0 million (US$3.9 million). Upon completion of this acquisition, Moxiu
Technology became our subsidiary and we started to consolidate Moxiu Technology in our financial statements. Beijing Starsinhand
Technology Company Limited is a subsidiary of Tencent Holdings Limited, one of our major beneficial shareholders.
Transactions with Tencent Shenzhen
We entered into a strategic cooperation agreement dated December 27, 2013, as amended on July 31, 2014, with Shenzhen
Tencent Computer Systems Company Limited, or Tencent Shenzhen, to promote various types of products of Tencent Holdings
Limited, its subsidiaries and their respective associates, or collectively the Tencent Group, through various forms of promotion
services on our mobile and PC applications and platforms. Tencent Shenzhen is a subsidiary of Tencent Holdings Limited, one of our
major beneficial shareholders. The price of services provided between us and Tencent Shenzhen will be based on (i) the prevailing fair
market price, (ii) the actual cost incurred plus a reasonable profit margin, or (iii) a price with reference to the price or reasonable profit
margin of an independent third party conducting the similar transactions. The term of the cooperation agreement was from January 1,
2014 to December 31, 2015.
The annual caps of all the transactions under this agreement, as further amended on June 30, 2015 and November 5, 2015,
was RMB100 million (US$15.4 million) and RMB340 million (US$52.5 million) for the years ended December 31, 2014 and 2015,
respectively. On January 30, 2015, we entered into a supplemental agreement with Tencent Shenzhen, pursuant to which Tencent
Shezhen agrees to provide promotion services to us, subject to an annual cap of RMB100 million (US$15.4 million) for the year ended
December 31, 2015.
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On December 30, 2015, we entered into a new strategic cooperation agreement with Tencent Shenzhen, pursuant to which we
and the Tencent Group will continue to provide promotion services to each other for the years ended December 31, 2016 and 2017,
subject to annual caps of RMB495 million (US$76.4 million) and RMB587 (US$90.6 million) million, respectively, for our services
provided to Tencent Group, and RMB30 million (US$4.6 million) and RMB45 million (US$6.9 million), respectively, for services
provided by the Tencent Group to us.
Pursuant to the strategic cooperation agreements, as amended, for the years ended December 31, 2014 and 2015, we
recognized total revenue from the Tencent Group in the amount of RMB78.4 million and RMB293.5 million (US$45.3 million),
respectively, and recognized aggregate fees of nil and RMB41.6 million (US$6.4 million), respectively, to the Tencent Group.
Transactions with Xiaomi
We have entered into various agreements with the subsidiaries and affiliates of Xiaomi Corporation, or Xiaomi, which is a
Cayman Islands company controlled by Mr. Jun Lei, the chairman of our board of directors. Pursuant to the agreements, we and
Xiaomi provide marketing and software installation services to each other. For the years ended December 31, 2014 and 2015, we
recognized a total revenue of RMB4.1 million and RMB117,000 (US$18,000), respectively, from Xiaomi, and we paid a total of
RMB2.9 million and RMB47.8 million (US$7.4 million), respectively, to Xiaomi.
On February 1, 2014, we entered into a non-exclusive game operation agreement with Beijing Wali Network Technology
Co., Ltd., or Beijing Wali, pursuant to which we agreed to allocate 50% of the revenue generated from jointly operated games to
Beijing Wali. For the years ended December 31, 2014 and 2015, we paid a total of RMB3.1 million and RMB3.1 million (US$0.5
million), respectively, to Beijing Wali as their share of revenues. On July 25, 2014, we entered into a second non-exclusive game
operation agreement with Beijing Wali. Pursuant to the agreement, we and Beijing Wali jointly operate games and share revenues
generated from the game operation at an agreed rate. For the years ended December 31, 2014 and 2015, we recognized a total of
RMB1.5 million and RMB2.5 million (US$0.4 million), respectively, as our share of revenues from the joint game operation. Beijing
Wali is an affiliate of Xiaomi Corporation.
Transactions with Wuhan Antian
On each of January 1, 2014 and 2015, we entered into an authorization and licensing agreement with Wuhan Antian
Information Technology Co., Ltd., or Wuhan Antian, to purchase a license to use certain technology. We paid RMB4.0 million and
RMB4.5 million (US$0.7 million) to Wuhan Antian for the years ended December 31, 2014 and 2015, respectively, for such a license.
We owned 40% and 20% equity interest in Wuhan Antian as of December 31, 2014 and 2015, respectively.
Registration Rights Agreement
Pursuant to the registration rights agreement dated April 25, 2014 with Kingsoft Corporation, Xiaomi Ventures Limited and
Baidu Holdings Limited, we agreed to grant each of the parties Form F-3 registration rights and the piggyback registration rights. In
addition, we agreed to pay expenses relating to their exercise of Form F-3 registration rights and piggyback registration rights, except
for underwriting discounts and commissions relating to the sale of securities, unless, subject to a few exceptions, a registration request
is subsequently withdrawn at the request of a majority-in-interest of the holders requesting such registration.
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Employment Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements.”
Share Incentive Plans
“Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Awards—Share Incentive
Plans.”
Other Transactions with Certain Directors and Affiliates
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Compensation of Directors and Officers.”
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
We are subject to legal proceedings and claims in our ordinary course of business from time to time. On May 27, 2015, we
filed a complaint in the district court of Northern District of California against APUS Group, an Android app developer, for
defamation, trade libel, copyright infringement, federal and state false advertising, trademark dilution, unfair competition, intentional
interference with prospective economic advantage, and intentional interference with contract, in connection with APUS Group’s
publication of certain negative statements about our company and products. We are seeking an injunction, monetary damages for the
harm to our business, reputation, and consumer goodwill, account of profits, punitive damages, and attorneys’ fees and costs.
Other than the above, we are currently not a party to, and are not aware of any threat of, any legal, arbitration or
administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business,
financial condition or results of operations. For a description of certain legal proceedings and arbitration that we are currently involved
in, see “Note 18. Commitments and Contingencies—Litigation” to our consolidated financial statements for the years ended
December 31, 2013, 2014 and 2015 included in this annual report.
In September 2011, Mr. Sheng Fu, our chief executive officer, was named as a defendant in a lawsuit filed by Qihoo in the
High Court of the Hong Kong Special Administrative Region. The complaint was subsequently amended in May 2012, July 2012 and
January 2014. The amended complaint alleges that Mr. Fu has breached his contractual obligations of confidentiality, non-
competition, non-solicitation and non-disparagement under the agreements Mr. Fu had entered into with a subsidiary of Qihoo prior to
his resignation from the subsidiary in August 2008. The complaint asserts that Mr. Fu was a product manager of Qihoo and was
responsible for, and participated in, product design and research of certain antivirus products, including 360 Anti-virus and 360 Safe
Guard and had access to the related confidential information, trade secret, technology and know-how.
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In connection with the above claims, the complaint specifically alleges that Mr. Fu: (i) used confidential information of
Qihoo to develop, by himself or through Beijing Conew and Conew Network, an anti-virus product released around May 2010 that
was substantially similar to Qihoo’s 360 Anti-virus and 360 Safe Guard and infringed upon the confidential information, trade secrets
and other rights of Qihoo; (ii) engaged in or dealt with businesses and products that directly competed with the businesses and/or
products of Qihoo within the 18-month restricted period; (iii) employed employees of Qihoo within the 18-month restricted period,
including Mr. Ming Xu, our chief technology officer, who was the then director of technology of 360 Safe Guard, a division of Qihoo;
and (iv) made certain negative statements publicly about Qihoo.
Qihoo is seeking a court declaration that Qihoo’s repurchase of its shares previously granted to Mr. Fu under Qihoo’s share
incentive plan at a nominal value was valid, a court order that Mr. Fu cease to use any confidential information or know-how of
Qihoo, damages for disparagement, and a court order that Mr. Fu account to Qihoo for any profits that he earned as a result of the
alleged breach.
Mr. Fu joined us in October 2010 when we acquired Conew.com Corporation, for which Mr. Fu served as the chief executive
officer prior to the acquisition. Our product offerings do not include, and are not derived from, the anti-virus products referenced in
the complaint.
Dividend Policy
We currently have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to
retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely on a significant amount of dividends from our
subsidiaries for our cash requirements, including any payment of dividends to our shareholders. With respect to our PRC subsidiaries,
PRC regulations may restrict their abilities to pay dividends to us. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
Doing Business in China—We may rely on dividends paid by our PRC subsidiaries to fund any cash and financing requirements we
may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our
ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.” and “Item 4. Information on the
Company—B. Business Overview—Regulations—Regulations of Foreign Currency Exchange and Dividend Distribution.”
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. In addition, our
shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors.
Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium
amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts
due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will
depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions
and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same
extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder. See “Item 12. Description of Securities Other than Equity Securities—D. American Depositary Shares.” Cash dividends
on our ordinary shares, if any, will be paid in U.S. dollars.
B.
Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our
audited consolidated financial statements included in this annual report.
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Item 9.
The Offer and Listing
A.
Offering and Listing Details
Our ADSs have been listed on The New York Stock Exchange, or the NYSE, since May 8, 2014. Our ADSs currently trade
on the NYSE under the symbol “CMCM.” One ADS represents ten Class A ordinary shares of our company.
The following table provides the high and low trading prices for our ADSs on the NYSE for the time periods indicated.
Trading Price
High
Low
30.77
36.63
25.00
30.77
21.67
30.77
36.63
29.90
21.37
18.19
20.39
21.37
19.37
16.25
17.18
18.19
17.13
12.50
13.33
12.50
18.03
14.76
12.50
17.23
13.33
13.80
13.62
13.80
17.11
15.88
13.62
13.71
14.20
15.62
Annual Highs and Lows
2014 (since May 8, 2014)
2015
Quarterly Highs and Lows
Second Quarter 2014 (since May 8, 2014)
Third Quarter 2014
Fourth Quarter 2014
First Quarter 2015
Second Quarter 2015
Third Quarter 2015
Fourth Quarter 2015
First Quarter 2016
Monthly Highs and Lows
October 2015
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016 (through April 21, 2016)
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ADSs have been listed on the NYSE since May 8, 2014 under the symbol “CMCM.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
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Item 10.
Additional Information
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our fourth amended and restated memorandum and
articles of association contained in our F-1 registration statement (File No. 333-194996), as amended, initially filed with the SEC on
April 2, 2014. The fourth amended and restated memorandum and articles of association was adopted by our shareholders by a special
resolution passed on April 2, 2014, and became effective immediately prior to the completion of our initial public offering of our
Class A ordinary shares represented by ADSs.
C.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described
in “Item 4. Information on the Company” or elsewhere in this annual report.
D.
Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange and
Dividend Distribution.”
E.
Taxation
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or
appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us
levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of, the Cayman Islands. There are no exchange control regulations or currency restrictions in
the Cayman Islands.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, an enterprise
established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income.
On April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of
Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies,
or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC
controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on July 27, 2011, the SAT issued
the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or
SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1,
2011. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and
competent tax authorities procedures. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC
enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having its “de facto management
body” in China only if all of the following conditions are met: (a) the senior management and core management departments in charge
of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to
determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and
files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or
senior management with voting rights habitually reside in the PRC. Although SAT Circular 82 and SAT Bulletin 45 only apply to
offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals
or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “de facto
management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are
controlled by PRC enterprises, individuals or foreigners.
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We do not believe Cheetah Mobile Inc. meets all of the criteria described above. We believe that none of Cheetah Mobile
Inc. and its subsidiaries outside of China is a PRC tax resident enterprise, because none of them is controlled by a PRC enterprise or
PRC enterprise group, and because their records (including the resolutions of its board of directors and the resolutions of shareholders)
are maintained outside the PRC. However, as the tax resident status of an enterprise is subject to determination by the PRC tax
authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” when applied to our
offshore entities, we may be considered as a resident enterprise and may therefore be subject to PRC enterprise income tax at 25% on
our global income. In addition, if the PRC tax authorities determine that our company is a PRC resident enterprise for PRC enterprise
income tax purposes, dividends paid by us to non-PRC holders may be subject to PRC withholding tax, and gains realized on the sale
or other disposition of ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20%
in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such dividends or gains are
deemed to be from PRC sources. Any such tax may reduce the returns on your investment in the ADSs.
If we are considered a “non-resident enterprise” by the PRC tax authorities, the dividends paid to us by our PRC subsidiaries
will be subject to a 10% withholding tax. The EIT Law also imposes a withholding income tax of 10% on dividends distributed by an
foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a
non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the
establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of
incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where our
company is incorporated, and the British Virgin Islands, where our subsidiary Conew.com Corporation was incorporated, do not have
such tax treaties with China. None of our U.S subsidiaries is an immediate holding company of our PRC subsidiaries. Under the
Arrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, the dividend withholding tax rate may be reduced to 5%,
if a Hong Kong resident enterprise that receives a dividend is considered a non-PRC tax resident enterprise and holds at least 25% of
the equity interests in the PRC enterprise distributing the dividends, subject to approval of the PRC local tax authority. However, if the
Hong Kong resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations,
such dividends may remain subject to withholding tax at a rate of 10%. Accordingly, our Hong Kong subsidiaries may be able to
enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries if they satisfy the relevant conditions
under tax rules and regulations, and obtain the approvals as required.
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According to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC
Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, with retroactive effect from
January 1, 2008, or SAT Circular 698, where a non-resident enterprise transfers the equity interests in a PRC resident enterprise
indirectly through a disposition of equity interests in an overseas holding company (other than a purchase and sale of shares issued by
a PRC resident enterprise in public securities market), PRC tax reporting and payment obligations may be triggered. On February 6,
2015, SAT issued a new guidance (Bulletin [2015] No. 7), or SAT Bulletin 7, on the PRC tax treatment of an indirect transfer of assets
by a non-resident enterprise. SAT Bulletin 7 is the latest regulatory instrument on indirect transfers, extending to not only the indirect
transfer of equity interests in PRC resident enterprises but also to assets attributed to an establishment in China and immovable
property in China or, collectively, Chinese Taxable Assets. According to SAT Circular 698 and SAT Bulletin 7, when a non-resident
enterprise engages in an indirect transfer of Chinese Taxable Assets, or Indirect Transfer, through an arrangement that does not have a
bona fide commercial purpose in order to avoid paying enterprise income tax, the transaction should be re-characterized as a direct
transfer of the Chinese assets and becomes taxable in China under the EIT Law, and gains derived from such indirect transfer may be
subject to the PRC withholding tax at a rate of up to 10%. In addition, transferees and transferors in such indirect transfers are subject
to tax withholding and reporting obligations, respectively. SAT Bulletin 7 does not replace SAT Circular 698 in its entirety. Instead, it
abolishes certain provisions and provides more comprehensive guidelines on a number of issues. Among other things, SAT Bulletin 7
substantially changes the reporting requirements in SAT Circular 698, provides more detailed guidance on how to determine a bona
fide commercial purpose, and also provides for a safe harbor for certain situations, including purchase and sale of shares in an offshore
listed enterprise on a public market by a non-resident enterprise, which may not be subject to the PRC enterprise income tax.
United States Federal Income Taxation
The following discussion is a summary of United States federal income tax considerations relating to the ownership, and
disposition of the ADSs or our Class A ordinary shares by a U.S. holder (as defined below) that holds the ADSs or our Class A
ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as
amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject to differing
interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”)
with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a
court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may
be important to particular holders in light of their individual circumstances, including holders subject to special tax rules (for example,
banks or other financial institutions, insurance companies, broker-dealers, pension plans, cooperatives, traders in securities that have
elected the mark-to-market method of accounting for their securities, partnerships and their partners, regulated investment companies,
real estate investment trusts, 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 who acquired their ADSs or Class A
ordinary shares pursuant to any employee share option or otherwise as compensation, holders that hold their ADSs or Class A
ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal
income tax purposes, or holders that have a functional currency other than the United States dollar, all of whom may be subject to tax
rules that differ significantly from those summarized below. In addition, except to the extent described below, this discussion does not
discuss any non-United States, alternative minimum tax, state, or local tax considerations, any non-income tax (such as the United
States federal gift and estate tax) considerations, or the Medicare tax. Each U.S. holder is urged to consult its tax advisors regarding
the United States federal, state, local, and non-United States income and other tax considerations with respect to the ownership and
disposition of the ADSs or our Class A ordinary shares.
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General
For purposes of this discussion, a “U.S. holder” is a beneficial owner of the ADSs or our Class A ordinary shares that is, for
United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other
entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United
States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary
supervision of a United States court and which has one or more United States persons who have the authority to control all substantial
decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of
the ADSs or our Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the
partner and the activities of the partnership. Partnerships holding the ADSs or our Class A ordinary shares and partners in such
partnerships are urged to consult their tax advisors as to the particular United States federal income tax consequences with respect to
the ownership and disposition of the ADSs or our Class A ordinary shares.
For United States federal income tax purposes, it is generally expected that a U.S. holder of ADSs will be treated as the
beneficial owner of the underlying shares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs
will be treated in this manner. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will generally not be subject
to United States federal income tax.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for
United States federal income tax purposes, if, in the case of any particular taxable year, either (i) 75% or more of its gross income for
such year consists of certain types of “passive” income or (ii) 50% or more of the average quarterly value of its assets (as determined
on the basis of fair market value) during such year produce or are held for the production of passive income. For this purpose, cash is
categorized as a passive asset and the company’s unbooked intangibles associated with active business activities may generally be
classified as active assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from
the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of
the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Although the law in this regard is unclear, we treat our VIEs and each of their subsidiaries as being owned by us for United
States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because
we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our
consolidated financial statements. Assuming that we are the owner of our VIEs and each of their subsidiaries for United States federal
income tax purposes, and based upon our current and expected income and assets and the market price of the ADSs, we do not
presently expect to be a PFIC for the current taxable year or the foreseeable future.
Assuming that we are the owner of our VIEs and each of their subsidiaries for United States federal income tax purposes,
although we do not expect to become a PFIC in the current or future taxable years, the determination of whether we will be or become
a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles (which will depend upon the market price
of our ADSs from time-to-time, which may be volatile). Among other matters, if our market capitalization declines, we may be or
become a PFIC for the 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.
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The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and
assets, which may be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public offering.
Under circumstances where we determine not to deploy significant amounts of cash for active purposes or if we were treated as not
owning our VIEs for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase.
Because our PFIC status for any taxable year is a factual determination that can be made only after the close of a taxable year, there
can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. Because PFIC status is
determined annually based on the facts at the relevant time, our special United States counsel expresses no opinion with respect to our
PFIC status for any taxable year and also expresses no opinion with respect to our expectations regarding our PFIC status. If we were
a PFIC for any year during which a U.S. holder held the ADSs or our Class A ordinary shares, we generally would continue to be
treated as a PFIC for all succeeding years during which such U.S. holder held the ADSs or our Class A ordinary shares.
The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Ordinary Shares” is written on the basis
that we will not be a PFIC for United 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 any subsequent taxable year are generally discussed below under “Passive Foreign
Investment Company Rules.”
Dividends
Subject to the PFIC rules discussed below, any cash distributions (including the amount of any tax withheld) paid on the
ADSs or our Class A ordinary shares out of our current or accumulated earnings and profits, as determined under United States federal
income tax principles, will generally be includible in the gross income of a U.S. holder as dividend income on the day actually or
constructively received by the U.S. holder, in the case of Class A ordinary shares, or by the depositary, in the case of ADSs. Because
we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution
paid will generally be reported as a “dividend” for United States federal income tax purposes. A non-corporate recipient of dividend
income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a reduced United States federal
tax rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements
are met.
A non-United States corporation (other than a corporation that is a PFIC for the taxable year in which the dividend is paid or
the preceding taxable year) will generally be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a
comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for
purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on
stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. Our ADSs
are listed on the NYSE, which is an established securities market in the United States, and the ADSs are expected to be readily
tradable for so long as they continue to be listed on the NYSE. Thus, we believe that we will be a qualified foreign corporation with
respect to dividends paid on the ADSs. Since we do not expect that our Class A ordinary shares will be listed on established securities
markets, it is unclear whether dividends that we pay on our Class A ordinary shares that are not backed by ADSs currently meet the
conditions required for the reduced tax rate. However, in the event we are deemed to be a resident enterprise under the PRC Enterprise
Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty (which the U.S. Treasury
Department has determined is satisfactory for this purpose) and in that case we would be treated as a qualified foreign corporation
with respect to dividends paid on our Class A ordinary shares or ADSs. Each non-corporate U.S. holder is advised to consult its tax
advisors regarding the availability of the reduced tax rate applicable to qualified dividend income for any dividends we pay with
respect to the ADSs or our Class A ordinary shares. Dividends received on the ADSs or Class A ordinary shares will not be eligible
for the dividends received deduction allowed to corporations.
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Dividends will generally be treated as income from foreign sources for United States foreign tax credit purposes and will
generally constitute passive category income. In the event that we are deemed to be a PRC “resident enterprise” under the PRC
Enterprise Income Tax Law, a U.S. holder may be subject to PRC withholding taxes on dividends paid on the ADSs or our Class A
ordinary shares. See “—People’s Republic of China Taxation.” A U.S. holder may be eligible, subject to a number of complex
limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or
Class A ordinary shares. A U.S. holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a
deduction, for United States federal income tax purposes, in respect of such 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 the foreign tax credit are complex. U.S. holders are
advised to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
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 or ordinary 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 ADSs or Class A ordinary shares. Any capital gain or loss will be long-term if the ADSs or
Class A ordinary shares have been held for more than one year and will generally be United States source gain or loss for United
States foreign tax credit purposes. Long-term capital gain of non-corporate U.S. holders is generally eligible for a reduced rate of
taxation. The deductibility of a capital loss may be subject to limitations. In the event that we are treated as a PRC “resident
enterprise” under the PRC Enterprise Income Tax Law and gain from the disposition of the ADSs or Class A ordinary shares is subject
to tax in the PRC, a U.S. holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may
elect to treat the gain as PRC source income. U.S. holders are advised to consult its tax advisors regarding the tax consequences if a
foreign tax is imposed on a disposition of the ADSs or our Class A ordinary shares, including the availability of the foreign tax credit
under their particular circumstances.
Passive Foreign Investment Company Rules
If we are a PFIC for any taxable year during which a U.S. holder holds the ADSs or our Class A ordinary shares, and unless
the U.S. holder makes a mark-to-market election (as described below), the U.S. holder will generally be subject to special tax
rules that have a penalizing effect, regardless of whether we remain a PFIC, for subsequent taxable years, on (i) any excess
distribution that we make to the U.S. holder (which generally means any distribution paid during a taxable year to a U.S. holder that is
greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. holder’s holding
period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the sale or other disposition, including, under certain
circumstances, a pledge, of ADSs or Class A ordinary shares. Under the PFIC rules:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or
Class A 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 which we are 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 to the U.S. holder 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 the ADSs or our Class A ordinary shares and any of
our non-United States subsidiaries is also a PFIC, such U.S. holder would be treated as owning a proportionate amount (by value) of
the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. holders are advised to consult their tax advisors
regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. holder of “marketable stock” in a PFIC may make a mark-to-market election
with respect to the ADSs (but not with respect to our Class A ordinary shares, which are not listed on the NYSE), provided that the
ADSs are regularly traded on NYSE. If a mark-to-market election is made, the U.S. holder will generally (i) include as ordinary
income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year
over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs
over the fair market value of such ADSs held at the end of the taxable year, but only 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 tax basis in the ADSs would be adjusted to
reflect any income or loss resulting from the mark-to-market election. If a U.S. holder makes an effective mark-to-market election, in
each year that we are a PFIC any gain recognized upon the sale or other disposition of the ADSs will be treated as ordinary income
and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-
to-market election.
If a U.S. holder makes a mark-to-market election in respect of a PFIC and such corporation ceases 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 such
corporation is not a PFIC.
Because a mark-to-market election cannot be made for any lower-tier PFICs that a PFIC may own, a U.S. holder who makes
a mark-to-market election with respect to the ADSs may continue to be subject to the general PFIC rules with respect to such U.S.
holder’s indirect interest in any of our non-United States subsidiaries if any of them is a PFIC.
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if
available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described
above.
As discussed above under “Dividends,” dividends that we pay on the ADSs or our Class A ordinary shares will not be
eligible for the reduced tax rate that applies to qualified dividend income if we are a PFIC for the taxable year in which the dividend is
paid or the preceding taxable year. In addition, if a U.S. holder owns the ADSs or our Class A ordinary shares during any taxable year
that we are a PFIC, such holder would generally be required to file an annual IRS Form 8621. Each U.S. holder is advised to consult
its tax advisors regarding the potential tax consequences to such holder if we are or become a PFIC, including the possibility of
making a mark-to-market election.
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Information Reporting
Certain U.S. holders may be required to report information to the IRS relating to an interest in “specified foreign financial
assets,” including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified foreign
financial assets exceeds US$50,000 (or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including an
exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose penalties
if a U.S. holder is required to submit such information to the IRS and fails to do so.
In addition, U.S. holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from
the sale or other disposition of the ADSs or our Class A ordinary shares. Each U.S. holder is advised to consult with its tax advisor
regarding the application of the United States information reporting rules to their particular circumstances.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under the Securities
Act of 1933, with respect to our Class A ordinary shares. We are subject to the periodic reporting and other informational
requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC.
Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the
public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also
maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the
rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a
review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of
shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary
will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record
holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
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In accordance with NYSE Rule 203.01, we will post this annual report on Form 20-F on our website at http://ir.cmcm.com. In
addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I.
Subsidiary Information
Not applicable.
Item 11.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosure about Market Risk
Foreign Exchange Risk
Our revenues and costs are partly denominated in Renminbi and partly denominated in foreign currencies, primarily U.S.
dollars. Our overseas revenues, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations
in foreign currency exchange rates against the Renminbi. We are a net receiver of foreign currencies and therefore benefit from a
weakening of the Renminbi and are adversely affected by a strengthening of the Renminbi relative to the foreign currency. To date,
we have not entered into hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although our
exposure to foreign exchange risks is generally limited, the value of your investment in the ADSs will be affected by the exchange rate
between the U.S. dollar and the Renminbi because the value of our business is mainly denominated in Renminbi, while the ADSs are
traded in U.S. dollars. Any significant revaluation of RMB against the U.S. dollar may materially affect our revenues and financial
position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Doing Business in China—Fluctuations in exchange rates could have a material adverse effect on our results of
operations and the value of your investment.”
As of December 31, 2015, we had RMB-denominated cash and cash equivalents and short-term investments of RM599.3
million, and U.S. dollar denominated cash and cash equivalents and short-term investments of US$180.9 million. Assuming we had
converted RMB599.3 million into U.S. dollars at the exchange rate of RMB6.4778 for US$1.00 as of December 31, 2015, our U.S.
dollar cash and cash equivalents and short-term investments would have been US$273.5 million. If the RMB had depreciated by 10%
against the U.S. dollar, our U.S. dollar cash balance would have been US$264.2 million instead. Assuming we had converted
US$180.9 million into RMB at the exchange rate of RMB6.4778 for US$1.00 as of December 31, 2015, our RMB cash balance would
have been RMB1,771.4 million. If the RMB had depreciated by 10% against the U.S. dollar, our RMB cash balance would have been
RMB1,888.6 million instead.
Interest Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in
interest-bearing bank deposits. We generated interest income of RMB7.1 million, RMB28.2 million, and RMB15.1 million (US$2.3
million) for the years ended December 31, 2013, 2014 and 2015, respectively. Interest-earning instruments carry a degree of interest
rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates.
However, our future interest income may fall short of expectations due to changes in market interest rates.
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Market Price Risk
We are exposed to market price risk primarily with respect to investment securities held by us which are reported at fair
value. A substantial portion of our investment in equity investees are all held for long-term appreciation or for strategic purposes. All
of these are accounted for under cost or equity method and not subject to market price risk. We are not exposed to commodity price
risk.
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
The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and surrender of ADSs
directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.
The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from
cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The
depositary may collect any of its fees by deduction from any cash distribution payable to ADS holders that are obligated to pay those
fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. The depositary’s
corporate trust office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286. The
depositary’s principal executive office is located at One Wall Street, New York, New York 10286.
Persons depositing or withdrawing shares must
pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
(cid:120) Issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property
(cid:120) Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
$.05 (or less) per ADS
(cid:120) Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
(cid:120) Distribution of securities distributed to holders of deposited
securities which are distributed by the depositary to ADS
holders
$.05 (or less) per ADSs per calendar year
(cid:120) Depositary services
Registration or transfer fees
Expenses of the depositary
(cid:120) Transfer and registration of shares on our share register to or
from the name of the depositary or its agent when you deposit
or withdraw shares
(cid:120) Cable, telex and facsimile transmissions (when expressly
provided in the deposit agreement)
(cid:120) converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the
custodian has to pay on any ADSs or shares underlying ADSs,
such as stock transfer taxes, stamp duty or withholding taxes
(cid:120) As necessary
Any charges incurred by the depositary or its agents for servicing
the deposited securities
(cid:120) As necessary
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Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our expenses incurred in connection with the administration and
maintenance of our ADS facility including, but not limited to, investor relations expenses, exchange listing fees, other program related
expenses related to our ADS facility and the travel expense of our key personnel in connection with such programs. The depositary
has also agreed to provide additional payments to us based on the applicable performance indicators relating to our ADS facility.
There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to
us is not necessarily tied to the amount of fees the depositary collects from investors. For the year ended December 31, 2015, we were
entitled to receive approximately US$0.13 million (after withholding tax) from the depositary as reimbursement for our expenses
incurred in connection with, among other things, investor relationship programs related to the ADS facility and the travel expense of
our key personnel in connection with such programs. This amount has been fully paid to us as of the date of this annual report.
Item 13.
Defaults, Dividend Arrearages and Delinquencies
PART II
None.
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
E.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number:
333-194996) in relation to our initial public offering of 12,000,000 ADSs representing 120,000,000 of our Class A ordinary shares,
and the underwriters’ full exercise of their option to purchase from us an additional 1,800,000 ADSs representing 18,000,000 Class A
ordinary shares, at an initial offering price of US$14.00 per ADS. Our initial public offering closed in May 2014.
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Concurrently with the initial public offering, we completed a private placement of an aggregate of 35,714,285 Class A
ordinary shares, or the Concurrent Private Placement, and received an additional US$50.0 million.
After deducting the total expenses, we received net proceeds of approximately US$226.4 million from our initial public
offering and the Concurrent Private Placement. For the period from May 7, 2014, the date that the F-1 Registration Statement was
declared effective by the SEC, to December 31, 2015, the net proceeds received from our initial public offering and the Concurrent
Private Placement were used to:
(cid:120) Approximately US$101 million to penetrate selected international markets;
(cid:120) Approximately US$61 million to invest in technology, infrastructure and research and development capabilities; and
(cid:120) Approximately US$64 million to expand and strengthen our sales and marketing efforts.
None of the net proceeds from our initial public offering were directly or indirectly paid to the directors, officers, general
partners of our company or their associates, persons owning 10% or more of our ordinary shares, or our affiliates.
Item 15.
Controls and Procedures
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rule 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial
reporting, as required by Rule 13a-15(c) of the Exchange Act, based on criteria established in the Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management has concluded that our internal control over financial reporting was effective as of December 31, 2015.
Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of MobPartner S.A.S., which is consolidated in our 2015 consolidated financial statements included in
this annual report, and constituted RMB404.8 million (US$62.5 million) and RMB299.1 million (US$46.2 million) of our total and
net assets, respectively, as of December 31, 2015 and RMB155.1 million (US$23.9 million) and RMB40.3 million (US$6.2 million)
of our revenues and net loss, respectively, for the year ended December 31, 2015.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has audited the effectiveness of our
internal control over financial reporting as of December 31, 2015, as stated in its report, which appears on page F-3 of this Form 20-F.
Changes in Internal Control over Financial Reporting
In preparing our consolidated financial statements for the three years ended December 31, 2013, we and Ernst & Young Hua
Ming LLP, an independent registered public accounting firm, noted a material weakness in our internal control over financial
reporting. The material weakness identified was lack of financial reporting personnel with the requisite U.S. GAAP and the SEC
financial reporting expertise. Since the second half of 2013, we have implemented several measures to remediate the material
weakness, including the following measures that were implemented in 2015:
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(cid:120) We have hired one reporting director with more than 7 years of extensive experience in U.S. GAAP, SEC regulations
and internal control over financial reporting;
(cid:120) strengthening our reporting team and internal audit function by hiring additional professionals with experience in U.S
GAAP, SEC reporting and compliance with the requirement of Section 404 of the Sarbanes-Oxley Act;
(cid:120) further increasing the accounting, internal control, and SEC reporting acumen and accountability of its finance
organization employees through training programs designed to enhance these employees’ competency with respect to
U.S. GAAP and internal control over financial reporting;
(cid:120) enhancing our monitoring control over financial reporting, including additional review by our chief financial officer,
vice president of finance and senior finance staff over the application of U.S. GAAP accounting knowledge and the
selection and evaluation of U.S. GAAP accounting policies, critical accounting judgments and estimates, reporting and
disclosures; and
(cid:120) establishing related policies and procedures such as accounting manual operation protocol to support the operation of
internal controls over financial statements at the entity level, transaction level as well as IT level.
In connection with the preparation of our consolidated financial statements included in this annual report, our management
has concluded that the above material weakness has been remediated, and our internal control over financial reporting was effective as
of December 31, 2015.
Other than as described above, there were no significant changes in our internal controls over financial reporting during the
period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of
the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our management
has concluded that, as of December 31, 2015, our disclosure controls and procedures were effective.
Item 16A.
Audit Committee Financial Expert
Our board of directors has determined that Mr. Richard Weidong Ji, an independent director (under the standards set forth in
the NYSE rules and Rule 10A-3 under the Exchange Act) and member of our audit committee, is an audit committee financial expert.
Item 16B.
Code of Ethics
Our board of directors has adopted a code of ethics that applies to our directors, officers and employees, including certain
provisions that specifically apply to our senior officers, including our chief executive officer, chief financial officer, other chief senior
officers, senior financial officers, controllers, senior vice presidents, vice presidents and any other persons who perform similar
functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 to our registration statement on Form F-1 (File
Number 333-194996), as amended, filed with the SEC on April 22, 2014. The code is also available on our official website under the
corporate governance section at our investor relations website http://ir.cmcm.com.
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We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten
working days after we receive such person’s written request.
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 Ernst & Young Hua Ming LLP, our principal external auditors, for the periods indicated.
(1)
Audit fees
Audit-related fees
(3)
Tax fees
All other fees
(4)
(2)
US$
US$
US$
US$
2014
2015
(in thousands)
1,115 US$
15 US$
146 US$
— US$
2,159
313
297
112
(1) Audit fees means the aggregate fees billed in each of the fiscal periods listed for professional services rendered by our principal
auditors for the audit of our annual consolidated financial statements and assistance with and review of documents filed with the
SEC. In 2014, the audit refers to financial audit. In 2015, the audit refers to financial audit and audit pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002.
(2) Audit-related fees means the aggregate fees billed for professional services rendered by our principal auditors for the assurance
and related services, which were not included under “Audit Fees” above. In 2014, the professional services are assurance services.
In 2015, the professional services are associated with certain due diligence projects.
(3) Tax fees means the aggregated fees billed in each of the fiscal periods listed for professional services rendered by our principal
auditors for tax compliance, tax advice and tax planning.
(4) All other fees means the aggregate fees billed in 2015 for subscription of certain U.S. GAAP reading materials from our principal
auditors and other advisory services rendered by our principal auditors.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming
LLP, including audit services, audit-related services, tax services and all other fees as described above, other than those for de minimis
services which are approved by the audit committee prior to the completion of the audit. Our audit committee has approved all of our
audit fees, audit-related fees, tax fees and all other fees for the year ended December 31, 2015.
Item 16D.
Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 16, 2016, our board of directors authorized a share repurchase program, whereby our company may repurchase up
to US$100 million of our shares or ADSs for a 12-month period. The share repurchases may be made in accordance with applicable
laws and regulations through open market transactions, privately negotiated transactions or other legally permissible means as
determined by our management, including through Rule 10b5-1 share repurchase plans. We publicly announced the share repurchase
program on March 16, 2016.
Item 16F.
Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G.
Corporate Governance
As of March 31, 2016, Kingsoft Corporation owned 60.8% of the total voting rights in our company. As a result, we are a
“controlled company” under Section 303A of the NYSE Listed Company Manual. As a controlled company, we rely on certain
exemptions that are available to controlled companies from the NYSE corporate governance requirements, including the requirements
that:
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(cid:120)
(cid:120)
(cid:120)
a majority of our board of directors consist of independent directors;
our compensation committee be composed entirely of independent directors; and
our nominating and corporate governance committee be composed entirely of independent directors.
In addition, we currently rely on the home country practice exemption available under NYSE corporate governance rules to
have an audit committee consisting of two instead of three independent directors. The NYSE corporate governance rules permit a
foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices
in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance rules. As we rely on
the controlled company exemptions and home country practice exemptions, our investors may not have the same protection afforded
to shareholders of companies that fully comply with NYSE corporate governance requirements.
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 Cheetah Mobile Inc., its subsidiaries and its VIEs and a VIE’s subsidiary are
included at the end of this annual report.
Item 19.
Exhibits
Exhibit
Number
1.1
2.1
2.2
2.3
4.1
4.2
Description of Document
Fourth amended and restated memorandum and articles of association of the Registrant (incorporated by reference to
Exhibit 3.2 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange
Commission on April 22, 2014)
Registrant’s specimen American depositary receipt (incorporated by reference to Exhibit 4.1 to our Registration
Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 25, 2014)
Registrant’s specimen certificate for Class A ordinary shares (incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on
April 22, 2014)
Deposit agreement dated May 7, 2014 among the Registrant, the depositary and owners and holders of the American
depositary shares (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-8 (file no. 333-
199577) filed with the Securities and Exchange Commission on October 24, 2014)
2011 share award scheme and an amendment thereto (incorporated by reference to Exhibit 10.1 to our Registration
Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
2013 equity incentive plan (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1 (file
no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
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Exhibit
Number
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Description of Document
2014 Restricted Shares Plan (incorporated by reference to Exhibit 10.48 to our Registration Statement on Form F-1
(file no. 333-194996) filed with the Securities and Exchange Commission on April 25, 2014)
Form of indemnification agreement between the Registrant and its director and executive officers (incorporated by
reference to Exhibit 10.3 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities
and Exchange Commission on April 2, 2014)
Form of employment agreement between the Registrant and its executive officers (incorporated by reference to
Exhibit 10.4 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange
Commission on April 2, 2014)
Business operation agreement, by and among Conew Network, Beijing Network, Ming Xu and Wei Liu, dated
July 18, 2012 (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 (file no. 333-
194996) filed with the Securities and Exchange Commission on April 2, 2014)
Loan agreement, by and among Conew Network, Ming Xu and Wei Liu, dated June 20, 2012 (incorporated by
reference to Exhibit 10.7 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities
and Exchange Commission on April 2, 2014)
Exclusive technology development, support and consultancy agreement, between Conew Network and Beijing
Network, dated July 18, 2012 (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1
(file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Exclusive equity option agreement, by and among Conew Network, Beijing Network, Ming Xu and Wei Liu, dated
July 18, 2012 (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 (file no. 333-
194996) filed with the Securities and Exchange Commission on April 2, 2014)
Shareholder voting proxy agreement, by and among Conew Network, Beijing Network, Ming Xu and Wei Liu, dated
July 18, 2012 (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form F-1 (file no. 333-
194996) filed with the Securities and Exchange Commission on April 2, 2014)
Equity pledge agreement, by and among Conew Network, Beijing Network, Ming Xu and Wei Liu, dated July 18,
2012 (incorporated by reference to Exhibit 10.11 to our Registration Statement on Form F-1 (file no. 333-194996)
filed with the Securities and Exchange Commission on April 2, 2014)
Financial support undertaking letter signed by Conew Network with respect to Beijing Network, dated January 17,
2014 (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form F-1 (file no. 333-194996)
filed with the Securities and Exchange Commission on April 2, 2014)
Spousal consent, signed by Xinchan Li, Wei Liu’s spouse, dated July 18, 2012 (incorporated by reference to
Exhibit 10.13 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and
Exchange Commission on April 2, 2014)
Business operation agreement, by and among Beijing Security, Beike Internet (currently Beijing Mobile), Sheng Fu
and Weiqin Qiu, dated January 1, 2011 (incorporated by reference to Exhibit 10.22 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
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Exhibit
Number
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24†
4.25†
Description of Document
Loan agreements, by and among Beijing Security, Sheng Fu and Weiqin Qiu, dated January 1, 2011 and
September 21, 2012 (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form F-1 (file no.
333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Exclusive technology development, support and consultancy agreement, between Beijing Security and Beike Internet
(currently Beijing Mobile), dated January 1, 2011 (incorporated by reference to Exhibit 10.24 to our Registration
Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Exclusive equity option agreement, by and among Beijing Security, Beike Internet (currently Beijing Mobile), Sheng
Fu and Weiqin Qiu, dated January 1, 2011 (incorporated by reference to Exhibit 10.25 to our Registration Statement
on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Shareholder voting proxy agreement, by and among Beijing Security, Beike Internet (currently Beijing Mobile),
Sheng Fu and Weiqin Qiu, dated January 1, 2011 (incorporated by reference to Exhibit 10.26 to our Registration
Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Equity pledge agreement, by and among Beijing Security, Beike Internet (currently Beijing Mobile), Sheng Fu and
Weiqin Qiu, dated January 1, 2011 and amendment thereto, dated October 11, 2012 (incorporated by reference to
Exhibit 10.27 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and
Exchange Commission on April 2, 2014)
Financial support undertaking letter signed by Beijing Security with respect to Beike Internet (currently Beijing
Mobile), dated January 17, 2014 (incorporated by reference to Exhibit 10.28 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Spousal consent, signed by Jin Wang, Weiqin Qiu’s spouse, dated January 1, 2012 (incorporated by reference to
Exhibit 10.29 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and
Exchange Commission on April 2, 2014)
Cooperation framework agreement between the Registrant and Kingsoft Corporation Limited, dated December 27,
2013 and supplemental agreement thereto, dated April 1, 2014 (incorporated by reference to Exhibit 10.38 to our
Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on
April 22, 2014)
Strategic cooperation agreement between the Registrant and Shenzhen Tencent Computer Systems Company
Limited, dated December 27, 2013 (incorporated by reference to Exhibit 10.39 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 2, 2014)
Cooperation agreement between Beike Internet (currently Beijing Mobile) and Baidu Online Network Technology
(Beijing) Co., Ltd., dated June 1, 2012 (incorporated by reference to Exhibit 10.40 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on May 5, 2014)
Cooperation agreement between Beike Internet (currently Beijing Mobile) and Baidu Online Network Technology
(Beijing) Co., Ltd., dated June 1, 2012 (incorporated by reference to Exhibit 10.41 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on May 5, 2014)
149
Table of Contents
Exhibit
Number
4.26†
4.27†
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
4.36
Description of Document
Cooperation agreement between Beike Internet (currently Beijing Mobile) and Baidu Online Network Technology
(Beijing) Co., Ltd., dated March 1, 2013 (incorporated by reference to Exhibit 10.42 to our Registration Statement
on Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on May 5, 2014)
Cooperation agreement between Beike Internet (currently Beijing Mobile) and Baidu Online Network Technology
(Beijing) Co., Ltd., dated May 1, 2013 (incorporated by reference to Exhibit 10.43 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on May 5, 2014)
Non-competition deed between the Registrant and Kingsoft Corporation Limited, dated May 14, 2014 (incorporated
by reference to Exhibit 4.46 to our Annual Report on Form 20-F (file no. 001-36427) filed with the Securities and
Exchange Commission on April 21, 2015)
Authorization and licensing agreement dated January 14, 2011 by and among Beijing Security, Zhuhai Juntian,
Conew Network, Beijing Kingsoft Digital Entertainment Technology Co., Ltd., Beijing Kingsoft Software Co., Ltd.
and Zhuhai Kingsoft Software Co., Ltd., as amended on February 14, 2011 and December 3, 2012 (incorporated by
reference to Exhibit 10.45 to our Registration Statement on Form F-1 (file no. 333-194996) filed with the Securities
and Exchange Commission on April 2, 2014)
Intellectual property transfer and license framework agreement the Registrant and Kingsoft Corporation, dated
April 1, 2014 (incorporated by reference to Exhibit 10.46 to our Registration Statement on Form F-1 (file no. 333-
194996) filed with the Securities and Exchange Commission on April 22, 2014)
Share transfer agreement between the Cheetah Technology Corporation Limited and Kingsoft Corporation, dated
March 18, 2014 (incorporated by reference to Exhibit 10.47 to our Registration Statement on Form F-1 (file no. 333-
194996) filed with the Securities and Exchange Commission on April 2, 2014)
Framework cooperation agreement on online game operation between the Registrant and Kingsoft Corporation
Limited, dated October 15, 2014 (incorporated by reference to Exhibit 4.50 to our Annual Report on Form 20-F (file
no. 001-36427) filed with the Securities and Exchange Commission on April 21, 2015)
Supplemental agreements to strategic cooperation agreement between the Registrant and Shenzhen Tencent
Computer Systems Company Limited, dated July 31, 2014 and January 30, 2015 (incorporated by reference to
Exhibit 4.51 to our Annual Report on Form 20-F (file no. 001-36427) filed with the Securities and Exchange
Commission on April 21, 2015)
Share and asset purchase agreement among the Registrant, Hongkong Zoom Interactive Network Marketing
Technology Limited and other parties thereto, dated June 6, 2014 (incorporated by reference to Exhibit 4.52 to our
Annual Report on Form 20-F (file no. 001-36427) filed with the Securities and Exchange Commission on April 21,
2015)
Stock purchase agreement among Hongkong Cheetah Mobile Technology Limited, MobPartner S.A.S. and other
parties thereto, dated March 15, 2015 (incorporated by reference to Exhibit 4.53 to our Annual Report on Form 20-F
(file no. 001-36427) filed with the Securities and Exchange Commission on April 21, 2015)
Parent guarantee between the Registrant and the Sellers’ Representatives named therein, dated March 15, 2015
(incorporated by reference to Exhibit 4.54 to our Annual Report on Form 20-F (file no. 001-36427) filed with the
Securities and Exchange Commission on April 21, 2015)
150
Table of Contents
Exhibit
Number
4.37*
4.38*
4.39*
4.40*
4.41*
4.42*
4.43*
4.44*
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Description of Document
Share transfer agreement among Beijing Security, Weiqin Qiu and Ming Xu, dated October 19, 2015, with respect to
Guangzhou Network
VIE termination agreement among Beijing Security, Guangzhou Network, Weiqin Qiu and Ming Xu, dated
October 19, 2015
Share transfer agreement between Beijing Security and each of Ming Xu and Wei Liu, dated October 13, 2015, with
respect to Beijing Antutu
VIE termination agreement among Beijing Security, Beijing Antutu, Ming Xu and Wei Liu, dated October 13, 2015
Supplemental agreements to strategic cooperation agreement between the Registrant and Shenzhen Tencent
Computer Systems Company Limited, dated June 30, 2015 and November 5, 2015
Strategic cooperation agreement between the Registrant and Shenzhen Tencent Computer Systems Company
Limited, dated December 30, 2015
Supplemental agreement to share and asset purchase agreement among the Registrant, Hongkong Zoom Interactive
Network Marketing Technology Limited and other parties thereto, dated March 16, 2015
Amendment to stock purchase agreement among Hongkong Cheetah Mobile Technology Limited, MobPartner
S.A.S. and other parties thereto, dated December 15, 2015
List of subsidiaries, VIEs and a VIE’s subsidiary
Code of business conduct and ethics (incorporated by reference to Exhibit 99.1 to our Registration Statement on
Form F-1 (file no. 333-194996) filed with the Securities and Exchange Commission on April 22, 2014)
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Global Law Office
Consent of Ernst & Young Hua Ming LLP
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
** Furnished herewith.
† Confidential treatment has been granted by the Securities and Exchange Commission with respect to portions of these exhibits
that have been redacted pursuant to Rule 406 under the Securities Act of 1933, as amended.
151
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual report on its behalf.
Cheetah Mobile Inc.
By: /s/ Sheng Fu
Name: Sheng Fu
Title: Chief Executive Officer and
Director
Date: April 22, 2016
152
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of independent registered public accounting firm
Consolidated balance sheets as of December 31, 2014 and 2015
Consolidated statements of comprehensive income for the years ended December 31, 2013, 2014 and 2015
Consolidated statements of cash flows for the years ended December 31, 2013, 2014 and 2015
Consolidated statements of shareholders’ equity for the years ended December 31, 2013, 2014 and 2015
Notes to the consolidated financial statements for the years ended December 31, 2013, 2014 and 2015
F-1
Page
F-2
F-4
F-6
F-8
F-10
F-11
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cheetah Mobile Inc.
We have audited the accompanying consolidated balance sheets of Cheetah Mobile Inc. (the “Company”) as of December 31, 2015
and 2014, and the related consolidated statements of comprehensive income, cash flows and shareholders’ equity for each of the three
years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Cheetah Mobile Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cheetah
Mobile Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated April 22, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
April 22, 2016
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cheetah Mobile Inc.
We have audited Cheetah Mobile Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). Cheetah Mobile Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
MobPartner S.A.S., which is included in the 2015 consolidated financial statements of Cheetah Mobile Inc. and constituted
RMB404.8 million and RMB299.1 million of total and net assets, respectively, as of December 31, 2015 and RMB155.1 million and
RMB40.3 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting
of Cheetah Mobile Inc. also did not include an evaluation of the internal control over financial reporting of MobPartner S.A.S..
In our opinion, Cheetah Mobile Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cheetah Mobile Inc. as of December 31, 2015 and 2014, and the related consolidated statements of
comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2015 of
Cheetah Mobile Inc. and our report dated April 22, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
April 22, 2016
F-3
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Notes
2014
RMB
As of December 31,
2015
RMB
US$
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable (net of allowance for doubtful accounts of
RMB3,230 and RMB17,592 (US$2,716) as of December 31, 2014
and 2015, respectively)
Prepayments and other current assets
Due from related parties
Deferred tax assets
Total current assets
Non-current assets
Property and equipment, net
Intangible assets, net
Goodwill
Investment in equity investees
Other long-term investments
Deferred tax assets
Other non-current assets
Total non-current assets
Total assets
LIABILITIES, NONCONTROLLING INTERESTS AND
SHAREHOLDERS’ EQUITY
Current liabilities (including current liabilities of the VIEs and a VIE’s
subsidiary without recourse to the Company amounting to
RMB179,313 and RMB277,364 (US$42,818) as of December 31,
2014 and 2015, respectively) (note 1)
Short-term loan
Accounts payable
Accrued expenses and other current liabilities
Redemption right liabilities
Deferred revenue
Due to related parties
Income tax payable
Deferred tax liabilities
Total current liabilities
Non-current liabilities (including non-current liabilities of the VIEs
and a VIE’s subsidiary without recourse to the Company amounting
to RMB2,828 and RMB2,160 (US$333) as of December 31, 2014 and
2015, respectively) (note 1)
Long-term loans
Deferred revenue
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
F-4
1,093,285
—
513,621
1,809,288
156,161
29,234
260,347
180,029
43,570
2,693
620,556
358,631
63,762
3,954
279,306
24,107
4,513
95,797
55,363
9,843
610
2,093,545
3,041,586
469,539
45,905
199,616
261,686
131,707
207,135
6,384
55,197
119,329
232,029
613,220
199,723
698,497
12,843
25,422
18,421
35,819
94,665
30,832
107,829
1,983
3,924
907,630
1,901,063
293,473
3,001,175
4,942,649
763,012
—
61,793
481,694
520
44,180
29,885
3,584
—
130,273
136,997
1,297,288
474
54,155
62,580
26,506
414
20,111
21,149
200,266
73
8,360
9,661
4,092
64
621,656
1,708,687
263,776
—
1,134
65,991
29,525
10,523
2,477
99,006
73,826
96,650
185,832
1,624
382
15,284
11,397
28,687
718,306
1,894,519
292,463
4
5
6
16
15
7
8
9
4
4
15
6
10
11
12
16
15
10
12
15
11
18
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Notes
2014
RMB
As of December 31,
2015
RMB
US$
Shareholders’ equity
Class A ordinary shares (par value of US$0.000025 per share;
7,600,000,000 shares authorized; 288,988,560 and
365,961,759 shares issued as of December 31, 2014 and
2015, respectively; 260,045,912 and 350,398,737 shares
outstanding as of December 31, 2014 and 2015, respectively)
Class B ordinary shares (par value of US$0.000025 per share;
1,400,000,000 shares authorized; 1,127,614,152 and
1,058,514,152 shares issued as of December 31, 2014 and
2015, respectively; 1,095,456,652 and 1,035,037,339 shares
outstanding as of December 31, 2014 and 2015, respectively)
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
19
19
19
19
Total Cheetah Mobile Inc. shareholders’ equity
Noncontrolling interests
Total equity
42
56
9
180
2,059,983
3,373
142,760
2,206,338
76,531
2,282,869
170
2,468,562
123,795
319,356
2,911,939
136,191
3,048,130
26
381,080
19,111
49,299
449,525
21,024
470,549
Total liabilities, noncontrolling interests and shareholders’
equity
3,001,175
4,942,649
763,012
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(1)
Revenues
Cost of revenues
(1)
(1)
Gross profit
Operating income and expenses
Research and development
Selling and marketing
General and administrative
Impairment of goodwill and intangible assets
Other operating income
Operating profit
Other income (expenses)
Interest income, net
Changes in fair value of redemption right and put
options granted
Settlement and changes in fair value of contingent
considerations
Foreign exchange gain (loss), net
Impairment of investments
Other income, net
Losses from equity method investments
Income before taxes
Income tax expenses
Net income
Less: net loss attributable to noncontrolling
interests
Net income attributable to Cheetah Mobile Inc.
Notes
13
2013
RMB
749,911
(140,526)
Year ended December 31,
2014
RMB
1,763,579
(403,412)
RMB
3,684,429
(935,154)
2015
US$
568,778
(144,363)
609,385
1,360,167
2,749,275
424,415
(217,846)
(201,504)
(97,817)
—
—
(517,167)
92,218
7,077
11,146
(1,067)
920
—
2,243
(1,849)
110,688
(48,670)
62,018
—
62,018
(436,840)
(580,610)
(251,743)
(8,304)
—
(1,277,497)
82,670
(687,235)
(1,479,441)
(423,248)
(49,882)
97,468
(2,542,338)
206,937
28,216
4,375
(13,749)
16
(9,136)
3,959
(5,447)
90,904
(23,993)
66,911
(1,030)
67,941
14,545
22
7,010
(250)
(34,728)
47,173
(9,334)
231,375
(60,097)
171,278
(5,318)
176,596
(106,091)
(228,386)
(65,338)
(7,700)
15,046
(392,469)
31,946
2,245
3
1,082
(39)
(5,361)
7,282
(1,441)
35,717
(9,277)
26,440
(821)
27,261
3
4
15
F-6
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Earnings per share
Basic
Diluted
Earnings per ADS (1 ADS represents 10
Class A ordinary share)
Basic
Diluted
Weighted average number of shares used
in computation of ordinary shares:
Basic
Diluted
Class A ordinary shares
Basic
Diluted
Class B ordinary shares
Basic
Diluted
Notes
20
20
2013
RMB
Year ended December 31,
2014
RMB
RMB
2015
US$
0.0567
0.0538
0.5671
0.5381
929,119,153
1,135,982,953
0.0527
0.0506
0.5272
0.5064
—
—
0.1286
0.1238
1.2863
1.2377
—
—
0.0199
0.0191
0.1986
0.1911
—
—
—
124,564,984
— 1,341,732,457
314,229,617
1,426,810,939
314,229,617
1,426,810,939
— 1,085,936,036
— 1,208,004,257
1,058,633,704
1,079,059,263
1,058,633,704
1,079,059,263
Other comprehensive income (loss), net of
tax of nil
Foreign currency translation adjustments
Unrealized gains on available-for-sale
securities, net
Reclassification adjustments for gains
included in net income
Other comprehensive (loss) income
19
Total comprehensive income
Less: Total comprehensive loss
attributable to noncontrolling interests
Total comprehensive income attributable
to Cheetah Mobile Inc.
(6,087)
(6,960)
117,977
20,929
—
14,842
76,860
—
76,860
18,119
(21,121)
(9,962)
56,949
(1,126)
58,075
9,729
(6,814)
120,892
292,170
(4,848)
297,018
18,213
1,502
(1,052)
18,663
45,103
(748)
45,851
(1)
The amount of transactions with related parties recorded in revenue, cost of revenues and operating income (expenses) are as
follows:
Revenues
Cost of revenues
Research and development
Selling and marketing
General and administrative
2013
RMB
111,218
(9,296)
(4,174)
(256)
(2,021)
Year ended December 31,
2014
RMB
RMB
2015
US$
86,708
(4,767)
(4,212)
(27,931)
(5,158)
321,881
(31,316)
(4,500)
(108,422)
(5,072)
49,690
(4,834)
(695)
(16,737)
(783)
Details of the related party transactions are set out in note 16(b) to the consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from
operating activities
Depreciation of property and equipment
Amortization of intangible assets
Provision for doubtful accounts
Impairment of goodwill and intangible assets
Impairment of investments
Loss on disposal of property and equipment
(Gain) loss on disposal of intangible assets
Gain on disposal/deemed disposal of equity method
investments
Settlement and changes in fair value of contingent
consideration
Changes in fair value of redemption right and put
options granted
Deemed employee compensation attributable to
redemption right granted to a noncontrolling
shareholder
Losses from equity method investments
(Gain) loss on disposal of an available-for-sale security
Deferred income tax expenses (benefits)
Share-based compensation expenses
Changes in operating assets and liabilities
Restricted cash
Accounts receivable
Prepayments and other current assets
Due from related parties
Other long-term assets
Accounts payable
Accrued expenses and other payables
Deferred revenue
Due to related parties
Income tax payable
Other non-current liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property and equipment
Purchase of intangible assets
Purchase of cost method investments
Purchase of available-for-sale securities
Purchase of equity method investments
Purchase of fixed-rate time deposits
Acquisition of business, net of cash acquired
Proceeds from sales of property and equipment
Proceeds from sales of intangible assets
Proceeds from sales of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Proceeds from sales of equity method investments
Maturity of fixed-rate time deposits
Entrusted loan to an investor of an equity investee
Entrusted loan to a third party
Repayment of entrusted loans from a third party
Repayment of entrusted loans from an investor of an
equity investee
Repayment of loans to investors of an equity investee
Settlement of contingent consideration
Net cash used for investing activities
2013
RMB
Year ended December 31,
2014
RMB
RMB
2015
US$
62,018
66,911
171,278
26,440
11,702
14,178
11,232
—
—
—
(3,600)
—
1,067
(11,146)
14,697
1,849
—
33,910
37,396
173,303
—
(55,867)
(45,433)
4,630
(1,665)
12,487
97,115
(4,258)
5,023
11,974
872
198,181
(27,641)
(2,359)
—
(36,582)
(4,400)
(105,000)
(52,785)
74
—
—
—
—
145,376
(14,000)
—
—
5,060
(5,530)
(3,000)
(100,787)
F-8
21,684
57,066
5,441
8,304
9,136
—
—
25,636
120,521
12,842
49,882
34,728
955
3,539
—
(44,483)
13,749
(4,375)
—
5,447
(1,967)
12,906
173,274
367,576
—
(151,979)
(85,484)
(30,702)
(15,917)
38,354
225,374
29,608
(2,008)
(8,995)
(4,385)
361,442
(36,169)
(144,896)
(157,304)
(110,774)
(125,739)
(1,388,167)
(195,199)
100
—
17,076
—
—
959,837
—
—
1,000
4,940
—
—
(1,175,295)
(7,010)
(22)
—
9,334
202
(6,962)
315,407
685,847
(378)
(316,152)
(162,139)
(19,508)
408
29,705
636,738
14,958
35,405
21,183
10,909
936,976
(61,090)
(34,590)
(399,522)
—
(107,131)
(481,207)
(249,425)
490
3,320
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13,000
901,364
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3,958
18,605
1,982
7,700
5,361
147
547
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(1,082)
(3)
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31
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48,690
105,876
(58)
(48,805)
(25,030)
(3,012)
63
4,586
98,295
2,309
5,466
3,270
1,684
144,644
(9,431)
(5,340)
(61,676)
—
(16,538)
(74,286)
(38,505)
76
513
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10,522
2,007
139,147
—
(463)
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1,389
—
—
(52,585)
Table of Contents
CHEETAH MOBILE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
2013
RMB
Year ended December 31,
2014
RMB
RMB
2015
US$
Cash flows from financing activities
Proceeds from issuance of Series B Preferred Shares, net
of issuance costs
Net proceeds from the initial public offering (“IPO”) and
concurrent private placement
Proceeds from exercise of restricted shares with an
option feature
Proceeds from bank loans
Cash received from noncontrolling shareholder
Distribution to a shareholder due to common control
acquisition
Settlement of contingent consideration
321,965
—
—
—
—
—
(17,693)
—
1,409,177
2
—
6,750
(30,775)
(4,265)
—
—
4,092
101,866
3,375
—
(27,706)
Net cash provided by financing activities
304,272
1,380,889
81,627
Effect of exchange rate changes on cash and cash
equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures
Income taxes paid
Interest expense paid
Non-cash investing and financing activities:
Capital injection to an equity investee by intangible
assets
Acquisition of property and equipment included in
accrued expenses and other liabilities
Acquisition of an cost method investment included in
accrued expenses and other liabilities
Acquisition of an equity method investment included in
accrued expenses and other liabilities
Contingent consideration payable for business
acquisitions
Non-cash acquisition of an equity method investment
Non-cash acquisition of an cost method investment
Non-cash acquisition of business
(5,506)
396,160
134,376
530,536
(4,287)
562,749
530,536
1,093,285
38,029
716,003
1,093,285
1,809,288
(3,329)
—
3,600
—
—
—
11,974
—
—
—
(20,410)
—
(22,105)
(547)
(3,412)
(84)
—
755
—
—
—
43,740
5,104
3,247
53,592
5,000
—
—
23,338
—
64,110
23,309
—
6,752
788
501
3,603
—
9,897
3,598
—
—
632
15,726
521
—
(4,277)
12,602
5,871
110,532
168,774
279,306
The accompanying notes are an integral part of these consolidated financial statements.
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F
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Cheetah Mobile Inc. (formerly known as Kingsoft Internet Security Software Holdings Limited) (the “Company”) is a limited
company incorporated in the Cayman Islands under the laws of Cayman Islands on July 30, 2009. The Company and its consolidated
subsidiaries, variable interest entities (“VIEs”) and a VIE’s subsidiary (collectively referred to the “Group”) are principally engaged in
the provision of online marketing services, internet value-added services and internet security services and others. The Company does
not conduct any substantive operations of its own, but conducts its primary business operations through its subsidiaries, VIEs and a
VIE’s subsidiary. The immediate holding company and the ultimate holding company of the Company is Kingsoft Corporation
Limited (“Kingsoft”), a company listed on the Stock Exchange of Hong Kong Limited.
In 2009, Kingsoft undertook a corporate reorganization to establish the Group, which started to specialize in internet security
services on a stand-alone basis with separate management oversight distinct from Kingsoft. Subsequent to the reorganization in 2009,
all revenues and costs generated by the internet security services, are reflected in the consolidated financial statements of the Group.
Details of the Company’s principal subsidiaries, VIEs, a VIE’s subsidiary as of December 31, 2015 are as follows:
F-11
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Company
Subsidiaries of the Company:
Cheetah Technology Corporation Limited
(“Cheetah Technology”)
Date of
incorporation/
registration
Place of
incorporation/
registration
Percentage of
ownership
August 26, 2009
Hong Kong
100%
Zhuhai Juntian Electronic Technology
September 28, 2000
The PRC
100%
Co., Ltd. (“Zhuhai Juntian”)
Beijing Kingsoft Internet Security Software
November 30, 2009
The PRC
100%
Co., Ltd. (“Beijing Security”)
Conew.com Corporation (“Conew”)
October 6, 2008
Conew Network Technology (Beijing)
March 19, 2009
Co., Ltd. (“Conew Network”)
British Virgin
Islands (“BVI”)
The PRC
100%
100%
Cheetah Mobile America, Inc. (“Cheetah
November 28, 2012
United States
100%
Mobile America”)
Hongkong Zoom Interactive Network
Marketing Technology Limited (“HK
Zoom”)
July 4, 2014
Hong Kong
100%
Hong Kong Youloft Technology Limited
August 1, 2014
Hong Kong
51.9%
(“Youloft HK”)
Chongqing Calendar Technology Co., Ltd.
December 3, 2014
The PRC
(“Calendar”)
Hongkong Cheetah Mobile Technology
March 9, 2015
Hong Kong
Limited (“Hongkong”)
100%
100%
Principal activities
Investment holding,
provision of online
advertising services and
provision of online games
publishing services.
Investment holding,
research and development
and provision of internet
security services
Provision of internet
security services and
research and development
of online applications
Investment holding
Research and development
of mobile applications and
provision of online
marketing services
Provision of mobile
marketing and value-
added services
Provision of online
marketing services
Provision of online
marketing services
Provision of online
marketing services
Investment holding
Cheetah Information Technology Company
March 9, 2015
Hong Kong
100%
Investment holding
Limited (“Cheetah Information”)
Beijing Kingsoft Cheetah Technology
Co., Ltd. (“Kingsoft Cheetah”)
April 30, 2015
The PRC
100%
MobPartner S.A.S. (“MobPartner”)
February 23, 2010
France
MobPartner Inc.
September 20, 2013
United States
MobPartner UK Limited
July 8, 2014
Moxiu Technology (Beijing) Co., Ltd
June 12, 2008
(“Moxiu Technology”)
United
Kingdom
The PRC
100%
100%
100%
52.10%
Beijing Antutu Technology Co., Ltd.
(iii)
June 14,2013
The PRC
100%
Guangzhou Kingsoft Network Technology
September 1, 2013
The PRC
100%
Research and development
of mobile applications and
provision of online
marketing services
Provision of online
marketing services
Provision of online
marketing services
Provision of online
marketing services
Provision of mobile
application development
Research and
development of mobile
applications
Research and
development of mobile
applications
December 22, 2005
The PRC
April 15, 2009
The PRC
July 18, 2012
The PRC
Nil
Nil
Nil
Dormant
Provision of online
marketing services
Provision of internet
value-added services
Co., Ltd.
(iii)
VIEs
Beijing Conew Technology Development
Co., Ltd. (“Beijing Conew”)
Beijing Cheetah Mobile Technology
Co., Ltd.(“Beijing Mobile”)
(i)
Beijing Cheetah Network Technology
Co., Ltd. (“Beijing Network”)
(ii)
Subsidiary of VIE
Suzhou Jiangduoduo Technology Co., Ltd.
January 8, 2014
The PRC
75%
(“Suzhou JDD”)
Provision of online lottery
sales services
(i)
(ii)
(iii)
Antutu and Guangzhou Network were terminated. As a result, Beijing Antutu and Guangzhou Network became the wholly-
On August 10, 2015, Beike (Beijing) Security Technology Co., Ltd. was renamed as Beijing Mobile.
On August 10, 2015, Beijing Kingsoft Network Technology Co., Ltd. was renamed as Beijing Network.
On October 13, 2015 and October 19, 2015, respectively, the VIE contractual arrangements with respect of Beijing
owned subsidiaries of Beijing Security. The termination of VIE contractual arrangements had no impact on the Company’s
operations and consolidated financial statements as both Beijing Aututu and Guangzhou Network were consolidated by the
Company prior to and after the termination.
F-12
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
VIE arrangements
In order to comply with the PRC laws and regulations which prohibit foreign control of companies involved in online marketing
and internet value-added business, the Group operates its website and conducts substantially the majority of its online marketing and
the distribution and operation of its internet value-added services and internet security services businesses in the PRC through the
VIEs and its wholly-owned subsidiaries. Except for Beijing Conew, the registered capital of the VIEs was funded by Beijing Security
and Conew Network (each or collectively referred to as the “Primary Beneficiaries”) through loans extended to the VIEs’
shareholders, Sheng Fu, Ming Xu, Wei Liu, who are executives and/or directors of the Group, as well as Ms.Weiqin Qiu, an affiliate
of the Group. The effective control of the VIEs is held by the Primary Beneficiaries, through a series of contractual agreements (the
“Contractual Agreements”). As a result of the Contractual Agreements, the Primary Beneficiaries have the power to direct the activity
that most significantly impacts the economic performance of the VIEs and receive the economic benefits of the VIEs.
The following is a summary of the Contractual Agreements amongst the Primary Beneficiaries, Beijing Mobile, Beijing
Network and their respective shareholders (“Nominee Shareholders”):
Exclusive technology development, support and consulting agreements
Pursuant to the exclusive technology development, support and consulting agreements entered into between the Primary
Beneficiaries and the VIEs, the VIEs engaged the Primary Beneficiaries as their exclusive provider of management consulting
services, technical development and support services in return for service fees of not less than 30% of the VIE’s pre-tax revenue. The
Primary Beneficiaries have the sole right to adjust the services fees upon written request and shall exclusively own any intellectual
property arising from the performance of this agreement. The agreements will remain effective unless terminated upon mutual
agreement by both parties. During the term of the agreement, the VIEs may not enter into any agreement with third parties for the
provision of any technical or management consulting services without the consent of the Primary Beneficiaries.
Loan agreements
Pursuant to the loan agreements between the Primary Beneficiaries and the Nominee Shareholders, the Primary Beneficiaries
granted interest free loans in an aggregate amount of RMB16,800 (US$2,593) to the Nominee Shareholders’ for their sole purpose of
contributing to the registered capital of the VIEs. The loans have no definite maturity date. At the option of the Primary Beneficiaries,
repayment may be requested at any time, which may be in the form of transferring the VIE’s equity interest to the Primary
Beneficiaries or its designees. The Nominee Shareholders may offer to repay part or the entire loan at any time, to the extent permitted
by PRC laws, in the form of transferring the VIE’s equity interest to the Primary Beneficiaries or its designees.
Exclusive equity option agreements
Pursuant to the exclusive equity option agreements entered into between the Primary Beneficiaries, the VIEs and the Nominee
Shareholders, the Primary Beneficiaries were granted an exclusive and irrevocable option to purchase, or designate a third party to
purchase, all or part of the equity interest of the VIEs held by the Nominee Shareholders. Without the prior written consent of the
Primary Beneficiaries, the Nominee Shareholders shall not assign or transfer to any third party, or create or cause any security interest
in whatsoever form to be created on, all or any part of the equity interest held in the VIEs. In addition, dividends and any form of
distributions are not permitted without the prior consent of the Primary Beneficiaries. The exercise consideration should be equal to
the corresponding loan amount as described above or the minimum consideration permitted under the PRC laws, whichever is higher.
The consideration in excess of the corresponding loan amount shall be waived by the Nominee Shareholders. While in the exclusive
equity option agreement with respect to Beijing Mobile, the exercise consideration is equal to the minimum price permitted under the
PRC laws and any amount in excess of the corresponding loan amount shall be refunded by the Nominee Shareholders to Beijing
Security or Beijing Security may deduct the excess amount upon payment of consideration. The Primary Beneficiaries or their
designee(s) may exercise such option at any time until it has acquired all the equity interest of the VIEs. The agreements will remain
effective until all the equity interests held by the Nominee Shareholders have been lawfully transferred to the Primary Beneficiaries or
its designee(s) pursuant to the terms of the agreements.
F-13
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Equity pledge agreements
Pursuant to the equity pledge agreements entered into between the Nominee Shareholders, the VIEs and the Primary
Beneficiaries, the Nominee Shareholders pledged all of their equity interest in the VIEs to the Primary Beneficiaries as collateral for
all of their payments due to the Primary Beneficiaries and to secure their obligations under the above agreements. Without the prior
written consent of the Primary Beneficiaries, the Nominee Shareholders may not assign or transfer to any third party, or create or
cause any security interest in whatsoever form to be created on, all or any part of the equity interest it holds in the VIEs. The Primary
Beneficiaries are entitled to transfer or assign in full, or in part, the shares pledged. In the event of default, the Primary Beneficiaries
as the pledgee, have first priority to be compensated through the sale or auction of the pledged equity interest. The Nominee
Shareholders agree to waive their dividend rights in relation to all of the pledged equity interest until such pledge has been lawfully
discharged. The equity pledge agreements will remain effective until all the obligations under these agreements have been satisfied in
full or all of the guaranteed liabilities have been repaid.
Shareholder voting proxy agreements
Pursuant to the shareholder voting proxy agreements signed between the Nominee Shareholders, the VIEs and the Primary
Beneficiaries, the Nominee Shareholders irrevocably nominates, appoints and constitutes any person designated by the Primary
Beneficiaries as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of
its equity interest in the VIE (including but not limited to the voting rights and the right to nominate executive directors of the VIE).
The shareholder voting proxy agreements are effective for an initial ten years and will be automatically renewed on an annual basis
thereafter if the Primary Beneficiaries do not provide notice of termination to the Nominee Shareholders thirty days prior to
expiration.
Business operation agreements
Pursuant to the business operations agreements entered into between the Nominee Shareholders, the VIEs and the Primary
Beneficiaries, the Nominee Shareholders must appoint candidates designated by the Primary Beneficiaries as its board of directors and
the Primary Beneficiaries have the right to appoint senior executives of the VIEs. In addition, the VIEs agree not to engage in any
transaction that may materially affect their assets, obligations, rights or operation without the prior written consent of the Primary
Beneficiaries. The Nominee Shareholders also agree to unconditionally pay or transfer to the Primary Beneficiaries any bonus,
dividends or any other profits or interest (in whatever form) that they are entitled to as shareholders of the VIEs, and waives any
consideration connected therewith. The agreement has a term of ten years, unless otherwise terminated by the Primary Beneficiaries.
Neither the VIEs nor the Nominee Shareholders may terminate this agreement.
Spousal consent letters
The spouses of certain shareholders of the VIEs have executed spousal consent letters. Pursuant to these letters, the spouses of
certain shareholders of the VIEs acknowledged that certain equity interest in the respective VIEs held by and registered in the name of
his or her spouse will be disposed pursuant to relevant arrangements under the shareholder voting proxy agreement, the exclusive
equity option agreement, the equity pledge agreement and the loan agreement. These spouses undertake not to take any action to
interfere with the disposition of such equity interest, including, without limitation, claiming that such equity interest constitute
communal marital property.
On January 17, 2014, the Contractual Agreements were supplemented with financial support undertaking letters executed by the
Primary Beneficiaries to memorialize the Primary Beneficiaries’ commitment to the VIEs and the commitment shall be retrospectively
effective from the date the other contractual agreements were fully executed. Pursuant to the financial support undertaking letters, the
Primary Beneficiaries commit to provide unlimited financial support to the VIEs to support their operations whether or not the VIEs
incur any losses, and not request for repayment if the VIEs are unable to do so.
Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Primary Beneficiaries
and the VIEs through the irrevocable shareholder voting proxy agreements, whereby the Nominee Shareholders effectively assigned
all of the voting rights underlying their equity interest in the VIEs to the Primary Beneficiaries. Furthermore, pursuant to the exclusive
equity option agreements, which include a substantive kick-out right, the Primary Beneficiaries have the power to control the Nominee
Shareholders, and therefore the power to govern the activities that most significantly impact the economic performance of the VIEs. In
addition, through the Contractual Agreements, the Primary Beneficiaries demonstrate its ability and intention to continue to exercise
the ability to absorb substantially all of the expected losses and the majority of the profits of the VIEs, and therefore have the rights to
the economic benefits of the VIEs.
F-14
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The shareholders of the VIEs elect and terminate the executive directors of the VIEs, approve the annual budget, financial
statements and significant investing and financing activities of the VIEs. Pursuant to the shareholder voting proxy agreements, the
shareholders of the VIEs have assigned all of their voting rights underlying the equity interest in the VIEs to any person nominated,
appointed or designated by the Primary Beneficiaries. Senior management of the Company, all employees of the Primary
Beneficiaries, are generally responsible for the review and approval of sales contracts, credit approval policies, pricing policies,
significant marketing promotions, product development, research and development, bandwidth and traffic expenditures, as well as the
appointments and terminations of personnel. Therefore, the Primary Beneficiaries have the power to direct the activities of the VIEs
that most significantly impact their economic performance.
Thus, Beijing Security and Conew Network are considered the primary beneficiaries of the VIEs. As a result of the above, the
Company, through the Primary Beneficiaries, consolidate the VIEs in accordance with SEC Regulation SX-3A-02 and Accounting
Standards Codification (“ASC”) topic 810-10 (“ASC 810-10”), Consolidation: Overall.
The Company, in consultation with its PRC legal counsel, believes that (i) the ownership structure of the Group, including its
subsidiaries in the PRC, VIEs and a VIE’s subsidiary is in compliance with all existing PRC laws and regulations; (ii) each of the
Contractual Agreements amongst the Primary Beneficiaries, the VIEs and the Nominee Shareholders of the VIEs governed by PRC
laws, are legal, valid and binding, enforceable against such parties, and will not result in any violation of PRC laws or regulations
currently in effect; and (iii) each of the Group’s PRC subsidiaries, VIEs and a VIE’s subsidiary have the necessary corporate power
and authority to conduct its business as described in its business scope under its business license, which is in full force and effect, and
the Group’s business operations in the PRC are in compliance with existing PRC laws and regulations.
However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current Contractual
Agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company, the Primary
Beneficiaries or any of its current or future VIEs are found in violation of any existing or future laws or regulations, or fail to obtain or
maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with
such violations, including levying fines, confiscating the income of the Primary Beneficiaries, and the VIEs, revoking the business
licenses or operating licenses of the Primary Beneficiaries, and VIEs, shutting down the Group’s servers or blocking the Group’s
websites, discontinuing or placing restrictions or onerous conditions on the Group’s operations, requiring the Group to undergo a
costly and disruptive restructuring, restricting the Group’s rights to use the proceeds from this offering to finance the Group’s business
and operations in PRC, or enforcement actions that could be harmful to the Group’s business. Any of these actions could cause
significant disruption to the Group’s business operations and severely damage the Group’s reputation, which would in turn materially
and adversely affect the Group’s business and results of operations. In addition, if the imposition of any of these penalties causes the
Primary Beneficiaries to lose the rights to direct the activities of VIEs or the right to receive their economic benefits, the Company,
through the Primary Beneficiaries, would no longer be able to consolidate the VIEs.
In addition, if the VIEs or the Nominee Shareholders fail to perform their obligations under the Contractual Agreements, the
Group may have to incur substantial costs and expend resources to enforce the Primary Beneficiaries’ rights under the contracts. The
Group may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming
damages, which may not be effective. All of these Contractual Agreements are governed by PRC laws and provide for the resolution
of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any
disputes would be resolved in accordance with PRC legal procedures. The legal system in PRC is not as developed as in other
jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Group’s ability to enforce
these contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts,
and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings,
which would incur additional expenses and delay. In the event the Group is unable to enforce these Contractual Agreements, the
Primary Beneficiaries may not be able to exert effective control over its VIEs, and the Group’s ability to conduct its business may be
negatively affected.
F-15
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The carrying amounts and classifications of the assets and liabilities of the VIEs and a VIE’s subsidiary are as follows:
Cash and cash equivalents
Accounts receivable
Prepayments and other current assets
Due from related parities
Total current assets
Property and equipment , net
Intangible assets, net
Goodwill
Investment in equity investees
Other long term investments
Other non-current assets
Total non-current assets
Total assets
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
(i)
Due to related parties
Total current liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
2014
RMB
As of December 31,
2015
RMB
US$
69,702
125,909
40,702
224,776
461,089
35,026
32,323
24,708
52,778
120,000
5,932
270,767
731,856
37,818
95,809
34,225
422,673
590,525
2,828
2,828
593,353
148,161
204,798
148,896
134,349
636,204
52,114
5,864
962
49,442
125,265
4,396
238,043
874,247
62,745
139,927
29,296
523,781
755,749
2,160
2,160
757,909
22,872
31,615
22,986
20,740
98,213
8,045
905
149
7,633
19,338
677
36,747
134,960
9,686
21,601
4,523
80,858
116,668
333
333
117,001
(i) As of December 31, 2014 and 2015, the balances due to related parties of the VIEs and a VIE’s subsidiary mainly
represented amounts due to subsidiaries of the Group of RMB411,212 and RMB478,385 (US$73,850), respectively, which were
eliminated upon consolidation by the Company.
F-16
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The financial performance and cash flows of the VIEs and a VIE’s subsidiary as follows:
Revenues
Cost of revenues
Net income(loss)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
2013
RMB
682,250
167,138
77,207
102,861
(22,814)
13,000
2015
Year ended December 31,
2014
RMB
1,536,443
596,371
13,847
188,513
(267,346)
6,750
RMB
1,817,642
1,338,932
(43,325)
110,090
(31,043)
(588)
US$
280,596
206,695
(6,688)
16,995
(4,792)
(91)
The revenue producing assets that are held by the VIEs and a VIE’s subsidiary comprise of leasehold improvements, servers,
licensed software, network equipment, acquired trade name and acquired domain name. Substantially all of such assets are recognized
in the Group’s consolidated financial statements, except for certain Internet Content Provider Licenses, internally developed software,
trademarks and patent applications which were not recorded on the Company’s consolidated balance sheets as they do not meet all the
capitalization criteria. The VIEs and a VIE’s subsidiary also hire assembled work force on sales, research and development and
operations whose costs are expensed as incurred.
There was no pledge or collateralization of the VIEs and a VIE’s subsidiary’ assets. Creditors of the VIEs and a VIE’s
subsidiary have no recourse to the general credit of the Primary Beneficiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted
accounting principles (“U.S. GAAP”).
Principles of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and a VIE’s
subsidiary. All significant intercompany transactions and balances between the Company, its subsidiaries, VIEs and a VIE’s
subsidiary are eliminated upon consolidation. Results of acquired subsidiaries, businesses and VIEs are consolidated from the date on
which control is transferred to the Company.
Certain items reported in the prior year’s consolidated financial statements have been reclassified to conform to the current
year’s presentation.
On May 26, 2011, the board of directors of the Company approved and adopted a share award scheme (the “2011 Share Award
Scheme”) in which selected employees of the Group are entitled to participate. The Group has set up a trust (the “Share Award
Scheme Trust”) for the purpose of administering the 2011 Share Award Scheme and holding shares awarded to the employees before
they vest and are transferred to the employees as instructed by employees. As the Group has the power to govern the financial and
operating policies of the Share Award Scheme Trust and derives benefits from the contributions of the employees who have been
awarded the shares of the Company through their continued employment with the Group, the assets and liabilities of the Share Award
Scheme Trust are included in the consolidated balance sheets and any ungranted, unvested, and vested shares held by the Share Award
Scheme Trust not transferred to grantees are not considered legally issued and outstanding ordinary shares of the Company.
F-17
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Management evaluates
estimates, including those related to the allowance for doubtful accounts, provision for inventories, average paying player lives of
exclusive online games, the purchase price allocation and fair value of noncontrolling interests and the contingent consideration with
respect to business combinations, useful lives of long-lived assets and intangible assets, impairment of long-lived assets, impairment
of cost method investment, impairment of equity method investment, impairment of available-for-sale securities, impairment of
intangible assets, impairment of goodwill, valuation allowance for deferred tax assets, uncertain tax positions, share-based
compensation, redemption right liabilities, fair values of available-for-sale securities and loss contingencies, among others. Changes in
facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may
be material to the consolidated financial statements.
Comparative Information
Certain items in the consolidated financial statements have been reclassified to conform to the current year’s presentation to
facilitate comparison.
Foreign currency translation and transactions
The functional currency of the Company is the US$. The Company’s subsidiaries, VIEs and VIE’s subsidiary determined their
functional currency based on the criteria of ASC 830, Foreign Currency Matters. The Group uses RMB as its reporting currency. The
Group uses the monthly average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating
results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income, a
component of shareholders’ equity.
Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on
the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the exchange rates prevailing at
the balance sheet date. Exchange gains and losses are included in the consolidated statements of comprehensive income as a
component of other income.
Convenience translation
Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of RMB6.4778 to
US$1.00 on December 31, 2015 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal
Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at
such rate.
F-18
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Business combinations and noncontrolling interests
The Group accounts for its business combinations using the purchase method of accounting in accordance with ASC 805,
Business Combinations. The purchase method of accounting requires that the consideration transferred to be allocated to the assets,
including separately identifiable assets, and liabilities the Group acquired, based on their estimated fair values. The consideration
transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities
incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition
date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities
acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any
noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date
fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is
recognized directly in earnings.
In a business combination achieved in stages, the Company remeasures its previously held equity interest in the acquiree
immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in
earnings.
The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling
interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most
significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow
projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount
rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values
are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.
For the Company’s majority-owned subsidiaries, VIEs and a VIE’s subsidiary, a noncontrolling interest is recognized to reflect
the portion of their equity which is not attributable, directly or indirectly, to the Company. Consolidated net income on the
consolidated statements of comprehensive income includes the net income (loss) attributable to noncontrolling interests. The
cumulative results of operations attributable to noncontrolling interests are recorded as noncontrolling interests in the Company’s
consolidated balance sheets.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted to withdrawal and use. All highly
liquid investments with original stated maturity of three months or less are classified as cash equivalents.
Restricted cash
Restricted cash mainly consists of the cash reserved in escrow accounts for the remaining payments in relation to business
acquisition and the cash pledged as collateral for a short-term bank loan.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recognized and carried at original invoiced amount less an allowance for any potential uncollectible
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as
incurred. The Group generally does not require collateral from its customers.
The Group maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make
payments on time. The Group reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the
Group considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and
current economic trends.
Deferred IPO costs
Direct costs incurred by the Company attributable to its IPO of Class A ordinary shares in the United States have been deferred
and recorded in prepayment and other current assets and was charged against the gross proceeds received from such offering.
F-19
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market value. If the cost of the
inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. No
inventory provision was recorded for any of the years presented.
Investments
Short-term investments
All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as
short-term investments. Investments that are expected to be realized in cash during the next 12 months are also included in short-term
investments. The Group accounts for its investments in debt and equity securities in accordance with ASC 320-10, Investments—Debt
and Equity Securities: Overall. The Group classifies the investments in debt and equity securities as “held-to-maturity”, “trading” or
“available-for-sale”, whose classification determines the respective accounting methods stipulated by ASC 320-10. Dividend and
interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in
securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a specific
identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.
The securities that the Group has positive intent and ability to hold to maturity are classified as held-to-maturity securities and
stated at amortized cost. For individual securities classified as held-to-maturity securities, the Group evaluates whether a decline in
fair value below the amortized cost basis is other-than-temporary in accordance with the Group’s policy and ASC 320-10. When the
Group intends to sell an impaired debt security or it is more likely than not that it will be required to sell prior to recovery of its
amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances, the other-than-temporary
impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its fair value at the
balance sheet date of the reporting period for which the assessment is made. When the Group does not intend to sell an impaired debt
security and it is more-likely-than-not that it will not be required to sell prior to recovery of its amortized cost basis, the Group must
determine whether or not it will recover its amortized cost basis. If the Group concludes that it will not, an other-than-temporary
impairment exists and that portion of the credit loss is recognized in earnings, while the portion of loss related to all other factors is
recognized in other comprehensive income.
The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading
securities. Unrealized holding gains and losses for trading securities are included in earnings.
Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale
securities are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Realized
gains or losses are charged to earnings during the period in which the gain or loss is realized. An impairment loss on available-for-sale
securities would be recognized in the consolidated statements of comprehensive income when the decline in value is determined to be
other-than-temporary.
F-20
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Long-term investments
In accordance with ASC 325-20, Investments-Other: Cost Method Investments, for investments in an investee over which the
Group does not have significant influence, the Group carries the investment at cost and only adjusts for other-than-temporary declines
in fair value and distributions of earnings. The Group’s management regularly evaluates the impairment of its cost method
investments based on the performance and financial position of the investee as well as other evidence of estimated market values.
Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical
financial performance, cash flow forecasts and current and future financing needs. An impairment loss is recognized in the
consolidated statements of operations equal to the excess of the investment’s cost over its fair value at the balance sheet date of the
reporting period for which the assessment is made. The fair value would then become the new cost basis of investment. Cost method
accounting is also applied to investments that are not considered as “in-substance” common stock investments, and do not have readily
determinable fair values.
The Group accounts for its investments in common stock in entities in which it can exercise significant influence but does not
own a majority equity interest or control using the equity method of accounting in accordance with ASC 323-10, Investments-Equity
Method and Joint Ventures: Overall. The Group applies the equity method of accounting that is consistent with ASC 323-10 in limited
partnership in which the Group holds a three percent or greater interest. Under the equity method, the Group initially records its
investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net
assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the
consolidated balance sheets. The Group subsequently adjusts the carrying amount of the investment to recognize the Group’s
proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Group evaluates the
equity method investments for impairment under ASC 323-10. An impairment loss on the equity method investments is recognized in
earnings when the decline in value is determined to be other-than-temporary.
Fair value measurements of financial instruments
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes
three levels of inputs that may be used to measure fair value.
Financial instruments primarily consist of cash and cash equivalents, restricted cash, short-term investments, accounts
receivable, amounts due from and due to related parties, other receivables, long-term investments, available-for-sale securities, short-
term loan, accounts payable, accrued expense and other current liabilities, payable for contingent consideration, redemption right
liabilities and long-term loans. The carrying amounts of these financial instruments, except for long-term equity method investments,
long-term available-for-sale securities, payable for contingent consideration, redemption right liabilities and long-term loans,
approximate their fair values because of their generally short-term maturities.
Available-for-sale securities were initially recognized at cost and subsequently remeasured at the end of each reporting period
with the adjustment in its fair value recognized in accumulated other comprehensive income. The Group, with the assistance of an
independent third party valuation firm, determined the estimated fair value of its post-acquisition settlement consideration, redemption
right granted to noncontrolling shareholder, put options granted to employees and debt securities classified as available-for-sale
securities that are recognized in the consolidated financial statements.
Equity method investments and cost method investments have no quoted market prices and it is not practicable to estimate their
fair value without incurring excessive costs. The Group reviews the investments for impairment whenever events or changes in
circumstances indicate that the carrying amount may no longer be recoverable.
F-21
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of
the assets, as follows:
Electronic equipment
Office equipment and fixtures
Motor vehicles
Leasehold improvements
Estimated useful life
3 years
5 years
4 years
Lesser of term of the lease or the
estimated useful lives of the assets
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the
useful lives of plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are
recorded by removing the cost and accumulated depreciation from the assets and accumulated depreciation accounts with any
resulting gain or loss reflected in the consolidated statements of comprehensive income.
All direct and indirect costs that are related to the construction of fixed assets and incurred before the assets are ready for their
intended use are capitalized as construction in progress. Construction in progress is transferred to specific fixed assets items and
depreciation of these assets commences when they are ready for their intended use.
Goodwill
Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the identifiable assets
acquired and the liabilities assumed of an acquired business (note 3). In accordance with ASC 350, Goodwill and Other Intangible
Assets, recorded goodwill amounts are not amortized, but rather are tested for impairment annually or more frequently at the reporting
unit level if there are indicators of impairment present.
The Group adopted Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment, to test goodwill for
impairment by performing a qualitative assessment before calculating the fair value of a reporting unit in step one of the goodwill
impairment test. If the Group determines, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than
not less than the carrying amount, a two-step impairment test is required. Otherwise, further testing is not needed. The events or
circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount include a significant
change in stock prices, business environment, legal factors, financial performances, competition, or events affecting the reporting unit.
In performing the two step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair
value of the reporting unit based on estimated fair value using a combination of the income approach and the market approach. If the
fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and the Group is not required
to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Group must
perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair
value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to
determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair
value, the excess is recognized as an impairment loss. Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and
determination of the fair value of each reporting unit.
As of December 31, 2015, the Group had two reporting units, consisting of the online lottery business and the remaining
business of the Group.
F-22
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Intangible assets
Intangible assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets acquired in a
business combination were recognized initially at fair value at the date of acquisition. Intangible assets with finite useful lives are
amortized using a straight-line method of amortization that reflects the estimated pattern in which the economic benefits of the
intangible asset are to be consumed. The estimated useful life for the intangible assets is as follows:
Customer relationship
Trademark
Technology
Non-compete agreements
Online game licenses
User base
Domain names
Platform
Estimated
useful life
3-6 years
3-10 years
1-10 years
6 years
1-5 years
1-3 years
1-10 years
5 years
If an intangible asset is determined to have an indefinite life, it should not be amortized until its useful life is determined to be
no longer indefinite
Impairment of long-lived assets and intangible assets
The Group evaluates its long-lived assets or asset group, including intangible assets with indefinite and finite lives, for
impairment. Intangible assets with indefinite lives that are not subject to amortization are tested for impairment at least annually or
more frequently if events or changes in circumstances indicate that the assets might be impaired in accordance with ASC 350-
30, Intangibles-Goodwill and Other: General Intangibles Other than Goodwill. Such impairment test compares the fair values of
assets with their carrying values with an impairment loss recognized when the carrying values exceed fair values. For long-lived assets
and intangible assets with finite lives that are subject to depreciation and amortization are tested for impairment whenever events or
changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets)
indicate that the carrying amount of an asset or a group of long-lived assets may not be recoverable. When these events occur, the
Group evaluates impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying
amount of the assets, the Group would recognize an impairment loss based on the excess of the carrying amount of the asset group
over its fair value.
F-23
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Revenue recognition
The Group generates its revenues primarily through online marketing services, internet value-added services and internet
security services and others. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the sales price is fixed or determinable, and collectability is reasonably assured.
(1) Online marketing services
Online advertising
Online advertising services revenue is primarily derived from displaying advertising customer’s advertisements on the Group’s
online platforms including duba.com and other websites, browsers, PC and mobile applications, and to a lesser extent, on third-party
advertising publishers’ websites or mobile applications. The Group has three general pricing models for its advertising products: cost
over a time period, cost for performance basis and cost per impression basis. For advertising contracts over a time period, the Group
generally recognizes revenue ratably over the period the advertising is displayed. For contracts that are charged on the cost for
performance basis, the Group charges an agreed-upon fee to its customers determined based on the effectiveness of advertising links,
which is typically measured by clicks, transactions, installations, user registrations, and other actions originating from the Group’s
online platforms. For contracts that are charged on the cost per impression basis, the Group charges an agreed-upon fee to its
customers based on the number of impressions in the contracted period in which impressions are delivered. Impressions are
considered delivered when an advertisement is displayed to users. Online advertising services revenue charged on the cost for
performance basis and the cost per impression basis is generally recognized upon receiving monthly statements from its customers
either in the current month or in the following month in which the service is provided, as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection is reasonably assured, as prescribed by ASC 605, Revenue Recognition.
For online advertising services arrangement involving third-party advertising publishers’ websites or mobile publications, the Group
recognizes gross revenue for the amount of fees received or receivable from customers as the Group is the primary obligor.
Payments made to the third-party advertising publishers are included in cost of revenues as traffic acquisition costs.
Advertising agency services
The Group provides advertising agency services by arranging advertisers to purchase various advertisement products from
certain online networks, primarily Facebook and Google. The Group receives from the online network performance-based
commissions, which are determined based on a pre-specified percentage of the payment by the advertisers for the online network’s
various advertisement products. The Group acts as an agent in the advertising agency arrangement as it is neither the primary obligor
to provide advertisement product nor to assume inventory risk. Revenue from advertising agency services is recognized on a net basis
when the advertisement products are delivered by the online networks. The revenue is estimated by the Group based on the real-time
advertising performance results provided by the online networks and the commission rates pre-determined in contracts signed with
relevant online networks. There were no significant difference between the Group’s estimates and the subsequent periodic invoices
provided by the online network for all the periods presented.
F-24
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(2)
Internet value-added services
Web and mobile games publishing
The Group enters into agreements with third party game developers to provide web and mobile game publishing and payment
collection services, in order for game players to purchase and recharge virtual currencies used in the games. The games are developed
and hosted by third-party game developers, and accessed by game players through the Group’s PC game center and mobile
applications or a third-party mobile platform. The payment collection services are mainly provided through third-party payment and
settlement institutions. The Group generally charges commission as a percentage of the gross proceeds or collection amount from the
settlement institutions, and pays the remaining proceeds to the game developers. When the settlement institutions directly remit the
collection amount to the developers, the Group collects its commission from the developer. The Group believes it acts as an agent to
the game developers in these arrangements as the Group is not considered the primary obligor, is not primarily responsible for
fulfillment of services, does not incur significant upfront costs, generally does not have the discretion in establishing prices, and earns
a fixed percentage of the collection amount from the settlement institutions. The Group estimates the commission based on its internal
system, which is confirmed with the respective settlement institutions in the same month in which the services are provided, and
recognizes the commission revenue accordingly. Purchases of in-game currency are not refundable after they have been sold unless
there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the revenue
generated by a game is insignificant. Up to December 31, 2015, the Group has never been required to pay significant cash refunds to
game players or game developers as a result of the discontinuation of a game.
Exclusively licensed games
The Group operates some games exclusively licensed from third-party developers. The proceeds, after commission fees paid to
distribution channels and third-party payment institutions, received from game players are shared between the Group and the game
developers based on a predetermined percentage for each game under exclusive license. The exclusively licensed games allow players
to play for free and the Group generates revenue from game players’ purchase of in-game virtual currency for in-game virtual items to
enhance their game-playing experience.
The Group acts as the principal in the exclusively licensed game arrangements under which the Group is the primary obligor of
the fulfillment of the game operation, including the selection of distribution platforms, the access maintenance, the promotion and
customer services, the hosting of game servers, if needed, and the determination of the service specifications and the pricing of the in-
game virtual items. Accordingly, the Group records revenues from operating the exclusively licensed mobile games on a gross basis.
Commission fees paid to distribution platforms and payment channels and the fees shared by the third-party game developers are
recorded as cost of revenues.
The Group recognizes the payment received from the paying players into revenue evenly over their estimated average paying
player life of each game. The Group tracks each paying player’s purchases and log-in history to estimate the average life of the paying
players. While the Group believes its estimates to be reasonable based on sufficient available game player information, it may revise
such estimates in the future as the games’ operation periods change or there is indication that the similarities in characteristics and
playing patterns of paying players of the games change. Any adjustments arising from changes in the estimates of the average paying
player life would be applied prospectively. The average paying player life ranged from 42 to 83 days in 2015.
Online lottery sales services
The Group received online lottery purchase orders from the end users through its website or mobile application and processed
the orders either with other entities or individuals who are authorized agents of lottery sales offices established by provincial
governments (“Authorized Distributors”). The Group received service fees from the Authorized Distributors based on the pre-
determined rate and the total amount of the processed orders. Upon fulfillment of its service obligations to the Authorized
Distributors, the Group recorded the revenue on a net basis because the Group acted as an agent of the Authorized Distributors in the
distribution and administration of the lottery products. Due to the temporary suspension of the Group’s online lottery business in 2015
in response to regulatory changes in China, no revenue was recorded starting from April 1, 2015.
F-25
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(3)
Internet security services and others
Internet security services
The Group markets and distributes its off-the-shelf anti-virus security solutions to enterprise and individual users.
Upon the customers’ initial purchase of the enterprise solutions, the arrangements include multiple elements, generally
comprising of software and post-contract customer services (“PCS”). When vendor-specific objective evidence (“VSOE”) of the fair
value of the PCS exists, the Group allocates and defers revenue for the PCS based on its fair value, and recognizes the difference
between the total arrangement fee and the amount deferred as software license revenue. When VSOE of the fair value of the PCS does
not exist, the entire arrangement fee is recognized ratably over the PCS period. In 2013, 2014 and 2015, the Group concluded that
VSOE of the fair value of the PCS does not exist, and recognized the entire arrangement fee ratably over the PCS period starting from
the end-users’ activation of the software. The arrangement fee of the PCS purchased on a stand-alone basis is recognized into revenue
ratably over the PCS period.
The software, including unspecified upgrades, for the individual solutions are provided to users free of charge via online
downloads. However, the Group does provide the individual users the option to purchase additional value-added services, which are
non-essential to the functionality of the software, either concurrent with the download of software, or separately as a renewal. The
value-added services are provided over the period of time as determined and purchased by the respective users. The fees for value-
added services are recognized into revenue ratably over the term of such services.
Others
Other revenues primarily comprise of the sale of air purifier products and licensing fees from Kingsoft Japan, a related party, for
the right to use certain internet security software (note 16). The Group recognizes revenue for the sale of air purifiers after a sales
agreement is signed, the price is fixed or determinable, products are delivered to customers, and collection of the resulting receivables
is assured. Product is considered delivered to the customers once it has been shipped and the amount of future returns can be
reasonably estimated, risk of loss and rewards of ownership have been transferred.
F-26
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Deferred revenues
Deferred revenues primarily consist of payments received from customers in relation to the service to be provided by the Group
but for which not all of the revenue recognition criteria are met and government subsidies not recognized in revenue due to attached
conditions not being met.
Cost of revenues
Cost of revenues primarily consists of cost of products sold, traffic acquisition cost, bandwidth costs, royalty fees, payment
collection costs, salaries and benefits, share-based compensation expenses, depreciation of equipment, amortization of licenses and
other intangible assets, inventory cost, value-added tax (“VAT”), business tax and related surcharges.
The Group’s business is subject to VAT, business taxes and surcharges levied on advertising related sales in China. Pursuant to
ASC 605-45, Revenue Recognition—Principal Agent Considerations, all such VAT, business taxes and surcharges of RMB48,355,
RMB105,475 and RMB132,288 (US$20,422) are presented as cost of revenues on the consolidated statements of comprehensive
income for the years ended December 31, 2013, 2014 and 2015, respectively. As of December 31, 2015, the Company’s subsidiaries
in the PRC, VIEs and a VIE’s subsidiary are subject to VAT at 6% or 17%.
Selling and marketing expenses
Selling and marketing expenses consist primarily of advertising and promotional expenses, staff costs and share-based
compensation expenses and other related incidental expenses that are incurred directly to attract or retain users and customers for the
Group’s websites, applications, software and online platforms. Advertising and promotional expenses are expensed when incurred.
For the years ended December 31, 2013, 2014 and 2015, advertising and promotional expenses were RMB172,969, RMB512,531 and
RMB1,312,752 (US$202,654), respectively.
The cash incentives and credits granted to the Group’s end users of online lottery sales services, which could be applied against
future lottery purchase orders placed through its website or mobile application, are expensed as incurred and are classified within
“Selling and marketing expense” in the consolidated statements of comprehensive income.
Research and development expenses
Research and development consist primarily of amortization of intangible assets used in research and development and
employee costs related to personnel involved in the development and enhancement of the Group’s service offerings on its websites
and mobile applications. The Group expensed these costs as incurred, unless such costs qualify for capitalization as software
development costs, including (i) preliminary project is completed, (ii) management has committed to funding the project and it is
probable that the project will be completed and the software will be used to perform the function intended, and (iii) they result in
significant additional functionality in the Group’s products. No costs were capitalized during any years presented as the Group has not
met all of the necessary capitalization requirements.
F-27
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Government subsidies
Government subsidies primarily consist of financial subsidies received from provincial and local governments, for operating a
business in their jurisdictions or conducting research and development projects pursuant to specific policies promoted by the local
governments. There are no defined rules and regulations to govern the criteria necessary for companies to receive such benefits, and
the amount of financial subsidy is determined at the discretion of the relevant government authorities. For the government subsidies
with non-operating feature and with no further conditions to be met, the amounts are recorded in “Other income” when received; for
the government subsidies with operating feature and with no further conditions or specific use requirements to be met, the amount are
recorded in “Other operating income” when received; and for the government subsidies related to research and development projects,
the amounts are recorded in “Deferred revenue” when received and will be offset against “Research and development” expenses over
the project period when no further conditions are to be met.
Leases
Leases have been classified as either capital or operating leases at the inception date. Leases that transfer substantially all the
benefits and risks incidental to the ownership of assets are accounted for as if there was an acquisition of an asset and incurrence of an
obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed on
a straight-line basis over the periods of their respective lease terms. The Group leases office space under operating lease agreements.
Certain of the lease agreements contain rent holidays. Rent holidays are considered in determining the straight-line rent expense to be
recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing
lease expense on a straight-line basis over the term of the lease.
The Company had no capital leases as of December 31, 2014 and 2015.
Comprehensive income
Comprehensive income is defined to include all changes in shareholders’ equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, ASC 220-10, Comprehensive Income: Overall requires that all items
that are required to be recognized under current accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other financial statements.
Income taxes
The Group accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that
will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax
assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment date.
F-28
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The Group applies ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes. ASC 740 prescribes a
recognition threshold a tax position is required to meet before being recognized in the financial statements. The Group has recorded
unrecognized tax benefits in the other non-current liabilities line item in the accompanying consolidated balance sheets. The Group
has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of “income tax
expense”, in the consolidated statements of comprehensive income.
The Group’s estimated liability for unrecognized tax benefits and the related interest and penalties are periodically assessed for
adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with
respect to tax audits, and expiration of the statute of limitations. The actual benefits ultimately realized may differ from the Group’s
estimates. As each audit is concluded, adjustments, if any, are recorded in the Group’s consolidated financial statements. Additionally,
in future periods, changes in facts and circumstances, and new information may require the Group to adjust the recognition and
measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in
the period in which they occur.
Share-based compensation
The Group accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation: Overall.
In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award
or equity award. All grants of share-based awards to employees classified as equity awards are recognized in the financial statements
based on their grant date fair values.
The Group has elected to recognize share-based compensation using the accelerated method, for all share-based awards granted
with graded vesting based on service conditions. Forfeiture rates are estimated based on historical experience and future expectations
of employee turnover rates and are periodically reviewed. If required vesting conditions are not met resulting in the forfeiture of the
share-based awards, previously recognized share-based compensation expenses relating to those awards are reversed. ASC 718
requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ
from initial estimates. To the extent the Group revises these estimates in the future, the share-based payments could be materially
impacted in the period of revision, as well as in following periods. Share-based compensation expenses was recorded net of estimated
forfeitures such that expense was recorded only for those share-based awards that are expected to vest. The Group, with the assistance
of an independent third party valuation firm, determined the fair value of share-based awards granted to employees. Determining the
fair value of share-based awards of the Company required complex and subjective judgments regarding its projected financial and
operating results, its unique business risks, the liquidity of its ordinary shares and its operating history and prospects at the time the
grants were made.
The Group has accounted for equity instruments issued to non-employees in accordance with the provisions of ASC 718-10 and
ASC 505-50, Equity: Equity-based Payments to Non-Employees. The Group records compensation expenses equal to the fair value of
the share at the measurement date, which is determined to be the earlier of the performance commitment date or the service
completion date.
F-29
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Earnings per share
Earnings per share are calculated in accordance with ASC 260-10, Earnings per Share: Overall. Basic earnings per share are
computed by dividing net income attributable to holders of ordinary shares by the weighted average number of ordinary shares
outstanding during the year using the two-class method. Under the two-class method, net income is allocated between the convertible
preferred shares, ordinary shares, Class A ordinary shares and Class B ordinary shares based on their participating rights in the
undistributed earnings as if all the earnings for the reporting period had been distributed.
Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average
number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of shares
issuable upon the conversion of the convertible preferred shares using the if-converted method, the vesting of restricted shares and the
exercising of restricted shares with an option feature using the treasury stock method. The computation of the dilutive earnings per
share of Class A ordinary share assumes the conversion of Class B ordinary shares.
Contingencies
The Group records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be
incurred and the amount of loss can be reasonably estimated. The Group evaluates, on a quarterly basis, developments in legal
proceedings or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency
both probable and reasonably estimable. The Group discloses the amount of the accrual if it is material.
Segment reporting
In accordance with ASC 280, Segment Reporting, the Company’s chief operating decision maker has been identified as the chief
executive officer, who reviews the consolidated results of operations when making decisions about allocating resources and assessing
performance of the Group as a whole and hence,the Group operates and manages its business as a single segment.
Concentration of risks
Concentration of credit risk
Financial instruments that are potentially subject to credit risk consist of cash and cash equivalents, restricted cash, short-term
investments, accounts receivable and other receivables. The carrying amounts of these financial instruments represent the maximum
amount of loss due to credit risk. As of December 31, 2015, the Group has RMB1,994,683 (US$307,926) in cash and cash
equivalents, restricted cash and short-term investments, 60.5% and 39.5% of which are held by financial institutions in the PRC and
international financial institutions outside of the PRC, respectively. Deposits held with financial institutions were not protected by
statutory or commercial insurance. In the event of bankruptcy of one of these financial institutions, the Group may be unlikely to
claim its deposits back in full. Management believes that these financial institutions are of high credit quality and continually monitors
the credit worthiness of these financial institutions.
Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party cash deposits protect the
depositors’ rights over and interests in their deposited money; PRC banks are subject to a series of risk control regulatory standards;
and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material
credit crisis.
Accounts receivable and other receivables are both typically unsecured, and are derived from revenue earned from customers or
cash receivables on behalf of publishers. The risk is mitigated by credit evaluations the Group performs on its ongoing credit
evaluations of its customers’ financial conditions and ongoing monitoring process of outstanding balances. The Group maintains
reserves for estimated credit losses and these losses have generally been within expectations.
F-30
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Business, customer, political, social and economic risks
The Group participates in a dynamic high technology industry and believes that changes in any of the following areas could
have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall
demand for services and products; competitive pressures due to new entrants; advances and new trends in new technologies and
industry standards; changes in bandwidth suppliers; changes in certain strategic relationships or customer relationships; regulatory
considerations; copyright regulations; and risks associated with the Group’s ability to attract and retain employees necessary to
support its growth.
For the year ended December 31, 2013, approximately 25%, 14% and 19% of the Group’s total revenue were derived from
Customer A, Customer B and Customer C, respectively. For the year ended December 31, 2014, approximately 15%, 15% and 12% of
the Group’s total revenue were derived from Customer A, Customer C and Customer D, respectively. For the year ended
December 31, 2015, approximately 29%, 11% and 8% of the Group’s total revenue were derived from Customer E, Customer C and
Customer B, respectively.
The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.
Internet and advertising related businesses are subject to significant restrictions under current PRC laws and regulations. Specifically,
foreign investors are not allowed to own more than 50% equity interests in any Internet Content Provider (“ICP”) business.
Currency convertibility risk
A significant portion of the Group’s operating activities as well as the assets and liabilities are denominated in RMB. The
Group’s financing activities are denominated in US$. On January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted daily by the People’s Bank of PRC (the “PBOC”). However, the unification of the
exchange rates does not imply that the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange
transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a
payment application form together with suppliers’ invoices, shipping documents and signed contracts.
Additionally, the value of the RMB is subject to changes in central government policies and international economic and political
developments affecting supply and demand in the PRC foreign exchange trading system market.
Foreign currency exchange rate risk
The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents, restricted cash
and short-term investments denominated in the US$. On June 19, 2010, the People’s Bank of China announced the end of the RMB’s
de facto peg to US$, a policy which was instituted in late 2008 in the face of the global financial crisis, to further reform the RMB
exchange rate regime and to enhance the RMB exchange rate flexibility. On April 16, 2012, the People’s Bank of China announced a
policy to expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign
exchange market from 0.5% to 1%. On March 17, 2014, the People’s Bank of China announced a policy to further expand the
maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market to 2%.
The appreciation of the RMB against US$ was approximately 3.1% in the year ended December 31, 2013. The depreciation of the
RMB against US$ was 2.4% and 5.8% during the years ended December 31, 2014 and 2015, respectively. In the long term, the RMB
may appreciate or depreciate more significantly in value against the U.S. dollar or other foreign currencies, depending on the market
supply and demand with reference to a basket of currencies.
F-31
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Recently issued accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from
Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core
principle of the guidance is that an entity should recognize revenue to depict the transfer of the promised goods or services to
customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The
amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period
within that reporting period. Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers-Deferral of the effective date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date
of ASU 2014-09 issued in May 2014. According to ASU 2015-14, the new revenue guidance ASU 2014-09 is effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. The Group is in the process of evaluating its contracts with customers under the new standard and cannot
currently estimate the financial statement impact of adoption.
In August 2014, the FASB issued ASU No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The
guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide
related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016,
and for annual and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a
significant impact on the Group’s consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02 (“ASU 2015-02”). Consolidation (Topic 810) —Amendments to the
Consolidation Analysis. The amendments in Topic 810 respond to stakeholders’ concerns about the current accounting for
consolidation of variable interest entities, by changing aspects of the analysis that a reporting entity must perform to determine
whether it should consolidate such entities. Under the amendments, all reporting entities are within the scope of Subtopic 810-10,
Consolidation—Overall, including limited partnerships and similar legal entities, unless a scope exception applies. The amendments
are intended to be an improvement to current U.S. GAAP, as they simplify the codification of FASB Statement No. 167, Amendments
to FASB Interpretation No. 46(R), with changes including reducing the number of consolidation models through the elimination of the
indefinite deferral of Statement 167 and placing more emphasis on risk of loss when determining a controlling financial interest. The
amendments are effective for publicly-traded companies for fiscal years beginning after December 15, 2015, and for interim periods
within those fiscal years. Earlier adoption is permitted. The Group is currently evaluating the impact on its consolidated financial
statements of adopting this guidance.
In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), Simplifying the Accounting for Measurement-Period
Adjustments, which eliminates the requirement for acquirers in a business combination to account for measurement-period adjustments
retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the
amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had
been completed at the acquisition date. This update is effective for interim and annual periods beginning after December 15, 2015,
with early adoption permitted. The implementation of this update is not expected to have any material impact on the Group’s
consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and
liabilities be classified as noncurrent on the balance sheet. The amendments in this update are effective for financial statements issued
for annual periods beginning after December 15, 2016, and interim periods within those annual periods. All short-term deferred tax
assets and liabilities will be reclassified to long-term assets and liabilities upon adoption of this update. The Group is currently
evaluating the impact on its consolidated financial statements of adopting this guidance.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 specifies the accounting for
leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost,
calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for
public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early
adoption is permitted. The Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07 (“ASU 2016-07”), Investments—Equity Method and Joint Ventures (Topic
323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to retrospectively apply the
equity method in previous periods. Instead, the investor must apply the equity method prospectively from the date the investment
qualifies for the equity method. The amendments in this update are effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Group is
currently evaluating the impact on its consolidated financial statements of adopting this guidance.
F-32
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
3. BUSINESS COMBINATIONS
Business combinations in 2015
Acquisition of MobPartner
On April 1, 2015, the Group acquired 100% equity interest of MobPartner, a global mobile advertising company, and its wholly-
owned subsidiaries for a total consideration of RMB314,237 (US$48,510). The acquisition is expected to enhance the Group’s
expertise in mobile advertising and accelerate global mobile monetization capabilities. The results of MobPartner have been included
in the Group’s consolidated financial statements since April 1, 2015.
Total purchase price comprised of:
(i)
-Cash consideration
-Equity consideration
-Contingent consideration in cash
(ii)
(iii)
Total
Details of the purchase consideration are as follows:
RMB
US$
273,726
23,309
17,202
314,237
42,256
3,598
2,656
48,510
(i) RMB150,938 (US$23,301) of cash consideration was paid in April 2015 and RMB122,788 (US$18,955) was paid to an
unconditional escrowed account, which will be settled on the required payment dates. The first deferred payment of RMB70,124
(US$10,825) will be settled in March 2016 and was recorded in “ Accrued expenses and other current liabilities”. The second and
third deferred payments of RMB 49,592 (US$7,656) and RMB3,072 (US$474) will be settled in March 2017 and January 2019,
respectively, and were recorded in “Other non-current liabilities” as of December 31, 2015.
(ii)
RMB23,309 (US$3,598) represented the fair value of 2,173,039 Class A ordinary shares issued by the Company on the
acquisition date.
(iii)
Part of the acquisition consideration is contingent on the achievement by MobPartner of certain financial targets from
January 2015 to December 2016 and capped at RMB56,949 (US$8,791) in total. The Group estimated and recognized a financial
liability for the contingent consideration at its fair value of RMB17,202 (US$2,656) as of the acquisition date. On December 15, 2015,
the Company early settled the contingent consideration with Mobpartner’s prior shareholders for RMB9,711 (US$1,499) and recorded
a gain of RMB8,439 (US$1,303) in “settlement and changes in fair value of contingent considerations” in the consolidated statements
of comprehensive income for the year ended December 31, 2015.
Since the acquisition, MobPartner contributed RMB155,053 (US$23,936) revenues and RMB40,305 (US$6,222) losses to the
Group for the year ended 2015. Had the acquisition taken place at the beginning of the year, the revenue of the Group and the net
income of the Group for the year ended December 31, 2015 would have been RMB3,745,048 (US$578,136) and RMB172,947
(US$26,698), respectively. The pro forma results have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had the acquisition occurred as of January 1, 2015, nor is it
indicative of future operating results.
F-33
Table of Contents
Acquisition of Moxiu Technology
On May 28, 2015, the Group acquired an additional 1.6% equity interest of Moxiu Technology for a consideration of
RMB25,000 (US$3,859) and the article of association of Moxiu Technology was amended to require simple majority of voting
interests for approval of significant financial and operating decisions. Upon completion of this acquisition, the Group obtained
controls over Moxiu Technology through its 52.1% voting interests of Moxiu Technology. This acquisition is to enhance the Group’s
online marketing services and provide synergies with its existing business. The results of Moxiu Technology have been included in the
Group’s consolidated financial statements since May 28, 2015.
Total purchase price comprised of:
- Cash consideration
- Fair value of previously held equity interests
(i)
Total
(i)
RMB
US$
25,000
63,488
88,488
3,859
9,801
13,660
A deemed disposal gain of RMB15,030 (US$2,320) was recognized and recorded in other income in relation to the
revaluation of the Group’s previously held equity interest of Moxiu Technology in the consolidated statement of
comprehensive income for year ended December 31, 2015.As Moxiu Technology is a private company, the fair value of
the Group’s previously held equity interest is estimated based on a discounted cash flow model using significant
unobservable inputs that market participants would consider, which mainly include revenue growth rate, discount rate
and discount for lack of control. The Group recognized a noncontrolling interest of RMB62,224 (US$9,606) based on
the fair value of noncontrolling interests at acquisition date.
The actual results of operation after the acquisition date and pro forma results of operations for the acquisition have not been
presented because the effects were not material.
Other acquisitions
In 2015, the Group also completed other acquisitions for a total consideration of RMB37,581 (US$5,802). These acquisitions are
expected to strengthen the Group’s current technology and to generate the synergy with the Groups’ mobile business. The total
consideration for the acquisitions was fully paid in cash in 2015.
The table below summarized the estimated fair values of the assets acquired and liabilities assumed from the 2015 acquisitions as
of the respective acquisition dates:
Cash and bank balance
Accounts receivable
Prepayments deposits and other current
asset
Property and equipment, net
Other non-current assets
Accounts payable
Accrued expenses and other current
liabilities
Other non-current liabilities
Intangible assets:
- Trademark
- Technology
- User base
- Customer relationship
- Platform
Deferred tax liabilities
Goodwill
Total fair value of purchase price
consideration
MobPartner
RMB
Moxiu
Technology
RMB
Others
RMB
Total
RMB
US$
60,150
37,308
1,091
1,207
465
(41,774)
(7,633)
(10,028)
13,515
—
—
6,266
67,579
(29,117)
215,208
26,732
1,043
767
2,270
5,065
(259)
(7,361)
—
6,000
6,200
430
—
—
(1,895)
111,720
—
—
33
—
—
—
—
—
—
7,572
7,994
—
—
—
21,982
86,882
38,351
1,891
3,477
5,530
(42,033)
(14,994)
(10,028)
19,515
13,772
8,424
6,266
67,579
(31,012)
348,910
13,412
5,920
292
537
854
(6,489)
(2,315)
(1,548)
3,013
2,126
1,300
967
10,432
(4,787)
53,862
314,237
88,488
37,581
440,306
67,972
Fair value of noncontrolling interests
—
62,224
—
62,224
9,606
The Group performed the valuation of tangible assets, intangible assets acquired and liabilities assumed, fair value of
noncontrolling interests and the fair value of contingent liabilities for the above business combinations with the assistance of an
independent valuation firm. The valuation analysis utilized and considered the generally accepted valuation methodologies such as the
income, market and cost approach. The Group has incorporated certain assumptions and inputs which include projected cash flows
and replacement costs.
The goodwill arising from the above business combinations, which is not tax deductible, is mainly attributable to synergies
expected to be achieved from the acquisitions. The synergies are mainly attributable to the enhancement of the Group’s monetization
capabilities by diversifying sources of income, promoting existing products and increasing customer’s loyalty.
F-34
Table of Contents
Business combinations in 2014
Acquisition of the online lottery business
On April 1, 2014, the Group through its wholly owned subsidiary Suzhou JDD acquired certain fixed assets, intellectual
properties, material contracts and key employees of the online lottery business (the “Online Lottery Business”) from third-party selling
shareholders for a total consideration of RMB26,663. The acquisition is to enhance the Group’s strategy to monetize its user base
through diversified service offerings.
(i)
Cash consideration
Contingent consideration in cash
(iii)
Less: Prepaid employee compensation
Total fair value of purchase consideration
(ii)
RMB
27,000
3,963
(4,300)
26,663
Details of the purchase consideration are as follows:
(i) RMB27,000 of cash consideration was paid in 2014.
(ii) The contingent consideration in cash are determined based on the achievement by the Online Lottery Business of certain
financial targets from April 2014 to March 2016 and capped at RMB13,500 per assessment year. The Group paid off
RMB9,698 (US$1,497) contingent consideration in 2015 for the achievement of the first year financial targets. The Group
recorded a loss of RMB8,342 and a gain of RMB2,606 (US$402), respectively, resulted from the change in fair value of the
contingent consideration liability for the years ended December 31, 2014 and 2015. There was no financial liability associated
with the Online Lottery Business contingent consideration as of December 31, 2015, since the key performance indicators
would not be achieved in the business suspending period.
(iii) The prepaid employee compensation represented part of consideration paid for post-acquisition services to be provided by
two employees of the Online Lottery Business for a four year period pursuant to the acquisition agreement. The Group
determined the fair value of the post-acquisition services at the acquisition date amounting to RMB4,300.
On September 15, 2014, the Group entered into a capital contribution agreement with an entity wholly owned by one of the
sellers of the Online Lottery Business, pursuant to which the entity is required to contribute RMB13,500 in exchange for 25% equity
interests of Suzhou JDD, the purchaser of the Online Lottery Business. During the years ended December 31, 2014 and 2015,
RMB6,750 and 3,375 (US$521) representing 14.3% and 5.7% of equity interests of Suzhou JDD was contributed from this entity.
RMB6,090 and RMB1,689 (US$261) were recognized in noncontrolling interest and RMB660 and RMB1,686 (US$260) were
recognized in the additional paid in capital on the consolidated balance sheets as of December 31, 2014 and 2015, respectively.
During the years ended December 31, 2014 and 2015, the Group recognized an impairment of goodwill and intangible assets
amounted to nil and RMB24,748 (US$3,820) in the consolidated statements of comprehensive income due to its suspension on the
online lottery sales in response to the PRC government’s regulatory uncertainty.
F-35
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Acquisition of HK Zoom business
On July 4, 2014, the Group acquired 100% controlling interest of HK Zoom, a mobile advertising agency, and certain operating
assets (the “HK Zoom Business”), including certain fixed assets, intellectual properties, material contracts and working capital, for a
total consideration of US$24,703 (equivalent to RMB152,274). The acquisition is expected to strengthen the Group’s global mobile
monetization capabilities.
In addition, the Group issued 2,431,775 restricted shares of the Company to a selling shareholder for future grant to the
employees of the HK Zoom Business over requisite service period subsequent to the acquisition. The related compensation for post-
acquisition services provided by the employees is accounted as compensation and recorded in the Company’s consolidated statements
of comprehensive income. The Company granted nil and 807,950 restricted shares to the employees of the HK Zoom for the years
ended 2014 and 2015, respectively.
(i)
Cash consideration
Contingent consideration in cash
Total fair value of purchase consideration
(ii)
RMB
123,284
28,990
152,274
Details of the purchase consideration are as follows:
(i) US$20,000 (equivalent to RMB123,284),of the above cash consideration was paid in 2014.
(ii) The contingent consideration in cash is determined based on the achievements by the HK Zoom Business of certain
performance targets from June 2013 to May 2016 and capped at US$3,000 per year. The Group recognized the fair value of the
contingent consideration of RMB28,990 as a liability at the acquisition date and the loss resulted from the changes in fair value
of the contingent consideration liability of RMB3,652 and RMB3,328 (US$514) for the years ended December 31, 2014 and
2015, respectively. During 2014 and 2015, the Group settled contingent consideration of nil and RMB18,340 (US$2,831),
respectively. As of December 31, 2014 and 2015, the fair value of the contingent consideration liability of RMB32,416 and
RMB18,383 (US$2,838) was recorded in “accrued expenses and other current liabilities” and “other non-current liabilities”.
Acquisition of Youloft HK
On August 1, 2014, the Group acquired approximately 51.9% equity interests in Youloft HK which engages in development of
mobile applications, from a shareholder of Youloft HK, for a total consideration of US$14,211 (equivalent to RMB87,655) in cash.
The acquisition allows the Group to enhance the online marketing services and provide synergies with its existing business.
(i)
Cash consideration
Less: Prepaid employee compensation
Total fair value of purchase consideration
(ii)
RMB
102,390
(14,735)
87,655
Details of the purchase consideration are as follows:
(i) US$16,600 (equivalent to RMB102,390) cash consideration was paid in 2014.
(ii) In accordance with the sale and purchase agreement, share-based compensation, consisting of the noncontrolling interests
held by the selling shareholder and an employee of Youloft HK, was granted at acquisition date to be vested over the requisite
service period. The noncontrolling interest would be sold at a predetermined exercise price back to the Group if the shareholder
or the employee terminates his employment before the requisite service period. The Group, with the assistance of an
independent third party valuation firm, determined the fair value of the share-based compensation to be RMB14,735. As of the
acquisition date, the Group recorded RMB5,702 in the “prepayments and other current assets” and RMB9,033 in the “other non-
current assets”. The net purchase consideration of the acquisition excluded such prepaid share-based compensation from the
cash consideration paid.
F-36
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The table below summarized the estimated fair values of the assets acquired and liabilities assumed from the 2014 acquisitions
as of the respective acquisition dates:
Cash and bank balance
Accounts receivable
Prepayments deposits and other receivables
Accrued expenses and other current liabilities
Property and equipment, net
Intangible assets:
Technology
Customer relationship
User base
Deferred tax liabilities
Goodwill
Total fair value of purchase price consideration
Fair value of noncontrolling interests
Online
Lottery
Business
RMB
HK Zoom
Business
RMB
Youloft HK
RMB
Total
RMB
—
—
—
—
817
1,700
—
400
—
23,746
26,663
—
13,768
11,170
39,659
(56,408)
132
36,000
31,100
—
(11,072)
87,925
152,274
—
—
—
24,672
—
—
15,420
—
27,756
(7,124)
98,481
87,655
71,550
13,768
11,170
64,331
(56,408)
949
53,120
31,100
28,156
(18,196)
210,152
266,592
71,550
The Group performed the valuation of tangible assets, intangible assets acquired and liabilities assumed, fair value of
noncontrolling interests and the fair value of contingent liabilities for the above business combinations with the assistance of an
independent third party valuation firm. The valuation analysis utilized and considered the generally accepted valuation methodologies
such as the income, market and cost approach. The Group has incorporated certain assumptions and inputs which include projected
cash flows and replacement costs.
The goodwill arising from the above business combinations, which is not tax deductible, is mainly attributable to synergies
expected to be achieved from the acquisitions. The synergies are mainly attributable to the enhancement of the Group’s monetization
capabilities by diversifying sources of income, promoting existing products and increasing customers’ loyalty.
F-37
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Business combinations in 2013
Acquisition of Antutu business
On April 17, 2013, the Company acquired certain intellectual properties, customer relationship and key employees of Antutu
Business (“Antutu Business”) from a third party for a cash consideration of RMB12,000, which was fully settled as of December 31,
2013. The acquisition is accounted for as a business combination. The acquisition allows the Group to enhance the mobile application
and provides synergies with its existing business.
In addition, the Company granted 2,750,000 restricted shares, which was valued at US$0.39 per share by the Company with the
assistance of an independent third party valuation firm, to the seller of Antutu Business who became the Group’s key employee after
the acquisition. Since the restricted shares are linked to continuing employment of the key employees, they are accounted for as share-
based compensation expenses. Any unvested restricted shares would be forfeited if the key employees cease their employment with
the Group during the three years’ service period commencing from the employment commencement date (note 17).
Acquisition of Photo Grid business
On May 20, 2013, the Company acquired certain intellectual properties, customer relationship and key employees of Photo Grid
Business (“Photo Grid Business”) from a third party for a cash consideration of US$6,600, which was fully settled as of December 31,
2013. The acquisition is accounted for as a business combination. The acquisition allows the Group to enhance the mobile application
and provides synergies with existing business.
The contingent consideration in cash is determined based on the achievements by the Photo Grid Business of certain
performance targets from June 2013 to May 2016 and capped at US$800 per year. The Group recognized the fair value of the
contingent consideration of RMB11,167 as a liability at the acquisition date and the loss resulted from the changes in fair value of the
contingent consideration liability of RMB971, RMB1,755 and RMB707 (US$109) for the years ended December 31, 2013, 2014 and
2015, respectively. During 2014 and 2015, the Group settled contingent consideration of RMB4,923 and RMB4,892 (US$755),
respectively. As of December 31, 2014 and 2015, the fair value of the contingent consideration liability of RMB8,870 and RMB4,955
(US$765) was recorded in “accrued expenses and other current liabilities”.
During the year ended December 31, 2014, the Company granted 1,000,000 restricted shares to a selling shareholder who
became the Group’s key employee after the business combination, at the first anniversary of the employment commencement date at
terms to be determined at such time.
The table below summarized the estimated fair values of the assets acquired and liabilities assumed from the 2013 acquisitions
as of the respective acquisition dates:
Intangible assets:
Trademark
Technology
Customer relationship
Goodwill
Total fair value of purchase price consideration
Satisfied by:
Cash consideration
Fair value of contingent consideration
Antutu Business
RMB
Photo Grid Business
RMB
Total
RMB
150
1,000
2,383
8,467
12,000
12,000
—
12,000
—
9,270
11,154
31,528
51,952
40,785
11,167
51,952
150
10,270
13,537
39,995
63,952
52,785
11,167
63,952
The Group performed the valuation of tangible assets, intangible assets acquired and liabilities assumed and the fair value of
contingent liabilities for the above business combinations with the assistance of an independent third party valuation firm. The
valuation analysis utilized and considered the generally accepted valuation methodologies such as the income, market and cost
approach. The Group has incorporated certain assumptions which include projected cash flows and replacement costs.
The goodwill arising from the above business combinations, which is not tax deductible is mainly attributable to (a) the
assembled work force and (b) the expected but unidentifiable business growth of the Group as a result of the synergy resulting from
the acquisition.
F-38
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
4. INVESTMENTS
(a) Short-term investments
As of December 31, 2014 and 2015, short-term investments included fixed-rate time deposits in commercial banks, available-
for-sale debt securities with a maturity of less than one year and available-for-sale equity securities that are expected to be sold within
one year.
As of December 31, 2014 and 2015, the balance of fixed-rate time deposits was RMB428,330 and RMB29,234 (US$4,513) ,
respectively.
For the years ended December 31, 2013, 2014 and 2015, interest income related to the fixed-rate time deposits of RMB2,479,
RMB15,901 and RMB9,877 (US$1,525), respectively, was recognized in the consolidated statements of comprehensive income.
The following is a summary of the available-for-sale securities as of December 31, 2014:
Short-term investments:
Available-for-sale equity security
Available-for-sale debt securities
Total
Amortized Cost
RMB
As of December 31, 2014
Gross unrealized
gains
RMB
Gross unrealized
Losses
RMB
Fair value
RMB
6,913
67,309
74,222
—
11,069
11,069
—
—
—
6,913
78,378
85,291
The short-term available-for-sale debt and equity securities were disposed during the year ended December 31, 2015. The
balance was nil as of December 31, 2015. For the years ended December 31, 2013, 2014 and 2015, the Group recognized a realized
gain on disposal of available-for-sale debt and equity securities of nil, RMB1,967 and RMB4,399 (US$679), respectively, in “other
income” in the consolidated statements of comprehensive income.
For the years ended December 31, 2013, 2014 and 2015, the Group recognized an impairment loss of available-for-sale equity
security of nil, RMB8,664 and nil, respectively in the consolidated statements of comprehensive income.
F-39
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(b) Long-term investments
As of December 31, 2014 and 2015, long-term investments consisted of the following:
Cost method investments
Equity method investments
Available-for-sale equity securities
Total
Cost method investments
151,395
131,707
55,740
338,842
As of December 31,
2015
2014
RMB
RMB
652,124
199,723
46,373
898,220
US$
100,671
30,832
7,158
138,661
In 2015, the Group acquired: i) 2.8% equity interest of a third party mobile application developer at a cash consideration of
RMB171,531 (US$28,000), ii) 9.6% equity interest of a third-party mobile advertising software provider at a consideration of
RMB122,896 (US$20,000), iii) preferred shares representing 35% equity interest not qualified as in-substance common stock of a
third-party e-commerce company at a consideration of RMB107,452 (US$17,522), and iv) other equity interests in eleven internet
companies for total consideration of RMB72,800 (US$11,238).
In 2014, the Group’s acquired 4% equity interest of NDP Media Corp. (“NDP”), a third-party online game developer at a cash
consideration of RMB120,000, and the Group also acquired 500,000 series A preferred share of NDP at a consideration of US$5,000.
The Group recognized impairment loss on the cost method investments of nil, nil and RMB6,031 (US$931) in the consolidated
statement of comprehensive income for the years ended December 31, 2013, 2014 and 2015, respectively. The investment income of
nil, nil and RMB700 (US$108) was recognized in other income in the consolidated statements of comprehensive income for the years
ended December 31, 2013, 2014 and 2015, respectively.
Equity method investments
On February 9, 2015, the Group acquired 51.73% of the equity interests in Dianjing Fund, L.P. (“Dianjing”) with a consideration
of RMB45,000 (US$6,947). Other than Dianjing, the Group also entered into investment agreements with eight internet companies
and three limited partnerships to acquire approximately 5% to 50% of the equity interests in those companies during 2015, with
aggregate consideration of RMB65,317 (US$10,083), on which the Group has ability to exercise significant influence.
On March 18, 2014, the Group entered into an equity transfer agreement with Kingsoft to purchase 20% ordinary shares of
Kingsoft Japan, a subsidiary of Kingsoft, for an aggregate purchase price in cash of Japanese Yen (“JPY”) 614 million. The
acquisition was accounted for as a transaction under common control. The excess of the purchase consideration over the carrying
amount of Kingsoft Japan ownership on the books of Kingsoft of RMB6,391 immediately before the transaction was recorded as a
deemed distribution to Kingsoft amounting to RMB30,775 on the acquisition date. On October 10, 2014, the Group acquired
additional 21.5% ordinary shares of Kingsoft Japan from a shareholder, for a purchase price of US$9,967. The difference in the cost
basis of the investment and the proportional interests in Kingsoft Japan was RMB51,782 as of December 31, 2014. In accordance
with ASC 810, Consolidation, Kingsoft Japan is a variable interest entity, as it was established with legal structure with non-
substantive voting rights. The maximum exposure to loss as a result of its involvement with Kingsoft Japan was RMB75,015
(US$11,580) as of December 31, 2015 which also equals to the carrying amount of the investment. The Group is not considered as the
primary beneficiary, as it does not have power to direct the activities of Kingsoft Japan that most significantly impact the Kingsoft
Japan’s economic performance.
During 2014, the Group also acquired 34% equity interest of an internet company and 6.7% interest of a limited partnership
during 2014, with aggregate consideration of RMB3,000, on which the Group has ability to exercise significant influence.
F-40
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
On February 11, 2014, the Group acquired 28.3% equity interests of Moxiu Technology with ability to exercise significant
influence for a cash consideration of RMB20,000 and promotion resources (including but not limited to the advertisement space on the
applications of the Group) with a value of approximately RMB5,000. On December 1, 2014, the Group acquired from a subsidiary of
Tencent Holdings Limited (“Tencent”) an additional 22.2% equity interests of Moxiu Technology for a cash consideration of
RMB30,000. Upon completion of this acquisition, the Group held 50.5% equity interests of Moxiu Technology. However, as the
article of association of Moxiu Technology requires approval from two-third of the voting interest for significant financial and
operating decisions, the Group did not obtain control and continued to have significant influence over Moxiu Technology. As
disclosed in note 3, on May 28, 2015, the Group acquired an additional 1.6% equity interest of Moxiu Technology and the article of
association of Moxiu Technology was amended to require simple majority of voting interests for approval of significant financial and
operating decisions. The Group obtained the control and consolidate the financial statement of Moxiu Technology since May 28,
2015.
On April 18, 2013, the Group invested RMB3,600 cash and self-developed technologies with fair value of RMB6,000 and
carrying value of nil in Beijing Security System Technology for its 40% equity interests. The Group performed the valuation with the
assistance of an independent third party valuation firm. A partial deemed disposal gain on intangible asset of RMB3,600 was
recognized for the year ended December 31, 2013. In June 2015, Beijing Security System Technology company received RMB44,500
(US$6,870) capital contribution from a third company. The Group’s equity interest percentage was diluted to 32%. Deemed disposal
gain amounted to RMB13,798 (US$2,130) was recognized and recorded in other income in consolidated statements of comprehensive
income for the year ended December 31, 2015.
The Group recorded a loss of RMB1,849, RMB5,447 and RMB9,334 (US$1,441) from equity method investments for the years
ended December 31, 2013, 2014 and 2015, respectively. The Group also recognized impairment losses of nil, RMB472 and
RMB2,806 (US$433) for equity method investments in the consolidated statement of comprehensive income for the years ended
December 31, 2013, 2014 and 2015, respectively. During the year ended December 31, 2015, the Group recognized disposal gain of
RMB 13,626 (US$2,103) due to the disposals of two equity method investees and a deemed disposal gain of RMB2,029 (US$313)
resulted from the additional capital contribution in an equity method investee from a third-party investor.
Available-for-sale equity security
Long-term available-for-sale equity security represents investment in the equity securities of a publicly listed company. As the
Group does not have significant influence over the investee, the investment was classified as available-for-sale security and reported at
fair value.
The following is a summary of the available-for-sale securities as of December 31, 2014:
Amortized
Cost
RMB
Gross
unrealized
gains
RMB
As of December 31, 2014
Gross
unrealized
Losses
RMB
Fair value
RMB
Fair value
US$
Available-for-sale equity security
48,952
6,788
—
55,740
8,605
The following is a summary of the available-for-sale securities as of December 31, 2015:
Amortized
Cost
RMB
Gross
unrealized
gains
RMB
As of December 31, 2015
Gross
unrealized
Losses
RMB
Fair value
RMB
Fair value
US$
Available-for-sale equity security
24,555
21,818
—
46,373
7,158
For the years ended December 31, 2013, 2014 and 2015, the Group recognized an impairment loss on the long-term available-
for-sale equity security of nil, nil and RMB25,891 (US$3,997), respectively, in the consolidated statements of comprehensive income.
F-41
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable
Allowance for doubtful accounts
2014
RMB
263,577
(3,230)
260,347
As of December 31,
2015
RMB
US$
638,148
(17,592)
620,556
98,513
(2,716)
95,797
The Group maintains allowance for doubtful accounts for estimated is recorded when loss is probable based on an assessment of
specific evidence indicating troubled collection, historical experience, accounts aging and other factors. The Group reviews the
accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of
individual balances. In evaluating the collectability of individual receivable balances, the Group considers many factors, including the
age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of December 31,
2014 and 2015, all accounts receivable were due from third party customers. The following table presents movement of the allowance
for doubtful receivables:
Balance at the beginning of the year
Charged to general and administrative expenses
Additions in connection with business acquisition
Write-off during the year
Foreign Exchange effect
Balance at the end of the year
6. PREPAYMENTS AND OTHER ASSETS
Prepayments and other current assets
(i)
(ii)
(iii)
VAT prepayments
Other receivables from advertisers and payment service providers
Receivables from employees
Advances to suppliers
Prepaid expenses
Advances to employees
Prepaid deposits
Prepaid employees compensation
Deferred cost
Entrusted loan to a third party
Loans to investors of an equity investee
Entrusted loan to an investor of an equity investee
Others
Total
(iii)
(iv)
(vi)
(v)
F-42
2014
RMB
As of December 31,
2015
RMB
US$
72
3,230
—
(72)
—
3,230
3,230
13,326
729
—
307
17,592
499
2,057
113
—
47
2,716
2014
RMB
As of December 31,
2015
RMB
US$
—
64,905
27,899
16,246
11,692
14,254
21,179
6,716
4,061
—
2,765
4,000
6,312
180,029
122,645
101,829
28,928
25,879
24,133
12,246
10,915
5,292
4,894
3,000
2,765
—
16,105
358,631
18,933
15,720
4,466
3,995
3,725
1,890
1,685
817
756
463
427
—
2,486
55,363
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(i) VAT prepayments as of December 31, 2015 represent VAT receivables from relevant PRC tax authorities arising from
services which will be used to deduct future tax payable.
(ii) The amount represents receivable from certain employees related to the individual income tax (“IIT”) arising from the vested
restricted shares and restricted shares with an option feature of the Company as of the end of the years presented.
(iii) As of December 31, 2014, provision for doubtful debts of RMB5,000 and RMB5,444 were made against the entrusted loan to
a third party and advance to suppliers, respectively. As of December 31, 2015, provision of RMB6,481(US1,000) , RMB1,730
(US267) and RMB1,759 (US$272) were made against advance to suppliers, other receivables from advertisers and prepaid deposits ,
respectively. The following table presents movement of the allowance for doubtful debts:
Balance at January 1,
Additions charged to general and administrative expenses
Reversal
Foreign exchange effect
Balance at December 31,
2014
RMB
2015
RMB
US$
11,160
1,284
(2,000)
—
10,444
10,444
4,516
(5,000)
10
9,970
1,612
697
(772)
2
1,539
(iv) The loan bears an interest rate of 5% and the repayment is due in June 2016.
(v) Loans to investors of an equity investee amounting to RMB5,530 (US$854) bear interest at rate reference to the market rate
with 10% discount. The loans are repayable in four years. As of December 31, 2015, RMB2,765 (US$427) of the loans were
included in “Other non-current assets” in the consolidated balance sheets.
(vi) Entrusted loan to an investor of an equity investee amounting to RMB4,000 (US$617) bears interest rate reference to the
market rate with 10% discount and has been repaid in June 2015.
Other non-current assets
Loans to investors of an equity investee
Staff loan receivables
Compensation to key employees and other expenses
Rental deposits
Investment prepayments
(ii)
(i)
2014
RMB
As of December 31,
2015
RMB
US$
2,765
3,052
9,049
9,855
30,476
55,197
2,765
1,074
4,417
17,166
—
25,422
427
166
682
2,649
—
3,924
(i) The balance mainly represented non-current portion of compensation to key employees of Suzhou JDD of RMB1,385
(US$214) and Youloft HK of RMB2,763 (US$427), respectively.
(ii) Balance represents prepayment for certain investments and intangible assets which had not been completed as of
December 31, 2014.
F-43
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
7. PROPERTY AND EQUIPMENT, NET
Electronic equipment
Leasehold improvements
Office equipment and fixtures
Motor vehicles
Construction in progress
Less: Accumulated depreciation
Property and equipment, net
2014
RMB
As of December 31,
2015
RMB
US$
71,185
10,657
5,980
761
—
(42,678)
94,800
55,794
18,650
2,673
1,322
(53,910)
45,905
119,329
14,635
8,613
2,879
413
204
(8,323)
18,421
Depreciation expense of property and equipment for the years ended December 31, 2013, 2014 and 2015were RMB11,702,
RMB21,684 and RMB25,636 (US$3,958), respectively.
8. INTANGIBLE ASSETS, NET
Intangible assets and the related accumulated amortization are summarized as follows:
Indefinite-lived:
Trade name and domain names
Finite-lived:
Technology
Online game licenses
Customer relationship
User base
Trademark
Domain names
Non-compete agreements
Indefinite-lived:
Trade name and domain names
Finite-lived:
Technology
Online game licenses
Customer relationship
User base
Trademark
Domain names
Non-compete agreements
Platform
As of December 31, 2014
Gross
carrying
value
RMB
Accumulated
amortization
RMB
Impairment
RMB
Net carrying
value
RMB
2,161
113,116
65,726
30,739
62,563
10,432
2,533
1,610
288,880
Gross
carrying
value
RMB
—
(36,027)
(14,678)
(3,901)
(23,750)
(827)
(239)
(1,538)
(80,960)
—
—
(8,304)
—
—
—
—
—
(8,304)
2,161
77,089
42,744
26,838
38,813
9,605
2,294
72
199,616
As of December 31, 2015
Accumulated
amortization
RMB
Impairment
RMB
Net carrying
value
RMB
US$
2,161
174,851
62,991
39,385
74,811
30,726
3,794
1,610
71,439
—
—
(89,851)
(30,039)
(13,373)
(50,216)
(5,823)
(1,471)
(1,610)
(10,715)
(213)
(25,639)
—
—
—
(789)
—
—
2,161
84,787
7,313
26,012
24,595
24,903
1,534
—
60,724
461,768
(203,098)
(26,641)
232,029
334
13,088
1,129
4,016
3,797
3,844
237
—
9,374
35,819
The Group recognized an impairment loss on intangible assets of nil, RMB8,304 and RMB26,136 (US$4,035) for the years
ended December 31, 2013, 2014 and 2015, respectively .
F-44
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Amortization expense of intangible assets for the years ended December 31, 2013, 2014 and 2015 were RMB14,178,
RMB57,066 and RMB120,521(US$18,605), respectively. Estimated amortization expense relating to the existing intangible assets
with finite lives for each of next five years and thereafter is as follows:
2016
2017
2018
2019
2020
Thereafter
9. GOODWILL
The changes in the carrying amount of goodwill were as follows:
Balance as of January 1,
Goodwill acquired in business combinations (note 3)
Impairment of Goodwill
Foreign currency translation adjustments
2014
RMB
52,819
210,152
—
(1,285)
Years ending December 31,
US$
RMB
103,924
58,210
34,481
20,698
5,980
6,575
16,043
8,986
5,323
3,195
923
1,015
2015
RMB
US$
261,686
348,910
(23,746)
26,370
40,397
53,862
(3,665)
4,071
94,665
Balance as of December 31,
261,686
613,220
During the year ended December 31, 2015, the Group recognized an impairment loss of RMB23,746 (US$3,665) for the online
lottery business reporting unit as the carrying amount exceeded its fair value due to the suspension of online lottery business in 2015.
10. LOANS PAYABLE
Short-term loan
On May 18, 2015, the Group entered into a revolving loan facility agreement ended March 31, 2016 with the Hang Seng Bank
Limited (“Hang Seng”), pursuant to which the Group is entitled to borrow a US$ denominated loan of RMB325,000 (US$50,000)
with an interest rate of 1.65% per annum over 1, 2, 3 or 6 months London Inter Bank Offered Rate (“LIBOR”). The loan facility is
subject to Hang Seng’s overriding right of repayment on demand and the loan under this facility is intended for the general working
capital of the Group. On November 20, 2015, the Group drew down RMB129,872 (US$20,000) under the loan facility agreement with
a revolving term of one month, which was secured by a pledge of bank deposit of RMB25,974 (US$4,000).
Long-term loans
In November 2014, MobPartner entered into two loan agreements with Bpifrance Financement, pursuant to which Mobpartner
borrowed two unsecured Euro denominated loans of RMB5,238 (Euro750) with a term of 7 years and RMB5,238 (Euro750) with a
term of 6.75 years. The loans will be settled with a fixed annual interest rate of 3.23% and 2.59%, respectively, during the respective
term of loans.
In January 2015, Mobpartner entered into a loan agreement with Hongkong and Shanghai Banking Corporation Limited (France
branch) (“HSBC”), pursuant to which Mobpartner borrowed an unsecured Euro denominated loan of RMB566 (Euro81) with a term
of 4 years. The loan is settled with a fixed annual interest rate of 2.26%. The Company had repaid RMB 118 (Euro16) of principals as
of December 31, 2015.
F-45
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities
Payable to online network providers
Accrued advertising, marketing and promotional expenses
Salary and welfare payable
Accrued operating expenses
Payable for acquisitions
Other taxes payable
Accrued data center expenses
Payables for purchase of property and equipment
Deposits from advertisers
Payable for contingent considerations (note 3)
Advances from customers
Advance from end users
Others
Total
Other non-current liabilities
Payable for contingent considerations (note 3)
Payable for acquisitions
FIN48 liabilities (note 15)
Total
F-46
As of December 31,
2014
RMB
2015
RMB
US$
127,247
62,522
105,433
30,248
—
27,629
23,783
755
34,358
31,318
18,192
6,980
13,229
481,694
356,647
252,588
168,723
131,471
88,054
73,666
69,482
43,740
33,258
23,338
22,769
14,019
19,533
1,297,288
55,057
38,993
26,046
20,296
13,593
11,372
10,726
6,752
5,134
3,603
3,515
2,164
3,015
200,266
2014
RMB
22,274
—
7,251
29,525
As of December. 31,
2015
RMB
US$
—
55,665
18,161
73,826
—
8,593
2,804
11,397
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
12. DEFERRED REVENUE
Current:
Deferred revenue from customers
Deferred government subsidies
Non-current:
Deferred revenue from customers
Deferred government subsidies
13. REVENUES
Online marketing services
Internet value-added services
Internet security services and others
14. GEOGRAPHICAL INFORMATION
2013
RMB
612,565
83,155
54,191
749,911
2014
RMB
As of December 31,
2015
RMB
US$
41,780
2,400
44,180
1,122
12
1,134
44,604
9,551
54,155
1,477
1,000
2,477
2015
Years ended December 31,
2014
RMB
1,322,612
400,671
40,296
1,763,579
RMB
3,244,130
395,312
44,987
3,684,429
6,886
1,474
8,360
228
154
382
US$
500,807
61,026
6,945
568,778
The following tables set forth revenue and property and equipment, net by geographic area:
Revenue
PRC
Non-PRC
Property and equipment, net
PRC
Non-PRC
15. INCOME TAXES
For the years ended December 31,
2013
RMB
2014
RMB
2015
RMB
US$
739,412
10,499
1,541,699
221,880
1,842,893
1,841,536
284,494
284,284
As of December 31,
2014
RMB
2015
RMB
US$
45,349
556
116,787
2,542
18,029
392
The Company is incorporated in the Cayman Islands and conducts its primary business operations through its subsidiaries, VIEs
and a VIE’s subsidiary in the PRC. It also has subsidiaries in the BVI, the United States, Hong Kong, Singapore, France and UK.
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain arising in Cayman
Islands. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be
imposed.
F-47
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
British Virgin Islands
Under the current laws of the BVI, the Company’s BVI incorporated subsidiary is not subject to tax on income or capital gains
arising in BVI. In addition, upon payments of dividends by this entity to its shareholder, no BVI withholding tax will be imposed.
The United States
Cheetah Mobile America and Mob Inc. are incorporated in the United States and are subject to federal income tax rate of 35%.
Hong Kong
Cheetah Technology, HK Zoom Youloft HK, Hongkong, Cheetah Information and Mob HK are incorporated in Hong Kong and
are subject to Hong Kong profits tax rate of 16.5%.
Singapore
Cheetah Mobile Singapore Pte. Ltd. is incorporated in Singapore and is subject to Singapore corporate income tax rate of 17%.
France
MobPartner is incorporated in France and is subject to French corporate tax rate of 33.33%.
The United Kingdom
MobPartner UK Ltd. (“MobPartner UK”) is incorporated in the United Kingdom and is subject to UK corporate income tax rate
of 20%.
PRC
The Company’s subsidiaries in the PRC, the VIEs and a VIE’s subsidiary are subject to the statutory rate of 25%, unless
otherwise specified, in accordance with the Enterprise Income Tax law (the “EIT Law”), which was effective since January 1, 2008.
Pursuant to CaiShui [2008] No.1, qualified new software development enterprises are each entitled to a tax holiday of two-year
full EIT exemption followed by three-year 50% EIT reduction (“2+3 tax holiday”) starting from their respective first profit-making
year. Zhuhai Juntian, Beijing Security, Conew Network and Beijing Mobile, being qualified new software development enterprises,
started each of their 2+3 tax holidays in 2009, 2010, 2013 and 2013, respectively. Further, Zhuhai Juntian and Beijing Security, being
qualified High New Technology Enterprise (“HNTE”) approved in 2013 and 2014, respectively, are entitled to the preferential tax rate
of 15% for 2015.
In summary, the following preferential tax rates are noted:
Zhuhai Juntian is subject to income tax at 12.5% for 2013, and at 15% for 2014 and 2015;
Beijing Security is subject to income tax at 12.5% for 2013 and 2014, and at 15% for 2015; and
Conew Network and Beijing Mobile are tax exempted for 2013 and 2014, and are subject to income tax at 12.5% from 2015 to
2017.
Without the tax holidays, the Group’s income tax expenses would have increased by RMB4,430,RMB40,509 and RMB 21,301
(US$3,288) for the years ended December 31, 2013 2014 and 2015, respectively. The impacts of the tax holidays on the basic earnings
per ordinary share were an increase of RMB0.0041 and RMB0.0314 and RMB 0.0155(US$0.0024) for the years ended December 31,
2013 and 2014 and 2015, respectively.
Under the EIT Law, dividends paid by PRC enterprises out of profits earned post-2007 to non-PRC tax resident investors are
subject to PRC dividend withholding tax of 10%. A lower withholding tax rate may be applied based on applicable tax treaty with
certain jurisdictions.
Income before income taxes consists of:
PRC
Non-PRC
Total
Year ended December 31,
2014
RMB
RMB
2015
218,060
(127,156)
90,904
154,095
77,280
231,375
US$
23,788
11,929
35,717
2013
RMB
124,154
(13,466)
110,688
F-48
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The current and deferred portions of income tax expense included in the consolidated statements of comprehensive income are
as follows:
Current income tax expenses
Deferred income tax expenses
Income tax expenses for the year
2013
RMB
14,760
33,910
48,670
Year ended December 31,
2014
RMB
RMB
2015
US$
11,087
12,906
23,993
67,059
(6,962)
60,097
10,352
(1,075)
9,277
A reconciliation of the differences between the statutory tax rate and the effective tax rate for enterprise income tax is as
follows:
Income before income tax
Income tax expense computed at the PRC statutory tax
rate of 25%
Effect of different tax rates in different jurisdictions
Effect of tax holiday and preferential tax rates
Research and development super-deduction
Non-deductible expenses(i)
Effect of change in tax rate
Outside basis difference on investment in a VIE
Withholding tax and others
Changes in valuation allowance
2013
RMB
Year ended December 31,
2014
RMB
RMB
2015
110,688
90,904
231,375
US$
35,717
27,672
2,350
(4,885)
(19,140)
10,354
—
33,910
191
(1,782)
22,727
15,877
(54,944)
(37,483)
50,150
(8,795)
15,821
1,844
18,796
57,844
(23,284)
(35,434)
(47,179)
82,455
1,464
11,378
7,906
4,947
8,929
(3,594)
(5,470)
(7,283)
12,729
226
1,756
1,220
764
9,277
Income tax expenses
48,670
23,993
60,097
(i)
Non-deductible expenses mainly consist of share-based compensation expenses, entertainments and other expenses that
exceed the allowable deduction limits.
F-49
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Deferred taxes were measured using the enacted tax rates for the periods in which the temporary differences are expected to be
reversed. The tax effects of temporary differences that give rise to the deferred tax balances as of December 31, 2014 and 2015 are as
follows:
As of December 31,
2014
RMB
2015
RMB
US$
Deferred tax assets, current portion:
Deferred revenue
Provision for doubtful debts
Tax loss carry forward
Others
Less: Valuation allowance
Current deferred tax assets
Deferred tax assets, non-current portion:
Deferred revenue
Intangible assets and prepaid expense
Foreign tax credit
Equity investment loss (gain)
Contingent consideration
Tax loss carry forward
Others
Less: Valuation allowance
656
3,866
15,600
686
(18,115)
2,693
111
4,403
960
1,402
2,085
8,051
650
(11,278)
1,493
14,280
96
1,251
(13,166)
3,954
—
4,586
1,222
(908)
1,434
27,517
458
(21,466)
Non-current deferred tax assets
6,384
12,843
Deferred tax liabilities, current portion:
Long-lived assets arising from acquisitions
Current deferred tax liabilities
Deferred tax liabilities, non-current portion:
Long-lived assets arising from acquisitions
Outside basis difference on investment in a VIE
Non-current deferred tax liabilities
—
—
16,259
49,732
65,991
414
414
37,897
61,109
99,006
230
2,204
15
193
(2,032)
610
—
708
189
(140)
221
4,248
71
(3,314)
1,983
64
64
5,850
9,434
15,284
The Group operates through several subsidiaries and VIEs and the valuation allowance is considered for each subsidiary and
VIE on an individual basis. As of December 31, 2014 and 2015, the Group’s total deferred tax assets before valuation allowances were
RMB38,470 and RMB51,429 (US$7,939), respectively. As of December 31, 2014 and 2015, the Group recorded valuation allowances
of RMB29,393 and RMB34,632 (US$5,346), respectively, on its deferred tax assets that are sufficient to reduce the deferred tax assets
to the amounts that are more-likely-than-not to be realized.
Undistributed earnings of certain of the Company’s PRC subsidiaries amounted to approximately RMB326,199 and RMB
588,704 (US$90,880) on December 31, 2014 and 2015, respectively. Those earnings are considered to be indefinitely reinvested;
accordingly, no provision for PRC withholding tax has been provided thereon. Upon repatriation of those earnings in the form of
dividends, the Company would be subject to PRC withholding tax at 10%. The PRC withholding tax rate could be reduced to 5%
should the treaty benefit between Hong Kong and the PRC be applicable. As such, the amount of unrecognized deferred income tax
liabilities are approximately ranging from RMB16,310 to RMB32,620 and RMB 29,435 (US$4,544) to RMB58,870 (US$9,088) as of
December 31, 2014 and 2015, respectively.
F-50
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Taxable outside basis differences are noted in the Company’s investment in Beijing Mobile, a VIE of the Group. The registered
shareholders of Beijing Mobile are contractually required to remit dividends received from Beijing Mobile to Beijing Security. This
distribution chain results in (i) taxable dividend from Beijing Mobile to its registered shareholders and (ii) a taxable contribution to
Beijing Security when the proceeds are remitted to Beijing Security by the registered shareholders. The tax impact on the future cash
distribution is recognized in deferred tax liabilities as “outside basis difference on investment in a VIE”.
As of December 31, 2015, the Group had net operating losses of approximately RMB102,934 (US$15,890) deriving from
entities in the PRC, Hong Kong, France, UK, USA, and Singapore, which can be carried forward per tax regulation to offset future net
profit for income tax purposes. The PRC net operating loss will expire from 2016 to 2021; the USA net operating loss will expire from
2035 to 2036; the Hong Kong, France, UK, and Singapore net operating loss can be carried forward without an expiration date.
As of December 31, 2015, the Group had foreign tax credit of approximately RMB1,222 (US$189), which can be carried
forward to offset tax payable. The foreign tax credit will start to expire from 2016 to 2021, if not utilized.
Unrecognized tax benefits
As of December 31, 2014 and 2015, the Group had unrecognized tax benefits of RMB16,046 and RMB46,615 (US$7,196),
respectively, of which RMB8,973 and RMB29,948 (US$4,623), respectively, were deducted against the deferred tax assets on tax
losses carry forward, and the remaining amounts of RMB7,073 and RMB16,667 (US$2,573), respectively were presented in the other
non-current liabilities line item in the consolidated balance sheets. The Group’s unrecognized tax benefits for the year ended
December 31, 2015 were primarily related to the tax-deduction of share-based compensation expenses and other expenses. It is
possible that the amount of unrecognized benefits will change in the next 12 months; however, an estimate of the range of the possible
change cannot be made at this moment. As of December 31, 2014 and 2015, there are RMB7,073 and RMB16,667 (US$2,573) of
unrecognized tax benefits that if recognized would impact the annual effective tax rate. A reconciliation of the beginning and ending
amount of unrecognized tax benefit is as follows:
Balance at January 1
Additions based on tax positions related to the current year
Balance at December 31
2014
RMB
3,212
12,834
16,046
As of December 31,
2015
RMB
US$
16,046
30,569
46,615
2,477
4,719
7,196
The Group recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expenses. During the
years ended December 31, 2014 and 2015, the Group recognized approximately RMB755 and RMB 638 (US$98) in interest and nil in
penalties. The Group had approximately RMB856 and RMB1,494(US$231) accrued interest at December 31, 2014 and 2015,
respectively.
As of December 31, 2015, the tax years ended December 31, 2010 through 2015 for the Group’s subsidiaries in the PRC and the
VIEs are generally subject to examination by the PRC tax authorities.
The Company revised the comparatives in the footnote disclosure of its PRC and non-PRC components of income before
income taxes, effective tax rate reconciliation and tabular reconciliation of unrecognized tax benefits to conform with the current year
presentation. The revised presentation in prior years had no impact on any line items within the consolidated balance sheet as of
December 31, 2014, and the related consolidated statements of comprehensive income, cash flows and shareholders’ equity for the
years ended December 31, 2013 and 2014.
F-51
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
16. RELATED PARTY TRANSACTIONS
a) Related parties
The ultimate holding company
Kingsoft
Entities controlled by Kingsoft
Beijing Kingsoft Cloud Network Technology Corporation Limited (“Beijing Kingsoft Cloud Network”)
Beijing Kingsoft Cloud Technology Corporation Limited (“Beijing Kingsoft Cloud Technology”)
Beijing Kingsoft Digital Entertainment Corporation Limited (“Beijing Kingsoft Digital Entertainment”)
Beijing Kingsoft Office Software Corporation Limited (“Beijing Kingsoft Office Software”)
Beijing Kingsoft Software Corporation Limited (“Beijing Kingsoft Software”)
Chengdu Kingsoft Digital Entertainment Technology Co., Ltd. (“Chengdu Kingsoft Digital Entertainment”)
Chengdu Kingsoft Interactive Entertainment Corporation Limited (“Chengdu Kingsoft Interactive Entertainment”)
Chengdu Westhouse Interactive Entertainment Co., Ltd. (“Chengdu Westhouse Interactive Entertainment”)
Kingsoft Office Software Corporation Limited (“Kingsoft Office Software”)
Kingsoft Japan
Westhouse Corporation Limited (“Westhouse Corporation”)
Zhuhai Kingsoft Application Software Corporation Limited (“Zhuhai Kingsoft Application”)
Zhuhai Kingsoft Software Corporation Limited (“Zhuhai Kingsoft Software”)
Entities controlled by a shareholder of the Company
Shenzhen Tencent Computer Systems Corporation Limited (“Tencent Shenzhen”)
Tencent Technology (Shenzhen) Company Limited (“Tencent Shenzhen”)
Tencent Technology (Beijing) Company Limited (“Tencent Beijing”)
Beijing Starsinhand Technology Limited (“Beijing Starsinhand Technology”)
WeChat International Pte. Ltd. (“WeChat International”)
Sixjoy Hong Kong Limited
Entities controlled by a director of the Company
Xiaomi Technology Company Limited (“Xiaomi Technology”)
Beijing Xiaomi Mobile Software Co., Ltd. (“Beijing Xiaomi Mobile”)
Beijing Wali Network Technology Co., Ltd. (“Beijing Wali Network Technology”)
Equity investees
Beijing Security System Technology
Beijing Shangyao World Technology Co., Ltd.
Wuhan Antian Information Technology Co., Ltd.
Baomi Information Technology(Shanghai) Co., Ltd.
F-52
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS) data)
b) In addition to the transactions detailed elsewhere in these financial statements, the Group had the following material related party
transactions for the years ended December 31, 2013, 2014 and 2015:
For the years ended December 31,
2013
RMB
2014
RMB
2015
RMB
US$
Corporate, technical support and leasing services received from:
Entities controlled by Kingsoft
Licensing fees paid to:
Entities controlled by Kingsoft
Sub-licensing revenue received from:
Entities controlled by Kingsoft
Software upgrade services provided to:
An entity controlled by Kingsoft
(i)
(ii)
(iii)
(iv)
Transfer of fixed assets, technology know-how, trademarks and other
(v)
intellectual properties from:
An equity investee
Entities controlled by Kingsoft
Promotion services received from:
Entities controlled by Kingsoft
An entity controlled by a director of the Company
An entity controlled by a shareholder of the Company
An equity investee
Online marketing services provided to:
Entities controlled by a shareholder of the Company
An entity controlled by a director of the Company
Entities controlled by Kingsoft
Equity investees
Research and development services received from:
An equity investee
Purchase of consumables from:
(vi)
(vii)
(viii)
(ix)
5,757
6,097
5,639
8,400
2,100
—
3,381
4,008
5,850
233
—
1,900
2,000
257
—
—
—
—
13,580
24,455
2,924
—
552
—
—
—
47,743
47,826
41,599
1
104,078
2,737
789
—
78,432
293,510
4,081
1,653
532
117
8,087
58
1,333
4,000
4,500
An entity controlled by a director of the Company
1,173
An equity investee
Payment of revenue sharing for online games operations:
(x)
Entities controlled by Kingsoft
An entity controlled by a director of the Company
An equity investee
Purchase of exclusive online game operating license from:
Entities controlled by Kingsoft
Online games operating revenue received from:
An entity controlled by a director of the Company
Acquisition of equity method investments from:
Kingsoft
An entity controlled by a shareholder of the Company
Sales of products to:
An equity investee
(xi)
(xii)
(xiii)
(xiv)
F-53
—
—
—
—
—
—
—
—
—
2,398
—
2,318
3,084
50
13,944
1,442
201
1,786
3,089
—
—
1,514
2,477
36,977
30,000
—
—
871
—
903
—
—
—
7,370
7,383
6,422
—
45,310
18
1,248
9
695
223
31
276
477
—
—
382
—
—
—
12,701
1,961
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
In 2013, 2014 and 2015, the Group entered into agreements with certain entities controlled by Kingsoft, pursuant to which,
these entities provided services including corporate, technology support and leasing services to the Group. The expenses
related to these services were recognized in the consolidated statements of comprehensive income.
In 2011, the Group entered into authorization and licensing agreements with certain entities controlled by Kingsoft to obtain
rights to use, redevelop and sub-license certain internet security software copyrights, patents and trademarks for five years for
a total consideration of RMB42,000. These agreements were terminated upon the transfer of these assets to the Group in
April 2014. The license fees were recognized in the consolidated statements of comprehensive income.
In 2009, the Group entered into an exclusive licensing agreement with an entity controlled by Kingsoft, pursuant to which, the
entity is granted the exclusive right to use certain internet security software within Japan until November 30, 2015. In
November 2013, the Group entered into a framework licensing agreement with the entity to supplement and amend provisions
to the original exclusive licensing agreement which primarily to amend the revenue arrangement between the parties. The
legal terms and conditions related to share of revenue from mobile related licensing are retroactively effective from January 1,
2013. . In December 2015, the Group entered into a supplemental licensing agreement with the entity to extended the service
to December 31,2016. In April 2014, the Group entered into sub-licensing agreement with an entity controlled by Kingsoft
and granted the right to use certain trademarks and copyright of software until February 1, 2024. These sub-licensing
revenues were recognized in the consolidated statements of comprehensive income.
In 2009, the Group entered into an agreement with an entity controlled by Kingsoft to provide upgrade services to the licensed
software during the licensing period. The software upgrade service revenues were recognized in the consolidated statements
of comprehensive income.
In 2013, the Group purchased certain fixed assets and software products from an equity investee and an entity controlled by
Kingsoft for a cash consideration of RMB1,900 and RMB2,000, respectively. In April 2014, the Group purchased certain
internet security software copyrights, patents and trademarks from certain entities controlled by Kingsoft for a cash
consideration of RMB13,580 .
In 2013, 2014 and 2015, the Group entered into agreements with entities controlled by Kingsoft, an entity controlled by a
director of the Company, an entity controlled by a shareholder of the Company and an equity investee for promotion services
ranging from three months to one year. The promotion service fees were recognized in the consolidated statements of
comprehensive income.
(vii) On September 27, 2012, the Group entered into a framework agreement with an entity controlled by a shareholder of the
Company to provide various forms of online marketing services to this entity. The term of the framework agreement
commenced from January 1, 2011 to October 31, 2013. In 2013, 2014 and 2015, the Group entered into a series of agreements
with an entity controlled by a director of the Company, entities controlled by a shareholder of the Company, entities
controlled by Kingsoft and equity investees to provide online marketing services. These online marketing revenues were
recognized in the consolidated statements of comprehensive income.
(viii)
In 2013, the Group entered into an agreement with an equity investee for research and development services. In January 2014
and January 2015, the Group entered into authorization and licensing agreement with the entity to obtain rights to use certain
product technology for an amount of RMB4,000 and RMB4,500(US$695) for the year 2014 and 2015, respectively. The
research and development expenses were recognized in the consolidated statements of comprehensive income.
(ix)
(x)
(xi)
(xii)
In 2013, 2014 and 2015, the Group purchased smartphones and other consumables from an entity controlled by a director of
the Company and an equity investee of the Company and recognized as property and equipment.
In 2014 and 2015, the Group entered into agreements and supplemental agreements with entities controlled by Kingsoft, an
entity controlled by a director of the Company and an equity investee to obtain the right to operate certain online games
developed by these entities. The percentages of revenue sharing to these entities were ranging from 20% to 70% and for a
term from one year to two years. The amount incurred arising from the revenue sharing were recognized in the consolidated
statements of comprehensive income.
In October 2014, the Group entered into exclusive operating agreements with entities controlled by Kingsoft to obtain the
license rights to exclusively operate certain mobile games developed by these entities from October 16, 2014 to December 31,
2015. The Group paid a total consideration of RMB13,944.
In July 2014, the Group entered into non-exclusive games agreements with an entity controlled by a director of the Company
and the revenue from the operation of the games is allocated based on a rate agreed in the agreements. In 2015, the Group
entered into non-exclusive games agreements and supplemental agreements with an entity controlled by a director of the
Company. The revenues allocated to the Group were recognized in the consolidated statements of comprehensive income.
(xiii)
In March 2014, the Group entered into an equity transfer agreement with Kingsoft to purchase 20% ordinary shares of
Kingsoft Japan, for an aggregate purchase price of JPY614 million (note 4). In August 2014, the Group acquired 22.2% of
Moxiu Technology from an entity controlled by a shareholder of the Company for an amount of RMB30,000 (note 4)
(xiv)
In 2015, the Group entered into a series of agreements with an equity investee to sell air purifier for an amount of
RMB12,701(US$1,961).The sales of the purifiers were recognized in the consolidated statements of comprehensive income.
F-54
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
c) The balances between the Group and its related parties as of December 31, 2014and 2015are listed below:
(1)
Amount due from related parties
Kingsoft
Entities controlled by a shareholder of the Company
Entities controlled by Kingsoft
Entities controlled by a director of the Company
Equity investees
Total
(2)
Amount due to related parties
Kingsoft
Entities controlled by Kingsoft
Entities controlled by a director of the Company
Entities controlled by a shareholder of the Company
Equity investees
Total
2014
RMB
As of December 31,
2015
RMB
US$
9,892
28,324
3,789
1,519
46
43,570
13,977
36,639
3,593
2,287
7,266
63,762
2,158
5,656
555
353
1,121
9,843
2014
RMB
As of December 31,
2015
RMB
US$
369
27,167
1,387
961
1
29,885
589
22,494
23,421
16,039
37
62,580
91
3,472
3,616
2,476
6
9,661
All the balances with related parties as of December 31, 2014 and 2015 were unsecured, non-interest bearing and repayable on
demand.
d) On January 14, 2011, the Group entered into a loan framework contract with Kingsoft, pursuant to which Kingsoft shall
provide the Group with the necessary funding in an aggregate amount not exceeding RMB110,000 (US$16,981). The interest rate
payable on the loan is 90% of the interest rate as promulgated by the People’s Bank of China for loans of the same class and for the
same period or other fair market loan interest rate. As of December 31, 2014 and 2015, the Group has not drawn any loan from
Kingsoft.
F-55
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
17. SHARE-BASED COMPENSATION
2014 Restricted Shares Plan
On April 22 and April 24, 2014, the board of directors and the shareholders of the Company approved to adopt a restricted
shares plan (the “2014 Restricted Shares Plan”), respectively. Under the 2014 Restricted Shares Plan, the Company is authorized to
issue up to 122,545,665 Class A ordinary shares pursuant to the grant of restricted shares and restricted share units thereunder. Unless
terminated earlier, the 2014 Restricted Shares Plan will terminate automatically in 2024. As of December 31,2015, the share awards
granted under 2014 Restricted Shares Plan had vesting terms of no longer than 5 years from the date of grant. The following table
summarizes the Group’s restricted shares with an option feature activity under the 2014 Restricted Shares Plan during the year ended
December 31, 2015:
Outstanding at January 1, 2015
Granted
Forfeited
Exercised
Outstanding at December 31, 2015
Vested and expected to vest at
December 31, 2015
Number of
shares
—
20,808,900
(811,000)
(200,000)
19,797,900
17,358,555
Exercisable as at December 31, 2015
584,000
Weighted
Average Exercise
Price
(US$)
Weighted
Average
Grant Date
Fair Value
(US$)
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value (US$)
—
0.30
0.34
—
0.30
0.29
0.00
—
2.21
2.30
2.58
2.20
2.23
2.58
8.31
8.31
8.31
25,801
22,692
934
Total intrinsic value of restricted shares with an option feature exercised for the year ended December 31, 2015 was RMB2,028
(US$313).
The grant date fair value of each restricted share with an option feature is estimated on the date of grant using the binomial tree
option pricing model with the following assumptions used for grants in 2015:
Fair value of ordinary share (US$)
Risk-free interest rates
Expected volatility range
Expected dividend yield
Expected exercise multiple
Fair value per option granted (US$)
Year ended December 31, 2015
1.60~2.58
2.68%~2.97%
53.1%~63.3%
0%
2.2
1.17~2.58
The risk-free interest rate for periods within the contractual life of the restricted shares with an option feature is based on the
U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected
volatility is estimated based on the historical volatility ordinary shares of several comparable companies in the same industry. The
dividend yield is estimated based on our expected dividend policy over the expected term of the restricted shares with an option
feature. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the
future.
Share-based compensation expenses recorded in respect of the 2014 Restricted Shares Plan amounted to RMB71,772
(US$11,080) for the year ended December 31, 2015.
As of December 31, 2015, 200,000 Class A ordinary shares were issued and outstanding for the exercised share awards under
the 2014 Restricted Shares Plan.
As of December 31, 2015, there was RMB177,524 (US$27,405) of total unrecognized share-based compensation expenses
related to non-vested restricted shares with an option feature and the cost is expected to be recognized over a weighted average period
of 2.48years. Total estimation share-based compensation expenses may be adjusted for future changes in estimated forfeitures.
2013 Incentive Scheme
On January 2, 2014, the Company adopted an equity incentive scheme (the “2013 Incentive Scheme”). The 2013 Incentive
Scheme provides for the grant of ordinary shares, restricted shares, share options and share appreciation rights to the employees,
directors or non-employee consultants of the Company. The maximum number of the Company’s ordinary shares which may be
issued under the 2013 Incentive Scheme is 64,497,718. The 2013 Incentive Scheme is valid and effective for a term of ten years
commencing from its adoption. Except for service conditions, there were no other vesting conditions for all the awards under 2013
Incentive Scheme. As of December 31, 2015, all the share awards granted under 2013 Incentive Scheme were restricted shares with an
option feature with vesting terms of no longer than 5 years from the date of grant.
The fair value of restricted shares with an option feature was determined by reference to the fair value of the Company’s
ordinary shares at their respective grant date, which was valued based on retrospective valuation with the assistance of an independent
third party valuation firm using the binomial tree model for an option pricing applied. The Company’s management is ultimately
responsible for the determination of the estimated fair value of its ordinary shares. Subsequent to the IPO, fair value of the ordinary
shares was determined based the price of the Company’s publicly traded ADSs.
F-56
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The following table summarizes the Group’s restricted shares with an option feature activity under the 2013 Incentive Scheme
during the year ended December 31, 2015:
Outstanding at January 1, 2015
Granted
Forfeited
Exercised
Outstanding at December 31, 2015
Vested and expected to vest at
December 31, 2015
Number of
shares
55,292,131
11,005,000
(3,087,000)
(1,889,800)
61,320,331
59,733,636
Exercisable as at December 31, 2015
10,023,493
Weighted
Average Exercise
Price
(US$)
Weighted
Average
Grant Date
Fair Value
(US$)
0.34
0.31
0.34
0.34
0.33
0.33
0.33
1.03
2.16
1.25
0.93
1.23
1.22
1.09
Weighted
Average
Remaining
Contractual
Term (Years)
9.01
Aggregate
Intrinsic
Value (US$)
64,802
8.01
8.01
8.01
77,726
75,704
12,752
Total intrinsic value of restricted shares with an option feature exercised for the year ended December 31, 2015 was
RMB26,613 (US$4,108).
The grant date fair value of each restricted shares with an option feature is estimated on the date of grant using the binomial tree
option pricing model with the following assumptions used for grants in 2015:
Fair value of ordinary share (US$)
Risk-free interest rates
Expected volatility range
Expected dividend yield
Expected exercise multiple
Fair value per option granted (US$)
Year ended December 31, 2015
1.45~2.87
2.40%~2.99%
52.6%~63.8%
0%
2.2
1.16~2.58
The risk-free interest rate for periods within the contractual life of the restricted shares with an option feature is based on the
U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected
volatility is estimated based on the historical volatility ordinary shares of several comparable companies in the same industry. The
dividend yield is estimated based on our expected dividend policy over the expected term of the restricted shares with an option
feature. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the
future.
Share-based compensation expenses recorded in respect of the 2013 Incentive Scheme amounted to nil, RMB126,399 and
RMB139,422(US$21,523) for the years ended December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2014 and 2015, 1,000 and 1,890,800 Class A ordinary shares were issued and outstanding for the exercised
share awards under the 2013 Incentive Scheme, respectively.
As of December 31, 2015, there was RMB210,455 (US$32,489) of total unrecognized share-based compensation expenses
related to non-vested restricted shares with an option feature and the cost is expected to be recognized over a weighted average period
of 2.41 years. Total estimation share-based compensation expenses may be adjusted for future changes in estimated forfeitures.
F-57
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
2011 Share Award Scheme
On May 26, 2011, the board of directors of the Company approved and adopted the 2011 Share Award Scheme, as amended in
September 2013, to recognize the contributions of certain employees and to give incentives thereto in order to retain them for the
continued operation and development of the Group. Under the 2011 Share Award Scheme, the board of directors may grant restricted
shares to its employees and directors to receive an aggregate of no more than 100,000,000 ordinary shares of the Company (excluding
shares which have lapsed or have been forfeited) as at the date of such grant. Unless early terminated by the board of directors of the
Company, the 2011 Share Award Scheme is valid and effective for a term of ten years commencing from its adoption.
Under the 2011 Share Award Scheme, grantees have no dividend or voting rights until the restricted shares are vested. The
restricted shares, unvested or vested, may not, at any time prior to being transferred to employees and the initial public offering of the
Company, be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered. Upon the occurrence of certain
contingent events which are considered outside the Company’s control, the Company has the right to repurchase all of an employee’s
vested restricted shares for an aggregate consideration of US$1.00 and any unvested shares would be forfeited.
The Group has set up the Share Award Scheme Trust for the purpose of administering the 2011 Share Award Scheme and
holding shares awarded to the employees before they vest. As of December 31, 2015, 1,273,840 (2014: 5,270,620) forfeited and
ungranted restricted shares are held by the Share Award Scheme and available to be granted in the future.
Among the 2013 grants, 3,000,000 restricted shares were granted to two employees who have the unilateral right to request the
Company to repurchase their vested restricted shares at a fixed price of RMB4 per share (if certain breaching conditions considered
within the control of the employee are not met). The Company also has the option to repurchase up to all of the vested restricted
shares at a fixed price of RMB4 per share if (i) the employee has served the Company for more than a year but less than four years;
and (ii) employment is terminated for any reason either by the Company or the employee. The restricted shares are accounted for as
tandem awards as they provide the employees the option to put the restricted shares back to the Company and therefore, have both an
equity and liability component.
The equity portion of the restricted share is recognized as share-based compensation based on its grant date fair value over the
requisite service period of four years. The redemption right liability as of December 31, 2014 and 2015 were and RMB520 and
RMB474(US$73), respectively. The redemption right liability considers the fair value of the employee’s redemption right as of the
end of a reporting period and the number of restricted shares that have vested to date. The change in the fair value of the redemption
right liability of RMB24 (US$4) was recorded as share-based compensation expenses and RMB22 (US$3) was recorded in changes in
fair value of put options granted to employees, respectively.
The fair value of restricted shares was determined by reference to the fair value of the Company’s ordinary shares at their
respective grant dates, which was valued based on retrospective valuation with the assistance of an independent third party valuation
firm using a discounted cash flow. The Company’s management is ultimately responsible for the determination of the estimated fair
value of its ordinary shares. Subsequent to the IPO, fair value of the ordinary shares was determined based on the price of the
Company’s publicly traded ADSs.
The following table summarizes the restricted shares activity pursuant to the 2011 Share Award Scheme for the year ended
December 31, 2015:
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
Number of
ordinary shares
38,398,753
6,380,530
(20,192,560)
(2,383,750)
22,202,973
Weighted average
grant date
fair value (US$)
0.55
1.91
0.36
0.63
1.11
Share-based compensation expenses recorded in respect of the 2011 Share Award Scheme amounted to RMB35,527,
RMB41,259 and RMB72,535 (US$11,197) for the years ended December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2015, the total estimated unrecognized share-based compensation expenses related to restricted shares
awarded to employees pursuant to the 2011 Share Award Scheme amounted to RMB68,582 (US$10,587), net of estimated forfeitures,
and is expected to be recognized over a weighted-average period of 1.92 years. Total unrecognized share-based compensation
expenses may be adjusted for future changes in estimated forfeitures.
The total fair value of vested restricted shares on their respective vesting dates during the years ended December 31, 2013, 2014
and 2015 were RMB74,962, RMB243,214 and RMB301,715 (US$46,577), respectively.
F-58
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Other Share Incentive Awards
In addition to awards granted pursuant to the Group’s share incentive plans stated above, the Group granted some restricted
shares to certain individuals for their employment or consultant service with the Group in connection with certain investments and
acquisitions made by the Group. Such awards are subjected to such employees and consultants’ continued employment with the Group
for specified terms.
The following table summarizes the restricted shares activity pursuant to the Other Share Incentive Award for the year ended
December 31, 2015:
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
Number of
ordinary shares
Weighted average
grant date
fair value (US$)
—
4,627,940
(926,023)
(11,250)
3,690,667
—
2.26
2.17
2.58
2.28
Share-based compensation expenses recorded in respect of the Other Share Incentive Award amounted to nil, nil and
RMB24,926 (US$3,848) for the years ended December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2015, the total estimated unrecognized share-based compensation expenses related to the Other Share
Incentive Award to grantees amounted to RMB25,993 (US$4,013), net of estimated forfeitures, and is expected to be recognized over
a weighted-average period of 1.57 years. Total unrecognized share-based compensation expenses may be adjusted for future changes
in estimated forfeitures.
The total fair value of vested restricted shares on their respective vesting dates during the years ended December 31, 2013, 2014
and 2015 were nil, nil and RMB12,247 (US$1,891), respectively.
Kingsoft shares awarded to the Group’s employees
On March 31, 2008, the board of directors of Kingsoft approved and adopted the share award scheme (the “Kingsoft Share
Award Scheme”) in which selected employees of Kingsoft (including its subsidiaries and VIEs) are entitled to participate.
The Group determined that all Kingsoft awarded shares granted to employees of the Group are classified and accounted for as
equity awards. The fair value of awarded shares granted under the Kingsoft Share Award Scheme was determined based on the fair
market value of Kingsoft’s ordinary shares at the grant date.
A summary of the awarded shares activity, relating to awarded shares held by employees of the Group pursuant to the Kingsoft
Share Award Scheme for the year ended December 31, 2015, is presented below:
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
Number of Kingsoft
ordinary shares
Weighted average
grant date
fair value (US$)
2,209,000
63,000
(439,000)
(496,000)
1,337,000
1.73
2.9
0.5
2.5
1.9
Share-based compensation expenses recorded in respect of the Kingsoft Share Award Scheme amounted to RMB1,869,
RMB5,616 and RMB5,525 (US$853) for the years ended December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2015, the total estimated unrecognized share-based compensation expenses related to awarded shares
granted to the Group’s employees pursuant to the Kingsoft Share Award Scheme amounted to RMB3,755 (US$580), net of estimated
forfeitures, and is expected to be recognized over a weighted-average period of 0.88 years.
The total fair value of vested awarded shares on their respective vesting dates during the years ended December 31, 2013, 2014
and 2015 were RMB11,240, RMB18,560 and RMB28,991 (US$4,475), respectively.
F-59
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
A Subsidiary’s incentive compensation
Moxiu Technology, a subsidiary acquired by the Group in 2015, adopted its own equity incentive awards plan. The share-based
compensation expenses recognized since the acquisition and the unrecognized share-based compensation as of December 31, 2015
were insignificant.
Total share-based compensation expenses recorded by the Group are as follows:
Cost of revenues
Research and development
Selling and marketing
General and administrative
18. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
2013
RMB
10
14,520
2,835
20,031
37,396
Years ended December 31,
2014
RMB
RMB
2015
US$
1,393
51,176
7,407
113,298
173,274
1,523
142,682
18,068
153,134
315,407
235
22,026
2,789
23,640
48,690
The Group leases facilities in the PRC under non-cancelable operating leases expiring on different dates. Payments under
operating leases are expensed on a straight-line basis over the periods of the respective leases. Total rental expense for offices was
RMB78,386 (US$12, 101) for the year ended December 31, 2015. Total other operating lease expenses were RMB220,770
(US$34,081) for the year ended December 31, 2015.
The Group’s lease arrangements have no renewal options, rent escalation clauses and restriction or contingent rents.
Future minimum payments under non-cancelable operating leases with initial terms of one-year or more consist of the following
as of December 31, 2015:
2016
2017
2018
2019
2020
Thereafter
RMB
US$
163,683
62,023
56,889
52,405
36,604
1,830
373,434
25,268
9,575
8,782
8,090
5,651
283
57,649
Licensing fee commitments:
The Group entered into authorization and licensing agreements to substantiate its research and developing activities with terms
of three years in 2013. The Group entered into authorization and licensing agreements of an online game with terms of two years in
2015. As of December 31, 2015, total licensing fee commitments were as follows:
2016
2017 and thereafter
RMB
US$
2,222
—
2,222
342
—
342
F-60
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Provision of loan facility
On March 13, 2013, Beijing Security entered into a loan facility of RMB10,000 at an interest rate with reference to the market
rate with 10% discount to an equity method investee, Beijing Security System Technology, to provide financial support to Beijing
Security System Technology should it be required for its operations. As of December 31, 2015, the credit facility was not drawn by
Beijing Security System Technology.
Litigation
The Group is involved in several other proceeding as of December 31, 2014 and 2015 which are either immaterial, or the Group
does not believe that a reasonable possibility of loss has been incurred as the proceedings are in the early stages, and/or there is a lack
of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. As a result, there
is considerable uncertainty regarding the timing or ultimate resolution of such matters, which includes eventual loss, fine, penalty or
business impact, if any, and therefore, an estimate for the reasonably possible loss or a range of reasonably possible losses cannot be
made. However, the Group believes that such matters, individually and in the aggregate, when finally resolved, are not reasonably
likely to have a material adverse effect on the Group’s consolidated results of operations, financial position and cash flows.
19. SHAREHOLDERS’ EQUITY
Ordinary shares
Upon completion of the Company’s initial public offering (“IPO”) in May 2014, 224,905,170 Class B ordinary shares were
issued upon conversion of all convertible preferred shares. In addition, immediately following the closing of the IPO, the
Memorandum and Articles of Association were amended and restated such that the authorized share capital of the Company was
reclassified and redesignated into 10,000,000,000 shares comprising of (i) 7,600,000,000 Class A ordinary shares; (ii) 1,400,000,000
Class B ordinary shares; and (iii) 1,000,000,000 reserved shares at par value of US$0.000025 per share. The rights of the holders of
Class A and Class B ordinary shares are identical, except with respect to voting and conversion rights. Each share of Class A ordinary
shares is entitled to one vote per share and is not convertible into Class B ordinary shares under any circumstances. Each share of
Class B ordinary shares is entitled to ten votes per share and is convertible into one Class A ordinary share at any time by the holder
thereof. Upon any transfer of Class B ordinary shares by the holder thereof to any person or entity that is not an affiliate of such
holder, such Class B ordinary shares would be automatically converted into an equal number of Class A ordinary shares. There were
86,330,627 and 691,000,000 Class B ordinary shares transferred to Class A ordinary shares in the year ended December 31, 2014 and
2015, respectively.
As of December 31, 2014, there were 260,045,912 and 1,095,456,652 Class A and Class B ordinary shares outstanding and no
preferred shares issued and outstanding. As of December 31, 2015, there were 350,398,737 and 1,035,037,339 Class A and Class B
ordinary shares outstanding and no preferred shares issued and outstanding.
Retained earnings
In accordance with the PRC Regulations on Enterprises with Foreign Investment and their articles of association, a foreign
invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise
expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory
accounts. A foreign invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the
enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested
enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Zhuhai
Juntian, Conew Network and Chongqing Calendar were established as a foreign invested enterprise and therefore are subject to the
above mandated restrictions on distributable profits.
F-61
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CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory common
reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the
enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of
the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. Beijing Security, Beijing Conew, Beike
Internet, Beijing Network, Beijing Antutu, Suzhou JDD and Guangzhou Kingsoft were established as domestic invested enterprises
and therefore are subject to the above mandated restrictions on distributable profits.
PRC statutory reserve funds
Unreserved retained earnings
Total retained earnings
2014
RMB
25,762
116,998
142,760
As of December 31,
2015
RMB
US$
27,121
292,235
319,356
4,187
45,112
49,299
Under PRC laws and regulations, there are restrictions on the Company’s subsidiaries in the PRC and VIEs with respect to
transferring certain of their net assets to the Company either in the form of dividends, loans, or advances. Amounts of net assets
restricted included paid-in capital and statutory reserve funds of the Company’s subsidiaries in the PRC and the net assets of the VIEs
in which the Company has no legal ownership, which amounted to RMB432,351 and RMB1,027,423 (US$158,607), as of
December 31, 2014 and 2015, respectively.
Furthermore, cash transfers from the Company’s subsidiaries in the PRC to its subsidiaries outside of China are subject to PRC
government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the subsidiaries
in the PRC and VIEs to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy
their foreign currency denominated obligations.
Accumulated other comprehensive income
The components of accumulated other comprehensive income is as follows:
Balance at January 1,2013
Other comprehensive income (loss) before reclassification
Balance at December 31, 2013
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income
Other comprehensive loss attribute to noncontrolling interests
Balance at December 31, 2014
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income
Other comprehensive loss attribute to noncontrolling interests
Balance at December 31, 2015
Balance at December 31, 2015, in US$
Foreign currency
translation
adjustment
RMB
Unrealized gains
on available-for
sale investments
RMB
Total
RMB
(1,603)
(6,087)
(7,690)
(6,960)
—
98
(14,552)
117,977
—
(470)
102,955
15,894
—
20,929
20,929
(24,125)
21,121
—
17,925
9,729
(6,814)
—
20,840
(1,603)
14,842
13,239
(31,085)
21,121
98
3,373
127,706
(6,814)
(470)
123,795
3,217
19,111
There was no tax expense or benefit recognized related to the changes of each component of accumulated other
comprehensive income during the years ended December 31, 2014 and 2015.
F-62
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
20. EARNINGS PER SHARE
Basic and diluted earnings per share for each of the years presented are calculated as follows:
2013
2014
Ordinary
shares
RMB
Ordinary
shares
RMB
Year ended December 31,
Class A
ordinary
shares
RMB
Class A
ordinary
shares
US$
2015
Class B
ordinary
shares
RMB
Class B
ordinary
shares
US$
Earnings per share-basic
Numerator:
Net income attributable to
Cheetah Mobile Inc.
Allocation of net income
attributable to Series A
Preferred Shareholders
Allocation of net income
attributable to Series B
Preferred Shareholders
Allocation of net income
attributable to ordinary
shareholders
Denominator:
Weighted average number of
ordinary shares outstanding
Earnings per share—basic
62,018
67,941
40,420
6,240
136,176
21,022
(5,807)
(1,879)
(3,521)
(2,247)
—
—
—
—
—
—
—
—
52,690
63,815
40,420
6,240
136,176
21,022
929,119,153
0.0567
1,210,501,020
0.0527
314,229,617
0.1286
314,229,617
0.0199
1,058,633,704
0.1286
1,058,633,704
0.0199
F-63
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
2013
2014
2015
Years ended December 31,
Ordinary
shares
RMB
Ordinary
Shares
RMB
Class A
ordinary
shares
RMB
Class A
ordinary
shares
US$
Class B
ordinary
shares
RMB
Class B
ordinary
shares
US$
Earnings per share—diluted
Numerator:
Allocation of net income
attributable to ordinary
shareholders
Reallocation of net income
attributable to ordinary
shareholders as a result of
conversion of Series A Preferred
Shares to ordinary shares
Reallocation of net income
attributable to ordinary
shareholders as a result of
conversion of Series B Preferred
Shares to ordinary shares
Change in share-based
compensation expense due to
remeasurement of the
redemption right granted to
employees
Reallocation of net income as a
result of conversion of Class B
into Class A ordinary shares
Net income attributable to ordinary
shareholders
Denominator:
Weighted average ordinary shares
52,690
63,815
43,041
6,644
133,555
20,617
5,807
1,879
3,521
2,247
(887)
—
—
—
—
—
—
133,555
61,131
67,941
176,596
—
—
—
20,617
27,261
—
—
—
—
—
—
—
—
133,555
20,617
outstanding
929,119,153 1,210,501,020
314,229,617
314,229,617 1,058,633,704 1,058,633,704
Conversion of Series A Preferred
Shares to ordinary shares
Conversion of Series B Preferred
Shares to ordinary shares
Dilutive effect of Restricted Shares
Dilutive effect of restricted shares
with an option feature
Conversion of Class B into Class A
ordinary shares
Denominator used for earnings per
share
Earnings per share—diluted
Earnings per ADS:
Denominator used for earnings per
102,409,639
35,632,943
—
—
—
—
62,086,776
42,367,385
42,621,733
43,813,545
—
858,757
—
858,757
—
20,425,559
—
20,425,559
—
—
9,163,216
32,663,302
32,663,302
— 1,079,059,263 1,079,059,263
—
—
—
—
1,135,982,953 1,341,732,457 1,426,810,939 1,426,810,939 1,079,059,263 1,079,059,263
0.0191
0.0506
0.0191
0.1238
0.0538
0.1238
ADS—basic
92,911,915
121,050,102
31,422,962
31,422,962
Denominator used for earnings per
ADS—diluted
Earnings per ADS—basic
Earnings per ADS—diluted
113,598,295
0.5671
0.5381
134,173,246
0.5272
0.5064
142,681,094
1.2863
1.2377
142,681,094
0.1986
0.1911
F-64
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
21. EMPLOYEE BENEFIT
Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which
certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor
regulations require that the subsidiaries in the PRC and VIEs of the Group make contributions to the government for these benefits
based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions
made. The total amounts for such employee benefits, which were expensed as incurred, were approximately RMB36,814, RMB75,538
and RMB105,554 (US$ 16,295) for the years ended December 31, 2013, 2014 and 2015, respectively.
22. FAIR VALUE MEASUREMENT
ASC 820-10, Fair Value Measurements and Disclosures: Overall, establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2—Include other inputs that are directly or indirectly observable in the marketplace
Level 3—Unobservable inputs which are supported by little or no market activity
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach;
(2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market
transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future
amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about
those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Assets and liabilities measured or disclosed at fair value
In accordance with ASC 820-10, the Group measures available-for-sale securities, payable for contingent consideration at fair
value on a recurring basis. The fair value of the available-for-sale equity securities are measured based on the market price in an active
market. The available-for-sale debt securities are classified within Level 3 as the fair value is measured based on business enterprise
value allocation method and probability expected return method. The contingent consideration for the acquisition are classified within
Level 3 as the fair value is measured based on inputs linked to the achievement of certain performance target that are unobservable in
the market.
F-65
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The Group measures certain financial assets, including loans receivable, other investments stated at cost and equity method
investments, at fair value on a nonrecurring basis only if an impairment loss were to be recognized. The Group’s non-financial assets,
such as intangible assets, goodwill and property and equipment, would be measured at fair value only if they were determined to be
impaired.
For the year ended December 31, 2015, assets and liabilities measured or disclosed at fair value are summarized below:
Total Fair
Value at
December 31,
2015
RMB
Total Fair
Value at
December 31,
2015
US$
Fair value measurement or disclosure
at December 31, 2015 using
Significant
other
observable
inputs (Level 2)
RMB
Quoted prices in
active markets
for identical
assets (Level 1)
RMB
Significant
unobservable
inputs (Level 3)
RMB
Fair value measurement—
Recurring:
Available-for-sale security
Fair value measurement—
Non-Recurring:
Intangible assets, net
Goodwill
Investment in equity investees
Other long-term investments
Total assets measured at fair
value
Fair value measurement—
Recurring:
Payable for contingent
considerations
Total liabilities measured at
fair value
46,373
7,158
46,373
—
—
—
—
—
—
—
—
—
46,373
7,158
46,373
23,338
23,338
3,603
3,603
—
—
—
—
—
—
—
—
—
23,338
23,338
Total losses
(26,136)
(23,746)
(2,806)
(6,031)
(58,719)
For the year ended December 31, 2014, assets and liabilities measured or disclosed at fair value are summarized below:
Total Fair
Value at
December 31,
2014
RMB
Total Fair
Value at
December 31,
2014
US$
Fair value measurement or disclosure
at December 31, 2014 using
Significant
other
observable
inputs (Level 2)
RMB
Quoted prices in
active markets
for identical
assets (Level 1)
RMB
Significant
unobservable
inputs (Level 3)
RMB
Fair value measurement—
Recurring:
Available-for-sale securities
Fair value measurement—
Non-Recurring:
Intangible assets, net
Investment in equity investees
Total assets measured at fair
value
Fair value measurement—
Recurring:
Payable for contingent
considerations
Total liabilities measured at
fair value
141,031
22,730
62,653
—
78,378
—
—
—
—
141,031
22,730
62,653
53,592
53,592
8,638
8,638
F-66
—
—
—
—
78,378
53,592
53,592
—
—
—
Total losses
(8,304)
(472)
(8,776)
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
There were no transfers of fair value measurements into or out of Level 3 for the years ended December 31, 2013, 2014 and
2015.
The Company has measured the available-for-sale debt securities and the contingent consideration payable at fair value on a
recurring basis using significant unobservable inputs (Level 3) as of the year ended December 31, 2014 and 2015. The significant
unobservable inputs used in the fair value measurement and the corresponding impacts to the fair values are presented below:
Available-for-sale
debt security -
Trustlook
Valuation
techniques
Guideline
company
method and
business
enterprise value
allocation
method
Available-for-sale
debt security -
NDP
Probability
expected return
method
Unobservable
inputs
(cid:120) Discount for
lack of
marketability
(cid:120) Volatility
(cid:120) Discount for
lack of
marketability
(cid:120) Probability of
conversion
Estimation as of
December
31,2014
Estimation as of
December
31,2015
20%
40.5%
3.81%
70%
*
*
*
*
Contingent
consideration
payable
Discount cash
flow method
(cid:120) Performance
target
34%-99%
0%-99%
(cid:120) Discount rate
10.0%-12.3%
10.0%-12.3%
Change in
unobservable
inputs
Increase /
(decrease)
Change in
fair value
Decrease /
(Increase)
Increase /
(decrease)
Increase /
(decrease)
Increase /
(decrease)
Increase /
(decrease)
Increase /
(decrease)
Decrease /
(Increase)
Decrease /
(increase)
Increase /
(decrease)
Increase /
(decrease)
Decrease /
(increase)
* The available-for-sale debt securities were settled in 2015.
F-67
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the years ended December 31, 2013, 2014 and 2015:
Balance as of December 31, 2013
Recognized during the year
Realized or unrealized loss
Settlement
Foreign exchange translation adjustments
Balance as of December 31, 2014
Recognized during the year
Realized or unrealized loss
Settlement
Foreign exchange translation adjustments
Balance as of December 31, 2015
Balance as of December 31, 2015 in US$
Contingent
consideration
payable
RMB
Available-
for-sales debt
securities
RMB
11,974
32,953
13,749
(4,923)
(161)
53,592
17,202
(7,010)
(42,641)
2,195
23,338
3,603
5,903
61,548
11,308
—
(381)
78,378
—
(11,094)
(67,507)
223
—
—
Realized or unrealized losses in the available-for-sale debt securities, realized or unrealized losses in the available-for-sale
equity securities and the contingent consideration payable were recorded as “Other income”, “Settle and Changes in fair value of
contingent consideration”, respectively, in the consolidated statements of comprehensive income.
23. SUBSEQUENT EVENTS
a) During from January 1 to April 22, 2016, the Group entered into various agreements to acquire certain investments with an
aggregate cash consideration of RMB42,370 (US$6,541).
b) On March 16, 2016, the Board of Directors of the Group authorized a share repurchase plan, pursuant to which the Company
was authorized to repurchase its own issued and outstanding ADSs up to an aggregate value of US$100 million from the open market,
in negotiated transactions off the market, or through other legally permissible means in accordance with applicable securities laws
from time to time within one year. The share repurchase plan does not require the Group to acquire a specific number of shares. As of
April 22, 2016, no ADS was repurchased by the Group. The ordinary shares representing the repurchased ADS will be recorded as
treasury shares at purchase cost at the time of repurchase.
c) On January 19, 2016, the Group entered into equity transfer agreements with three third-parties to obtain additional 4.63%
equity interest of Kingsoft Japan for a cash consideration of JPY136 million. On January 29, 2016, the Group entered into an
agreement with Kingsoft delegated the voting right of 183,540 ordinary shares (represented 5% of the total shares of Kingsoft Japan)
to the Group. As a result, the Group had a total of 51% voting rights, in Kingsoft Japan and accounted for it as a business combination
under common control. The Group would make retrospective adjustment for the consolidated financial statements for the periods since
the Group and Kingsoft Japan were under common control.
F-68
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
24. CONDENSED FINANCIAL INFORMATION OF THE COMPANY
Balance Sheets
As of December 31,
2014
RMB
2015
RMB
US$
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Short-term investments
Prepayments and other current assets
Due from related parities
Total current assets
Non-current assets
Intangible assets, net
Goodwill
Investment in equity investees
Other long-term investment
Investment in subsidiaries
Total non-current assets
Total assets
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’
EQUITY
Current liabilities
Bank loans
Accrued expenses and other current liabilities
Redemption right liabilities
Due to related parties
Income tax payable
Total current liabilities
Non-current liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity
Class A ordinary shares (par value of US$0.000025 per share;
7,600,000,000 shares authorized as of December 31, 2014 and 2015,
respectively; 288,988,560 and 365,961,759 shares issued as of
December 31, 2014 and 2015, respectively; 260,045,912 and
350,398,737 shares outstanding as of December 31, 2014 and 2015,
respectively)
Class B ordinary shares (par value of US$0.000025 per share;
1,400,000,000 shares authorized as of December 31, 2014 and 2015,
respectively; 1,127,614,152 and 1,058,514,152 shares issued as of
December 31, 2014 and 2015, respectively; 1,095,456,652 and
1,035,037,339 shares outstanding as of December 31, 2014 and 2015,
respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
534,390
—
428,330
2,325
698,888
583,374
25,974
6,494
15,162
1,411,418
1,663,933
2,042,422
36,062
39,578
—
55,740
436,286
25,022
59,404
5,802
46,373
949,494
567,666
1,086,095
2,231,599
3,128,517
—
6,919
520
12,272
1,188
20,899
4,362
4,362
129,872
17,734
474
57,933
10,351
216,364
214
214
90,057
4,010
1,003
2,341
217,885
315,296
3,863
9,170
896
7,158
146,577
167,664
482,960
20,049
2,738
73
8,943
1,598
33,401
34
34
25,261
216,578
33,435
42
56
9
180
2,059,983
142,760
3,373
2,206,338
170
2,468,562
319,356
123,795
2,911,939
26
381,080
49,299
19,111
449,525
482,960
Total liabilities, mezzanine equity and shareholders’ equity
2,231,599
3,128,517
F-69
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Statements of Comprehensive Income
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Selling and marketing
General and administrative
Total operating expenses
2013
RMB
2,070
(1,950)
120
(12,491)
—
(15,146)
Years ended December 31,
2014
RMB
RMB
2015
US$
22,002
(17,752)
196,640
(20,531)
4,250
176,109
(44,011)
(31)
(13,103)
(74,426)
(107)
(31,279)
30,356
(3,169)
27,187
(11,489)
(17)
(4,829)
(27,637)
(57,145)
(105,812)
(16,335)
Equity in profit of subsidiaries
Interest income, net
Changes in fair value of redemption right and put
options granted
Losses from equity method investments
Impairment of investments
Settlement and changes in fair value of contingent
considerations
Foreign exchange gain (loss), net
Other income, net
76,031
2,494
11,146
—
—
(973)
946
—
99,213
20,908
3,576
—
—
(1,755)
(17)
—
133,495
7,169
—
(42)
(25,891)
(707)
389
1,620
Income before income taxes
62,127
69,030
186,330
Income tax expenses
Net income
(109)
(1,089)
(9,734)
62,018
67,941
176,596
Other comprehensive income (loss), net of tax of nil
Unrealized gains on available-for-sale securities, net
Foreign currency translation adjustments
Other comprehensive income
—
(8,807)
(8,807)
—
(6,918)
(6,918)
Total comprehensive income
53,211
61,023
2,945
117,477
120,422
297,018
F-70
20,608
1,107
—
(6)
(3,997)
(109)
60
250
28,765
(1,503)
27,262
455
18,135
18,590
45,852
Table of Contents
CHEETAH MOBILE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(Amounts in thousands of Renminbi (“RMB”) and US dollars (“US$”), except for number of shares and per share (or ADS)
data)
Statements of Cash Flows
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
(a) Basis of presentation
2013
RMB
1,335
(57,070)
321,965
(5,504)
260,726
21,858
282,584
Years ended December 31,
2014
RMB
RMB
2015
(629,518)
(516,106)
1,404,056
(6,626)
251,806
282,584
534,390
118,281
(202,844)
102,366
31,181
48,984
534,390
583,374
US$
18,259
(31,314)
15,803
4,813
7,561
82,496
90,057
For the Company only condensed financial information, the Company records its investment in its subsidiaries and VIEs under
the equity method of accounting. Such investment is presented on the condensed balance sheets as “Investment in subsidiaries” and
share of their income as “Equity in profit of subsidiaries” on the condensed statements of comprehensive income. The subsidiaries and
VIEs did not pay any dividends to the Company for any of the years presented.
The Company only condensed financial statements should be read in conjunction with the Group’s consolidated financial
statements.
(b) Commitments
The Company does not have any significant commitments or long-term obligations as of any of the periods presented.
F-71
This document is an English translation of the original Chinese text
Exhibit 4.37
SHARE TRANSFER AGREEMENT
OF
GUANGZHOU KINGSOFT NETWORK TECHNOLOGY CO., LTD.
BY AND AMONG
MING XU
WEIQIN QIU
AND
BEIJING KINGSOFT SECURITY SOFTWARE CO. LTD.
October 19, 2015
1
This Share Transfer Agreement (“this Agreement”) is executed on October 19, 2015 in Beijing by and among:
SHARE TRANSFER AGREEMENT
Party A: Ming Xu
Identity Card No.:
Residential address:
Party B: Weiqin Qiu
Identity Card No.:
Residential address:
Party C: Beijing Kingsoft Security Software Co., Ltd. (hereinafter referred to as “Party C” or the “Purchaser”)
Registered Address: Floor 2 East, 33 Xiaoying West Road, Haidian District, Beijing
Legal Representative: Sheng Fu
The above-mentioned parties shall be collectively referred to as the “Parties” and individually as “a Party”; Party A and Party B shall
be collectively referred to as the “Seller”.
WHEREAS,
Guangzhou Kingsoft Network Technology Co., Ltd. (hereinafter referred to as the “Company”) is a limited liability company legally
incorporated and validly existing under the laws of China, whose registered capital is RMB 10 million and paid-in capital is RMB 10
million;
Based on the spirit of equality, voluntariness and mutual cooperation, Party A and Party B agree to transfer 50% shares respectively
held by them in the Company to the Purchaser on the terms and conditions as stipulated herein, and the Purchaser agrees to acquire
such shares.
2
Therefore, in consideration of the above-mentioned preconditions and the representations, warranties, commitments and warranties
herein, the Parties agree upon as follows:
1.1 DEFINITIONS
CLAUSE 1 DEFINITIONS
Unless otherwise provided herein, the following terms shall have the following meanings in this Agreement:
“Business Day”
Shall refer to any day other than Saturdays, Sundays, legal holidays of China, or any day other than those
days on which the banks in China may not be open for business.
“Taxes”
Shall refer to any taxes and charges levied by any governmental authorities, including but not limited to
value-added tax, business tax, income tax, withholding tax, real estate tax, land use tax, stamp tax, tariff
and such charges as urban construction and education surcharges, and penalties and fines, etc..
“Share Transfer” or
“Share Purchase”
Shall refer to that, as set forth in “Whereas” provisions, the Purchaser purchases 50% shares held
respectively by Party A and Party B in the Company on the terms and conditions herein.
“China”
Shall refer to the People’s Republic of China, which for the purpose of this Agreement does not include
Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan.
“Delivery”
Shall have the definition as set forth in Sub-clause 2.3.1.
3
“Delivery Date”
Shall have the definition as set forth in Sub-clause 2.3.1.
“Company”
“Confidential
Information”
“Encumbrance”
Shall refer to Guangzhou Kingsoft Network Technology Co., Ltd., including its current or future
subsidiaries, affiliated companies or entities actually controlling and/or operating the Company’s
business.
Shall have the definition as set forth in Sub-clause 6.1.
Shall refer to any debt pledging for any person or any security, attachment (whether fixed or not fixed),
pledge, lien, mortgage, assignment, trust deed, ownership reservation, security interest, or other
encumbrances of any kind, including any right created by a transaction, from the point of view of law, the
creation of such right does not create security, but causes economic or financial effect similar to the
creation of security and legally enforceable under the applicable law, any agency agreement, power of
attorney, power of attorney for voting rights, interests, option, priority, negotiation or refusal or
assignment limitation in favor of any person.
“A Party” or “Parties”
Shall have the definition as set forth in the preamble hereof.
“This Agreement”
Shall have the definition as set forth in the preamble hereof.
“Current Shareholders”
Party A and Party B shall be collectively referred to as the Current Shareholders.
4
1.2 INTERPRETATION
1.2.1
1.2.2
1.2.3
The table of contents and titles hereof shall be listed out only for the convenience of reading, and shall not affect the
meaning or interpretation of this Agreement in any way.
Unless otherwise stated, the clauses, terms, schedules, lists or appendix Shall refer to the clauses, terms, schedules, lists
or appendix of this Agreement.
Such terms as “including” and other similar expressions shall not mean limitation, but shall be interpreted as “including
but not limited to”.
2.1 SHARE PURCHASE
CLAUSE 2 SHARE PURCHASE
The Parties agree that the Purchaser shall, in accordance with the terms and conditions as provided herein, respectively purchase 50%
shares held by Party A in the Company (corresponding to capital of RMB 5,000,000) and all rights and obligations attached to such
shares and capital, and 50% shares held by Party B in the Company (corresponding to capital of RMB 5,000,000) and all rights and
obligations attached to such shares and capital.
2.2 SHARE TRANSFER PRICE
The Parties agree that the total price for this Share Purchase shall be RMB 10 million (the “Share Transfer Price”).
2.3 DELIVERY
2.3.1 The Share Purchase shall be deemed as delivered hereunder on the date (“Delivery Date”) on which all of the following
matters shall have been completed: (i) all conditions set forth in Clause 3 of this Agreement shall be satisfied or exempted
by the Purchaser; (ii) the name of the Purchaser shall be listed in the Company’s register of members ; and (iii) the
registration of release of share pledge and share modification with the competent administration for industry and
commerce shall be completed, and a new Business License for Enterprise Legal Person reflecting the completion of the
purchase by the Purchaser shall be issued (if necessary). The Purchaser shall be entitled to the rights and undertake the
obligations as the shareholder from the Delivery Date.
5
The shareholding structure of the Company prior to the Delivery shall be as follows:
Name of Shareholder
Ming Xu
Weiqin Qiu
Total
Subscribed Capital
(RMB)
Shareholding Percentage
5,000,000
5,000,000
10,000,000
50%
50%
100.00%
The shareholding structure of the Company after the Delivery shall be as follows:
Name of Shareholder
Beijing Kingsoft Security Software Co., Ltd.
Total
Subscribed Capital
(RMB)
Shareholding Percentage
10,000,000
10,000,000
100.00%
100.00%
2.3.2 The Purchaser shall pay the Seller the Share Transfer Price as set forth in Sub-clause 2.2 within one (1) month after the
completion of the modification registration regarding the Share Transfer hereunder with the competent administration for
industry and commerce. Each relevant party shall actively assist in signing necessary documents and completed other
necessary acts so as to cause the Delivery to be accomplished as soon as possible.
6
3.1 PRECONDITIONS FOR THE DELIVERY
CLAUSE 3 PRECONDITIONS FOR THE DELIVERY
The Share Purchase hereunder shall satisfy with the following conditions (any of such conditions may be waived by the Purchaser in
writing):
(1) Accuracy of Representations and Warranties. All representations and warranties made by the Seller in all transaction
documents shall be true, complete, accurate and valid on the date when they are made and on the Delivery Date.
(2) No Legal Procedures. There shall not be any pending legal procedure or legal procedure threatened by any person. There
shall not be, in the reasonable opinion of the Purchaser, a reasonable possibility that may cause the completion of the Share
Purchase at the time of the Delivery to be prohibited or restricted or otherwise hindered at all aspects or at main aspects, or
any objection, claim or pursuit of other remedy for the Share Purchase in any other way, or imposing any limitation or
condition on the Share Purchase, or otherwise interfering with the Share Purchase at other aspects.
CLAUSE 4 REPRESENTATIONS AND WARRANTIES BY THE PURCHASER
The Purchaser hereby makes the following representations and warranties to the Company:
4.1 LEGAL STATUS, CAPACITY AND CREDIT
The Purchaser is a citizen of the People’s Republic of China, with full civil capacity; it is of full and independent legal status and
capacity for executing, delivering and performing this Agreement and may be an independent party to act as a subject of
litigation.
7
4.2 FURTHER WARRANTIES
It will perform all necessary acts and sign all necessary documents, deeds or letters of consent for performance of any term
hereof (including but not limited to satisfying the conditions for each Party’s performing the Delivery obligations).
CLAUSE 5 REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby makes the following representations and warranties to the Purchaser:
5.1 LEGAL STATUS AND CAPACITY OF THE SELLER
The Seller is a natural person with full civil capacity and liability. The Seller is of full and independent legal status and capacity
for executing, delivering and performing this Agreement and may be an independent party to a suit.
5.2 AUTHORIZATIONS AND APPROVALS
The Seller shall have full powers and authorizations to execute and deliver this Agreement and other documents related to the
transaction under this Agreement to be executed. The execution and delivery of this Agreement by the Seller shall obtain all
necessary authorization, and approval, and the fulfillment of the obligations by the Seller hereunder shall also obtain all
necessary authorization and approval.
5.3 OWNERSHIP OF SHARES IN THE COMPANY
Party A and Party B respectively holds 50% shares in the Company, and have the right to agree the Purchaser’s acquisition of
50% shares in the Company respectively held by Party A and Party B by purchasing such shares. As of the date of this
Agreement, such shares and the registered capital corresponding thereto is legally paid up without any fraudulent investment,
false funding or flight of funding.
8
CLAUSE 6 CONFIDENTIALITY
6.1 Prior to the date of this Agreement and during the term of this Agreement, the confidentiality, proprietary information and data
regarding its business, financial status, knowhow, research and development and other confidential matters disclosed or may be
disclosed by each Party to other Parties (the “Confidential Information”) shall be kept confidential by each Party and the
Company.
6.2 If any Party or the Company breaches the provisions of this Clause 6, it shall be liable for compensating the damages incurred by
other Parties and/or the Company as consequence of such breach. The payment of such compensation shall not affect any other
rights or remedies enjoyed by any Party on the date of such breach.
6.3 The existence, negotiation, execution and contents of this Agreement shall be Confidential Information and shall be strictly kept
confidential by each Party.
6.4 This Clause 6 and the obligations and interests hereunder shall remain valid within three (3) years after the performance or earlier
termination of this Agreement.
7.1 EXECUTION AND EFFECTIVENESS
CLAUSE 7 MISCELLANEOUS
This Agreement shall become effective upon duly executed (stamped on the seal) by the legal or authorized representative of each
Party.
7.2 REGISTER WITH THE ADMINISTRATION FOR INDUSTRY AND COMMERCE
After effectiveness of this Agreement, each Party shall assist the Company to complete the share pledge release procedures and alter
the registration particulars with the administration for industry and commerce.
9
7.3 APPLICABLE LAW
This Agreement shall be governed by, interpreted and performed in accordance with the laws of China.
7.4 DISPUTE RESOLUTION
Any dispute arising from this Agreement shall be resolved firstly through amicable consultations by the Parties, if failed, the Parties
agree that such dispute shall be submitted to Beijing Arbitration Commission for arbitration under its rules. The arbitration award shall
be final and bound upon the Parties.
7.5 TAXES
The Taxes occurred in the transaction hereunder shall be respectively borne by the Parties in accordance with the laws and regulations.
7.6 SEVERABILITY
The provisions hereof shall be deemed to be severable, and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of other provisions hereof.
7.7 WAIVER
If any Party waive the other Party’s obligation of breach of contract, the waiver shall be made in writing and signed by the Party, and
such waiver shall not constitute a waiver of any future breach of the other Party hereunder.
7.8 LIABILITIES FOR BREACH
(1)
If, after the execution of this Agreement, any Party breaches this Agreement or fails to perform any of its obligations which shall
be performed prior to effectiveness of this Agreement and causes this Agreement not able to be performed, the breaching Party
shall compensate all losses incurred by the non-breaching Parties due to such non-performance of this Agreement. Any Party,
who fails to perform any of its obligations hereunder or whose performance of any of its obligations hereunder does not comply
with the provisions hereof, shall bear such liabilities for its breach as continuance of performance, remediation or compensation
of loss.
10
(2) The Parties shall conscientiously perform this Agreement upon it becoming effective, and any Party fails to perform its
obligations in accordance with this Agreement or breaching any of its commitments or warranties shall be liable for breach in
accordance with the relevant laws and this Agreement.
7.9 AMENDMENT
This Agreement shall be amended or altered only by signed writing by the Parties.
7.10 ENTIRE AGREEMENT
The provisions of this Agreement and other transaction documents shall constitute all agreements and understandings of the Parties on
the subject matter hereof, and supersede all previous oral and written agreements and all other communications of the Parties on the
subject matter hereof.
7.11 LANGUAGE AND DUPLICATE
This Agreement shall be executed in three (3) Chinese counterparts, each Party shall hold one (1) counterpart and the rest counterparts
shall be used for record of competent authorities. Each counterpart shall have same effect.
(The remainder of this page is intentionally left blank)
11
IN WITNESSTH HEREOF, this Agreement shall be executed by the duly authorized representatives of the Parties on the date first
written above.
Seller (Party A):
Ming Xu
By:
/s/ Ming Xu
Seller (Party B):
Weiqin Qiu
By:
/s/ Weiqin Qiu
12
IN WITNESSTH HEREOF, this Agreement shall be executed by the duly authorized representatives of the Parties on the date first
written above.
Purchaser (Party C):
Beijing Kingsoft Security Software Co., Ltd.
Stamped with company chop of Beijing Kingsoft Security Software Co., Ltd.
Authorized Representative
Name:
Title:
13
This document is an English translation of the original Chinese text
Exhibit 4.38
VIE TERMINATION AGREEMENT
This VIE Termination Agreement (hereinafter referred to as “this Agreement”) is executed on October 19 , 2015 by and among the
following parties (hereinafter referred to as the “Parties”):
th
Party A: Beijing Kingsoft Security Software Co., Ltd.
Registered Address: Floor 2 East, 33 Xiaoying West Road, Haidian District, Beijing
Legal Representative: Sheng Fu
Party B: Guangzhou Kingsoft Network Technology Co., Ltd.
Registered Address: Rooms 3101-3106, Rooms 3108-3110, Huaxia Road, Tianhe District, Guangzhou
Legal Representative: Sheng Fu
Party C:
Weiqin Qiu (Identity Card No. )
Ming Xu (Identity Card No. )
WHEREAS,
1. Party A, Party B and Party C have executed a Business Operation Agreement on September 1 , 2013 (the “Business Operation
Agreement”), providing that Party B and Party C shall make to Party A commitments and warranties for the daily operation of
the company.
st
1
2. Party C and Party A have executed a Loan Agreement on August 5 , 2013 (the “Loan Agreement”), providing that Party A shall
lend and pay Party C RMB 10 million prior to August 7 , 2013, including respectively lending and paying Weiqin Qiu RMB 5
million and lending and paying RMB Ming Xu 5 million.
th
th
3. Party A, Party B and Party C have executed an Equity Pledge Agreement on September 1 , 2013 (the “Equity Pledge
st
Agreement”), providing that Weiqin Qiu and Ming Xu of Party C shall set pledge in favor of Party A on 50% of shares
respectively held by them in Party B.
4. Party A, Party B and Party C have executed a Shareholder Voting Proxy Agreement on September 1 , 2013 (the “Shareholder
st
Voting Proxy Agreement”), providing that Party C shall irrevocably fully authorize the person then appointed by Party A to, for
and on behalf of Party C, perform all voting rights of Party C as shareholders of Party B.
5. Party A, Party B and Party C have executed an Exclusive Equity Option Agreement for Share Transfer on September 1 , 2013
(the “Exclusive Equity Option Agreement for Share Transfer”), providing that Party C shall, to the extent permitted by the
law of China, as requested by Party A, transfer all or part of shares held by it in the company to Party A or any other entity or
individual appointed by Party A.
st
st
6. Party A and Party B have executed an Exclusive Technology Development, Support and Consultancy Agreement on September 1 ,
2013 (the “Exclusive Technology Development, Support and Consultancy Agreement”), providing that Party A shall supply
Party B with paid technical support and service.
The agreements as mentioned in above paragraphs 1-6 are collectively referred to as the “Original Agreements”.
2
7. Party A and Party C have executed a Share Transfer Agreement on October 19 , 2015 (the “Share Transfer Agreement”),
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providing that Party C shall transfer 100% of shares held by it in Party B to Party A for the consideration of RMB 10 million, of
which RMB 5 million shall be paid to Ming Xu and RMB 5 million shall be paid to Weiqin Qiu.
NOW THEREFORE, through amicable discussion and based on the principles of equality and mutual benefit, the parties hereto agree
upon as follows:
1. Party A, Party B and Party C agree that the Business Operation Agreement, the Equity Pledge Agreement, the Shareholder Voting
Proxy Agreement and the Exclusive Equity Option Agreement for Share Transfer shall terminate on the execution date of this
Agreement, and Party A, Party B and Party C shall not be entitled to the rights or undertake the obligations thereunder.
2. Party A and Party C agree that the loan of RMB 10 million repayable by Party C to Party A under the Loan Agreement shall
offset the consideration of RMB 10 million payable by Party A to Party C under the Share Transfer Agreement; from the date of
this Agreement, the obligations of Party A and Party C for repayments and payments under the Loan Agreement and the Share
Transfer Agreement shall be deemed to have been fulfilled, the Loan Agreement shall terminate, and Party A and Party C shall
not be entitled to the rights or undertake the obligations under the Loan Agreement other than the repayment term thereof.
3. Party A and Party B agree that, as of the date of this Agreement, the Exclusive Technology Development, Support and
Consultancy Agreement shall terminate, and Party A and Party B shall not be entitled to the rights or undertake the obligations
thereunder; provided that Party B shall still pay Party A the service fees and other costs payable before the date of this Agreement
under the Exclusive Technology Development, Support and Consultancy Agreement.
4. Party B and Party C shall actively assist Party A in completing the VIE structure release, including but not limited to signing the
documents for modification registration with the administration for industry and commerce and providing the documents and
materials regarding the VIE structure release.
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5. The confidentiality, indemnity and dispute settlement terms in the Original Agreements shall survive the termination of the
Original Agreements.
6. This Agreement shall become effective as of the date on which the VIE structure release of Party B shall have been completed.
The VIE structure release includes the modification procedure with the administration for industry and commerce and other
procedures as required by the taxation authority and other authorities necessary for Party C transferring 100% shares held by it in
Party B to Party A.
7. This Agreement is made in four counterparts of the equal legal validity, each Party holding one.
(The remainder of this page is intentionally left blank)
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IN WITNESS THEREOF, the parties have, through their authorized representatives, executed this Agreement on the date first written
above.
Party A: Beijing Kingsoft Security Software Co., Ltd.
(Seal)
By:
Stamped with company chop of Beijing Kingsoft Security Software Co., Ltd.
Party B: Guangzhou Kingsoft Network Technology Co., Ltd.
(Seal)
By: Stamped with company chop of Guangzhou Kingsoft Network Technology Co., Ltd.
Party C:
Ming Xu
/s/ Ming Xu
Weiqin Qiu
/s/ Weiqin Qiu
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This document is an English translation of the original Chinese text
Exhibit 4.39
SHARE TRANSFER AGREEMENT
BEIJING ANTUTU TECHNOLOGY CO., LTD.
Transferor: Ming Xu
Transferee: Beijing Kingsoft Security Software Co., Ltd.
In accordance with the Company Law of the People’s Republic of China and the Articles of Association of Beijing Antutu Technology
Co., Ltd., the Transferor and Transferee have voluntarily executed this Share Transfer Agreement on October 13 , 2015.
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The Transferor, Ming Xu, agrees to transfer the shares held by him in Beijing Antutu Technology Co., Ltd. corresponding to capital
RMB 1.5 million paid in cash thereof to Beijing Kingsoft Security Software Co., Ltd..
The Transferee, Beijing Kingsoft Security Software Co., Ltd., agrees to acquire the shares in Beijing Antutu Technology Co., Ltd.
transferred by Ming Xu corresponding to capital of RMB 1.5 million paid in cash thereof.
The parties shall close the share transfer from the execution date of this Agreement; the creditor’s rights and debts incurred prior to the
transfer shall be assumed by the Transferor, and the creditor’s rights and debts incurred after the transfer shall be assumed by the
Transferee.
Transferor:
/s/ Ming Xu
October 13 , 2015
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Transferee:
Beijing Kingsoft Security Software Co., Ltd.
Stamped with company chop of Beijing Kingsoft Security Software
Co., Ltd.
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SHARE TRANSFER AGREEMENT
BEIJING ANTUTU TECHNOLOGY CO., LTD.
Transferor: Wei Liu
Transferee: Beijing Kingsoft Security Software Co., Ltd.
In accordance with the Company Law of the People’s Republic of China and the Articles of Association of Beijing Antutu Technology
Co., Ltd., the Transferor and Transferee have voluntarily executed this Share Transfer Agreement on October 13 , 2015.
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The Transferor, Wei Liu, agrees to transfer the shares held by him in Beijing Antutu Technology Co., Ltd. corresponding to capital
RMB 1.5 million paid in cash thereof to Beijing Kingsoft Security Software Co., Ltd..
The Transferee, Beijing Kingsoft Security Software Co., Ltd., agrees to acquire the shares in Beijing Antutu Technology Co., Ltd.
transferred by Wei Liu corresponding to capital of RMB 1.5 million paid in cash thereof.
The parties shall close the share transfer from the execution date of this Agreement; the creditor’s rights and debts incurred prior to the
transfer shall be assumed by the Transferor, and the creditor’s rights and debts incurred after the transfer shall be assumed by the
Transferee.
Transferor:
Transferee:
/s/ Wei Liu
October 13 , 2015
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Beijing Kingsoft Security Software Co. Ltd.
Stamped with company chop of Beijing Kingsoft Security Software
Co. Ltd.
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This document is an English translation of the original Chinese text
Exhibit 4.40
VIE TERMINATION AGREEMENT
This VIE Termination Agreement (hereinafter referred to as “this Agreement”) is executed on October 13 , 2015 by and among the
following parties (hereinafter referred to as the “Parties”):
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Party A: Beijing Kingsoft Security Software Co., Ltd.
Registered Address: Floor 2 East, 33 Xiaoying West Road, Haidian District, Beijing
Legal Representative: Sheng Fu
Party B: Beijing Antutu Technology Co., Ltd.
Registered Address: Room A-0049, Floor 2, No.3 Building, No.30 Yard, Shixing Street, Shijingshan District, Beijing
Legal Representative: Sheng Fu
Party C:
Wei Liu (Identity Card No. )
Ming Xu (Identity Card No. )
WHEREAS,
1. Party A, Party B and Party C have executed a Business Operation Agreement on June 14 , 2013 (the “Business Operation
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Agreement”), providing that Party B and Party C shall make to Party A commitments and warranties for the daily operation of the
company.
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2. Party C and Party A have executed a Loan Agreement on June 7 , 2013 (the “Loan Agreement”), providing that Party A shall
lend and pay Party C RMB 1.5 million prior to June 7 , 2013, including respectively lending and paying Wei Liu RMB 0.75
million and lending and paying Ming Xu RMB 0.75 million.
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3. Party A, Party B and Party C have executed an Equity Pledge Agreement on June 14 , 2013 (the “Equity Pledge Agreement”),
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providing that Wei Liu and Ming Xu of Party C shall set pledge in favor of Party A on 50% of shares respectively held by them in
Party B.
4. Party A, Party B and Party C have executed a Shareholder Voting Proxy Agreement on June 14 , 2013 (the “Shareholder Voting
Proxy Agreement”), providing that Party C shall irrevocably fully authorize the person then appointed by Party A to, for and on
behalf of Party C, perform all voting rights of Party C as shareholders of Party B.
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5. Party A, Party B and Party C have executed an Exclusive Equity Option Agreement for Share Transfer on June 14 , 2013 (the
“Exclusive Equity Option Agreement for Share Transfer”), providing that Party C shall, to the extent permitted by the law of
China, as requested by Party A, transfer all or part of shares held by it in the company to Party A or any other entity or individual
appointed by Party A.
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6. Party A and Party B have executed an Exclusive Technology Development, Support and Consultancy Agreement on June 14 ,
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2013 (the “Exclusive Technology Development, Support and Consultancy Agreement”), providing that Party A shall supply Party
B with paid technical support and service.
The agreements as mentioned in above paragraphs 1-6 are collectively referred to as the “Original Agreements”.
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7. Party A and Party C have executed a Share Transfer Agreement on October 13 , 2015 (the “Share Transfer Agreement”),
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providing that Party C shall transfer 100% of shares held by it in Party B to Party A for the consideration of RMB 1.5 million, of
which RMB 0.75 million shall be paid to Ming Xu and RMB 0.75 million paid to Wei Liu.
NOW THEREFORE, through amicable discussion and based on the principles of equality and mutual benefit, the Parties hereto agree
upon as follows:
1. Party A, Party B and Party C agree that the Business Operation Agreement, the Equity Pledge Agreement, the Shareholder Voting
Proxy Agreement and the Exclusive Equity Option Agreement for Share Transfer shall terminate on the execution date of this
Agreement, and Party A, Party B and Party C shall not be entitled to the rights or undertake the obligations thereunder.
2. Party A and Party C agree that the loan of RMB 1.5 million repayable by Party C to Party A under the Loan Agreement shall
offset the consideration of RMB 1.5 million payable by Party A to Party C under the Share Transfer Agreement; from the date of
this Agreement, the obligations of Party A and Party C for repayments and payments under the Loan Agreement and the Share
Transfer Agreement shall be deemed to have been fulfilled, the Loan Agreement shall terminate, and Party A and Party C shall
not be entitled to the rights or undertake the obligations under the Loan Agreement other than the repayment term thereof.
3. Party A and Party B agree that, on the date of this Agreement, the Exclusive Technology Development, Support and Consultancy
Agreement shall terminate, and Party A and Party B shall not be entitled to the rights or undertake the obligations thereunder;
provided that Party B shall still pay Party A the service fees and other costs payable before the date of this Agreement under the
Exclusive Technology Development, Support and Consultancy Agreement.
4. Party B and Party C shall actively assist Party A in completing the VIE structure release, including but not limited to signing the
documents for modification registration with the administration for industry and commerce and providing the documents and
materials regarding the VIE structure release.
3
5. The confidentiality, indemnity and dispute settlement terms in the Original Agreements shall survive the termination of the
Original Agreements.
6. This Agreement shall become effective on the date on which the VIE structure release of Party B shall have been completed. The
VIE structure release includes the modification procedure with the administration for industry and commerce and other
procedures as required by the taxation authority and other authorities necessary for Party C transferring 100% shares held by it in
Party B to Party A.
7. This Agreement is made in four counterparts of equal legal validity, each Party holding one.
(The remainder of this page is intentionally left blank)
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IN WITNESS THEREOF, the parties have, through their authorized representatives, executed this Agreement on the date first written
above.
Party A: Beijing Kingsoft Security Software Co. Ltd.
(Seal)
By: Stamped with company chop of Beijing Kingsoft Security Software Co. Ltd.
Party B: Beijing Antutu Technology Co., Ltd.
(Seal)
By: Stamped with company chop of Beijing Antutu Technology Co., Ltd.
Party C:
Ming Xu
/s/ Ming Xu
Wei Liu
/s/ Wei Liu
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This document is an English translation of the original Chinese text
Exhibit 4.41
Third Supplemental Agreement
to Strategic Cooperation Agreement
This Third Supplemental Agreement for Strategic Cooperation Agreement (this “Agreement”) is executed on June 30 , 2015 in
Chaoyang District, Beijing.
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Party A: Cheetah Mobile Inc.
Address: PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands
Tel: 010-62927779
Contact Person: Sheng Fu
Party B: Shenzhen Tencent Computer Systems Company Limited
Address: Tencent Building, Kejizhongyi Road, Nanshan Science and Technology Park, Shenzhen
Tel: 0755-62671188
Contact Person:
WHEREAS,
Party A (formerly known as Kingsoft Internet Software Holdings Limited) and Party B have executed Strategic Cooperation
Agreement on matters related to the parties’ cooperation on December 27 , 2013 (the “Original Agreement”), Supplemental
Agreement to Strategic Cooperation Agreement on July 31 , 2014, and Second Supplemental Agreement to Strategic Cooperation
Agreement on January 30 , 2015 (collectively referred to as the “Original Supplemental Agreements”). The Original Supplemental
Agreements amended Clause 2 of Chapter II “Cooperation Matters” of the Original Agreement, and other provisions of the Original
Agreement remain unchanged and are still valid. Due to the necessity of business development, the parties intend to amend relevant
provisions of the Original Agreement and Original Supplemental Agreements.
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Party A and Party B, through amicable consultations, hereby agree upon as follows:
1. Clause 1 of the Original Supplemental Agreements (which is Clause 2 of Chapter II “Cooperation Matters” of the Original
Agreement) shall, on the effectiveness date of this Agreement, be terminated and superseded by the following provisions:
(1) “The parties agree that it is estimated that Party B (including its affiliated companies, similarly hereinafter) may bring Party A
(including its affiliated companies, similarly hereinafter) business contracts and orders amounting to not more than RMB 100
million from January 1 , 2014 to December 31 , 2014; it is estimated that Party B may bring Party A business contracts and
orders amounting to not more than RMB 250 million from January 1 , 2015 to December 31 , 2015; it is estimated that Party A
may bring Party B business contracts and orders amounting to not more than RMB 100 million from January 1 , 2015 to
December 31 , 2015; the transactions including such contracts and orders shall be actually executed and performed by the parties
or their affiliated companies, and shall be determined based on the fair market price.”
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2. The other provisions of the Original Agreement and Original Supplemental Agreements shall remain unchanged and are still
valid. In case of any conflict among the Original Agreement, Original Supplemental Agreements and this Agreement, this
Agreement shall prevail. The matters not defined herein shall be performed in accordance with the Original Agreement.
3. This Agreement shall become effective upon the satisfaction of all of the following conditions:
(1) The parties have executed this Agreement; and
(2) Party A has obtained approvals from its board of directors and general meeting of shareholders (if necessary) in accordance
with the listing rules of Stock Exchange of Hong Kong.
4. This Agreement shall be executed in two (2) or more counterparts, each party shall hold one (1) counterpart. Each copy shall have
the same effectiveness.
Party A: Cheetah Mobile Inc.
Party B: Shenzhen Tencent Computer Systems Company Limited
Signed by Authorized Representative:
Signed by Authorized Representative:
/s/ Sheng Fu
Stamped with company chop of Shenzhen Tencent Computer
System Co., Ltd.
This document is an English translation of the original Chinese text
Fourth Supplemental Agreement
to Strategic Cooperation Agreement
This Fourth Supplemental Agreement to Strategic Cooperation Agreement (“this Agreement”) is executed on November 5 , 2015 in
Chaoyang District, Beijing.
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Party A: Cheetah Mobile Inc.
Address: PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands
Tel: 010-62927779
Contact Person: Sheng Fu
Party B: Shenzhen Tencent Computer Systems Company Limited
Address: Tencent Building, Kejizhongyi Road, Nanshan Science and Technology Park, Shenzhen
Tel: 0755-62671188
Contact Person:
WHEREAS,
Party A (formerly known as Kingsoft Internet Software Holdings Limited) and Party B have executed Strategic Cooperation
Agreement on matters related to the parties’ cooperation on December 27 , 2013 (the “Original Agreement”), Supplemental
Agreement for Strategic Cooperation Agreement on July 31 , 2014, Second Supplemental Agreement to Strategic Cooperation
Agreement on January 30 , 2015, and Third Supplemental Agreement to Strategic Cooperation Agreement on June 30 , 2015
(collectively referred to as the “Original Supplemental Agreements”). The Original Supplemental Agreements amended Clause 2 of
Chapter II “Cooperation Matters” of the Original Agreement, and other provisions of the Original Agreement remain unchanged and
are still valid. Due to the necessity of business development, the parties intend to amend relevant provisions of the Original Agreement
and Original Supplemental Agreements.
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Party A and Party B, through amicable consultations, hereby agree upon as follows:
1. Clause 1 of the Original Supplemental Agreements (which is Clause 2 of Chapter II “Cooperation Matters” of the Original
Agreement) shall, on the effectiveness date of this Agreement, be terminated and superseded by the following provisions:
(1) “Party A (including its affiliated companies, similarly hereinafter) estimates that Party B (including its affiliated companies,
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similarly hereinafter) may bring Party A business contracts and orders amounting to not more than RMB 100 million from
January 1 , 2014 to December 31 , 2014; Party A (including its affiliated companies, similarly hereinafter) estimates that
Party B (including its affiliated companies, similarly hereinafter) may bring Party A business contracts and orders amounting
to not more than RMB 340 million from January 1 , 2015 to December 31 , 2015; it is estimated that Party A may bring
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Party B business contracts and orders amounting to not more than RMB 100 million from January 1 , 2015 to December 31 ,
2015; the transactions including such contracts and orders shall be actually executed and performed by the parties or their
affiliated companies, and shall be determined based on the fair market price.”
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2. The other provisions of the Original Agreement and Original Supplemental Agreements shall remain unchanged and are still
valid. In case of any conflict among the Original Agreement, Original Supplemental Agreements and this Agreement, this
Agreement shall prevail. The matters not defined herein shall be performed in accordance with the Original Agreement.
3. This Agreement shall become effective upon the satisfaction of all of the following conditions:
(1) The parties have executed this Agreement; and
(2) Party A has obtained approvals from its board of directors and general meeting of shareholders (if necessary) in accordance
with the listing rules of Stock Exchange of Hong Kong.
4. This Agreement shall be executed in two (2) or more counterparts, each party shall hold one (1) counterpart. Each copy shall have
the same effectiveness.
Party A: Cheetah Mobile Inc.
Party B: Shenzhen Tencent Computer Systems Company Limited
Signed by Authorized Representative:
Signed by Authorized Representative:
/s/ Sheng Fu
Stamped with company chop of Shenzhen Tencent Computer
System Co., Ltd.
This document is an English translation of the original Chinese text
Exhibit 4.42
Strategic Cooperation Agreement
This Strategic Cooperation Agreement (“this Agreement”) is executed on December 30 , 2015 in Chaoyang District, Beijing.
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Party A: Cheetah Mobile Inc.
Address: PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands
Tel: 010-62927779
Contact Person: Sheng Fu
Party B: Shenzhen Tencent Computer System Co., Ltd.
Address: Tencent Building, Kejizhongyi Road, Nanshan Science and Technology Park, Shenzhen
Tel: Huateng Ma
Contact Person: 0755-86013388
Party A and Party, through amicable consultations, agree upon as follows:
Chapter I Purpose
1. The basis of the commercial cooperation strategic partnership between both Parties is to build mutual trust, convention and tacit
understanding in cooperation. Improved efficiency and joint development are the objective and fundamental interests of the
cooperation between both Parties.
2. The basic principles of the Agreement are resources, win-win, reciprocity and mutual benefit, mutual promotion, joint
development, confidentiality and protection of the cooperation market.
1
3. The parties shall fully utilize their advantages, complement each other’s advantages, improve competitiveness and jointly explore
the market; Besides, the parties shall deeply cooperate at all aspects through themselves or respective affiliates established by
them in the territory of the People’s Republic of China (any reference to Party A and Party B shall be construed accordingly).
Under this Agreement, “affiliates” of Parties A shall refer to any other party directly or indirectly controlled by Party A.
“Affiliates” of Parties B shall refer to any other party directly or indirectly controlled by Party B, controlling Party B or under the
common control with Party B, and as well as associate of the aforesaid entities (if applicable). “Control” shall refer to the power
that directly or indirectly direct or cause (other party) to direct the management and policies of a party, whether through
ownership of shares of voting rights or a contract or otherwise, including (x) directly or indirectly owning 50% or more shares in
that party, (y) directly or indirectly owing 50% or more voting rights in that party, or (z) directly or indirectly having the right to
appoint the majority of the board of directors or similar management body of that party which shares are held by that party. The
definition of “associate(s)” shall have the meaning as set forth in the listing rules of Stock Exchange of Hong Kong.
4. The Agreement is a framework agreement, which shall serve as a guidance document for the long-term cooperation between both
Parties as well as the basis for both Parties to conclude and sign relevant supplementary agreements and other agreements.
Chapter II Scope of Cooperation
1. Party A and Party B decide to establish strategic partnership specific to joint research, joint development and exploration of
operation models and cooperation models in the fields of internet and mobile internet etc. The contents of cooperation includes
but not limited to: Party A shall carry out promotion, in various manners, of products of various kinds of Party B and authorized
to Party B through PC products or platforms of Party A or authorized to Party A; Party A shall carry out promotion, in various
manners, of products of various kinds of Party B and authorized to Party B through mobile products or platforms of Party A or
authorized to Party A; Party B shall carry out promotion, in various manners, of products of various kinds of Party A and
authorized to Party A through PC products or platforms of Party B or authorized to Party B; Party B shall carry out promotion, in
various manners, of products of various kinds of Party A and authorized to Party A through mobile products or platforms of Party
B or authorized to Party B.
2
2. Party A estimates that Party B may bring Party A contracts and orders amounting to not more than RMB 495 million from
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January 1 , 2016 to December 31 , 2016; Party A estimates that Party B may bring Party A contracts and orders amounting to not
more than RMB 587 million from January 1 , 2017 to December 31 , 2017; the transactions including such contracts and orders
shall be actually executed and performed by the parties or their affiliates, and be priced as per the fair price in the market.
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3.
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It is estimated that Party A may bring Party B contracts and orders amounting to not more than RMB 30 million from January 1 ,
2016 to December 31 , 2016; it is estimated that that Party A may bring Party B contracts and orders amounting to not more than
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RMB 45 million from January 1 , 2017 to December 31 , 2017; the transactions including such contracts and orders shall be
actually executed and performed by the parties or their affiliates, and shall be determined at the fair market price.
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4. All transactions between Party A and Party B shall follow the following pricing principles: the industry pricing rules in fair
market at the time of transaction, or cost price plus reasonable profit or by reference to the price of independent third parties.
5. When Party B makes payment to Party A, the payment method shall refer to the business of the same kind in market at the time of
transaction.
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Chapter III Confidentiality
1. Trade Secrets: any technical information and operation information of either Party, whether in public or not, including without
limitation product planning, marketing plans, incentive policies, customer data, financial information etc., as well as non-patented
technologies, designs, procedures, technical data, production methods and information sources etc. shall all constitute trade
secrets in such respect.
2. Confidentiality: either Party shall assume confidentiality obligations with respect to any trade secret of the other Party known by
it under the Agreement; unless otherwise stipulated by the laws and regulations or required by the stock exchanges where Party A,
Party B or their respective affiliates are listing, neither Party may disclose such trade secrets to any third party without written
consent of the other Party. Either Party who violates this Clause shall compensate for all direct and indirect losses incurred by the
other Party in full.
3. After termination of the Agreement, both Parties shall still assume the confidentiality obligations hereunder.
Chapter IV Effectiveness, Termination of the Agreement and Miscellaneous
1. Any dispute arising from the Agreement shall be settled through friendly consultations by both Parties. If no settlement can be
reached through consultations, both Parties agree to submit the dispute to Beijing Arbitration Commission for arbitration in
accordance with its rules of arbitration. The arbitral award is legally binding upon both Parties. The signature, performance and
interpretation of the Agreement shall be governed by the laws of the People’s Republic of China.
2. The Agreement is executed in quadruplicate, with each Party holding 2 copies. The valid term of the Agreement shall be from
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January 1 , 2016 to December 31 , 2017. However, whether the Agreement will become effective shall be subject to the approval
of the board of directors and the shareholders’ meeting (if required) of Kingsoft Corporation Limited, one shareholder of Party A.
The Agreement shall automatically terminate upon its expiry.
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Party A: Cheetah Mobile Inc.
Party B: Shenzhen Tencent Computer System Co., Ltd.
Signed by Authorized Representative:
Signed by Authorized Representative:
/s/ Sheng Fu
Date:
Stamped with company chop of Shenzhen Tencent Computer
System Co., Ltd.
Date:
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This document is an English translation of the original Chinese text
Exhibit 4.43
Supplemental Agreement
to Share and Asset Purchase Agreement
This Supplemental Agreement is executed on March 16 , 2015 in Beijing by and among:
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(1) CHEETAH MOBILE INC. (registered in Cayman Islands, hereinafter referred to as “Cheetah Mobile”)
Address: Floor 12, Fuxing International Center, 237 Chaoyang North Road, Chaoyang District, Beijing
(2) CHEETAH TECHNOLOGY CORPORATION LIMITED (registered in Hong Kong, China, hereafter referred to as
“Cheetah Technology”)
Address: Room 1309, Floor 13, Cable T.V. Tower, 9 Hoi Shing Road, Tsuen Wan, N.T., Hong Kong
(3) BEIKE INTERNET (BEIJING) SECURITY TECHNOLOGY, CO., LTD. (registered in Beijing, hereinafter referred to
as “Beike Internet”)
Address: Room A-0072, No.3 Building, No.30 Yard, Shixing Street, Shijingshan District, Beijing
Cheetah Mobile, Cheetah Technology and Beike Internet are collectively referred to as the “Purchasers”.
(4) HONGKONG ZOOM INTERACTIVE NETWORK MARKETING TECHNOLOGY LIMITED (registered in Hong
Kong, China, hereinafter referred to as “Hongkong Zoom”)
Address: Room 1701 (206), 17/F Henan Building, 90 Jaffe Road, Wanchai, Hong Kong
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(5) BEIJING PZOOM INTERACTIVE NETWORK MARKETING TECHNOLOGY CO., LTD. (registered in Beijing,
China, hereinafter referred to as “Beijing Pzoom”)
Address: No. 5 Building, 25 Shuntong Road, Renhe Town, Shunyi District, Beijing
(6) BEIJING JISHI INTERACTIVE NETWORK MARKETING TECHNOLOGY CO., LTD. (registered in Beijing, China,
hereinafter referred to as “Beijing Jishi”)
Address: No. 5 Building, 25 Shuntong Road, Renhe Town, Shunyi District, Beijing
(7) SHANGHAI QISOU INTERNET TECHNOLOGY CO., LTD. (registered in Shanghai, China, hereinafter referred to as
“Shanghai Qisou”)
Address: Room 1-203-59, 337 Shahe Road, Jiangqiao Town, Jiading District, Shanghai
Beijing Pzoom, Beijing Jishi and Shanghai Qisou collectively referred to as the “Transferors”.
(8) FOCUS AD NETWORK MARKETING TECHNOLOGY LIMITED (registered in British Virgin Islands, hereinafter
referred to “Focus AD” or “Selling Shareholder”)
Address: PO Box 4389, Road Town, Tortola, British Virgin Islands
(9) XIAOXIA MA
Identity Card No.:
(10) YU CHENG
Identity Card No.:
Yu Cheng and Xiaoxia Ma are the “Founders” of Hongkong Zoom and collectively with Focus AD referred to as the “Sellers”.
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Whereas, the parties hereto have executed SHARE AND ASSET PURCHASE AGREEMENT on June 6 , 2014 (hereinafter referred
to as the “Purchase Agreement”), and, through amicable discussion, execute this Supplemental Agreement for the fulfillment of and
matters not defined in the Purchase Agreement.
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The interpretation of the terms used herein shall have the same meaning as set forth in the Purchase Agreement.
1. On March 1 , 2015, Beijing Jishi has terminated its contract with Google and has caused Google to execute a substantially similar
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agreement with the entity designated by the Purchasers, and such agreement has become effective on March 1 , 2015.
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2. Within thirty (30) days after the completion of the transaction, the Transferors have completed the following matters: i)
terminating the transfer contracts as required under Part A of Schedule 2 of the Purchase Agreement, and having caused other
parties to such transfer contracts to execute substantially similar agreements with the entity designated by the Purchasers; and
(ii) transferring to the Purchasers the receivables regarding the transfer contracts as required in Part B of Schedule 2 of the
Purchase Agreement.
3. The minority shareholders have signed letters of consent in accordance with the Purchase Agreement, whereby they acknowledge
and agree that Beijing Pzoom and Beijing Jishi shall execute the Purchase Agreement and other transaction documents, perform
their obligations under the Purchase Agreement and other transaction documents and complete the transaction, and irrevocably
waive any and all rights and claims of any kind which they may assert against the group company, Sellers and any affiliates in
relation to the execution of the Purchase Agreement and other transaction documents and the completion of the transaction.
4. The Sellers have satisfied or caused to satisfy the conditions of the Purchasers prior to June 30 , 2014 in accordance with the
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Purchase Agreement.
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5. Beijing Pzoom has terminated employment agreements with its management within thirty (30) days after the completion date of
the transaction, and has caused its management to sign relevant agreements pursuant to Sub-clause 4.3 of the Purchase
Agreement.
6. The Transferors have received the receivables not assigned under the Transfer Agreement pursuant to the Purchase Agreement.
7. The Transferors have not performed any act or omission in breach of the Purchase Agreement from the date of the Purchase
Agreement to the completion date of the transaction.
8. Each party confirms that: the transfer of ownership, possession and control of all transferred assets from the Sellers and
Transferors to the Purchasers or their affiliates has been completed.
9. Each party confirms that, as of the date of this Agreement, Beijing Jishi has not obtained any exclusive right to use trademark and
therefore does not need to execute with Hongkong Zoom the agreement for Beijing Jishi transferring to Hongkong Zoom the
exclusive right to use trademark.
10. Each party agrees to waive the Founders from their obligations under Sub-clause 4.7 of the Purchase Agreement to cause
Beijing Yu Tang Lian Chuang Information Technology Co., Ltd. to pledge 5% shares in Beijing Pzoom in favor of the
Purchasers.
11. Beijing Jishi has performed its obligations under Sub-clause 4.8 of the Purchase Agreement.
12. Beijing Pzoom, Beijing Jishi and Shanghai Qisou have completed their sale, transfer, assignment, conveyance and delivery of
externally purchased tangible assets owned by them to the Purchasers or affiliates designated by the Purchasers. Each party
confirms that: Beijing Pzoom, Beijing Jishi and Shanghai Qisou do not have any externally purchased intangible asset necessary
to sell, transfer, assign, convey and deliver to the Purchasers or affiliates designated by the Purchasers.
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13. The Purchasers agree to waive their rights to buy all or part of non-360 business from Beijing Pzoom subject to Beijing Pzoom
disposing of all of its 360 business within one year after the completion of the transaction.
14. Each party agrees that shares of Cheetah Mobile with an aggregate value of US$4 million that shall be issued to Hongkong Zoom
business team under the Purchase Agreement and the Restricted Share Award Agreement executed between Cheetah Mobile and
Focus AD shall be allocated as follows: with respect to the shares with an aggregate value of US$1 million, Xiaoxia Ma and
Focus AD shall submit the list of members of Hongkong Zoom sales team to whom such shares shall be allocated and the number
of shares to be allocated to each of such persons to Cheetah Mobile for review, and such shares will be granted after the review of
Cheetah; with respect to shares with an aggregate value of US$3 million, Cheetah Mobile shall allocate such shares to members
of the overseas advertisement and sales and commercialization and relevant technical team reorganized from Hongkong Zoom
business. In order to achieve the foregoing purpose, Focus AD shall transfer the shares of Cheetah Mobile with an aggregate
value of US$3 million that have been issued to Focus AD to the persons designated by Cheetah Mobile. Persons to whom such
shares will be allocated shall not limited to the list of key persons as specified in the Purchase Agreement.
15. This Supplemental Agreement shall have equal effect as the Purchase Agreement; and in case of any discrepancy between this
Supplemental Agreement and the Purchase Agreement, this Supplemental Agreement shall prevail.
16. This Supplemental Agreement shall become effective upon the date of execution by the parties.
17. This Supplemental Agreement is made in ten counterparts with the same legal effect, and each party shall hold one counterpart.
(The remainder of this page is intentionally left blank)
5
(There is no text on this page, only for signature by the Purchasers of the Supplemental Agreement to Share and Asset Purchase
Agreement)
CHEETAH MOBILE INC. (seal)
Signed by Legal or Authorized Representative:
/s/ Sheng Fu
CHEETAH TECHNOLOGY CORPORATION LIMITED (seal)
Signed by Legal or Authorized Representative:
/s/ Sheng Fu
BEIKE INTERNET (BEIJING) SECURITY TECHNOLOGY, CO., LTD. (seal)
Stamped with company chop of Beike Internet (Beijing) Security Technology Co., Ltd.
Signed by Legal or Authorized Representative:
HONGKONG ZOOM INTERACTIVE NETWORK MARKETING TECHNOLOGY LIMITED (seal)
Signed by Legal or Authorized Representative:
/s/ Sheng Fu
6
BEIJING PZOOM INTERACTIVE NETWORK MARKETING TECHNOLOGY CO., LTD. (seal)
Stamped with company chop of Beijing Pzoom Interactive Network Marketing Technology Co., Ltd.
Signed by Legal or Authorized Representative:
/s/ Yu Cheng
BEIJING JISHI INTERACTIVE NETWORK MARKETING TECHNOLOGY CO., LTD. (SEAL)
Stamped with company chop of Beijing Jishi Interactive Network Marketing Technology Co., Ltd.
Signed by Legal or Authorized Representative:
/s/ Yu Cheng
SHANGHAI QISOU INTERNET TECHNOLOGY CO., LTD. (seal)
Stamped with company chop of Shanghai Qisou Internet Technology Co., Ltd.
Signed by Legal or Authorized Representative:
7
(There is no text on this page, only for signature by the Sellers of the Supplemental Agreement to Share and Asset Purchase
Agreement)
FOCUS AD NETWORK MARKETING TECHNOLOGY LIMITED (seal)
Signed by Legal or Authorized Representative:
/s/ Authorized Representative
XIAOXIA MA (signature):
/s/ Xiaoxia Ma
YU CHENG (signature):
/s/ Yu Cheng
8
Exhibit 4.44
AMENDMENT TO THE STOCK PURCHASE AGREEMENT
This amendment (the “Amendment”) dated as of December 15, 2015, is entered into by and among Hongkong Cheetah
Mobile Technology Limited, a Hong Kong company, with its registered address at Rm 1101, 11/F San Toi Bldg, No.139, Connaught
Rd Central Hong Kong (the “Purchaser”); Mr. Vianney Settini and Mr. Guillaume Alabert (the “Founders”), funds managed by
Alven Capital Partners and Newfund Management (the “Investors”) and each of the other Persons identified under the heading “Main
Sellers” on the signature page hereto (collectively with the Founders and the Investors, the “Main Sellers”); Mr. Djamel Agaoua and
Alven Capital Partners solely in their capacity as the Sellers’ Representatives; and MobPartner S.A.S., a société par actions simplifiée
organized and existing under the laws of France and with its registered offices at 89-91, avenue Ledru-Rollin, 75011 Paris, France
registered with the Commercial Registry under number 484 374 533 R.C.S. Paris (the “Company”). The Purchaser, the Founders, the
Investors, the Main Sellers, the Sellers’ Representatives and the Company shall be referred to, individually, as a “Party” and,
collectively, as the “Parties”.
RECITALS
WHEREAS a stock purchase agreement was entered into on March 15, 2015 and amended on April 1 2015, by and among
(i) the Purchaser, (ii) the Founders, (iii) the Investors, (v) each of the other Persons identified under the heading “Main Sellers” on the
signature page hereto, (vi) Mr. Djamel Agaoua and Alven Capital Partners solely in their capacity as the Sellers’ Representatives, and
(vii) the Company (the “SPA”);
st,
WHEREAS numerous discussions and correspondence regarding the Conditional Deferred Payments occurred between the
Sellers’ Representatives and the Purchaser, the Parties decided to amend certain terms of the SPA as set forth herein.
IT IS AGREED AS FOLLOWS:
ARTICLE I
DEFINITIONS
Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to them in the SPA.
ARTICLE II
FINAL PAYMENT
Section 2.1
Final Payment. For and in consideration of the provisions and mutual releases contained herein, and as final
settlement of the discussions relating to the Conditional Deferred Payments, as well as of any potential claims relating to the amount
due by the Purchaser in connection with such Conditional Deferred Payments, Purchaser shall pay or cause to be paid to, Main Sellers
an aggregate amount equal to US$ 1,500,000 (the “Final Payment”) to be allocated among Main Sellers as set forth in Exhibit II
herein.
For the avoidance of doubt, each Main Seller hereby irrevocably (i) agrees with such Final Payment, (ii) acknowledges that
such Final Payment supersedes and replaces all Conditional Deferred Payments originally provided for in the SPA, and therefore
(iii) waives any contractual or legal right such Main Seller may have had relating to the Conditional Deferred Payments originally
provided for in the SPA.
Section 2.2
Payment of the Final Payment shall be made on the date hereof by wire transfer of immediately available
funds to the bank account of each Main Seller set forth in Exhibit II.
Section 2.3
The Parties agree that the present Amendment irrevocably replaces the Conditional Deferred Payments
mechanism set forth in Section 1.5 of the SPA in its entirety.
ARTICLE III
MISCELLANEOUS
Section 3.1
Effectiveness. This Amendment shall become effective immediately upon its execution by the Parties.
Section 3.2
Continuing Effect. This Amendment shall not constitute an amendment or waiver of any provision of the
SPA not expressly referred to herein and, except as expressly modified hereby, the terms, conditions and provisions of the SPA are
and shall remain in full force and effect.
Section 3.3
Governing Law and Dispute Resolution. Section 11.6 (Governing Law) and Section 11.7 (Dispute
Resolution; Submission to Jurisdiction for Injunctive Relief) of the Sale and Purchase Agreement shall also apply mutatis mutandis to
this Amendment.
[Signatures are included on the following page.]
IN WITNESS WHEREOF, Purchaser, the Sellers’ Representatives and the Main Sellers have executed this Amendment or
caused this Amendment to be executed by their respective officers thereby duly authorized as of the date first written above.
PURCHASER
HONGKONG CHEETAH MOBILE TECHNOLOGY LIMITED
By:
/s/ Sheng Fu
Name: Sheng Fu
Title: Authorized Representative
COMPANY
MOBPARTNER S.A.S.
By:
/s/ Djamel Agaoua
Name: Djamel Agaoua
Title: Président
SELLERS’ REPRESENTATIVES
By:
/s/ Djamel Agaoua
Name: Djamel Agaoua
By:
/s/ Jeremy Uzan
Name: Alven Capital Partners, represented by Jeremy Uzan
Title: Attorney-in-fact
Signature Page to Amendment to Stock Purchase Agreement
MAIN SELLERS
By: /s/ Vianney Settini
Name: Vianney Settini
Address: 10 rue Monge — 75005 Paris, France
E-mail: vianney.settini@gmail.com
By:
/s/ Guillaume Alabert
Name: Guillaume Alabert
Address: 3 rue Valette — 75005 Paris, France
E-mail: guillaume@mobpartner.com
By: /s/ Djamel Agaoua
Name: Djamel Agaoua
Address: French residence: 58 allee des Romarins —
Port d’Alon — 83270 Saint-Cyr-sur-Mer, France
US residence: 231 Princeton Avenue, Mill Valley,
CA 94941, USA
E-mail: djamel.agaoua@mobpartner.com
By:
By:
FCPR Alven Capital III, represented by Alven
/s/ Jeremy Uzan
Name:
Capital Partners, itself represented by Jeremy Uzan
Title:
Address: 1 place Andre Malraux — 75001 Paris, France
E-mail: uzan@alvencapital.com
Attorney-in-fact
/s/ Charles-Antoine Morand
Name:
FPCI NewFund 1, represented by Newfund
Management, itself represented by Charles-Antoine
Morand
Title: Attorney-in-fact
E-mail Address: morand@newfund.fr
By: /s/ Charles-Antoine Morand
Name: Charles-Antoine Morand
Address: 3 rue des Vignes — 75016 Paris
E-mail: morand@newfund.fr
By:
/s/ OM Invest
Name: OM Invest
Address: Chemin des Fourches — 13124 Peypin, France
Earn Out Dec 15
Mr Vianney Settini
Mr Guillaume Alabert
Alven Capital
Newfund
Mr Djamel Agaoua
OM Invest
C A Morand
MOBPARTNER SAS
Total
Exhibit II — Allocation between Main Sellers
Landing currency
USD
USD
USD
USD
USD
USD
EUR
USD
Amount
429,774.12
429,774.12
306,780.86
152,465.59
66,931.67
22,004.17
910.91
91,358.56
1,500,000.00
$
$
$
$
$
$
$
$
$
List of Subsidiaries and VIEs and a VIE’s subsidiary
Exhibit 8.1
Subsidiaries
Conew.com Corporation
Cheetah Information Technology Company Limited
Cheetah Technology Corporation Limited
Hongkong Cheetah Mobile Technology Limited
Hongkong Zoom Interactive Network Marketing Technology
Limited
Hong Kong Youloft Technology Limited
MobPartner Ltd.
MobPartner S.A.S.
MobPartner UK Limited
Cheetah Mobile America, Inc.
MobPartner Inc.
Beijing Kingsoft Internet Security Software Co., Ltd.
Conew Network Technology (Beijing) Co., Ltd.
MobPartner Information Technology (Beijing) Co., Ltd.
Zhuhai Juntian Electronic Technology Co., Ltd.
Beijing Antutu Technology Co., Ltd.
Guangzhou Kingsoft Network Technology Co., Ltd.
Chongqing Calendar Technology Co., Ltd.
Cheetah Mobile Malaysia Sdn. Bhd.
Cheetah Mobile Singapore Pte. Ltd.
Taiwan Cheetah Mobile Corp
Cheetah Mobile German GmbH
Beijing Kingsoft Cheetah Technology Co., Ltd.
Moxiu Technology (Beijing) Co., Ltd.
Weiluoke Technology (Beijing) Co., Ltd.
Variable Interest Entities
Beijing Cheetah Network Technology Co., Ltd.
Beijing Conew Technology Development Co., Ltd.
Beijing Cheetah Mobile Technology Co., Ltd.
Subsidiary of a Variable Interest Entity
Suzhou Jiangduoduo Technology Co., Ltd.
Place of Incorporation
British Virgin Islands
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
France
United Kingdom
United States
United States
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
Malaysia
Singapore
Taiwan
Germany
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
People’s Republic of China
Exhibit 12.1
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Sheng Fu, certify that:
1.
I have reviewed this annual report on Form 20-F of Cheetah Mobile Inc.;
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 the statements 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 the financial 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 in Exchange 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 the company and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure 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)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness 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 the annual 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, to the company’s auditors and the audit committee of the 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 reasonably likely 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 control over financial reporting.
Date: April 22, 2016
By:
/s/ Sheng Fu
Name: Sheng Fu
Title: Chief Executive Officer
Exhibit 12.2
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ka Wai Andy Yeung, certify that:
1.
I have reviewed this annual report on Form 20-F of Cheetah Mobile Inc.;
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 the statements 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 the financial 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 in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f) and 15d-15(f)) for the company and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure 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)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness 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 the annual 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, to the company’s auditors and the audit committee of the 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 reasonably likely 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 control over financial reporting.
Date: April 22, 2016
By:
/s/ Ka Wai Andy Yeung
Name: Ka Wai Andy Yeung
Title: Chief Financial Officer
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the Annual Report of Cheetah Mobile Inc. (the “Company”) on Form 20-F for the year ended
December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sheng Fu, Chief
Executive Officer of the Company, certify, pursuant to 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 the Company.
Date: April 22, 2016
By:
/s/ Sheng Fu
Name: Sheng Fu
Title: Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
In connection with the Annual Report of Cheetah Mobile Inc. (the “Company”) on Form 20-F for the year ended
December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ka Wai Andy Yeung,
Chief Financial Officer of the Company, certify, pursuant to 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 the Company.
Date: April 22, 2016
By:
/s/ Ka Wai Andy Yeung
Name: Ka Wai Andy Yeung
Title: Chief Financial Officer
Exhibit 15.1
April 22, 2016
Cheetah Mobile Inc.
12/F, Fosun International Center Tower
No. 237 Chaoyang North Road
Chaoyang District, Beijing 100022
People’s Republic of China
Dear Sirs,
We hereby consent to the reference of our name under the headings “Item 3. Key Information—D. Risk Factors,” “Item 4. Information
on the Company—B. Business Overview—Regulations” and “Item 4. Information on the Company—C. Organizational Structure” in
Cheetah Mobile Inc.’s Annual Report on Form 20-F for the year ended December 31, 2015 (the “Annual Report”), which will be
filed with the Securities and Exchange Commission (the “SEC”) in the month of April 2016, and further consent to the incorporation
by reference into the Registration Statement on Form S-8 (No. 333-199577) filed with the SEC on October 24, 2015) of the summary
of our opinions and advice under the headings “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—
B. Business Overview—Regulation” and “Item 4. Information on the Company—C. Organizational Structure” in the Annual Report.
We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations
promulgated thereunder.
Very truly yours,
/s/ Global Law Office
Global Law Office
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-199577) pertaining to the 2013 Equity
Incentive Plan and 2014 Restricted Shares Plan of Cheetah Mobile Inc. of our reports dated April 22, 2016, with respect to the
consolidated financial statements of Cheetah Mobile Inc., and the effectiveness of internal control over financial reporting of Cheetah
Mobile Inc. included in its Annual Report (Form 20-F) for the year ended December 31, 2015, filed with the Securities and Exchange
Commission.
Exhibit 15.2
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
April 22, 2016
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