Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
x 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
o
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
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 . . . . . . . . . . . . . . . . . . .
For the transition period from to
Commission file number 001-36396
Leju Holdings Limited
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
15/F Floor, Shoudong International Plaza, No. 5 Building, Guangqu Home
Dongcheng District, Beijing 100022
People’s Republic of China
(Address of principal executive offices)
Min Chen, Chief Financial Officer
Leju Holdings Limited
15/F Floor, Shoudong International Plaza, No. 5 Building, Guangqu Home
Dongcheng District, Beijing 100022
People’s Republic of China
Telephone: +86 10 5895 1180
Facsimile: +86 10 8722 4920
(Name, Telephone, E-mail 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 one ordinary share, par
value $0.001 per share
Name of exchange on which registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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.
139,229,418 ordinary shares, par value $0.001 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. o Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP x
International Financial Reporting Standards as issued
by the International Accounting Standards Board o
Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. o Yes o No
Table of Contents
TABLE OF CONTENTS
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.
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
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
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
i
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
SIGNATURES
Table of Contents
INTRODUCTION
1
1
2
2
2
2
39
58
58
77
86
93
94
95
105
105
107
107
107
108
108
108
108
109
109
109
109
109
109
110
110
110
110
114
Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:
· “Leju,” “we,” “us,” “our company” and “our” are to Leju Holdings Limited, its subsidiaries and its consolidated variable interest entities;
· “ADSs” are to our American depositary shares, each of which represents one ordinary share;
· “Beijing Leju” are to Beijing Yisheng Leju Information Services Co., Ltd.;
· “Beijing Jiajujiu” are to Beijing Jiajujiu E-Commerce Co., Ltd.;
· “Beijing Maiteng” are to Beijing Maiteng Fengshun Science and Technology Co., Ltd.;
· “China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and
Taiwan;
· “China Online Housing” are to China Online Housing Technology Corporation;
· “consolidated variable interest entity” are to each of our consolidated variable interest entities, namely each of Beijing Leju, Shanghai Yi Xin
and Beijing Jiajujiu;
· “CITIC” are to CITIC Bank Corporation Limited;
· “E-House” are to E-House (China) Holdings Limited, a Cayman Islands exempted company with limited liability, and its predecessor entities;
· “O2O services” are to online to offline services, including in connection with the marketing of new residential properties by developers;
· “ordinary shares” to our ordinary shares, par value $0.001 per share;
· “RMB” and “Renminbi” are to the legal currency of China;
· “Shanghai SINA Leju” are to Shanghai SINA Leju Information Technology Co., Ltd.;
· “Shanghai Yi Xin” are to Shanghai Yi Xin E-Commerce Co., Ltd.;
· “Shanghai Yi Yue” are to Shanghai Yi Yue Information Technology Co., Ltd.;
· “Tencent” are to Tencent Holdings Limited or certain of its affiliates which have entered into agreements with us as described under “Item 7.
Major Shareholders and Related Party Transactions—Related Party Transactions—Transactions and Agreements with Tencent,” as applicable;
and
· “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements of
historical facts are forward-looking statements. 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.
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You can identify these forward-looking statements by words or phrases such as
“may,”“will,”“expect,”“anticipate,”“aim,”“estimate,”“intend,”“plan,”“believe,”“likely to” 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:
· our anticipated growth strategies;
· our future business development, results of operations and financial condition;
· expected changes in our revenues and certain cost or expense items;
· our ability to attract clients and further enhance our brand recognition; and
· trends and competition in the real estate services industry.
You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual future
results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in
an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and
uncertainties, 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 materially from those contained in any forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise.
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
Selected Consolidated Financial Data
The following selected consolidated statements of operations data for the years ended December 31, 2013, 2014 and 2015 and selected consolidated
balance sheet data as of December 31, 2014 and 2015 have been derived from our audited consolidated financial statements included elsewhere in this annual
report. The selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes and “Item
5. Operating and Financial Review and Prospects” in this annual report. Our consolidated financial statements are prepared and presented in accordance with
U.S. GAAP.
Our selected consolidated statement of operations data for the fiscal years ended December 31, 2011 and 2012 and our consolidated balance sheet
data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements not included in this annual report.
Our selected consolidated financial data also includes certain non-GAAP measures, which are not required by, or presented in accordance with U.S.
GAAP, but are included because we believe they are indicative of our operating performance and are used by investors and analysts to evaluate companies in
our industry.
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Our historical results do not necessarily indicate results expected for any future periods.
Consolidated Statement of Operations Data
Revenues
E-commerce
Online advertising
Listing
Total revenues
Cost of revenues
Selling, general and administrative expenses
Goodwill impairment charge
Other operating income
Income (loss) from operations
Income (loss) before taxes and equity in affiliates
Net income (loss)
Net income (loss) attributable to Leju shareholders
Earnings (loss) per share:
Basic
Diluted
Weighted average numbers of shares used in
computation:
Basic
Diluted
Consolidated Balance Sheet Data
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Total current assets
Intangible assets, net
Total assets
Amounts due to related parties
Total current liabilities
Total liabilities
Total Leju equity
Non-GAAP Financial Measures
2011
Year Ended December 31,
2012
2014
2013
(in thousands of $, except share and per share data)
2015
—
132,076
5,015
137,091
(37,583)
(121,610)
(417,822)
14
(439,911)
(440,261)
(438,252)
(438,831)
(3.66)
(3.66)
26,996
138,767
5,533
171,296
(54,118)
(163,535)
—
153
(46,203)
(47,926)
(43,849)
(44,759)
(0.37)
(0.37)
170,205
145,445
19,772
335,422
(63,991)
(226,143)
—
600
45,888
45,785
42,650
42,525
0.35
0.35
326,680
155,050
14,293
496,023
(51,130)
(366,342)
—
2,526
81,077
82,429
66,659
66,521
0.51
0.50
420,552
134,229
21,023
575,804
(60,314)
(475,445)
—
3,568
43,613
45,341
34,806
35,330
0.26
0.26
120,000,000
120,000,000
120,000,000
120,000,000
120,000,000
120,000,000
129,320,666
132,502,100
134,528,971
136,223,974
2012
As of December 31,
2013
2014
(in thousands of $)
2015
71,090
86,652
178,968
163,204
393,867
83,143
159,661
200,588
190,173
98,730
87,316
222,788
128,530
402,938
4,501
123,584
151,148
248,706
317,811
119,742
480,766
105,419
638,266
5,289
197,301
223,342
414,845
260,296
113,991
485,084
90,737
626,838
10,214
179,607
202,605
424,712
The following table sets forth, for the periods specified, our adjusted income (loss) from operations, our adjusted net income (loss), and our adjusted
net income (loss) attributable to Leju shareholders. We present these non-GAAP financial measures because they are used by our management to evaluate our
operating performance, formulate business plans, and make strategic decisions on capital allocation. These non-GAAP financial measures enable our
management to assess our operating results without considering the impact of non-cash charges, including share-based compensation expense, amortization of
intangible assets resulting from business combinations and goodwill impairment charge. We also believe they are indicative of our operating performance and
are used by investors and analysts to evaluate companies in our industry. These non-GAAP measures of our performance are not required by, or presented in
accordance with, U.S. GAAP. Such measures are not a measurement of financial performance or liquidity under U.S. GAAP and should not be considered as
an alternative to income from operations, net income or any other performance measures derived in accordance with U.S. GAAP or an alternative to cash
flows from operating activities as a measure of liquidity. Our presentation of such measures may not be comparable to similarly titled measures presented by
other companies. You should not compare such measures as presented by us with the presentation of such measures by other companies because not all
companies use the same definition.
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We define adjusted income (loss) from operations as income (loss) from operations before share-based compensation expense, amortization of
intangible assets resulting from business combinations and goodwill impairment charge.
We define adjusted net income (loss) as net income (loss) before share-based compensation expense (net of tax), amortization of intangible assets
resulting from business combinations (net of tax) and goodwill impairment charge (net of tax)
We define adjusted net income (loss) attributable to Leju shareholders as net income (loss) before share-based compensation expense (net of tax and
non-controlling interests), amortization of intangible assets resulting from business combinations (net of tax and non-controlling interests) and goodwill
impairment charge (net of tax and non-controlling interests).
The use of the above non-GAAP financial measures has material limitations as an analytical tool, as they do not include all items that impact our
income (loss) from operations, net income (loss), and net income (loss) attributable to Leju shareholders for the period. We compensate for these limitations
by providing the relevant disclosure of our share-based compensation expense, amortization of intangible assets results from business acquisitions, and
goodwill impairment charge both in our reconciliations to the financial measures under U.S. GAAP, and in our consolidated financial statements, all of which
should be considered when evaluating our performance.
The following table reconciles our adjusted income (loss) from operations, adjusted net income (loss) and adjusted net income (loss) attributable to
Leju shareholders in the periods presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP:
2011
2012
Year Ended December 31,
2013
(in thousands of $)
45,888
6,311
Income (loss) from operations
Share-based compensation expense
Amortization of intangible assets resulting from business
(1)
acquisitions
Goodwill impairment charge
Adjusted income (loss) from operations
Net income (loss)
Share-based compensation expense (net of tax)
Amortization of intangible assets resulting from business
(1)
acquisitions (net of tax)
Goodwill impairment charge (net of tax)
Adjusted net income (loss)
Net income (loss) attributable to Leju shareholders
Share-based compensation expense (net of tax and non-
controlling interests)
(1)
Amortization of intangible assets resulting from business
acquisitions (net of tax and non-controlling interests)
Goodwill impairment charge (net of tax and non-
controlling interests)
Adjusted net income (loss) attributable to Leju
shareholders
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(439,911)
13,542
21,321
417,822
12,774
(438,252)
13,542
18,535
417,822
11,647
(46,203)
15,134
22,079
—
(8,990)
(43,849)
15,134
19,082
—
(9,633)
(438,831)
(44,759)
13,542
18,342
417,822
10,875
4
15,134
18,719
—
(10,906)
2014
2015
81,077
11,311
14,569
—
106,957
66,659
11,311
12,957
—
90,927
66,521
11,311
12,842
—
43,613
12,585
12,653
—
68,851
34,806
12,585
9,490
—
56,881
35,330
12,576
9,490
—
22,017
—
74,216
42,650
6,311
14,482
—
63,443
42,525
6,311
14,197
—
63,033
90,674
57,396
Note:
(1) Share-based compensation expense includes share-based compensation expenses recorded by us as well as share-based compensation expenses allocated
from E-House to us.
Exchange Rate Information
Our reporting and financial statements are expressed in the U.S. dollar, which is our reporting and functional currency. However, our business is
conducted in China and substantially all of our revenues are denominated in Renminbi. This annual report contains translations of RMB 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, for the amounts not otherwise
recorded in our consolidated financial statements included elsewhere in this annual report, is based on the certified exchange rate published by the Board of
Governors of the Federal Reserve Bank. 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 $1.00, the certified exchange rate in effect on 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, at the rates stated below, 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
currencies and through restrictions on foreign trade. On April 15, 2016, the certified exchange rate was RMB6.4730 to $1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are
provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our
periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Statistical Release.
Period
2011
2012
2013
2014
2015
October
November
December
2016
January
February
March
April (through April 15, 2016)
Period End
Noon Buying Rate
(1)
Average
Low
High
6.2939
6.2301
6.0537
6.2046
6.4778
6.3180
6.3883
6.4778
6.5752
6.5525
6.4480
6.4730
(RMB per US$1.00)
6.4475
6.2290
6.1412
6.1704
6.2827
6.3505
6.3640
6.4491
6.5726
6.5505
6.5027
6.4713
6.6364
6.3879
6.2438
6.2591
6.4896
6.3591
6.3945
6.4896
6.5219
6.5154
6.5500
6.4810
6.2939
6.2221
6.0537
6.0402
6.1870
6.3180
6.3180
6.3883
6.5932
6.5795
6.4480
6.4580
Source: Federal Reserve Statistical Release
Note:
(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
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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 Related to Our Business
Our business is susceptible to fluctuations in China’s real estate industry, which may materially and adversely affect our results of operations.
We conduct our real estate services business primarily in China. Our business depends substantially on conditions in China’s real estate industry and
more particularly on the volume of new property transactions in China. Demand for private residential real estate in China has grown rapidly in recent years
but such growth is often coupled with volatility and fluctuations in real estate transaction volume and prices. Fluctuations of supply and demand in China’s
real estate industry are caused by economic, social, political and other factors. Over the years, governments at both national and local levels have announced
and implemented various policies and measures aimed to regulate the real estate market, in some cases to stimulate further development and more purchase of
residential real estate units and in other cases to restrict these activities from growing too rapidly. These measures can affect real estate buyers’ eligibility to
purchase additional units, their downpayment requirements and financing, as well as availability of land to developers and their ability to obtain financing.
These measures have affected and continue to affect the conditions of China’s real estate market and cause fluctuations in real estate pricing and transaction
volume. See “—Our business may be materially and adversely affected by government measures aimed at China’s real estate industry.” Furthermore, there
may be situations in which China’s real estate industry is so active that real estate developers see a reduced need for marketing initiatives and reduce their
spending on such initiatives, which could potentially adversely affect our result of operations. To the extent fluctuations in China’s real estate industry
adversely affect spending on real estate marketing, our financial condition and results of operations may be materially and adversely affected.
Our business may be materially and adversely affected by government measures aimed at China’s real estate industry.
The real estate industry in China is subject to government regulations, including measures that are intended to control real estate prices. Since
April 2010, PRC government agencies have issued a number of restrictive measures on the real estate market, which include:
· minimum down payments for the first self-use housing unit purchased by a family must be no less than 20% of the purchase price;
· minimum down payments for the second housing unit purchased by a family must be no less than 40% of the purchase price, and the loan
interest rate must be no less than 110% of benchmark lending interest rate;
· certain municipalities, including Beijing, Shanghai and Guangzhou, where the local housing prices are deemed to be too high or to have risen too
fast, are required to temporarily suspend the sale of housing units to families with registered local permanent residences that already own two or
more housing units, families without registered local permanent residences that already own one or more housing units, and families without
registered local permanent residences that cannot provide evidence of their local payment of taxes or social insurance premiums for a required
period;
· business tax is imposed and calculated on the full sales revenues for the sale of all housing units held for less than two years, and on the
difference between the sales revenues and the amount paid for the housing unit for the sale of non-ordinary housing units which were purchased
two or more years ago;
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· real estate property tax pilot projects were launched in Shanghai and Chongqing. Local regulations require a real property tax to be imposed on
certain local housing units purchased on or after January 28, 2011, at a current tax rate of 0.6% in Shanghai and at a tax rate ranging from 0.5%
to 1.2% in Chongqing; and
· governments of most major cities are required to set up and make public their target for controlling the price of local, newly built, residential
housing units for the current year within the first season. Accordingly, many cities, including Shanghai, Beijing, Chongqing and Shenzhen, have
started such exercise to announce their respective price control targets for each year since 2011.
In late February and March 2013, the PRC government issued the “New Five Policies” for administration of the housing market and detailed
implementation rules, which revealed the PRC government’s strong determination to curb the increase of housing prices by requiring more stringent
implementation of housing price control measures. For example, in cities where housing unit sales have already been subject to restrictions, if the local
housing supply is not sufficient so that the housing prices are rising too fast, local governments are required to take more stringent measures to restrict
housing units from being sold to those families who own one or more housing units. Following the request of the central government, Beijing, Shanghai and
other major cities in China have announced detailed regulations for the New Five Policies in late March 2013, to further cool down local real estate markets.
Such measures and policies by the government have caused a reduction in transactions in the real estate market. While these measures and policies remain in
effect, they may continue to depress the real estate market, dissuade would-be purchasers from making purchases, reduce transaction volume, cause a decline
in average selling prices, and prevent developers from raising the capital they need and increase developers’ costs to start new projects.
To stimulate the real property market, the Chinese government has released policies to loosen some of the restrictive measures in 2015 and 2016. For
example, the Chinese government lowered the percentage of down payment for purchase of houses during 2015 and 2016, and relaxed real property related
tax policies in early 2016. Certain cities have also loosened their local housing price control measures in 2015 and 2016. However, we cannot assure you that
the PRC government will not retighten its policies or adopt new measures in the future that may result in lower growth rates in the real estate industry.
Frequent changes in government policies may also create uncertainty that could discourage investment in real estate. Our business may be materially and
adversely affected as a result of decreased transaction volumes or real estate prices that may result from government policies.
We may fail to compete effectively, which could significantly reduce our market share and materially and adversely affect our business, financial
condition and results of operations.
We face competition in each of our primary business activities. Our largest competitor at the national level is fang.com, formerly soufun.com, with
which we compete on all of our business lines. We also compete with providers for online property listings, including 58.com, which acquired anjuke.com in
2015. In addition, we have faced and may continue to face competition from regionally focused websites providing regional real estate listings together with
localized services, such as house365.com in the Nanjing market. Our competitors may have more established brand names, larger visitor numbers and more
extensive distribution channels than we do, either overall, or in specific regions in which we operate.
The business of providing online real estate services in China has become increasingly competitive. The barriers to entry for establishing internet-
based businesses are low, thereby allowing new entrants to emerge rapidly. The new competitive landscape has placed additional demands on us to increase
the amount of resources we provide to customers and increase the quality of our services in order to retain customers. As the online real estate services
industry in China is relatively new and constantly evolving, our current or future competitors may be able to better position themselves to attract funding and
to compete as the industry matures.
We also face competition from companies in other media that offer e-commerce, advertising, listing and similar services. Any of these competitors
may offer products and services that provide significant advantages over those offered by us in terms of performance, price, scope, creativity or other
advantages. These products and services may achieve greater market acceptance than our service offerings, and thus weaken our brand. Increased competition
in the online real estate services industry in China could make it difficult for us to retain existing customers and attract new customers, and could lead to a
reduction in our revenues or an increase in our costs and expenses to conduct business.
Any of our current or future competitors may also receive investments from or enter into other commercial or strategic relationships with larger,
well-established and well-financed companies and obtain significantly greater financial, marketing and content licensing and development resources than us.
Furthermore, some of our competitors receive support from local governments, which may place us at a disadvantage when competing with them in their
local markets. We cannot assure you that we will be able to compete successfully against our current or future competitors. Any failure to compete effectively
in the real estate internet services market in China would have a material adverse effect on our business, financial condition and results of operations.
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Failure to continue to develop and expand our content, service offerings and features, and to develop or incorporate the technologies that support
them, could jeopardize our competitive position.
As a company providing online services, we participate in an industry characterized by rapidly changing technology and new products and services.
We rely in part on attracting customers to our platform by providing attractive and helpful content and tools on our websites and mobile devices to assist
customers seeking to purchase residential properties and home furnishings. In addition, our ability to continue to generate and maintain online advertising
service revenues depends on our ability to innovate. To remain competitive, we must continue to develop and expand our content and service offerings. We
must also continue to enhance and improve the user interface, functionality and features of our websites and our mobile applications. These efforts may
require us to develop internally, or to license, increasingly complex technologies. In addition, many of our competitors are continually introducing new
internet-related products, services and technologies, which will require us to update or modify our own technology to keep pace. New internet-related
products, services and technologies developed by competitors could render our products and services obsolete if we are unable to update or modify our own
technology. Developing and integrating new products, services and technologies into our existing businesses could be expensive and time-consuming.
Furthermore, such new features, functions and services may not achieve market acceptance or serve to enhance our brand loyalty. We may not succeed in
incorporating new internet technologies, or, in order to do so, we may incur substantial expenses. If we fail to develop and introduce or acquire new features,
functions, services or technologies effectively and on a timely basis, we may not continue to attract new users and may be unable to retain our existing users.
If we are not successful in incorporating new internet technologies, our business, results of operations and growth prospects could be materially and adversely
affected.
Failure to attract and retain qualified personnel at a reasonable cost could jeopardize our competitive position.
As our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in
order to attract and retain quality sales, technical and other operational personnel in the future. We compete with other companies engaged in online real estate
services and internet-related businesses and with print media for qualified personnel. We have, from time to time in the past, experienced, and we expect in
the future to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. There may be a limited supply
of qualified individuals in some of the cities in China where we have operations and other cities into which we intend to expand. We must hire and train
qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of services across our
operations in various geographic locations. We must also provide continued training to our managerial and other employees so that they are equipped with up-
to-date knowledge of various aspects of our operations and can meet our demand for high-quality services. If we fail to do so, the quality of our services may
decline in one or more of the markets where we operate, which in turn, may cause a negative perception of our brand and adversely affect our business. We
cannot assure you we will be able to attract or retain the quality personnel that we need to achieve our business objectives.
In addition, we place substantial reliance on the real estate industry experience and knowledge of our senior management team as well as their
relationships with other industry participants. For example, Mr. Xin Zhou, our chairman, and Mr. Yinyu He, our chief executive officer, are both particularly
important to our future success. We do not carry key person insurance on any member of our senior management team. The loss of one or more members of
our senior management team could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements
for our current senior management could be difficult as competition for such talent is intense.
If we fail to successfully attract new personnel, retain and motivate our current personnel, or retain our senior management, we may lose
competitiveness and our business and results of operations could be materially and adversely affected.
Our business faces risks associated with the application of the e-commerce business model to the real estate industry and our new products and
services may not perform as expected.
Our e-commerce business was established in 2011 and experienced rapid growth to become an integral part of our online real estate service
operations. Although we generally have been able to effectively manage the growth of this product and maintain contractual arrangements with third-party
property developers who allow us to sell discount coupons to prospective real estate purchasers on acceptable terms, there can be no assurance that we will
continue to be able to do so in the future. Customer complaints or negative publicity about our services could diminish consumer confidence in and use of our
services. We may also explore new real estate e-commerce products or other product offerings and new products may involve various risks and may not
perform as expected. For example, we offer financial products to facilitate transactions as needed by our customers, such as the Leju Loan in cooperation with
CITIC or the “Easy Home Plan”, which allows qualified home purchasers to obtain Leju e-Loan through the “Fang Jin Suo” platform of E-House. There can
be no assuance that such products will perform as expected or be well received by customers. We may also face challenges for any other new initiatives we
pursue in the future. Any of the foregoing could materially and adversely affect our business, results of operations and revenue growth prospects.
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We derive a significant amount of revenue from our operation of SINA websites and there can be no assurance that our relationship with SINA will
continue on satisfactory terms.
Through an agreement in 2009 entered into between SINA and E-House, our parent company, we own SINA’s real estate operations. SINA is a
substantial shareholder in E-House, our parent company. To a large extent, the operations and revenues of our business rely on SINA’s cooperation with us.
The domain names of some major websites of our business are owned by SINA and licensed to us through agreements which we initially entered into with
SINA in 2009 with terms through 2019 and which we amended and restated in 2014 to extend through 2024. A significant number of users of these websites
are linked through other SINA websites. Pursuant to an advertising inventory agency agreement with SINA, we are the exclusive agent of SINA for selling
advertising to the real estate advertisers through 2024. To a certain extent, we rely on SINA’s continued cooperation on an ongoing basis to enjoy our rights
pursuant to our agreements with SINA. SINA could at any time reduce its support for our business. In addition, SINA’s dual role as our substantial indirect
shareholder and contractual counterparty could result in conflicts of interest. If for any reason SINA does not fulfill its obligations in accordance with the
advertising inventory agency agreement or any of the other agreements or otherwise reduces its support for our online real estate operations, our business may
be materially and adversely affected.
Changes in our relationship with Baidu or the termination thereof could adversely affect our business and results of operations.
We had been the exclusive real property advertising partner of Baidu, China’s leading search engine platform, from 2010 to 2015. In August 2010,
we launched Baidu’s real estate website, house.baidu.com, and home furnishing website, jiaju.baidu.com, to offer search-based advertising for China’s real
estate industry. Pursuant to our original strategic cooperation agreement with Baidu, we had the exclusive right, through March 2015, to build and operate all
of Baidu’s websites related to real estate and home furnishing, and to retain all revenues generated from these websites in exchange for a fixed fee that we pay
to Baidu. In August 2011, we expanded our strategic partnership with Baidu, pursuant to which we became Baidu’s premier strategic online real estate partner
and obtained the exclusive right, through March 2015, to sell Baidu’s real estate Brand-Link product, a form of keyword advertising. In addition, we and
Baidu had also continued our cooperation in several other Baidu products to further expand the online search-based advertising market for China’s real estate
industry. In March 2015, we and Baidu agreed to extend the term of our strategic cooperation for another nine months through December 2015. Upon the
expiration of the cooperation in December 2015, we did not renew the strategic partnership with Baidu, but continue to work with Baidu as our product
partner. There can be no assurance that Baidu will continue such cooperation with us as a product partner, and changes in our relationship with Baidu or the
termination thereof could adversely affect our business and results of operations, if we are unable to secure substituting customers or sources of revenues.
We derive a substantial portion of our revenues from several major urban centers in China, and we face market risk due to our concentration in these
major urban areas.
We derive a substantial portion of our revenues from major urban centers in China, including Beijing, Shanghai, Guangzhou, Chongqing and Tianjin.
In each of the years ended December 31, 2013, 2014 and 2015, more than 50% of our revenues was derived from Beijing, Shanghai, Guangzhou, Chongqing
and Tianjin, and more than 20% of our total revenues were derived from Beijing. We expect these five urban centers to continue to be important sources of
revenues. If any of these major urban centers experiences an event that negatively impacts the local real estate industry or online advertising, such as a serious
economic downturn or contraction, a natural disaster, or slower growth due to adverse governmental policies or otherwise, demand for our services could
decline significantly and our business and growth prospects could be materially and adversely impacted.
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A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.
The global macroeconomic environment is facing challenges, including the escalation of the European sovereign debt crisis since 2011, the end of
quantitative easing by the U.S. Federal Reserve and the economic slowdown in the Eurozone in 2014. The Chinese economy has slowed down since 2012 and
such slowdown may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the
central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over
unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets, and over the conflicts involving
Ukraine and Syria. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential
conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic
economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or
Chinese economy may materially and adversely affect our business, results of operations and financial condition.
Failure to maintain or enhance our brands or image or failure of SINA to maintain its brands or images could have a material and adverse effect on
our business and results of operations.
We believe the “Leju” brand is associated with a leading real estate online platform in China and it is important for the continued success of our
business. The success of the websites we operate on the platform of SINA is also dependent on the brands and images of SINA. These brands are integral to
our sales and marketing efforts. Our continued success in maintaining and enhancing our brands and image depends to a large extent on our ability to satisfy
customer needs by further developing and maintaining quality of services across our operations, as well as our ability to respond to competitive pressures.
We may not be able to successfully execute our strategy of strengthening our geographic coverage.
We plan to further enhance our presence in cities covered by our direct operations, especially provincial capitals and other strategically important
urban areas, to further capture share in such markets. In addition, we may expand our business by operating directly in select cities where we currently
outsource operations to local outsourcing partners. There have been instances in the past when, upon our decision to directly operate a website that we had
previously outsourced to a third party, the third party failed to pay all or a portion of the fixed fees owed to us under the outsourcing arrangement. There can
be no assurance that the costs of implementing our strategy, whether due to uncollected fees or otherwise, will not be substantial. Furthermore, when we
attempt to enhance our presence in markets or enter new markets, we may face intense competition from companies with greater experience or a more
established presence in the targeted geographical areas or from other companies with similar expansion targets. In addition, our business model and services
may not be successful in untested markets and markets with a different legal and business environment. If we are unable to execute our strategy of
strengthening our geographic coverage, our growth prospects could be materially and adversely affected.
If we cannot manage our growth effectively and efficiently, our results of operations or profitability could be adversely affected.
We have experienced substantial growth in recent periods. Our revenues increased from $335.4 million in 2013 to $575.8 million in 2015 at a CAGR
of 31%. We intend to continue to grow our operations primarily in our current markets. This growth has placed, and will continue to place, substantial
demands on our managerial, operational, technological and other resources. Our planned growth will also place significant demands on us to maintain the
quality of our services. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological
systems and our financial and management controls, and recruit, train and retain additional qualified real estate service professionals as well as other
administrative and sales and marketing personnel, particularly as we expand into new markets. We may not be able to effectively and efficiently manage the
growth of our operations, recruit and retain qualified personnel and integrate new expansion into our operations. As a result, our quality of service may
deteriorate and our results of operations or profitability could be adversely affected.
Our results of operations may fluctuate or otherwise be materially and adversely affected due to seasonal variations.
Our operating income and earnings have historically been substantially lower during the first quarter than other quarters. The first quarter of each
year generally contributes the smallest portion of our annual revenues due to reduced real estate transactions, advertising and marketing activities of our
customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs in January or February of each year
and due to the cold winter weather in northern China. In contrast, the third and fourth quarters of each year generally contribute a larger portion of our annual
revenues due to increased real estate transactions, advertising and marketing activities during the months of September and October. For this reason, our
results of operations may not be comparable from quarter to quarter.
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Unexpected network interruptions or security breaches, including “hacking” or computer virus attacks, may cause delays or interruptions of service,
resulting in reduced use and performance of our websites and damage our reputation and brands.
Our business depends heavily on the performance and reliability of China’s internet infrastructure, the continued accessibility of bandwidth and
servers on our service providers’ networks and the continuing performance, reliability and availability of our technology platform. Any failure to maintain the
satisfactory performance, reliability, security and availability of our computer and hardware systems may cause significant harm to our reputation and our
ability to attract and maintain customers and visitor traffic. Major risks related to our network infrastructure include:
· any breakdown or system failure resulting in a sustained shutdown of our servers, including failures which may be attributable to sustained
power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or
hardware;
· any disruption or failure in the national backbone network, which would prevent our customers and users from accessing our websites;
· any damage from fire, flood, earthquake and other natural disasters; and
· computer viruses, hackings and similar events.
Computer viruses and hackings may cause delays or other service interruptions and could result in significant damage to our hardware, software
systems and databases, disruptions to our business activities, such as to our e-mail and other communication systems, breaches of security and inadvertent
disclosure of confidential or sensitive information, inadvertent transmissions of computer viruses and interruptions of access to our websites through the use
of denial-of-service or similar attacks. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and
possible liability. We maintain most of our servers and backup servers in Beijing, Shanghai, Guangzhou and Tianjin, and all information on our websites is
backed up weekly. Any hacking, security breach or other system disruption or failure that occurs in between our weekly backup procedures could disrupt our
business or cause us to lose, and be unable to recover, data such as real estate listings, contact information and other important customer information.
Ensuring secured transmission of confidential information through public networks is essential to maintaining the confidence of our customers and
users. Our existing security measures may not be adequate to protect such confidential information. In addition, computer and network systems are
susceptible to breaches by computer hackers. Security breaches could expose us to litigation and potential liability for failing to secure confidential customer
information, and could harm our reputation and reduce our ability to attract customers and users. Future security breaches, if any, may result in a material
adverse effect on our business, financial condition and results of operations.
We also do not maintain insurance policies covering losses relating to our systems and do not have business interruption insurance. Moreover, the
low coverage limits of our property insurance policies may not be adequate to compensate us for all losses, particularly with respect to any loss of business
and reputation that may occur. To improve our performance and to prevent disruption of our services, we may have to make substantial investments to deploy
additional servers or create one or more copies of our websites to mirror our online resources, either of which could increase our expenses and reduce our net
income.
Any failure to protect our trademarks, copyrights and other intellectual property rights could have a negative impact on our business.
We believe our trademarks, copyrights and other intellectual property rights are critical to our success. Any unauthorized use of our trademarks and
other intellectual property rights could harm our business. Historically, China’s track record for protection of intellectual property rights has been poor, and
infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is
difficult and the measures we take to protect our intellectual property rights may not be adequate. We have registered the software copyrights of all our mobile
applications and software copyrights are still enforceable absent registration in China, but registration by itself may not be adequate protection from potential
misuse, infringement or other challenges from third parties claiming rights on our intellectual property.
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Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could expose us to
risks. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, we may lose these rights and our business may suffer
materially. We typically impose contractual obligations on employees and consultants and have taken other precautionary measures to maintain the
confidentiality of our proprietary information and restricted the use of the proprietary information other than for our company’s benefit. However, if our
employees and consultants do not honor their contractual obligations or misappropriate our database and other proprietary information, our business would
suffer as a result.
As internet domain name rights are not rigorously regulated or enforced in China, other companies have incorporated in their domain names
elements similar in writing or pronunciation to the “Leju” trademark or its Chinese equivalent. This may result in confusion between those companies and our
company and may lead to the dilution of our brand value, which could adversely affect our business.
We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal
expenses and, if determined adversely against us, could materially disrupt our business.
Some of our competitors may own copyrights, trademarks, trade secrets and internet content, which they may use to assert claims against us. We
provide training to our staff with respect to procedures designed to reduce the likelihood that we may use, develop or make available any content or
applications without the proper licenses or necessary third party consents. However, these procedures may not be effective in completely preventing the
unauthorized posting or use of copyrighted material or the infringement of other rights of third parties.
The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in China, is uncertain and
still evolving. For example, as we face increasing competition and as litigation becomes a more common way to resolve disputes in China, we face a higher
risk of being the subject of intellectual property infringement claims. Pursuant to relevant laws and regulations, internet service providers may be held liable
for damages if such providers have reason to know that the works uploaded or linked infringe the copyrights of others. In cases involving the unauthorized
posting of copyrighted content by users on websites in China, there have been court proceedings but no settled court practice as to when and how hosting
providers and administrators of a website can be held liable for the unauthorized posting by third parties of copyrighted material. Any such proceeding could
result in significant costs to us and divert our management’s time and attention from the operation of our business, as well as potentially adversely impact our
reputation, even if we are ultimately absolved of all liability.
In addition, we cannot assure you that we will not become subject to intellectual property laws in other jurisdictions, such as the United States, by
virtue of our ADSs being listed on the NYSE, the ability of users to access, download and use our products and services in the United States and other
jurisdictions, the ownership of our ADSs by investors in the United States and other jurisdictions, or the extraterritorial application of foreign law by foreign
courts or otherwise, among other reasons. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be
required to pay substantial penalties or other damages and fines, remove relevant content or enter into license agreements which may not be available on
commercially reasonable terms or at all. Even though the allegations or claims could be baseless, defense against any of these allegations or claims would be
both costly and time-consuming and could significantly divert the efforts and resources of our management and other personnel.
Regulation of the internet industry in China, including censorship of information distributed over the internet, may materially and adversely affect
our business.
China has enacted laws, rules and regulations governing internet access and the distribution of news, information or other content, as well as
products and services, through the internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems
to be in violation of applicable PRC laws, rules and regulations. In particular, under regulations promulgated by the State Council, the Ministry of Industry
and Information Technology (formerly the Ministry of Information Industry), or MIIT, the General Administration of Press, Publication, Radio, Film and
Television (established in March 2013 as a result of institutional reform integrating the former State Administration of Radio, Film and Television, and the
former General Administration of Press and Publication), or GAPPRFT, and the Ministry of Culture, internet content providers and internet publishers are
prohibited from posting or displaying content over the internet that, among other things: (i) opposes the fundamental principles of the PRC constitution;
(ii) compromises state security, divulges state secrets, subverts state power or damages national unity; (iii) disseminates rumors, disturbs social order or
disrupts social stability; (iv) propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes; or (v) insults or
slanders a third party or infringes upon the lawful right of a third party.
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If any internet content we offer or will offer through our consolidated variable interest entities were deemed by the PRC government to violate any of
such content restrictions, we would not be able to continue such offerings and could be subject to penalties, including confiscation of illegal revenues, fines,
suspension of business and revocation of required licenses, which could have a material adverse effect on our business, financial condition and results of
operations. We may also be subject to potential liability for any unlawful actions of our customers or affiliates or for content we distribute that is deemed
inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be forced to cease
operation of our websites in China.
If we fail to obtain or keep licenses, permits or approvals applicable to the various online real estate services provided by us, we may incur significant
financial penalties and other government sanctions.
The internet and online advertising industries in China are highly regulated by the PRC government. Various regulatory authorities of the PRC
government, such as the State Council, the MIIT, the State Administration of Industry and Commerce, or SAIC, the General Administration of Press,
Publication, Radio, Film and Television, and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of
the internet and advertising industries. Moreover, new laws, rules and regulations may be adopted, or new interpretations of existing laws, rules and
regulations may be released, to address issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and
implementation of any current and future PRC laws, rules and regulations applicable to the internet and online advertising industries.
Each of our consolidated variable interest entities, including Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu, as well as their respective
subsidiaries, is required to obtain and maintain a value-added telecommunications service operating license, or ICP license, from the MIIT or its local
counterpart in order to provide internet information services and a business license from the SAIC or its local branches which specifically includes operating
advertising business in order to engage in advertising activities in China, to the extent applicable to their respective business. Each of our consolidated
variable interest entities is up to date on all of the requirements of these licenses applicable to their respective current business. Beijing Leju, Shanghai Yi Xin
and Beijing Yisheng Leju Internet Technology Co., Ltd., a subsidiary of our consolidated variable interest entity Beijing Jiajujiu, each holds a valid ICP
license issued by the local provincial branch of the MIIT, and the business scope of the business licenses of Beijing Leju and its subsidiaries which engage in
the advertising business includes operating advertising business. These licenses are essential to the operation of our online real estate business. The ICP
licenses are subject to annual review by the relevant government authorities. The annual review of ICP licenses and business licenses is for the government
authorities to conduct an annual inspection of the status of compliance of the license-holding entity. At the time of and for the purpose of the annual review of
these licenses, the relevant government authorities did not ask for disclosure of our full corporate structure and thus we did not provide such information.
They have not so far expressed any opinion with respect to our corporate structure in connection with these annual reviews. Moreover, the regulations relating
to ICP licenses also provide that an ICP license holder must first obtain approvals from, or make filings with, competent counterparts of the MIIT in
connection with subsequent updates to its shareholding structure or certain other matters relating to such ICP license holder. We cannot assure you that we
will be able to successfully pass the annual review of our ICP licenses, or complete the updating and renewal of the filing records of our ICP licenses with
local MIIT counterparts on a timely basis.
In addition, Beijing Leju, Shanghai Yi Xin and/or Beijing Jiajujiu and their respective subsidiaries may be required to obtain additional licenses. For
example, the release, broadcasting and transmission of graphics, video and audio programs or weblinks to such programs, other websites or data on the
websites may be deemed as providing internet publication services as well as transmission of video and audio programs on the internet, which could require
internet publication licenses and licenses for online transmission of audio-visual programs. During operation of our e-commerce business, we post
information, including graphics, weblinks to videos, other websites or data on websites operated by us. Our consolidated variable interest entities and their
subsidiaries do not have internet publication licenses and licenses for online transmission of audio-visual programs, and are not applying for these licenses.
For those video/audio programs and certain other forms of content that we believe are subject to the requirements of these licenses, such programs and
content are hosted by SINA through our contractual arrangement with SINA. In the case that SINA does not possess the necessary licenses and permits, our
video/audio programs and other content hosted by SINA are subject to the risk of being suspended by government authorities. Moreover, we cannot assure
you that government would not require us to obtain these licenses separately for operation of our own websites and those websites licensed to us even if the
underlying hosting of the relevant content may be provided by a qualified third party. If we are required to apply for such licenses, we can provide no
assurance that we will procure and maintain such additional licenses.
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Under applicable PRC laws, rules and regulations, the failure to obtain and/or maintain the licenses and permits required to conduct our business
may subject our affected consolidated variable interest entities to various penalties, including confiscation of revenues, imposition of fines and/or restrictions
on their business operations, or the discontinuation of their operations. Any such disruption in the business operations of our consolidated variable interest
entities could materially and adversely affect our business, financial condition and results of operations.
We are exposed to potential liability for information on our websites and for products and services sold over the internet and we may incur significant
costs and damage to our reputation as a result of defending against such potential liability and could be subject to penalties or other severe
consequences from PRC regulatory authorities as a result of such information.
We provide third-party content on our websites such as real estate listings, contractor information listings, links to third-party websites,
advertisements and content provided by customers and users of our community-oriented services. In addition, our website, jiaju.com, is a platform for third
party home furnishing distributors to offer their products and services to consumers. We could be exposed to liability with respect to such third-party
information or the goods and services sold through our website. Among other things, we may face assertions that, by directly or indirectly providing such
third-party content or links to other websites, we should be liable for defamation, negligence, copyright or trademark infringement, or other actions by parties
providing such content or operating those websites. We may also face assertions that content on our websites, including statistics or other data we compile
internally, or information contained in websites linked to our websites contains false information, errors or omissions, and users and our customers could seek
damages for losses incurred as a result of their reliance upon or otherwise relating to incorrect information. We may also be subject to fines and other
sanctions by the government for such incorrect information. Moreover, our relevant consolidated variable interest entities, as internet advertising service
providers, are obligated under PRC laws and regulations to monitor the advertising content shown on our websites for compliance with applicable law.
Violation of applicable law may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the offending
advertisements and orders to publish advertisements correcting the misleading information. In case of serious violations, the PRC authorities may revoke the
offending entities’ advertising licenses and/or business licenses. In addition, our websites could be used as a platform for fraudulent transactions. The
measures we take to guard against liability for third-party content or information may not be adequate to exonerate us from relevant civil and other liabilities.
Any such claims, with or without merit, could be time-consuming to defend and result in litigation and significant diversion of management’s attention and
resources. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and suffer
damage to our reputation. Our general liability insurance may not cover all potential claims to which we are exposed to and may not be adequate to indemnify
us for all liability that may be imposed.
Failure to maintain effective internal controls over financial reporting could cause us to inaccurately report our financial result or fail to prevent
fraud and have a material and adverse effect on our business, results of operations and the trading price of our ADSs.
We are subject to the reporting obligations under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require public
companies to include a report of management on their internal control over financial reporting in their annual reports. This report must contain an assessment
by management of the effectiveness of a public company’s internal control over financial reporting. We sometimes hire a professional consultant to assist us
in such efforts. Our efforts to implement standardized internal control procedures and develop the internal tests necessary to verify the proper application of
the internal control procedures and their effectiveness are a key area of focus for our board of directors, our audit committee and senior management.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable
to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation
requirements of Section 404 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing.
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Our management has concluded that our internal control over financial reporting was effective as of December 31, 2015. See “Item 15. Controls and
Procedures.” However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered
public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Moreover,
effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a
result, our failure to achieve and maintain effective internal controls over financial reporting could in turn result in the loss of investor confidence in the
reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue
to incur considerable costs, management time and other resources in an effort to continue to comply with Section 404 and other requirements of the Sarbanes-
Oxley Act.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
China’s economy 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. 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 customers by increasing prices for our products or services,
our profitability and results of operations may be materially and adversely affected.
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 fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing
insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that
became effective in January 2008 and its implementing rules that became effective in September 2008 and its amendments that became effective in July 2013,
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. Besides, pursuant to the Labor Contract Law and its amendments, dispatched employees
are intended to be a supplementary form of employment and the fundamental form should be direct employment by enterprises and organizations that require
employees. Further, it is expressly stated in the Interim Provisions on Labor Dispatch that became effective in March 2014 that the number of seconded
employees an employer uses may not exceed 10% of its total labor force and the employer has a two-year transition period to comply with such requirement.
Some of our PRC subsidiaries, consolidated variable interest entities and their subsidiaries use seconded employees for their principal business activities. The
transition period ended on February 29, 2016, and those PRC subsidiaries are taking steps to decrease the number of seconded employees. If the relevant PRC
companies are deemed to have violated the limitation on the use of seconded employees under the relevant labor laws and regulations, we may be subject to
fines and incur other costs to make required changes to our current employment practices.
As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice
does 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.
The successful operation of our business depends upon the performance and reliability of the internet infrastructure and telecommunications
networks in China.
Our business depends on the performance and reliability of the internet infrastructure in China. Substantially all access to the internet is maintained
through state-controlled telecommunication operators under the administrative control and regulatory supervision of the MIIT. In addition, the national
networks in China are connected to the internet through international gateways controlled by the PRC government. These international gateways are generally
the only websites through which a domestic user can connect to the internet. We cannot assure you that a more sophisticated internet infrastructure will be
developed 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.
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We also rely on China Unicom and China Telecom to provide us with data communications capacity primarily through local telecommunications
lines and internet data centers to host our servers. We do not have access to alternative services in the event of disruptions, failures or other problems with the
fixed telecommunications networks of China Unicom or China Telecom, or if China Unicom or China Telecom otherwise fails to provide such services. Any
unscheduled service interruption could disrupt our operations, damage our reputation and result in a decrease in our revenues. Furthermore, we have no
control over the costs of the services provided by China Unicom and China Telecom. If the prices that we pay for telecommunications and internet services
rise significantly, our gross margins could be significantly reduced. In addition, if internet access fees or other charges to internet users increase, our user
traffic may decrease, which in turn may cause our revenues to decline.
Any natural or other disasters, including outbreaks of health epidemics, and other extraordinary events could severely disrupt our business
operations.
Our operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquakes, fire, floods, environmental
accidents, power loss, communication failures and similar events. If any natural disaster or other extraordinary events were to occur in the area where we
operate, our ability to operate our business could be seriously impaired. Our business could be materially and adversely affected by the outbreak of H7N9 bird
flu, H1N1 swine influenza, avian influenza, severe acute respiratory syndrome, or SARS, Ebola or another epidemic. Any such occurrence in China could
severely disrupt our business operations and adversely affect our results of operations.
Potential strategic investments, acquisitions or new business initiatives may disrupt our ability to manage our business effectively.
Strategic investments, acquisitions or new business initiatives and any subsequent integration of new companies or businesses will require significant
attention from our management, in particular to ensure that such changes do not disrupt any existing collaborations, or affect our users’ opinion and
perception of our services and customer support. In addition, in the case of acquisitions or new business initiatives our management will need to ensure that
the acquired or new business is effectively integrated into our existing operations. The diversion of our management’s attention and any difficulties
encountered in integration could have a material adverse effect on our ability to manage our business. In addition, strategic investments, acquisitions or new
business initiatives could expose us to potential risks, including:
· risks associated with the assimilation of new operations, services, technologies and personnel;
· unforeseen or hidden liabilities;
· the diversion of resources from our existing businesses and technologies;
· the inability to generate sufficient revenues to offset the costs and expenses of the transaction; and
· potential loss of, or harm to, relationships with employees, customers and users as a result of the integration of new businesses or investment.
Certain of our leased office premises contain defects in the leasehold interests and if we are forced to relocate operations affected by such defects, our
operations may be adversely affected.
As of December 31, 2015, we had leased 86 office premises in 57 cities in China, in addition to a branch office in Hong Kong and our principal
executive offices in Beijing, China. A number of these leased properties contain defects in the leasehold interests. Such defects include the lack of proper title
or right to lease with respect to 7 leased premises and the landlords’ failure to duly register the leases with the relevant PRC government authority with
respect to 78 leased premises.
Under PRC regulations, in situations where a tenant lacks evidence of the landlord’s title or right to lease, the relevant lease agreement may not be
valid or enforceable and may also be subject to challenge by third parties. In addition, under PRC laws and regulations, while the failure to register the lease
agreement does not affect its effectiveness between the tenant and the landlord, such lease agreement may be subject to challenge by and unenforceable
against a third party who leases the same property from the landlord and the lease agreement entered into by such third party has been duly registered the
lease with the competent PRC government authority. This risk may be mitigated if we continue to occupy the leased premises under our lease. Furthermore,
the landlord and the tenant may be subject to administrative fines for such failure to register the lease.
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We have taken steps to cause our landlords to procure valid evidence as to the title or right to lease, as well as to complete the lease registration
procedures. However, we cannot assure you that such defects will be cured in a timely manner or at all. Our operations may be interrupted and additional
relocation costs may be incurred if we are required to relocate operations affected by such defects.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development and PRC insurance companies offer only limited business insurance
products. As a result, we do not have any business disruption insurance or litigation insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster may cause us to incur substantial costs and result in the diversion of our resources, as well as significantly disrupt our operations,
and have a material adverse effect on our business, financial position and results of operations.
Risks Related to Our Carve-out from E-House and Our Relationships with E-House
We have limited experience operating as a stand-alone public company.
We have limited experience conducting our operations as a stand-alone public company. We are controlled by E-House, which has provided us with
accounting, administrative, marketing, internal control, customer service and legal support, and has also provided us with the services of a number of its
executives and employees. As E-House has continued to be our controlling shareholder following our initial public offering in April 2014, we expect E-House
to continue to provide us with certain support services, but to the extent E-House does not continue to provide us with these support services, we will need to
provide such services on our own. For example, with respect to our sales of discount coupons for property developments in Beijing, for regulatory reasons the
fees for such discount coupons are collected by E-House on our behalf and either remitted to us or used to offset amounts owed by us to E-House. In the past,
E-House has not charged any fee or commission for its provision of this service to us. There can be no assurance that E-House will not charge a fee or
commission for this service, or any similar service that E-House may provide to us in the future. We may encounter operational, administrative and strategic
difficulties as we adjust to operating as a stand-alone public company, which may cause us to react slower than our competitors to industry changes, may
divert our management’s attention from running our business or may otherwise harm our operations.
In addition, our management team is required to develop the expertise necessary to comply with the numerous regulatory and other requirements
applicable to public companies, including requirements relating to corporate governance, listing standards and investor relations issues. While we were a
wholly owned subsidiary of E-House, we were indirectly subject to requirements to maintain an effective internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. However, as a stand-alone public company, our management team has to evaluate our internal
control system independently with new thresholds of materiality, and to implement necessary changes to our internal control system. We cannot guarantee
that we will be able to do so in a timely and effective manner.
Our historical financial information included in this annual report may not be representative of our financial condition and results of operations as a
stand-alone public company.
Our consolidated financial statements for periods prior to our initial public offering in April 2014 have been prepared on a carve-out basis. We made
numerous estimates, assumptions and allocations in our financial information because E-House did not account for us, and we did not operate, as a separate,
stand-alone company for any period prior to the completion of our initial public offering.
Prior to the establishment of our holding company in November 2013, the operations of the online real estate business of E-House were carried out
by various companies owned or controlled by E-House. For periods both before and after November 2013, our consolidated financial statements include the
assets, liabilities, revenues, expenses and changes in shareholders’ equity and cash flows that were directly attributable to our real estate online services
whether held or incurred by E-House or by us. In cases involving assets and liabilities not specifically identifiable to any particular operation of E-House,
only those assets and liabilities transferred to us are included in our consolidated balance sheets. Our financial statements included elsewhere in this annual
report include our direct expenses as well as allocations for various selling, general and administrative expenses of E-House that are not directly related to
online services. These expenses consist primarily of share-based compensation expenses and shared marketing and management expenses including
accounting, administrative, marketing, internal control, customer service and legal support. These allocations were made using a proportional cost allocation
method and were based on revenues and headcount as well as estimates of actual time spent on the provision of services attributable to our Company.
Although our management believes that the assumptions underlying our financial statements and the above allocations are reasonable, our financial
statements may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone public company
during the periods presented. See “Item 4. Information on the Company—A. History and Development of the Company—Our Relationship with E-House”
for our arrangements with E-House and “Item 5. Operating and Financial Review and Prospects” and the notes to our consolidated financial statements
included elsewhere in this annual report for our historical cost allocation. Since our initial public offering, we no longer undertake allocation of any selling,
general and administrative expenses of E-House, because E-House, pursuant to the offshore and onshore transitional services agreements entered into in
March 2014 in connection with our initial public offering, has been charging us service fees for providing corporate support in accounting, administration,
marketing, internal control, legal and customer service. Our financial information included in this annual report may not reflect our results of operations,
financial position and cash flows as a stand-alone public company, and you should not view our historical results as indicators of our future performance.
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Although we have entered into a series of agreements with E-House relating to our ongoing business partnership and service arrangements with E-
House, we cannot assure you we will continue to receive the same level of support from E-House as a stand-alone public company. Any of the foregoing
could materially and adversely affect our business.
Our agreements with E-House may be less favorable to us than similar agreements negotiated between unaffiliated third parties. In particular, our
non-competition agreement with E-House limits the scope of business that we are allowed to conduct.
We have entered into a series of agreements with E-House prior to our initial public offering in April 2014 and the terms of such agreements may be
less favorable to us than would be the case if they were negotiated with unaffiliated third parties. In particular, under the non-competition agreement we have
entered into with E-House, we have agreed during a specified non-competition period not to compete with E-House in any business conducted by E-House as
described in its periodic filings with the SEC, other than the business we have been engaged in as described in the prospectus of our initial public offering.
Such contractual limitations restrict our ability to diversify our revenue sources. In addition, pursuant to our master transaction agreement with E-House, we
have agreed to indemnify E-House for, among other things, liabilities arising from litigation and other contingencies related to our business and assumed
these liabilities as part of our carve-out from E-House. The allocation of assets and liabilities between E-House and us may not reflect the allocation that
would have been reached by two unaffiliated parties. Moreover, so long as E-House continues to control us, we may not be able to bring a legal claim against
E-House in the event of contractual breach, notwithstanding our contractual rights under the agreements described above and other inter-company agreements
entered into from time to time.
Any negative development with respect to E-House may materially and adversely affect our business and brand.
We continue to be controlled by and an affiliate of E-House after our initial public offering in April 2014. We have benefited significantly from E-
House in marketing our services. For example, we have benefited from E-House by providing services to E-House’s clients. If E-House loses its market
position or suffers any negative publicity, it could have an adverse impact on our business, our marketing efforts, our relationships with strategic partners and
customers, our reputation and brand.
E-House will control the outcome of shareholder actions of our company.
As of March 31, 2016, E-House held 69.3% of our ordinary shares and voting power. E-House’s voting power gives it the power to control actions
that require shareholder approval under Cayman Islands law, our memorandum and articles of association and NYSE requirements, including the election and
removal of a majority of our board of directors, approval of mergers and other business combinations, changes to our memorandum and articles of
association, the number of shares available for issuance under share incentive plans, and the issuance of significant amounts of our ordinary shares in private
placements.
E-House’s voting control may cause transactions to occur that might not be beneficial to you as a holder of our ADSs, and may prevent transactions
that would be beneficial to you. For example, E-House’s voting control may prevent a transaction involving a change of control of us, including transactions
in which you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price. In addition, E-House is not
prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your ADSs. If
E-House is acquired or otherwise undergoes a change of control, any acquirer or successor will be entitled to exercise the voting control and contractual rights
of E-House, and may do so in a manner that could vary significantly from that of E-House.
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The proposed going private transaction of E-House may materially affect our corporate structure, business and operations.
On June 9, 2015, E-House’s board of directors received a preliminary non-binding proposal letter from Mr. Xin Zhou, co-chairman of the board of
directors and chief executive officer of E-House, and Mr. Neil Nanpeng Shen, a member of E-House’s board of directors, to acquire all of E-House’s
outstanding ordinary shares not already owned by Mr. Zhou, Mr. Shen or their respective affiliates. On June 19, 2015, E-House was informed that SINA had
joined the buyer group by entering into a consortium agreement with Mr. Zhou and Mr. Shen, pursuant to which they had agreed to, among other things, form
a consortium to work exclusively with one another to undertake the going-private transaction to acquire all of E-House’s outstanding shares other than the
shares owned by the consortium members or their affiliates. E-House was also informed that SINA had agreed to exchange all the E-House shares held by
SINA at the closing of the going-private transaction for a portion of the ordinary shares of Leju held by E-House at the closing, based on an exchange ratio
determined in accordance with a mutually agreed formula. On April 15, 2016, E-House entered into a merger agreement with E-House Holdings Ltd., or the
Parent, and E-House Merger Sub Ltd., or the Merger Sub, a wholly owned subsidiary of the Parent. Subject to satisfaction of the terms and conditions under
the merger agreement, at the effective time of the merger the Merger Sub will merge with and into E-House, with E-House continuing as the surviving
corporation and a wholly-owned subsidiary of the Parent. If the merger and the share exchange is consummated as contemplated, SINA will become a
principal shareholder of our company, and may exercise its voting power and other rights as principal shareholder in a manner that vary significantly from
that of E-House. In addition, we cannot rule out the possibility that the buyer consortium will create security interest over E-House’s assets, including E-
House’s shares in our company, at the closing of the going-private transaction, in order to obtain financing from their financing sources, which may result in a
reduction of E-House’s shareholding in our company in the event of default. If E-House’s shareholding in our company decreases, E-House may not continue
to provide the same level of support as it currently does, and our business and operations may be materially and adversely affected.
We are a “controlled company” within the meaning of the Corporate Governance Rules of the NYSE and, as a result, qualify for, and intend to rely
on, exemptions from certain corporate governance requirements.
Immediately after the closing of our initial public offering and the concurrent private placement to Tencent, E-House held 76.3% of our then
outstanding ordinary shares. As of March 31, 2016, E-House held 69.3% of our outstanding ordinary shares. We have been a “controlled company” within the
meaning of applicable corporate governance standards since our initial public offering. Under the Corporate Governance Rules of the NYSE, a company of
which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with
certain corporate governance requirements, including:
· the requirement that we have a majority of independent directors on our board of directors;
· the requirement that we have a nominating committee that is composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities;
· the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities; and
· the requirement for an annual performance evaluation of the nominating and compensation committees.
Following our initial public offering, we have been utilizing, and intend to continue to utilize the foregoing exemptions from the applicable corporate
governance requirements. As a result, we do not have a majority of independent directors nor a separate nominating committee. In addition, our compensation
committee does not consist entirely of independent directors and we are not required to have an annual performance evaluation of the compensation
committee. See “Item 6. Directors, Senior Management and Employees—C. Board Practices.” Accordingly, you will not have the same protections afforded
to shareholders of companies that are subject to all of the applicable corporate governance requirements.
We may have conflicts of interest with E-House and, because of E-House’s controlling ownership interest in our company, may not be able to resolve
such conflicts on favorable terms for us.
Conflicts of interest may arise between E-House and us in a number of areas relating to our past and ongoing relationships. Potential conflicts of
interest include the following:
· Indemnification arrangements with E-House. We have agreed to indemnify E-House with respect to lawsuits and other matters relating to our
real estate online services business, including operations of that business when it was a business unit of E-House. These indemnification
arrangements could result in our having interests that are adverse to those of E-House, for example, different interests with respect to settlement
arrangements in a litigation matter. In addition, under these arrangements, we have agreed to reimburse E-House for liabilities incurred
(including legal defense costs) in connection with any litigation, while E-House will be the party prosecuting or defending the litigation.
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· Non-competition arrangements with E-House. We and E-House have each agreed not to compete in each other’s core business. E-House has
agreed not to compete with us in the business of providing real estate e-commerce, online advertising and listing services anywhere in the world.
We have agreed not to compete with E-House in any other business conducted by E-House as described in its periodic filings with the SEC,
other than the business we are engaged in as described in the prospectus of our initial public offering.
· Employee recruiting and retention. Because both we and E-House are engaged in real estate services in China, we may compete with E-house in
the hiring of new employees, in particular with respect to real estate information and research. We have a non-solicitation arrangement with E-
House that would restrict either E-House or us from hiring any of the other’s employees.
· Our board members or executive officers may have conflicts of interest. Mr. Xin Zhou, our chairman, is currently also serving as E-House’s co-
chairman and chief executive officer. Some of our board members and executive officers are also board members and executive officers of E-
House and/or also own shares or options in E-House. E-House may continue to grant incentive share compensation to our board members and
executive officers from time to time. These relationships could create, or appear to create, conflicts of interest when these persons are faced with
decisions with potentially different implications for E-House and us.
· Sale of shares in our company. E-House may decide to sell all or a portion of our shares that it holds to a third party, including to one of 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 certain of our shareholders, including our employees or our public shareholders.
· Allocation of business opportunities. Business opportunities may arise that both we and E-House find attractive, and which would complement
our respective businesses. E-House may decide to take the opportunities itself, which would prevent us from taking advantage of the
opportunity.
· Developing business relationships with E-House’s competitors. So long as E-House remains our controlling shareholder, we may be limited in
our ability to do business with its competitors, such as other real estate services companies in China or other companies with which E-House
does not want to conduct business. This may limit our ability to market our services for the best interest of our company and our other
shareholders.
Although our company has become a stand-alone public company, we operate, for as long as E-House is our controlling shareholder, as an affiliate
of E-House. E-House may from time to time make strategic decisions that it believes are in the best interests of its business and its shareholders. These
decisions may be different from the decisions that we would have made on our own. E-House’s decisions with respect to us or our business may be resolved
in ways that favor E-House and therefore E-House’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.
Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating our advertising services business and real estate online
business in China do not comply with PRC governmental restrictions on foreign investment in the advertising industry or the internet information
service industry, we could be subject to severe penalties.
Leju Holdings Limited is a Cayman Islands company and a foreign person under PRC law. Due to PRC government restrictions on foreign
investment in the internet industry and the uncertainty over administrative practice in advertising industries, we conduct part of our business through
contractual arrangements with our affiliated PRC entities. Our e-commerce business with respect to new residential properties is operated through our
contractual arrangements with Shanghai Yi Xin and its shareholders. Our e-commerce business with respect to home furnishing is operated through our
contractual arrangements with Beijing Jiajujiu and its shareholders. Our online advertising business for new residential properties websites and our secondary
listings business are operated through our contractual arrangements with Beijing Leju and its shareholders. Beijing Leju and its subsidiaries, Shanghai Yi Xin,
and Beijing Jiajujiu and its subsidiaries and branches hold the licenses and approvals that are essential for our business operations.
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We have entered into, through our PRC subsidiaries, Shanghai SINA Leju, Shanghai Yi Yue and Beijing Maiteng, a series of contractual
arrangements with Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their respective shareholders. These contractual arrangements enable us to (i) direct the
activities that most significantly affect the economic performance of Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their subsidiaries and branches;
(ii) receive substantially all of the economic benefits from the three consolidated variable interest entities and their subsidiaries in consideration for the
services provided by our PRC subsidiaries; and (iii) have an exclusive option to purchase all or part of the equity interests in the consolidated variable interest
entities, when and to the extent permitted by PRC law, or request any existing shareholder of the consolidated variable interest entities to transfer all or part of
the equity interest in the consolidated variable interest entities to another PRC person or entity designated by us at any time in our discretion. These
agreements make us their “primary beneficiary” for accounting purposes under U.S. GAAP. For descriptions of these contractual arrangements, see “Item 4.
Information on the Company—C. Organizational Structure.”
If the PRC government finds that these contractual arrangements do not comply with its restrictions on foreign investment in the internet business or
advertising industry, or if the PRC government otherwise finds that we, Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu, or any of their subsidiaries and
branches is in violation of PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities,
including the State Administration for Industry and Commerce, which regulates advertising companies, and the MIIT, which regulates internet information
service companies, would have broad discretion in dealing with such violations, including:
· revoking our business and operating licenses;
· discontinuing or restricting our operations;
· imposing fines or confiscating any of our income that they deem to have been obtained through illegal operations;
· imposing conditions or requirements with which we or our PRC subsidiaries and affiliates may not be able to comply;
· requiring us or our PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations; or
· taking other regulatory or enforcement actions that could be harmful to our business.
The imposition of any of these penalties could have a material and adverse effect on our business, financial condition and results of operations. If any
of these penalties results in our inability to direct the activities of any of Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu that most significantly impact its
economic performance, and/or our failure to receive the economic benefits from any of Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu, we may not be able
to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements with Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu and their respective shareholders for a portion of our
operations, which may not be as effective as direct ownership in providing operational control.
We rely on contractual arrangements with Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu and their respective shareholders to operate our online
real estate business and our real estate advertising business. For descriptions of these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over Beijing Leju,
Shanghai Yi Xin or Beijing Jiajujiu. These contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration
in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. If any of the other parties fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and
resources to enforce such arrangements, and we would have to rely on legal remedies under PRC law, including seeking specific performance or injunctive
relief and claiming damages, which we cannot assure you will be effective. Furthermore, the legal environment in the 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 our ability to enforce these contractual arrangements,
which may make it difficult to exert effective control over Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu, and our ability to conduct our business may be
negatively affected.
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In 2013, 2014 and 2015, Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their respective subsidiaries and branches contributed in aggregate
94.3%, 97.7% and 97.0% of our total net revenues, respectively. In the event we are unable to enforce the contractual arrangements, we may not be able to
have the power to direct the activities that most significantly affect the economic performance of Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their
respective subsidiaries and branches, and our ability to conduct our business may be negatively affected, and we may not be able to consolidate the financial
results of Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their respective subsidiaries and branches into our consolidated financial statements in
accordance with U.S. GAAP.
The shareholders of our consolidated variable interest entities may have potential conflicts of interest with us, and if any such conflicts of interest are
not resolved in our favor, our business may be materially and adversely affected.
We have designated individuals who are PRC nationals to be the shareholders of our consolidated variable interest entities in China, Beijing Leju,
Shanghai Yi Xin, and Beijing Jiajujiu. These individuals may have conflicts of interest with us. Each of Shanghai Yi Xin and Beijing Jiajujiu is 70% owned
by Mr. Zuyu Ding, E-House’s co-president and 30% owned by Mr. Weijie Ma, our co-president. Beijing Leju is 80% owned by Mr. Xudong Zhu, the head of
E-House’s offline advertising operations, and 20% owned by Mr. Zuyu Ding, E-House’s co-president. None of Mr. Zhu, Mr. Ding and Mr. Ma has a
significant equity stake in our company. We cannot assure you that when conflicts of interest arise, they will act in the best interests of our company or that
conflicts of interests will be resolved in our favor. In addition, they may breach or cause our variable interest entities and their subsidiaries to breach or refuse
to renew the existing contractual arrangements that allow us to effectively control our consolidated variable interest entities and their subsidiaries and receive
economic benefits from them. Currently, we do not have arrangements to address potential conflicts of interest between the shareholders of our consolidated
variable interest entities and our company. We rely on them to abide by the laws of the Cayman Islands and China, which provide that directors and/or
officers owe a fiduciary duty to our company, which requires them to act in good faith and in the best interests of our company and not to use their positions
for personal gain. If we cannot resolve any potential conflicts of interest or disputes between us and the individual shareholders of our consolidated variable
interest entities which may arise, we would have to rely on legal proceedings to enforce our rights, which could be costly and unsuccessful.
Our ability to enforce the equity pledge agreements between us and the shareholders of Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu may be
subject to limitations based on PRC laws and regulations.
Pursuant to the equity pledge agreements relating to our consolidated variable interest entities, Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu,
the shareholders of the consolidated variable interest entities pledge their equity interest in the consolidated variable interest entities to our subsidiaries to
secure their and the relevant consolidated variable interest entities’ performance of the obligations under the relevant contractual arrangements. The equity
pledges under these equity pledge agreements have been registered with the relevant local branch of the State Administration for Industry and Commerce.
According to the PRC Property Law and PRC Guarantee Law, the pledgee and the pledgor are prohibited from making an agreement prior to the expiration of
the debt performance period to transfer the ownership of the pledged equity to the pledgee when the obligor fails to pay the debt due. However, under the
PRC Property Law, when an obligor fails to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledgor to obtain the
pledged equity or seek payments from the proceeds of the auction or sell-off of the pledged equity. If any of the consolidated variable interest entities or its
shareholders fails to perform its obligations secured by the pledges under the equity pledge agreements, one remedy in the event of default under the
agreements is to require the pledgor to sell the equity interests in the relevant consolidated variable interest entity in an auction or private sale and remit the
proceeds to our subsidiaries in China, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of the full value of the
equity interests in the relevant consolidated variable interest entity. We consider it very unlikely that the public auction process would be undertaken since, in
an event of default, our preferred approach would be to ask our PRC subsidiary that is a party to the exclusive call option agreement with the consolidated
variable interest entity’s shareholder, to designate another PRC person or entity to acquire the equity interest in the consolidated variable interest entity and
replace the existing shareholder pursuant to the exclusive call option agreement.
In addition, in the registration forms of the local branch of State Administration for Industry and Commerce for the pledges over the equity interests
under the equity pledge agreements, the amount of registered equity interests pledged to our PRC subsidiaries was stated as the pledgor’s portion of the
registered capital of the consolidated variable interest entity. The equity pledge agreements with the shareholders of the consolidated variable interest entities
provide that the pledged equity interest constitute continuing security for any and all of the indebtedness, obligations and liabilities under the relevant
contractual arrangements, and therefore the scope of pledge should not be limited by the amount of the registered capital of the consolidated variable interest
entities. However, there is no guarantee that a PRC court will not take the position that the amount listed on the equity pledge registration forms represents the
full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity pledge
agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court to be unsecured debt, which takes last
priority among creditors and often does not have to be paid back at all. We do not have agreements that pledge the assets of the consolidated variable interest
entities and their subsidiaries for the benefit of us or our PRC subsidiaries, although the consolidated variable interest entities grant our PRC subsidiaries
options to purchase the assets of the consolidated variable interest entities and their equity interests in their subsidiaries under the exclusive call option
agreement.
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Contractual arrangements we have entered into with Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu may be subject to scrutiny by the PRC tax
authorities and a finding that we, Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu owe additional taxes could reduce our net income and the value
of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be audited or challenged by the PRC tax authorities. We
could face material and adverse consequences if the PRC tax authorities determine that the contractual arrangements we have entered into with Beijing Leju,
Shanghai Yi Xin or Beijing Jiajujiu do not represent an arm’s-length price and adjust the taxable income of Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu or
their subsidiaries and branches in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of
expense deductions recorded by Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu or their subsidiaries and branches, which could in turn increase their PRC tax
liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on our consolidated variable interest entities for
underpayment of taxes. Our consolidated net income may be materially and adversely affected if our consolidated variable interest entities’ tax liabilities
increase or if they are found to be subject to late payment fees or other penalties.
Risks Related to Doing Business in China
Changes in PRC government policies could have a material and adverse effect on overall economic growth in China, which could adversely affect
our business.
We conduct substantially all of our business in China. As the real estate industry is highly sensitive to business spending, credit conditions and
personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and
prospects are subject, to a significant degree, to economic developments in China. While China’s economy has experienced significant growth in the past
three decades, growth has been uneven across different periods, regions and among various economic sectors of China. The PRC government may implement
measures that are intended to benefit the overall economy even if they would be expected to have a negative effect on the real estate industry. The real estate
industry is also sensitive to credit policies. In recent years, the PRC government adjusted the People’s Bank of China’s statutory deposit reserve ratio and
benchmark interest rates several times in response to various economic situations. Any future monetary tightening may reduce the overall liquidity in the
economy and reduce the amount of credit available for real estate purchase. Higher interest rates may increase borrowing costs for purchasers who rely on
mortgage loans to finance their real estate purchase. These could negatively affect overall demand for real estate and adversely affect our operating and
financial results. We cannot assure you that China will continue to have rapid or stable economic growth in the future or that changes in credit or other
government policies that are intended to create stable economic growth will not adversely impact the real estate industry.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries and consolidated variable interest entities in China. Our operations in China are
governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference
but have limited precedential value. PRC legislation and regulations have gradually enhanced the protections afforded to various forms of foreign investments
in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and
management attention.
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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 Ministry of Commerce, or MOC, published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its
enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-
foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary
regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with
prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOC is
currently soliciting 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 and
business operations in many aspects.
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 MOC, 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 or similar
equity interest of the subject entity; (ii) holding less than 50% of the voting rights or similar equity interest 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,” to be separately issued by the State Council in the future, market
entry clearance by the MOC or its local counterparts will be required. Otherwise, all foreign investors may make investments on the same terms as domestic
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 “Risks Related to Our Corporate Structure.” Under the
draft Foreign Investment Law, variable interest entities 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 state-owned enterprises or agencies or PRC
citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any
operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
Our controlling shareholder, E-House, held approximately 69.3% of our voting power, and our record shareholders in the United States held
approximately 12% of our total voting power, as of March 31, 2016. 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, while it is soliciting comments
from the public on this point. Moreover, it is uncertain whether the real estate service industry, in which our variable interest entities 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, such as MOC market entry clearance or certain restructuring of our corporate structure and operations, to be
completed by companies with existing VIE structure like us, we 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.
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Governmental control of currency conversion may affect the value of your investment.
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The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out
of China. Restrictions on currency exchanges between the Renminbi and other currencies may limit our ability to utilize our revenues and funds, in particular
in relation to capital account transactions such as investments and loans. We receive substantially all of our revenues in the Renminbi. Under our current
structure, our income will be primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries and our consolidated variable interest entities to remit sufficient foreign currency to pay dividends or other
payments to us, or otherwise satisfy their foreign currency denominated obligations.
Under current PRC regulations, the Renminbi is convertible for “current account transactions,” which include among other things dividend payments
and payments for the import of goods and services, subject to compliance with certain procedural requirements. Although the Renminbi has been fully
convertible for current account transactions since 1996, we cannot assure you that the relevant PRC government authorities will not limit or eliminate our
ability to purchase and retain foreign currencies for current account transactions in the future.
Conversion of the Renminbi into foreign currencies and of foreign currencies into the Renminbi, for payments relating to “capital account
transactions,” which principally include investments and loans, generally requires the approval of the State Administration of Foreign Exchange, or SAFE,
and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of
our PRC subsidiaries and affiliated PRC operating companies to make investments overseas or to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
Fluctuation in the value of the RMB may have a material and adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by
China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this
appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated
against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the
exchange rate between the RMB and the U.S. dollar in the future.
As our costs and expenses are mostly denominated in RMB, the appreciation of the RMB against the U.S. dollar would increase our costs in U.S.
dollar terms. In addition, as our operating subsidiaries and variable interest entities in China receive revenues in RMB, any significant depreciation of the
RMB against the U.S. dollar may have a material and adverse effect on our revenues in U.S. dollar terms and financial condition, and the value of, and any
dividends payable on, our ordinary shares. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the
RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB
into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar
against the RMB would have a negative effect on the U.S. dollar amount available to us. These and other effects on our financial data resulting from
fluctuations in the value of the RMB against the U.S. dollar could have a material and adverse effect on the market price of our ADSs and your investment.
See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial
owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability
to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
The Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-Trip Investment Activities of Domestic
Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75, requires PRC residents to register with the relevant local branch of
SAFE before establishing or controlling any company outside of China, referred to as an offshore special purpose company, for the purpose of raising funds
from overseas to acquire or exchange the assets of, or acquiring equity interests in, PRC entities held by such PRC residents and to update such registration in
the event of any significant changes with respect to that offshore company. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange
Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on
July 4, 2014, which replaced the SAFE Circular 75. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with
their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” The
term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents
in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other
arrangements. SAFE Circular 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special
purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event.
If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC
subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company,
and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE
registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions.
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We have requested our beneficial owners who are PRC residents to make the necessary applications, filings and amendments required by SAFE.
However, we cannot provide any assurances that all of our beneficial owners who are PRC residents will continue to make, obtain or amend any applicable
registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident beneficial owners to comply with the registration
procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our ability to contribute
additional capital into our PRC subsidiaries, or limit our PRC subsidiaries’ ability to pay dividends or make other distributions to our company or otherwise
adversely affect our business. Moreover, failure to comply with the SAFE registration requirements could result in liability under PRC laws for evasion of
foreign exchange restrictions. Furthermore, pursuant to our agreements with Tencent, our PRC subsidiaries, Shanghai SINA Leju, Shanghai Yi Yue and
Beijing Maiteng are restricted from paying dividends to us until each of our individual beneficial shareholders who are PRC residents and subject to SAFE
registration as described above submits its application to SAFE and each of such PRC subsidiaries submits an application with SAFE as required. We intend
to cause such applications to be submitted in the near future.
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business
operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities,
including the remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our results of operations and financial
condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be,
will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our
ability to implement our acquisition strategy and could adversely affect our business and prospects.
Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may
subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Under the applicable regulations and SAFE rules, PRC citizens who participate in an employee stock ownership plan or a stock option plan in an
overseas publicly listed company are required to register with SAFE and complete certain other procedures. In February 2012, SAFE promulgated the Notices
on Issues concerning the Foreign Exchange Administration for Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Option Rules, which
terminated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or
Stock Option Plan of Overseas Publicly-Listed Company issued by SAFE in March 2007. Pursuant to the Stock Option Rules, if a PRC resident participates
in any stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent must, among other things, file on behalf of such
participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance
with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participating
PRC residents’ foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully
remitted into a PRC collective foreign currency account opened and managed by the PRC agent before distribution to such participants. We and our PRC
employees who have been granted stock options are subject to this rule and we have registered our existing employee stock ownership plan and stock option
plan with SAFE Shanghai Branch. However, if there is any change to our existing employee stock ownership plan or stock option plan, we cannot assure you
that we and our PRC optionees will be able to amend such registration in a timely manner, or at all. If we or our PRC optionees fail to comply with these
regulations, we or our PRC optionees may be subject to fines and legal sanctions. See “Item 4. Information on the Company—B. Business Overview—
Regulation—Foreign Exchange Registration of Employee Stock Incentive Plans.”
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PRC regulations relating to acquisitions in China require us to obtain certain approvals from the Ministry of Commerce and the failure to obtain
such approvals could have a material and adverse effect on our business, results of operations, reputation and the trading price of our ADSs.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, jointly issued by six PRC
regulatory agencies and amended by the Ministry of Commerce in 2009, include provisions that purport to require the Ministry of Commerce’s approval for
acquisitions by offshore entities established or controlled by domestic companies, enterprises or natural persons of onshore entities that are related to such
domestic companies, enterprises or natural persons. However, the interpretation and implementation of the M&A Rules remain unclear with no consensus
currently existing regarding the scope and applicability of the Ministry of Commerce approval requirement on foreign acquisitions among related parties.
We have entered into contractual arrangements with each of Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu and their respective shareholders,
which provide us with substantial ability to control each of these entities. See “Item 4. Information on the Company—C. Organizational Structure.”
If the Ministry of Commerce subsequently determines that their approval was required for such contractual arrangements, we may need to apply for
a remedial approval. There can be no assurance that we will be able to obtain such approval or waiver of such approval from the Ministry of Commerce.
Inability to obtain such approval or waiver from the Ministry of Commerce may have a material and adverse effect on our business. Further, we may be
subject to certain administrative punishments or other sanctions from the Ministry of Commerce. The Ministry of Commerce or other regulatory agencies
may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of U.S. dollars into
the PRC, or take other actions that could have further material and adverse effects on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our ADSs.
The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules and 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 PRC
Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if
(i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the 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. Mergers, acquisitions or
contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance
to the PRC Ministry of Commerce when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the
Prior Notification Rules, issued by the State Council in August 2008 is triggered. In addition, the Implementing Rules Concerning Security Review on the
Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the PRC Ministry of Commerce in August 2011, specify that mergers and
acquisitions by foreign investors involved in “an industry related to national security” are subject to strict review by the PRC Ministry of Commerce, and
prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement.
In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and
other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the PRC
Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions. We believe that our business is not in an
industry related to national security but we cannot preclude the possibility that the PRC Ministry of Commerce or other government agencies may publish
explanations contrary to our understanding or broaden the scope of such security reviews in the future, 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.
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Our PRC subsidiaries and consolidated variable interest entities are subject to restrictions on paying dividends or making other payments to us,
which may restrict our ability to satisfy our liquidity requirements.
We are a holding company registered in the Cayman Islands. We rely on dividends from our PRC subsidiaries as well as service and other fees paid
to our PRC subsidiaries by our consolidated variable interest entities for our cash and financing requirements, such as the funds necessary to pay dividends
and other cash distributions to our shareholders, including holders of our ADSs, and service any debt we may incur.
Our consolidated variable interest entities are directly held by certain PRC individuals designated by us and thus are not able to make dividend
payments to our PRC subsidiaries and holding companies outside the PRC. We have the right to charge our consolidated variable interest entities service fees
through our relevant PRC subsidiaries pursuant to the exclusive technical support agreements entered into with our consolidated variable interest entities,
which together with the other agreements with our consolidated variable interest entities and their respective shareholders, enable us to enjoy substantially all
of the economic benefits of our consolidated variable interest entities. These contractual arrangements we have entered into with our consolidated variable
interest entities may be subject to scrutiny by the PRC tax authorities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate
Structure—Contractual arrangements we have entered into with Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu may be subject to scrutiny by the PRC tax
authorities and a finding that we, Beijing Leju, Shanghai Yi Xin or Beijing Jiajujiu owe additional taxes could reduce our net income and the value of your
investment.” Our consolidated variable interest entities have paid and will continue to pay the service fees to our relevant PRC subsidiaries pursuant to the
exclusive technical support agreements between them.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance
with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside a certain amount of its after-tax profits
each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. In addition, the PRC Enterprise Income Tax Law, or
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. We have not received any dividend payments or other distributions
from our PRC subsidiaries, and as we currently intend to retain all of the available funds and any future earnings of our PRC subsidiaries to fund the
development and growth of our business, we do not expect to receive any dividend payments or other distributions from our PRC subsidiaries in the
foreseeable future.
Furthermore, if our PRC subsidiaries and consolidated variable interest entities incur debt on their own behalf in the future, the instruments
governing the debt may restrict the ability of our consolidated variable interest entities to pay service fees to our PRC subsidiaries or the ability of our PRC
subsidiaries to pay dividends to us, which may restrict our ability to satisfy our liquidity requirements. Our contractual arrangements with our consolidated
variable interest entities enable us to prevent them from entering into debt arrangements that may be detrimental to us because these contractual arrangements
provide us with the ability to direct the activities that most significantly affect the economic performance of our consolidated variable interest entities. In
addition, the exclusive call option agreements among our PRC subsidiaries, consolidated variable interest entities and their respective shareholders
specifically provide that the applicable consolidated variable interest entity shall not, and its shareholders shall ensure that the consolidated variable interest
entity does not, incur any loan or offer any guarantee without the prior written consent of our applicable PRC subsidiary. However, any limitation on the
ability of our PRC subsidiaries or consolidated variable interest entities to pay dividends or make other payments 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.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or
additional capital contributions to our PRC operating subsidiaries.
As an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries and consolidated variable interest
entities, or may make additional capital contributions to our PRC subsidiaries, subject to satisfaction of applicable governmental registration and approval
requirements.
Any loans we extend to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, cannot exceed the statutory limit and
must be registered with the local counterpart of the SAFE. The statutory limit for the total amount of foreign debt of a foreign-invested company is the
difference between the amount of total investment and the amount of registered capital of such foreign-invested company as approved by the Ministry of
Commerce or its local counterpart. The current statutory limit on the loans we may make to Beijing Maiteng, our PRC subsidiary, is HK$40 million ($5.2
million). The current total investment in each of our other PRC subsidiaries, namely, Shanghai SINA Leju, Shanghai Yi Yue, E-House City Rehouse Real
Estate Broker (Shanghai) Co., Ltd., or City Rehouse, Leju (China) Internet Technology Co., Ltd, or Leju IT, and Shanghai Fangxin Information Technology
Co., Ltd., or Shanghai Fangxin, is in the same amount of their respective registered capital. In order for us to make loans to any of our PRC subsidiaries, the
subsidiary would need to apply to the Ministry of Commerce or its local counterpart to increase its total investment. The permitted maximum amount of
foreign loans that the subsidiary is eligible to raise would be equal to the difference between the total investment and the registered capital. After the increase
of total investment is approved by the Ministry of Commerce or its local counterpart, we may extend loans to the relevant PRC subsidiary in an amount that
does not exceed the difference referenced above. Any loans we extend to our consolidated variable interest entities or other PRC operating companies that are
domestic PRC entities, must be approved by the National Development and Reform Commission or its local counterpart and must also be registered with
SAFE or its local branches.
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We may also decide to finance our PRC subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-
invested enterprises in China, these capital contributions are subject to approval by the Ministry of Commerce or its local counterpart. In addition, the SAFE
has also issued a few circulars with respect to the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi and the
flow and use of such Renminbi fund. On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, which will be valid on June 1, 2015, or SAFE Circular 19. Under SAFE Circular 19, a foreign-
invested enterprise may choose converting its registered capital from foreign currency to Renminbi on self-discretionary basis, and the Renminbi capital
converted can be used for equity investments within PRC, which will be regarded as the reinvestment of foreign-invested enterprise. Before the promulgation
of SAFE Circular 19, the SAFE had strong oversight in this area, but also introduced reforms to facilitate the business and capital operations of foreign
invested enterprises. In 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of
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. The use of such Renminbi fund may
not be altered without SAFE approval, and such Renminbi fund may not in any case be used to repay Renminbi loans if the proceeds of such loans have not
been used. In August 2014, the SAFE issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of
the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas, or SAFE Circular 36, which suspended the application of SAFE
Circular 142 in certain areas and allowed a foreign-invested enterprise registered in the designated areas to use the RMB capital converted from foreign
currency registered capital for equity investments within the PRC., which is regarded as the reinvestment of foreign-invested enterprise. After the SAFE
Circular 19 becomes valid, both SAFE Circular 142 and SAFE Circular 36 will be abolished.
SAFE also promulgated a circular in November 2011, which prohibits a foreign-invested enterprise from using Renminbi funds converted from its
foreign currency registered capital to provide entrustment loans or repay loans borrowed from non-financial enterprises. Violation of these circulars could
result in severe monetary or other penalties. These circulars may limit our ability to transfer funds to our consolidated variable interest entities and the
subsidiaries of our PRC subsidiaries, and we may not be able to convert funds into Renminbi to invest in or acquire any other PRC companies, or establish
other consolidated variable interest entities in China. Despite the restrictions under these SAFE circulars, our PRC subsidiaries may use their income in
Renminbi generated from their operations to finance the relevant consolidated variable interest entities through entrustment loans to the consolidated variable
interest entities or loans to such variable interest entities’ shareholders for the purpose of making capital contributions to such variable interest entities. In
addition, our PRC subsidiaries can use Renminbi funds converted from foreign currency registered capital to carry out any activities within their normal
course of business and business scope, including to purchase or lease servers and other relevant equipment and fund other operational needs in connection
with their provision of services to the relevant consolidated variable interest entities under the applicable exclusive technical support agreements.
In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies,
we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis,
if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capital contributions by us to our PRC
subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to 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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The discontinuation of any of the preferential tax treatments currently available to us in the PRC or imposition of any additional PRC taxes on us
could adversely affect our financial condition and results of operations.
Pursuant to a Circular on Enterprise Income Tax Preferential Treatments issued by the State Administration of Taxation and the Ministry of Finance
effective as of February 22, 2008, as partially amended by a Circular on Enterprise Income Tax Policies for Further Encouraging the Development of the
Software Industry and the Integrated Circuit Industry, a qualified software enterprise is eligible to be exempted from income tax for its first two profitable
years, followed by a 50% reduction in income tax, to a rate of 12.5%, for the subsequent three years. Shanghai SINA Leju was recognized as a qualified
software enterprise in February 2009 and was further approved by the local tax authority in June 2009, and, thus, became eligible to be exempted from
income tax for 2009, followed by a 50% reduction in income tax from 2010 through 2012. Another wholly owned subsidiary, Shanghai Fangxin, was
recognized as a qualified software enterprise and was further approved by the local tax authority in October 2012 to become eligible for being exempted from
income tax for 2012 and 2013, followed by a 50% reduction in income tax from 2014 through 2016. Shanghai SINA Leju was entitled to enjoy a favorable
statutory tax rate of 15% for 2013 and 2014 as a “high and new technology enterprise.” Shanghai SINA Leju renewed its qualification of “high and new
technology enterprise” in 2015 and is entitled to enjoy a favorable statutory tax rate of 15% from 2015 through 2017. If Shanghai SINA Leju or Shanghai
Fangxin fails to maintain software enterprise status or “high and new technology enterprise” status, their applicable enterprise income tax rate may increase to
up to 25%, which could have a material and adverse effect on our financial condition and results of operations.
Various local governments in China have also provided discretionary preferential tax treatments to us. However, at any time, these local governments
may decide to reduce or eliminate these preferential tax treatments. Furthermore, these local implementations of tax laws may be found in violation of
national laws or regulations, and as a consequence, we may be subject to retroactive imposition of higher taxes as a result. We are required under U.S. GAAP
to accrue taxes for these contingencies. The change in accounting requirement for reporting tax contingencies, any reduction or elimination of these
preferential tax treatments and any retroactive imposition of higher taxes could have an adverse effect on our results of operations.
We face uncertainty with respect to indirect transfer of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment
of a non-PRC company, or immovable properties located in China owned by their non-PRC holding companies.
We face uncertainties on the reporting and consequences on private equity financing transactions, share exchange or other transactions involving the
transfer of shares in our company by investors who are non-PRC resident enterprises.
On February 3, 2015, the State Administration of Taxation, or the SAT, issued the Notice on Several Issues Concerning Enterprise Income Tax for
Indirect Share Transfer by Non-PRC Resident Enterprises, or SAT Bulletin 7, which replaced previous rules under the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT in 2009. Pursuant to
SAT Bulletin 7, an “indirect transfer” of assets of a PRC resident enterprise, including equity interests in a PRC resident enterprise, by non-PRC resident
enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such transaction arrangement lacks a reasonable commercial
purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be
subject to PRC enterprise income tax. According to SAT Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable
properties located in China, and equity interests in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC
resident enterprise, would be subject to PRC enterprise income taxes. In respect of an indirect transfer of assets of a PRC establishment, the resulting gain is
to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to
PRC enterprise income tax at a rate of 25%. If the underlying transfer relates to immovable properties located in China or to equity interests in a PRC resident
enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply,
subject to preferential tax treatment under applicable tax treaties or similar arrangements, if any, and the party who is obligated to make payments for the
transfer has a withholding obligation. Although SAT Bulletin 7 does not apply to share transfers of publicly traded companies, there is uncertainty as to the
application of SAT Bulletin 7 or previous rules under SAT Circular 698. We and our non-PRC resident investors may be at risk of being subject to tax filing
or withholding obligations under SAT Bulletin 7 and we may be required to expend valuable resources to comply with SAT Bulletin 7 or to establish that we
should not be taxed under SAT Bulletin 7.
We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing and withholding
or tax payment obligations on the transferors and transferees, while our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on a
transfer of our shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your
investment in us.
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Dividends payable to us by our PRC subsidiaries may be subject to PRC withholding taxes or we may be subject to PRC taxation on our worldwide
income, and dividends distributed to our investors may be subject to PRC withholding taxes under the EIT Law and our investors may be subject to
PRC withholding tax on the transfer of our ordinary shares or ADSs.
Under the EIT Law and its implementation rules, all domestic and foreign invested companies would be subject to a uniform enterprise income tax at
the rate of 25% and dividends from a PRC subsidiary to its foreign parent company will be subject to a withholding tax at the rate of 10%, unless such foreign
parent company’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding, or the tax is otherwise exempted or
reduced pursuant to PRC tax laws.
Under the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), effective on October 1, 2009, our Hong
Kong subsidiaries need to obtain approval from the relevant local branch of the State Administration of Taxation in order to enjoy the preferential withholding
tax rate of 5% in accordance with the Arrangement between Mainland China and Hong Kong for the Avoidance of Double Taxation and Prevention of Fiscal
Evasion with respect to Taxes on Income. The PRC State Administration of Taxation further clarified in a circular that tax treaty benefits will be denied to
“conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to
determine whether or not to grant the tax treaty benefits. It is unclear at this stage whether this circular applies to dividends from our PRC subsidiaries paid to
us through our Hong Kong subsidiaries. However, it is possible that our Hong Kong subsidiaries might not be considered as “beneficial owners” of any
dividends from their PRC subsidiaries and as a result would be subject to withholding tax at the rate of 10%. As a result, there is no assurance that our Hong
Kong subsidiaries will be able to enjoy the preferential withholding tax rate.
In addition, under the EIT Law, enterprises organized under the laws of jurisdictions outside of China with their “de facto management bodies”
located within China may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at the rate of 25% on their worldwide
income. Under the implementation rules of the EIT Law, “de facto management bodies” are defined as the bodies that have material and overall management
and control over the business, personnel, accounts and properties of the enterprise. A subsequent circular issued by the State Administration of Taxation
provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto
management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge
of its daily operations function mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or
bodies in the PRC; (iii) 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 (iv) more than half of the enterprise’s directors or senior management with voting rights reside in the PRC.
The EIT Law and its implementation rules are relatively new and ambiguities exist with respect to the interpretation of the provisions relating to
resident enterprise issues. Although our offshore holding companies are not controlled by any PRC company or company group, we cannot assure you that we
will not be deemed to be a PRC resident enterprise under the EIT Law and its implementation rules. If we were considered a PRC resident enterprise, we
would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income; dividend income we receive from the PRC subsidiaries,
however, may be exempt from PRC tax since such income is exempted under the EIT Law to a PRC resident recipient. However, as there is still uncertainty
as to how the EIT Law and its implementation rules will be interpreted and implemented, and the PRC foreign exchange control authorities have not yet
issued guidance with respect to the processing of outbound remittances to entities that are treated as PRC resident enterprises, we cannot assure you that we
are eligible for such PRC enterprise income tax exemptions or reductions. In addition, ambiguities also exist with respect to the interpretation of the
provisions relating to identification of PRC-sourced income. If we were considered a PRC resident enterprise, any dividends payable to non-resident holders
of our ordinary shares or ADSs, and the gains such investors may realize from the transfer of our ordinary shares or ADSs, may be treated as PRC-sourced
income and therefore be subject to a 10% PRC withholding tax (or 20% in the case of non-resident individual holders), unless otherwise exempted or reduced
pursuant to treaties or applicable PRC law.
If we became a PRC resident enterprise under the new PRC tax system and received income other than dividends, our profitability and cash flows
would be adversely affected due to our worldwide income being taxed in China under the EIT Law. Additionally, we would incur an incremental PRC
dividend withholding tax cost if we distributed our profits to our ultimate shareholders. There is, however, not necessarily an incremental PRC dividend
withholding tax on the piece of the profits distributed from our PRC subsidiaries, since they would have been subject to PRC dividend withholding tax even if
we were not a PRC tax resident.
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Failure to obtain the approvals or complete the filings required for our real estate agency and brokerage business in China may limit our ability to
provide real estate agency and brokerage services or establish new PRC operating entities.
Currently, we mainly use City Rehouse, and its subsidiaries to provide support for our e-commerce business. Certain of the support services provided
by City Rehouse and its subsidiaries may be regarded as real estate agency and brokerage services under PRC law. Pursuant to the previous Foreign
Investment Industrial Guidance Catalogue issued in 2011, foreign ownership of the real estate agency and brokerage business in China is subject to
government approval. Accordingly, the establishment of, or investment in any company with a registered business scope of, real estate agency and brokerage
services in China by our PRC subsidiaries directly is, and by our PRC subsidiaries indirectly through their subsidiaries may be, subject to approval of the
PRC Ministry of Commerce or its relevant local counterparts which should be obtained before registering such company with the SAIC or its local
counterparts. Although City Rehouse has not obtained approval from the competent local branch of the PRC Ministry of Commerce in connection with its
establishment of, or investment in, its subsidiaries with a registered business scope of real estate brokerage business, each subsidiary of City Rehouse has
obtained and maintained a business license with such business scope, and none of such subsidiaries has received any notice of warning or penalties from the
competent authorities for lacking such approval.
The latest Foreign Investment Industrial Guidance Catalogue, which became effective on April 10, 2015, loosens the restrictions on foreign
ownership of the real estate agency and brokerage business in China by removing it from the restricted category for foreign investment. Under the new
catalogue, City Rehouse no longer needs the approval of the PRC Ministry of Commerce or its relevant local counterparts for the establishment of, or
investment in any new PRC subsidiary with a registered business scope of real estate agency and brokerage services. However, we cannot assure you that the
historical non-compliance of City Rehouse not obtaining the requisite government approval would not be found as a violation by relevant PRC government
authorities. If the historical non-compliance were found and determined by the relevant PRC government authorities as a violation, our relevant subsidiaries
would be subject to warnings, fines or even revocation of its licenses.
In addition, pursuant to the relevant regulations regarding real estate agency and brokerage businesses, a real estate broker must conduct a filing with
the real estate administrative authority within 30 days after issuance of its business license. We have completed the filing with the competent local real estate
administrative authorities for our 22 PRC operating entities which currently provide support services considered to be real estate agency and brokerage
services under the PRC law. In addition, among our other 11 PRC operating entities with the registered business scope of real estate brokerage business which
are intended to provide support services to our e-commerce business, we are in the process of making such filings with the relevant local real estate
administrative authorities for 2 entities, and are in the process of preparing the relevant application documents with respect to all the remaining 9 entities
which intend to make such filings. The requirements of the local real estate administrative authority for such filing may vary in different cities and we cannot
assure you that we will be able to complete such filing in a timely manner or at all. If we fail to properly complete such filings, it may limit the ability of the
relevant PRC operating entities to provide similar support service to our e-commerce business.
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 issued the audit reports included in this annual report 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.
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 and lose confidence in our reported financial
information and procedures and the quality of our financial statements.
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Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could
result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011 the PRC affiliates of the ‘‘big four’’ accounting firms (including our independent registered public accounting firm) were affected
by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB
sought to obtain from the PRC firms access to their audit work papers and related documents. The firms were, however, advised and directed that under PRC
law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to
be channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the
Sarbanes-Oxley Act of 2002 against the PRC-based accounting firms (including our independent registered public accounting firm). A first instance trial of
the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge
proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect
pending review by the SEC. On February 6, 2015, before SEC’s review had taken place, the firms reached a settlement with the SEC. The settlement
requires the firms to follow detailed procedures to seek to provide the SEC with access to PRC-based accounting firms’ audit documents via the CSRC. If
they fail to meet specified criteria, the SEC retains the authority to impose a variety of additional remedial measures on the firms depending on the nature of
the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit
work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major
PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such
future proceedings against these audit firms may cause investor uncertainty regarding PRC-based, U.S.-listed companies and the market price of our ADSs
may be adversely affected.
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 financial statements, our financial statements could be determined
not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary shares from the
NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to Our ADSs
The market price for our ADSs has been and may continue to be highly volatile.
In 2015, the closing price of our ADSs on the New York Stock Exchange, or the NYSE, varied from a high of $13.30 to a low of $4.38.
The market price for our ADSs has been and may continue to be highly volatile and subject to wide fluctuations due to factors beyond our control,
such as broad market and industry factors. The securities markets in the United States, China and elsewhere have experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies, particularly in recent years. The securities of some China-based
companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some
cases, substantial price declines in the trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings
may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our
ADSs, regardless of our actual operating performance. Since 2011, some China-based companies became targets of short sellers. Any negative news or
perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may
also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any
inappropriate activities. Although we have confidence in our corporate governance practice and internal control over financial reporting, we cannot assure
you that we will not be subject to such attack. Any negative news or perceptions about our corporate governance or accounting practice in the future,
regardless of its merits, will negatively affect the trading performance of our ADSs. In addition, the global financial crisis and the ensuing economic
recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets.
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In addition to the broad market and industry fluctuations, factors specific to our own operations may adversely affect the market price of our ADSs,
including the following:
· variations in our net 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 operating metrics;
· additions or departures of key personnel;
· release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;
· detrimental negative publicity about us, our competitors or our industry;
· regulatory developments affecting us or our industry; and
· potential litigation or regulatory investigations.
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
· the rules under the Exchange Act requiring the filing with the SEC, of quarterly reports on Form 10-Q or current reports on Form 8-K;
· the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the
Exchange Act;
· the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders
who profit from trades made in a short period of time; and
· the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results
on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material
events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and
less timely as compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or
information, which would be made available to you, were you investing in a U.S. domestic issuer.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our
ADSs and trading volume could decline.
The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business.
If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or
publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market
price or trading volume for our ADSs to decline.
The sale or availability for sale, or perceived sale or availability for sale, of substantial amounts of our ADSs could adversely affect their
market price.
Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of
March 31, 2016, we had 139,489,416 ordinary shares issued, including the 4,243,550 ordinary shares that had been issued to our depositary and reserved for
future grants under our share incentive plan, and 93,694,920 and 21,231,220 ordinary shares were held by E-House and Tencent, respectively. The sale or
perceived sale of a substantial amount of our ADSs by E-House or Tencent could adversely affect the prevailing market price for our ADSs. Such sales or
perceived sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. In
addition, if we pay for our future acquisitions in whole or in part with additionally issued ordinary shares, your ownership interests in our company would be
diluted and this, in turn, could have an adverse effect on the price of our ADSs.
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 memorandum and 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, in the form of ADS, 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 our ADSs may
fall and the voting and other rights of the holders of our ordinary shares and 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 and restated 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 English common law, 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, shareholders of 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.
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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.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by
management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the
United States.
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 effect service of process within the United States upon us or these persons or 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 U.S.
federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render
you unable to enforce a judgment against our assets or the assets of our directors and officers.
There is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, and the Cayman
Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments. A judgment obtained in such jurisdiction will be
recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action
commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) was given by a foreign court of competent
jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of
taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy
of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions
of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are
penal or punitive in nature. Because such determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability
judgments from U.S. courts would be enforceable in the Cayman Islands.
You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary
shares in accordance with the provisions of the deposit agreement. Under our memorandum and articles of association, the minimum notice period required to
convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you
to withdraw the ordinary shares underlying your ADSs to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its
agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause
the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you
can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to
vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may
lack recourse if the ordinary shares underlying your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able
to call a shareholders’ meeting.
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The return of your investment our ADSs will primarily depend upon any future price appreciation of our ADS.
Subject to our memorandum and articles of association and the laws of the Cayman Islands, our board of directors has complete discretion as to
whether to distribute dividends. Our shareholders may by ordinary resolution declare a dividend, but not exceeding the amount recommended by our board of
directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of dividends will depend on, among other things,
our results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our
financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our
ADSs will likely depend primarily upon any future price appreciation of our ADSs. There is no guarantee that our 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 our ADSs and you may even lose your entire
investment in our ADSs.
You may not receive dividends or other distributions on our 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 our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other
deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary
shares your ADSs represent. However, the depositary 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 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 our ADSs.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
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.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time
when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of
ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any
requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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We may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S.
Holders.
We will be classified as a “passive foreign investment company,” or “PFIC” for U.S. federal income tax purposes for any taxable year, if either
(i) 75% or more of our gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of our assets (as determined
on the basis of a quarterly average) during such year produce or are held for the production of passive income. Although the law in this regard is unclear, we
treat our consolidated variable interest entities as being owned by us for U.S. 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 operating
results in our consolidated financial statements.
While we believe we were not a PFIC for U.S. federal income tax purposes for the taxable year ended December 31, 2015 and do not expect to be a
PFIC for the current taxable year and the foreseeable future, no assurance can be given in this regard because the determination of whether we will be or
become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets. Fluctuations in the market
price of our ADSs and ordinary shares may cause us to become a PFIC for the current taxable year or future taxable years because the value of our assets for
purposes of the asset test, including the value of our goodwill and other unbooked intangibles, may be determined by reference to the market price of our
ADSs and the value of our assets from time to time, including, in particular the value of our goodwill and other unbooked intangibles (which may depend
upon the market value of our ADSs or ordinary shares from time-to-time, (which may be volatile). Furthermore, the determination of whether we will be or
become a PFIC will also be affected by how, and how quickly, we use our liquid assets. Under circumstances where our revenue from activities that produce
passive income significantly increase relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant
amounts of cash for active purposes our risk of being classified as a PFIC may substantially increase. It is also possible that the Internal Revenue Service may
challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being or, becoming classified as, a
PFIC for the current or future taxable years. In addition, there can be no assurance our business plans will not change in a manner that will affect our PFIC
status.
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If we are classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—U.S. Federal Income Tax Considerations”) may incur
significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of
distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax
rules. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be
treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. Each U.S. Holder is urged to consult its tax
advisor concerning the U.S. federal income tax consequences of an investment in our ADSs or ordinary shares if we are treated as a PFIC for any taxable
year, including the possibility of making a “mark-to-market” election.
See the discussion under “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment
Company Rules” concerning the U.S. federal income tax consequences of an investment in the ADSs or ordinary shares if we are or become classified as a
PFIC, including the possibility of making a “mark-to-market” election.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Leju Holdings Limited was incorporated as our holding company in November 2013 by our parent company, E-House, a leading real estate services
company in China listed on the NYSE. E-House has remained our parent company and controlling shareholder after our initial public offering in April 2014.
Substantially all of our operations are conducted through the PRC subsidiaries and consolidated variable interest entities under China Online Housing
Technology Corporation, or China Online Housing, Omnigold Holdings Limited, or Omnigold, China E-Real Estate Holdings Limited, or E-Real, and E-
House China (Tianjin) Holdings Limited, or E-House Tianjin, each of which became our subsidiary in December 2013 as part of a restructuring by E-House.
China Online Housing was incorporated as a joint venture of SINA and E-House in 2008 to operate the SINA real estate and home furnishing website and
related business, including online advertising services. China Online Housing became a consolidated subsidiary of E-House in 2009 and a wholly owned
subsidiary of E-House in 2012. Omnigold was incorporated by E-House in October 2010 to operate the home furnishing services business and is currently
84% owned by us. E-Real and E-House Tianjin were incorporated by E-House in June 2011 and March 2012, respectively, and are wholly owned by us. E-
Real was incorporated to operate the real estate e-commerce business. E-House Tianjin supports our real estate e-commerce business.
Due to PRC legal restrictions on foreign ownership and investment in the internet information services and advertising businesses, we conduct such
activities through contractual arrangements with our consolidated variable interest entities in China. Our e-commerce business with respect to new residential
properties is operated through our contractual arrangements with Shanghai Yi Xin and its shareholders. Our e-commerce business with respect to home
furnishing is operated through our contractual arrangements with Beijing Jiajujiu and its shareholders. Our online advertising business for new residential
properties websites and our secondary listings business are operated through our contractual arrangements with Beijing Leju and its shareholders. We have
entered into, through our PRC subsidiaries, Shanghai SINA Leju, Shanghai Yi Yue and Beijing Maiteng, a series of contractual arrangements with Beijing
Leju, Shanghai Yi Xin, Beijing Jiajujiu and their respective shareholders. As a result of these contractual arrangements, Leju Holdings Limited, through PRC
subsidiaries, is the primary beneficiary of these PRC entities and accounts for them as variable interest entities, and consolidates the financial results of these
entities into our financial statements in accordance with U.S. GAAP. For a description of these contractual arrangements, see “Item 4. Information on the
Company—C. Organizational Structure.”
On April 17, 2014, our ADSs commenced trading on the NYSE under the symbol “LEJU.” We raised from our initial public offering approximately
$101.4 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us. Concurrently with our initial public
offering, we also raised from Tencent in a private placement $18.9 million in net proceeds after deducting estimated fees and expenses payable by us.
Our Relationship with E-House
We are a subsidiary of and controlled by E-House. E-House first reported its real estate online services business as a separate segment in its annual
report on Form 20-F for the year ended December 31, 2009. Prior to our initial public offering in April 2014, E-House has provided us with accounting,
administrative, marketing, internal control, customer service and legal support, and has also provided us with the services of a number of its executives and
employees.
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We have entered into agreements with E-House with respect to various ongoing relationships between us. These include a master transaction
agreement, an offshore transitional services agreement, an onshore transitional services agreement, a non-competition agreement and an onshore cooperation
agreement. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions and Agreements with E-House”
and “Item 3. Key Information—Risk Factors—Risk Related to Our Carve-out from E-House and Our Relationships with E-House.”
On or about January 15, 2015, E-House completed a partial spin-off of us by distributing in the form of a dividend of 0.05 ordinary shares, par value
$0.001, of Leju, for each of E-House ordinary shares outstanding as of December 3, 2014, or 0.05 ADSs of Leju, for each of E-House ADSs outstanding as of
December 3, 2014. E-House distributed a total of 7,103,280 ordinary shares of Leju to holders of E-House ordinary shares in this manner, which include a
total of 3,877,658 ordinary shares of Leju in the form of 3,877,658 ADSs of Leju to E-House ADS holders through the depositary bank of E-House.
Following the completion of the partial spin-off, E-House owned 93,694,920 ordinary shares of us. As of March 31, 2016, E-House owned 93,694,920
ordinary shares of us, representing approximately 69.3% of our total outstanding ordinary shares.
Our Relationship with Tencent
On March 10, 2014, we entered into a strategic cooperation agreement with Tencent, a provider of comprehensive internet services serving the
largest online community in China. Pursuant to the strategic cooperation agreement, we and Tencent have agreed to jointly develop software and tools for use
on Tencent’s social communication platform, Weixin, to facilitate our opening of Weixin public accounts associated with real estate projects, which provides
real estate information to Weixin users, enable us to better connect with our users through such accounts and expand payment solutions provided to user. We
have agreed to adopt Weixin payment solutions as the default payment method for real estate O2O e-commerce transactions conducted by our users on
Weixin. We and Tencent have also agreed to explore and pursue additional opportunities for potential cooperation, including but not limited to cooperation
involving Tencent’s social communications platform, including Weixin, “QQ” and “mobile QQ;” the social media service, “Tencent Weibo;” the social
networking service “Qzone;” and/or certain other Tencent wholly-owned internet properties in China.
In March 2014, pursuant to a share purchase and subscription agreement we entered into with E-House and Tencent, Tencent acquired from E-House
19,201,800 of our ordinary shares, or 15% of our total outstanding shares on a fully diluted basis, including all options and restricted shares and any other
rights to acquire our shares that were granted and outstanding, for $180 million in cash. Concurrent with the consummation of our initial public offering,
Tencent purchased 2,029,420 ordinary shares from us at a price per ordinary share equal to the initial public offering price per ordinary shares to maintain a
15% equity interest in us on a fully diluted basis as of the consummation of our initial public offering. In connection with the sale of shares to Tencent, we
have entered into an investor rights agreement with E-House and Tencent, which grants E-House and Tencent certain registration rights with respect to our
ordinary shares owned by them, grants certain board representation rights to Tencent and places certain restrictions on the transfer of our ordinary shares by
E-House or Tencent.
See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions and Agreements with Tencent” for
more information.
Corporate Information
Our principal executive offices are located at 15/F, Beijing Shoudong International Plaza, No. 5 Building, Guangqu Home Dongcheng District,
Beijing 100022, People’s Republic of China. Our telephone number at this address is +86 10 5895 1000. Our registered office in the Cayman Islands is
located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. In addition, we have
57 branch offices in mainland China and a branch office in Hong Kong. Our agent for service of process in the United States is Law Debenture Corporate
Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.
B. Business Overview
Overview
We are a leading O2O real estate services provider in China. We offer real estate e-commerce, online advertising and online listing services through
our online platform, which comprises local websites covering over 260 cities and various mobile applications. We integrate our online platform with
complementary offline services to facilitate residential property transactions. In addition to our own websites, we also operate various real estate and home
furnishing websites of SINA. We had also operated Baidu’s real estate and home furnishing websites until December 31, 2015. Moreover, we operate official
accounts on various mobile platforms, including over 50,000 on Weibo and over 70,000 on Weixin.
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E-Commerce. We offer e-commerce services primarily in connection with new residential property sales. Our O2O services for new residential
properties include selling discount coupons and facilitating online property viewing, physical property visits, marketing events and pre-sale customer support.
We earn revenue primarily from the sale of discount coupons used for property purchases.
Online Advertising. We currently sell advertising primarily on the SINA new residential properties and home furnishing websites, which are operated
by us. We also had similar arrangement with Baidu until December 31, 2015. In addition, we are the exclusive advertising agent for the SINA home page and
non-real estate websites with respect to advertising sold to real estate and home furnishing advertisers. We also had the exclusive right to sell Baidu’s Brand-
Link product for real estate related advertising until December 31, 2015.
Listing. We offer fee-based online property listing services to real estate agents and free services to individual property sellers. We currently operate
the SINA real estate websites for listings of existing residential properties for sale or lease. We had also operated the Baidu real estate websites for such
listing until December 31, 2015.
We have experienced substantial growth in recent years. Our total revenues have increased from $335.4 million in 2013 to $496.0 million in 2014
and to $575.8 million in 2015. We generated net income of $42.7 million, $66.7 million and $34.8 million in 2013, 2014 and 2015, respectively. We had
adjusted net income of $63.4 million, $90.9 million and $56.9 million in 2013, 2014 and 2015, respectively. Substantially all of our operations are in China.
For information regarding adjusted net income, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures”.
Our O2O Platform
We offer multiple online and offline access points for consumers. We reach consumers through our own websites; various websites on sina.com
which are operated by us; the microblog, SinaWEIBO; the social communication platform Weixin, and various mobile applications. These websites and
mobile applications enable us to better reach potential purchasers for whom we are then able to provide our offline services. We also provide complementary
offline services to cultivate customer loyalty and ensure superior customer experience.
Websites
Our internet presence includes local real estate websites across China that we either operate directly or outsource to local outsourcing partners. These
local websites provide region-specific real estate news, information, property data and access to online communities to real estate consumers and participants.
We believe our local presence in each of these cities enables us to provide services that are tailored to local conditions, enhancing the attractiveness of our
websites to consumer and to advertisers who seek targeted advertising opportunities.
Through our direct operations and outsourcing to local partners we operate websites in every province of China, except Xinjiang and Tibet.
New residential property websites that we operate include house.sina.com.cn and leju.com. Viewers are automatically directed to a local website
with localized real estate information and services, covering over 260 cities. On house.sina.com.cn and our website, leju.com, we offer customers the ability
to purchase discount coupons for property purchases. We also operate esf.sina.com.cn, an existing residential property website. Viewers are automatically
directed to a local website with localized real estate information and services, covering 60 cities. Home furnishings websites that we operate include
jiaju.com, which is a platform for distributors to offer home furnishings to consumers, jiaju.sina.com.cn, which offers information with respect to home
furnishing, and 7gz.com, which is a platform connecting customers with professional contractors. Viewers have access to localized information on home
furnishing information, offerings and listings of contractors across China through our home furnishing websites.
We sell online advertising on each of our self-operated local websites covering 74 cities. We also outsource 189 local websites to third parties that
pay us fixed fees for the right to operate the websites. The amount of user traffic on the websites that we own or operate, our ability to achieve user
demographic characteristics that are attractive to advertisers, and our ability to demonstrate such user traffic and demographic characteristics through website
traffic tracking tools and reporting systems are important factors in maintaining our advertising revenue from websites that we operate directly and fixed fees
from websites that we outsource to third parties. We track such data internally and through third party tracking tools. We identify cities to convert to direct
operations on an ongoing basis.
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Mobile Applications
Our mobile applications include “Pocket Leju,” “Leju Er Shou Fang,” “Fang Niu Jia” and “Pocket Renovation,” each of which has version for the
iOS and Android operating systems.
· Pocket Leju is China’s first mobile real estate e-commerce platform. Pocket Leju provides personalized services to potential buyers of new and
existing homes, and potential residential renters. These services include home visits, selection, access to purchase discounts, special offer
recommendations, local housing price interpretations, purchase guides, property assessment, tax calculation, housing loan calculation and
others. Pocket Leju also assists buyers with home purchasing procedures.
· Leju Er Shou Fang provides services to potential home buyers of existing homes and potential residential renters with housing information
provided by brokers, as well as housing loan calculation and chat tools.
· Fang Niu Jia provides services to brokers, including free calls to targeted clients, promotion of brokers with “gold” status, clients’ mortgage loan
services, group chat and purchasing tools.
· Pocket Renovation provides a variety of styles for high-quality home decoration to users. Users of Pocket Renovation can directly contact
designers and contractors via telephone and other modes for renovation consultations. Pocket Renovation also provides favorable promotions,
discounts on home decoration goods, knowledge for various stages of renovations, decoration diaries posted by users and other services to users
and provides a renovation budget analysis system and billing management system to help the users manage the financial aspects of the
renovation.
On March 10, 2014, we entered into a strategic cooperation agreement with Tencent, a provider of comprehensive internet services serving the
largest online community in China. Pursuant to the strategic cooperation agreement, we and Tencent have agreed to jointly develop software and tools for use
on Tencent’s social communication platform, Weixin, to facilitate our opening of Weixin public accounts associated with real estate projects, which we
believe will provide real estate information to Weixin users, enable us to better connect with our users through such accounts and expand payment solutions
provided to users. We have agreed to adopt Weixin payment solutions as the default payment method for real estate O2O e-commerce transactions conducted
by our users on Weixin. We and Tencent have also agreed to explore and pursue additional opportunities for potential cooperation, including but not limited to
cooperation involving Tencent’s social communications platform, including Weixin, “QQ” and “mobile QQ;” the social media service, “Tencent Weibo;” the
social networking service, “Qzone;” and/or certain other Tencent wholly-owned internet properties in China. We had opened 73,834 project-related official
accounts on Weixin by December 31, 2015.
In March 2014, we launched our mobile e-commerce platform based on (i) existing mobile applications developed by our company, including
“Pocket Leju” and “Fang Niu Jia,” and (ii) SINA’s Weibo and Tencent’s Weixin, two of China’s leading social media platforms. Our mobile platform aims to
connect home buyers and developers and real estate agents through mobile devices to allow potential buyers to view detailed information about real estate
projects, conduct live chats with sales agents, make appointments for property viewing, reserve individual units, and purchase discount coupons. Our mobile
e-commerce platform will also connect real estate sales personnel and agents with potential home buyers and sellers, including through live chat services, in
addition to providing updated customer data and analysis and a facility for making appointments for site visits.
In June 2014, we officially launched the first “Weixin Home Promotion”, using the Weixin platform as an integral part of our mobile e-commerce
platform. In July 2014, we upgraded our mobile e-commerce platform to consolidate all of our mobile resources to provide developers with three unique
groups of mobile promotional tools, including media channels, communication tools and e-commerce tools, to further enhance mobile marketing for our
clients. Since then we have continually added new product offerings on our mobile platform, including various interactive marketing games. In July 2015, we
launched an innovative mobile product in cooperation with Didi Kuaidi, a leading taxi and car service company in China, to arrange individual site visits for
customers using private cars.
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Complementary Offline Services
Our offline services include physical property visits and a call center, which enables our website viewers to contact us or representatives of property
developers for information on new residential properties and our services. Our services are also available at developers’ show rooms and through real estate
brokers. We also organize and conduct offline marketing events for property developers to promote their new resident properties.
Our Services
We offer e-commerce services in connection with new residential property sales and home furnishing; online advertising services in connection with
new residential property sales and home furnishing; and online listing services for existing residential properties.
E-Commerce
The majority of our e-commerce revenue is derived from the sale of discount coupons for new residential properties that are promoted by developers.
We commenced the sale of discount coupons from the first quarter of 2012. In addition, since the third quarter of 2012, we have provided third-party
merchants of home furnishing and improvement products and services with the ability to reach consumers through our home furnishing platform, jiaju.com.
Our revenues generated from e-commerce services in 2013, 2014 and 2015 were $170.2 million, $326.7 million and $420.6 million, respectively, representing
50.7%, 65.9% and 73.0%, respectively, of our total revenues for those periods.
O2O Services for New Residential Properties
Our O2O offering includes selling discount coupons for new residential properties, facilitating online property viewing and physical property visits,
setting up telephone calls between prospective purchasers and representatives of developers, organizing real property exhibitions and facilitating pre-sales
customer support provided by developers. Our O2O services can be accessed by prospective purchasers through the real estate website of SINA which we
operate and our website, leju.com, as well as through our mobile applications. Prospective purchasers can also access our services at show houses for new
residential properties and through real estate developers.
Discount Coupons. A discount coupon entitles a purchaser to purchase a property from the property developer at a particular development at a
discount from the advertised price. Discount coupons can be purchased by prospective property purchasers online at leju.com and house.sina.com.cn, and
their respective local websites as well as offline in showrooms for new property developments. We enter into arrangements with developers whereby we offer
O2O services, including the sale of discount coupons, to facilitate property sales. Each such arrangement is specific to a particular development. The
arrangement may terminate at a pre-agreed date or continue until all properties at the development have been sold, as agreed in advance by the developer and
us. Coupons may expire on a stated expiry date, typically at the end of a promotional period, or when all properties at the development to which the coupon
relates have been sold. When a prospective property purchaser purchases a discount coupon as part of our O2O services, the purchaser remits the payment for
the coupon to an account maintained by the purchaser with an independent payment platform provider. Upon confirmation from a purchaser or developer that
a discount coupon is redeemed to purchase property, the payment for the discount coupon is transferred to us. However, if for any reason the coupon is not
redeemed, the payment is refunded to the purchaser and we do not earn revenue from the transaction.
The following table sets forth certain operating metrics with respect to our sales of discount coupons for the periods specified.
Three months ended
March 31, 2015
Three months ended
June 30, 2015
Three months ended
September 30, 2015
Three months ended
December 31, 2015
Number of discount coupons issued to
prospective purchasers (number of
transactions)
Number of discount coupons redeemed
(number of transactions)
(1)
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40,765
32,111
43
94,489
52,413
70,641
57,303
98,051
61,567
Note:
(1) The number of discount coupons issued to prospective purchasers that were used by the purchaser to obtain a discount in connection with a property
purchase during the period. We recognize revenue from the sale of discount coupons that are redeemed. See ‘‘Item 5. Operating and Financial Review
and Prospects—A. Operating Results—Critical Accounting Policies.’’
We have entered into arrangements with China Unionpay, or Unionpay, to use its payment platform to collect payments for discount coupons. Under
our agreement with Unionpay, we are Unionpay’s exclusive partner for real estate e-commerce services during the term of our contract and Unionpay has
agreed not to provide e-payment services to other real estate internet enterprises. The term of the agreement is for two years through 2015 and will be
automatically renewed for another two years unless either party provides written notice of cancellation. Either party may terminate the agreement upon 30
days written notice to the other party. Under the agreement, Unionpay provides customers with the ability to make online or on-site payments.
Financial services products. In connection with our discount coupon offerings, we also offer to qualified home purchasers various financial services
products, with a view of facilitating the integration of real estate e-commerce with financial services, increasing liquidity and improving the overall
purchasing power of home purchasers in China. In November 2013, we formed a strategic partnership with CITIC, pursuant to which CITIC introduced Leju
Loan through our online platform. Through Leju Loan, qualified home purchasers who purchase real estate through our real estate e-commerce platform at
leju.com can obtain a line of credit from CITIC by pledging their existing properties as collateral. In July 2014, we also began to offer the “Easy Home Plan”,
which allows qualified home purchasers to obtain a bridge loan of up to 50% of the down payment through Leju e-Loan, a product offered through “Fang Jin
Suo” platform, the first online real estate financial services platform in China. The “Fang Jin Suo” platform was jointly developed by E-House, SINA and
Sequoia Capital. We currently do not have revenues from these products. We believe that the offering of these products makes our online platform more
attractive to both developers and home purchasers.
Home Furnishing
Our website, jiaju.com, is a business-to-consumer platform that we launched in the third quarter of 2012, through which home furnishing suppliers
may offer their products to consumers. We charge distributors a technical services fee in connection for setting up the service and a commission based on the
value of products and services sold through our platform. Payments for purchases made on jiaju.com are processed by our third-party partner which allocates
such payments to home furnishing suppliers and us in accordance with our pre-agreed arrangements with home furnishing suppliers.
In March 2013 we entered into an agreement with Beijing Jing Dong Century Trading Co., Ltd., or JD.com, pursuant to which we launched The Jing
Dong Jiajujiu Building Materials and Furnishings Flagship Store, or the JD Jiajujiu Store, on JD.com’s website in October 2013. The JD Jiajujiu Store
promotes home furnishing and home improvement products and services that are also promoted on jiaju.com. We charge home furnishing suppliers a
commission, and we are required to pay JD.com a commission, in each case based on the value of products and services sold by the JD Jiajujiu Store.
In July 2014, we launched qianggongzhang.com (now 7gz.com), an online platform for independent contractors who serve home purchasers in the
home renovation and decoration process, by working with city-level operators who aggregate the contractors. Home purchasers in each city can use the
website to choose and compare up to three free quotes from individual contractors before selecting a contractor and can rely on third-party inspection
companies engaged by us to ensure quality control during and after the renovation and decoration process.
Online Advertising
We currently operate the SINA real estate and home furnishing websites. We had also operated such websites of Baidu until December 31, 2015. In
addition, we are the exclusive advertising agent for SINA’s home page and non-real estate websites with respect to advertising sold to real estate and home
furnishing advertisers. We also had the exclusive right to sell Baidu’s Brand-Link product for real estate related advertising until December 31, 2015. We earn
revenue from the sale of online advertising on each of these websites. Revenues for online advertising are typically based on a fixed fee for the period of the
advertising and are recognized ratably. We enter into both short term and long term online advertising contracts with advertisers and we are entitled to
prepayment from certain customers while others pay us only after the advertisement has been posted.
Our revenues generated from advertising services in 2013, 2014 and 2015 were $145.4 million, $155.1 million and $134.2 million, respectively,
representing 43.4%, 31.2% and 23.3%, respectively, of our total revenues for those periods.
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Advertising on SINA Websites
We operate the SINA real estate website, house.sina.com.cn, and the SINA home furnishings website, jiaju.sina.com.cn, and we are entitled to all
advertising revenues from these websites. In addition, pursuant to an agency agreement with SINA, we are the exclusive advertising agent of the SINA
homepage and non-real estate websites, for advertising sold to real estate and home furnishing advertisers. We are entitled to 85% of the revenue derived from
advertising on these other websites. Aided by SINA’s strong brand recognition, market influence in China’s online space and its large user base, we help real
estate advertisers reach their target audiences in many of China’s major cities. Real estate advertisers primarily include real estate developers, agents and
brokers as well as suppliers and providers of home furnishing and improvement products and services.
Furthermore, as the exclusive real estate advertising agency for SINA non-real estate websites, we facilitate advertising by our real estate advertising
clients on the SINA real estate websites as well as non-real estate websites. Real estate advertising offerings on SINA websites include online advertising and
sponsorship arrangements. Online advertising arrangements allow advertisers to place advertisements on particular areas of SINA websites, in particular
formats, such as banners and text links, and over particular periods of time. Sponsorship arrangements allow advertisers to sponsor a particular area on SINA
websites in exchange for a fixed payment over the contract period. Real estate advertising on SINA websites also includes revenue from outsourcing
arrangements with local business partners. Revenues from outsourcing arrangements are on a fixed fee and recognized ratably over the term of the contract.
Our revenues generated from advertising on SINA websites represented 90.5%, 89.9% and 90.1%, respectively, of our total revenues from online advertising
in 2013, 2014 and 2015.
We and SINA have entered into a number of agreements governing our relationship with SINA, including an advertising inventory agency
agreement, an amended and restated domain name and content license agreement, an amended and restated trademark license agreement and an amended and
restated software license and support services agreement. For descriptions of these agreements, see “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Transactions and Agreements with SINA.”
Advertising on Baidu Websites
We had been the exclusive real property advertising partner of Baidu, China’s leading search engine platform, from 2010 to 2015. In August 2010,
we launched the Baidu real estate website, house.baidu.com, and home furnishing website, jiaju.baidu.com. We earn revenue from the sale of search-based
advertising on these websites. Pursuant to our original strategic cooperation agreement with Baidu, we had the exclusive right, through March 31, 2015, to
build and operate all Baidu websites related to real estate and home furnishing, and to retain all advertising revenues generated from these websites in
exchange for a fixed fee that we pay to Baidu in two installments per year. In August 2011, we expanded our strategic partnership with Baidu, pursuant to
which we became Baidu’s premier strategic online real estate partner and obtained the exclusive right, through March 2015, to sell Baidu’s real estate Brand-
Link product to advertisers. In addition, we and Baidu had also continued our cooperation in several other Baidu products, including Baidu Connect on
mobile devices, to further expand the online search-based advertising market for the real estate industry. In March 2015, we and Baidu agreed to extend the
term of our strategic cooperation for another nine months through December 2015. We did not renew the strategic partnership with Baidu upon the expiration
of the cooperation in December 2015, but continue to work with Baidu as our product partner.
Most of our revenues generated by our arrangements with Baidu are derived from sales of the Brand-Link product. Our revenues generated from
advertising on Baidu websites represented 9.5%, 10.1% and 9.9% of our total revenues from online advertising in 2013, 2014 and 2015, respectively.
Listing
We offer online residential listing services for sales and leases of existing residential properties. Our listing services are currently offered in 17 cities
where we maintain a local sales force. Our revenues generated from online listing services in 2013, 2014 and 2015 were $19.8 million, $14.3 million and
$21.0 million, respectively, representing 5.9%, 2.9% and 3.7%, respectively, of our total revenues for those periods. Real estate agents and property owners
use our listing services. Payment of the listing fees entitle them to post multiple listings for properties over the subscription period. Our listing subscription
contracts are typically for a term of up to one year with fixed fees payable on a monthly basis for a fixed number of listings. The subscription fees are
generally fixed and vary from city to city. We also provide free listing services to individual property sellers selling existing residential properties. Our listing
customers submit property listings by logging on to our platform directly. Once a listing has been uploaded to our website, it can be viewed for free by
visitors to our website. All visitors to our website have access to listing information free of charge, 24-hours a day. With respect to listings submitted by agents
or brokers, the name of the agent or broker appears as a link, offering viewers access to additional listings promoted by the same agent or broker.
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Brand Promotion
We employ a variety of marketing and brand promotion methods to enhance our brand recognition and attract developer clients and real estate
purchasers, including advertising arrangements and the Leju Membership Club. Membership in the Leju Membership Club is free. Users can sign up to join
the Leju Membership Club online at our website, leju.com, and become members following email or phone number confirmation through text message.
We conduct advertising activities in 74 cities where we directly operate local websites through promotional events for developers and other industry
participants, including industry award ceremonies, panel discussions and similar events.
Sales and Marketing
Most of our new home advertising revenue and home furnishing advertising revenue is derived from our direct sales force. We also derive new home
and home furnishing advertising revenue from sales through third party advertising agencies.
We have built a sales and marketing team that is experienced in the online advertising, internet and real estate industries. Our sales and marketing
team comprised 1,276 personnel as of December 31, 2015. Our sales and marketing personnel work closely with our customers in local markets and help us
gain insight into developments in these local markets, the competitive landscape and new market opportunities, which help us set our prices and strategies for
each locality.
To motivate our sales and marketing personnel, a majority of their compensation consists of performance incentives such as commissions and
bonuses. Sales quotas are assigned to all sales personnel according to monthly, quarterly and annual sales plans. In addition, we apply a merit based
promotion system to motivate our sales personnel.
Seasonality
The real estate sector in China is characterized by seasonal fluctuations, which may cause our revenues to fluctuate significantly from quarter to
quarter. The first quarter of each year generally contributes the smallest portion of our annual revenues due to reduced real estate transactions, advertising and
marketing activities of our customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs in
January or February of each year and due to the cold winter weather in northern China. In contrast, the third and fourth quarters of each year generally
contribute a larger portion of our annual revenues due to increased real estate transaction, advertising and marketing activity during the months of
September and October.
Competition
We face competition from other companies in each of our primary business activities. We compete with these companies primarily on our ability to
attract consumers to our websites. We compete for consumers principally on the basis of the quality and quantity of real estate listings and other information
content and services. We also compete for developers’ business on the basis on website traffic volume, consumer loyalty, geographic coverage and service
offerings. We also compete for qualified employees with skills and experience related to sales, real estate services, advertising, technology and the internet
industry. Our primary competitor at the national level is fang.com, formerly soufun.com. In addition, we have faced and may continue to face competition
from regionally focused websites providing regional real estate listings together with localized services. We have various regional competitors, such as
house365.com in the Nanjing market, and we compete with various providers in the market for online paid property listings, including 58.com, which
acquired anjuke.com in 2015. Our competitors may have more established brand names, larger visitor numbers and more extensive distribution channels than
we do, either overall, or in specific regions in which we operate. We also compete with traditional advertising media such as general-purpose and real estate-
focused newspapers, magazines, television and outdoor advertising that compete for spending on real estate advertising and listings.
Some of our competitors may have greater access to capital markets, more financial and other resources and a longer operating history than us. For
instance, major general-purpose websites, which provide real estate and real estate-related information services, may have an advantage over us due to their
more established brand name, larger user base and extensive internet distribution channels.
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Technology
To better serve our customers, we have utilized our key proprietary technologies and developed a technology infrastructure that is specifically used
for our real estate and home related internet website services. The key components of our technology platform include:
· Search platform. Our search platform is designed to support targeted searches of our listing databases. Besides the key word search function, our
search platform provides additional search functions that improve search accuracy with various search criteria, including searches based on the
location, price and type of the property. In addition, our search engine is able to refine the search by conditional filtering and aggregation of the
search results.
· Large-scale system infrastructure. With a combination of proprietary in-house and third-party solutions, we have designed our system to handle
large amounts of data flow with a high degree of scalability and reliability. We use parallel computing technology and clusters of low-cost
computers to handle high-volume visitor traffic and process large amounts of information.
· Anti-fraud and anti-spam technology. We have anti-fraud technology incorporated in our IT systems with a view to addressing the potential for
non-compliant activities at our local branch offices. We maintain advertising price and discount data in our customer relationship management
master file. Our system automatically triggers a risk alert for any deviation from pre-set discounts, in which case, a pre-approval email from our
headquarters is required. Our system also generates a weekly report of any such exceptions for review by our headquarters. We also have an
anti-spam system through which we are able to detect identify and filter spam messages with a view to protecting our staff. We attempt to
continuously improve the accuracy and effectiveness of our technology through machine-learning capability and customizable rules.
We maintain our servers and backup servers in Beijing, Shanghai, Guangzhou and Tianjin. We believe our server hosting partners provide significant
operating advantages, including high-quality bandwidth, constant room temperature and an enhanced ability to protect our systems from power loss, break-ins
and other external causes of service interruption. We have not experienced any material system failures.
Insurance
We maintain property insurance to cover potential damages to a portion of our property. In addition, we provide medical, unemployment and other
insurance to our employees in compliance with applicable laws, rules and regulations. We do not maintain insurance policies covering losses relating to our
systems and do not have business interruption insurance.
Regulation
We are subject to a number of laws and regulations in China relating to real estate service companies. This section summarizes the principal PRC
laws and regulations that are currently applicable to our business and operations.
General
The telecommunications industry, including internet information services, is highly regulated by the PRC government. Regulations issued or
implemented by the State Council, the MIIT and other relevant government authorities cover virtually every aspect of telecommunications network
operations, including entry into the telecommunications industry, the scope of permissible business activities, tariff policy and foreign investment.
The MIIT, under the leadership of the State Council, is responsible for, among other things:
· formulating and enforcing telecommunications industry policy, standards and regulations;
· granting licenses to provide telecommunications and internet services;
· formulating tariff and service charge policies for telecommunications and internet services;
· supervising the operations of telecommunications and internet service providers; and
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· maintaining fair and orderly market competition among operators.
In addition to the regulations promulgated by the central PRC government, some local governments have also promulgated local rules applicable to
internet companies operating within their respective jurisdictions.
In 1994, the Standing Committee of the National People’s Congress promulgated the PRC Advertising Law. In addition, the SAIC and other
ministries and agencies have issued regulations that further regulate our advertising business, as discussed below.
Restrictions on Foreign Investment in the Value-Added Telecommunication Industry and Advertising Industry
Restrictions on Foreign Investment in the Value-Added Telecommunication Industry
In September 2000, the State Council promulgated the Telecommunications Regulations, which categorize all telecommunications businesses in
China as either basic telecommunications businesses or value-added telecommunications businesses. According to the Classification of Telecommunications
Business which came into effect on March 1, 2016, internet information services are classified as value-added telecommunications businesses.
The State Council promulgated the Administrative Rules on Foreign-invested Telecommunications Enterprises in December 2001, as amended in
September 2008, or the FITE Regulations. The FITE Regulations set forth detailed requirements with respect to capitalization, investor qualifications and
application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. Pursuant to these administrative rules, the
ultimate capital contribution ratio of the foreign investor or investors in a foreign-invested telecommunications enterprise that aims to provide value-added
telecommunications services may not exceed 50.0%. In addition, pursuant to the Foreign Investment Industrial Guidance Catalogue issued by the PRC
government, the permitted foreign investment in value-added telecommunications service providers may not be more than 50%. However, for a foreign
investor to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and
operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business
overseas. Moreover, foreign investors that meet these requirements must obtain approvals from the MIIT and the Ministry of Commerce or their authorized
local counterparts, which retain considerable discretion in granting approvals.
In July 2006, the MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-added
Telecommunications Business, or the MIIT Notice, which reiterates certain provisions under the FITE Regulations. According to the MIIT Notice, if any
foreign investor intends to invest in a PRC telecommunications business, a foreign-invested telecommunications enterprise must be established and such
enterprise must apply for the relevant telecommunications business licenses. Under the MIIT Notice, domestic telecommunications enterprises are prohibited
from renting, transferring or selling a telecommunications license to foreign investors in any form, and from providing any resources, premises, facilities and
other assistance in any form to foreign investors for their illegal operation of any telecommunications business in China.
Regulation relating to Our Business
Internet Information Services
General
The provision of real estate and home-related and other content on internet websites is subject to applicable PRC laws, rules and regulations relating
to the telecommunications industry and the internet, and regulated by various government authorities, including the MIIT and the SAIC. Under the applicable
regulations, internet information services are classified as value-added telecommunications businesses, and a commercial operator must obtain an ICP license
from the MIIT or its relevant provincial counterparts in order to carry out commercial internet information service operations in China. If an internet
information service provider is not engaged in commercial internet information service, it is only required to file a record with the MIIT or its relevant
provincial counterparts. In addition, the regulations also provide that operators involved in internet content provision in sensitive and strategic sectors,
including news, publishing, education, health care, medicine and medical devices, must obtain additional approvals from the relevant authorities in relation to
those sectors.
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In compliance with these laws and regulations, Beijing Leju and Shanghai Yi Xin, our consolidated variable interest entities, and Beijing Yisheng
Leju Internet Technology Co., Ltd., a subsidiary of our consolidated variable interest entity Beijing Jiajujiu, each hold a valid ICP license issued by the local
provincial branch of the MIIT for the operation of our value-added telecommunication business.
The MIIT Notice requires that a value-added telecommunications business operator (or its shareholders) must own domain names and trademarks
used by it in the value-added telecommunications business, and have premises and facilities appropriate for such business. To comply with the MIIT Notice,
Beijing Leju, a consolidated variable interest entity, has been registered as the owner or is applying to be the owner of the Chinese and English dual-language
“Leju” trademark in several categories and has obtained the domain names of leju.com and leju.cn. Beijing Yisheng Leju Online Technology Co., Ltd., a
subsidiary of our consolidated variable interest entity Beijing Jiajujiu, has registered the domain name of jiaju.com.
Network Publication Service License
According to the Provisions on Network Publication Service Administration, jointly issued by GAPPRFT and the MIIT in February 2016, all entities
that are engaged in network publication service in China must obtain the Network Publication Service License from GAPPRFT. Network publication service
is broadly defined in the Provisions on Network Publication Service Administration Regulation as the use of information networks to provide the public with
digital works that have characteristics of publication such as editing, creation or processing. Our consolidated variable interest entities and their subsidiaries
do not have network publication licenses. For content which we believe are subject to the requirements of these licenses, such content is hosted by SINA
through our contractual arrangement with SINA. In the case that SINA does not possess the necessary licenses and permits, our content hosted by SINA is
subject to the risk of being suspended by government authorities. Moreover, we cannot assure you that government would not require us to obtain these
licenses separately for operation of our own websites and those websites licensed to us even if the underlying hosting of the relevant content is provided by a
qualified third party. See “Item 3. Key Information—D. Risk Factors—Risks related to Our Business—If we fail to obtain or keep licenses, permits or
approvals applicable to the various online real estate services provided by us, we may incur significant financial penalties and other government sanctions.”
Online Transmission of Audio-Visual Programs
On December 20, 2007, GAPPRFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-visual Program Service, or
the Audio-visual Program Provisions, which came into effect on January 31, 2008. The Audio-visual Program Provisions apply to the provision of audio-
visual program services to the public via internet (including mobile network) within the territory of the PRC. Providers of internet audio-visual program
services are required to obtain a License for Online Transmission of Audio-visual Programs issued by GAPPRFT or complete certain registration procedures
with GAPPRFT. Providers of internet audio-visual program services are generally required to be either state-owned or state-controlled by the PRC
government, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program
services determined by GAPPRFT. On May 21, 2008, GAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for
Online Transmission of Audio-visual Programs, which further sets forth detailed provisions concerning the application and approval process regarding the
License for Online Transmission of Audio-visual Programs. The notice also provides that providers of internet audio-visual program services who engaged in
such services prior to the promulgation of the Audio-visual Program Provisions shall also be eligible to apply for the license so long as their violation of the
laws and regulations (if any) is minor and can be rectified timely and they have no record of violation during the latest three months prior to the promulgation
of the Audio-visual Program Provisions. On April 1, 2010, GAPPRFT issued the Internet Audio/Visual Program Services Categories (Provisional) which
classified internet audio-visual programs into four categories. Our consolidated variable interest entities and their subsidiaries do not have Licenses for Online
Transmission of Audio-visual Programs. For content which we believe are subject to the requirements of these licenses, such content is hosted by SINA
through our contractual arrangement with SINA. In the case that SINA does not possess the necessary licenses and permits, our content hosted by SINA is
subject to the risk of being suspended by government authorities. Moreover, we cannot assure you that government would not require us to obtain these
licenses separately for operation of our own websites and those websites licensed to us even if the underlying hosting of the relevant content is provided by a
qualified third party. See “Item 3. Key Information—D. Risk Factors—Risks related to Our Business—If we fail to obtain or keep licenses, permits or
approvals applicable to the various online real estate services provided by us, we may incur significant financial penalties and other government sanctions.”
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Regulations relating to Information Security and Confidentiality of User Identity and Information
Internet content in China is also regulated and restricted from a state security standpoint. Pursuant to the Decision Regarding the Protection of
Internet Security enacted by the Standing Committee of the National People’s Congress, any effort to undertake the following actions may be subject to
criminal punishment in China:
· gain improper entry into a computer or system of national strategic importance;
· disseminate politically disruptive information;
· leak government secrets;
· spread false commercial information; or
· infringe intellectual property rights.
The Ministry of Public Security has also promulgated measures that prohibit the use of the internet in ways that, among other things, result in the
leakage of government secrets or the spread of socially destabilizing content. The Ministry of Public Security and its local counterparts have supervision and
inspection powers in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an internet information service provider violates
these measures, the PRC government may revoke its license and shut down its website. To comply with these laws and regulations, we require our users to
accept the user terms or service agreement for registration with, and use of, our websites, whereby they agree to comply with the applicable PRC laws and
regulations in using our websites, and we also maintain constant surveillance and monitoring on the information posted on our websites. However, the
measures we take may not be adequate to ensure that all the information posted on our websites are in compliance with these laws and regulations. See “Item
3. Key Information—D. Risk Factors—Risks related to Our Business—Regulation of the internet industry in China, including censorship of information
distributed over the internet, may materially and adversely affect our business.”
The security and confidentiality of information on the identity of internet users are also regulated in China. The Internet Information Service
Administrative Measures promulgated by the PRC State Council require internet information service providers to maintain an adequate system that protects
the security of user information. In December 2005, the Ministry of Public Security promulgated the Regulations on Technical Measures of Internet Security
Protection, requiring internet service providers to utilize standard technical measures for internet security protection. Moreover, the Rules for Regulating the
Market Order of Internet Content Services enhance the protection of internet users’ personal information by prohibiting internet information service providers
from unauthorized collection, disclosure or use of personal information of their users. In December 2012, the Standing Committee of the National People’s
Congress passed the Decision on Strengthening Internet Information Protection, which provides that all internet service providers in China, including internet
information service providers, should require their users to provide real identity information when entering into service agreements or providing services to
the users. On July 16, 2013, the MIIT issued Provisions on Protecting Personal Information of Telecommunication and Internet Users, or the Provisions on
Personal Information, under which Internet information service providers are subject to strict requirements to protect personal information of internet users.
The internet information service providers are prohibited from collecting personal information of internet users without obtaining consent from the users.
Personal information collected shall be used only in connection with the services to be provided by Internet information service providers to such users and
shall be kept in strict confidence. To comply with these laws and regulations, we require our users to accept the user terms or service agreement for
registration with and use of our websites whereby they agree to provide certain personal information to us and agree to our use of their provided personal
information under certain agreed circumstances, and we have established information security systems to protect users’ privacy.
Advertising Services
The SAIC is responsible for regulating advertising activities in China. Pursuant to applicable regulations, companies that engage in advertising
activities in China must obtain from the SAIC or its local branches a business license which specifically includes operating an advertising business within its
business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of illegal
revenues 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 law or regulation.
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The business scope of the business licenses of Beijing Leju and its subsidiaries includes operating an advertising business, which allows them to
engage in the advertising business.
PRC advertising laws and regulations also set forth certain content requirements for advertisements in the PRC 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 by PRC advertising laws and
regulations to ensure that the content of the advertisements they prepare or distribute is true and in full compliance with applicable law. 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. In circumstances involving serious violations, the SAIC or its local branches
may revoke violators’ licenses or permits for their advertising business operations. To comply with these laws and regulations, we maintain a task force to
review the advertising materials to ensure the content does not violate the relevant laws and regulations before displaying such advertisements, and we also
request relevant advertisers to provide proof of governmental approval if an advertisement is subject to special government review.
Regulations relating to Real Estate Brokerage Business
The principal regulations governing the real estate brokerage business in China include the Law on Administration of the Urban Real Estate issued
by the Standing Committee of National People’s Congress in July 1994 and revised in August 2009, and the Administrative Measures for Real Estate
Brokerage issued in January 2011. Pursuant to these laws, a company must register with the local offices of SAIC in each locality where it does business in
order to operate real estate brokerage business. In addition, a real estate brokerage company and its branches shall file with the local real estate administrative
authority within 30 days after it obtains the business license.
The previous Foreign Investment Industrial Guidance Catalogue issued in 2011 classified the real estate agency and brokerage services within the
restricted category for foreign investment. Accordingly, a wholly foreign-owned enterprise in China was required to obtain approval from the Ministry of
Commerce or its local counterpart in order to establish or invest in any subsidiary to engage real estate agency and brokerage services. The National
Development and Reform Commission and the Ministry of Commerce issued a new Foreign Investment Industrial Guidance Catalogue, which became
effective on April 10, 2015. The new Foreign Investment Industrial Guidance Catalogue removed the real estate agency and brokerage services from the
restricted category. Accordingly, the establishment of or the investment in a subsidiary to engage in real estate agency and brokerage services is no longer
subject to the approval of the Ministry of Commerce or its local counterparts.
We mainly use City Rehouse and its subsidiaries to provide support for our e-commerce business. Each subsidiary of City Rehouse has obtained and
maintained a business license with such business scope, and 22 of our PRC operating entities have completed the filing with the competent local real estate
administrative authorities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Failure to obtain the approvals or
complete the filings required for our real estate agency and brokerage business in China may limit our ability to provide real estate agency and brokerage
services or establish new PRC operating entities”
Regulations relating to Trademarks
Both the PRC Trademark Law and the Implementation Regulation of the PRC Trademark Law, as currently in effect, provide protection to the
holders of registered trademarks and trade names. The PRC Trademark Office handles trademark registrations and grants a renewable term of rights of ten
years to registered trademarks. In addition, trademark license agreements must be filed with the PRC Trademark Office.
After receiving a trademark registration application, the PRC Trademark Office will make a public announcement with respect to the proposed
trademark registration application if the relevant trademark passes the preliminary examination. Any person may, within three months after such public
announcement, object to such trademark application. The PRC Trademark Office will then decide who is entitled to the trademark registration, and its
decisions may be appealed to the PRC Trademark Review and Adjudication Board, whose decision may be further appealed through judicial proceedings. If
no objection is filed within three months after the public announcement period or if the objection has been overruled, the PRC Trademark Office will approve
the registration and issue a registration certificate, upon which the trademark is registered and will be effective for a renewable ten-year period, unless
otherwise revoked. As of December 31, 2015, we owned or licensed 193 registered trademarks in China, and had 50 trademark applications in various
industry categories pending with the China Trademark Office.
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Regulations relating to Employment
Under the PRC Labor Law, PRC Labor Contract Law and its implementing rules, employers must enter into written labor contracts with full-time
employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Employers in China are required
to provide employees with welfare schemes covering pension insurance, medical insurance, work-related injury insurance, unemployment insurance,
maternity insurance and housing funds. Employers in most cases are also required to provide a severance payment to their employees after their employment
relationships are terminated. We have caused all of our full-time employees to enter into written labor contracts with us and provide our employees with the
proper welfare and employment benefits.
Pursuant to the PRC Labor Contract Law and its amendments, dispatched employees are intended to be a supplementary form of employment and
shall only apply to provisional, auxiliary or substitutive positions, and the fundamental form should be direct employment by enterprises and organizations
that require employees. It is expressly stated that the number of dispatched employees an employer uses may not exceed a “certain percentage” of its total
labor force. The Interim Provisions on Labor Dispatch which came into force on March 1, 2014, further set such percentage at 10% and provide a two-year
transitional period for compliance with such requirement. Failure to comply with these requirements may result in orders of rectification and imposition of
fines. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Increases in labor costs in the PRC may adversely affect our
business and our profitability.”
Regulations relating to Foreign Exchange Control and Administration
Foreign Exchange Administration
The principal regulation governing foreign currency exchange in the PRC is the Regulations of the PRC on Foreign Exchange Administration, or the
Foreign Exchange Regulations, as amended in August 2008. Under the Foreign Exchange Regulations and other relevant PRC regulations and rules,
Renminbi is convertible into other currencies for the purpose of current account transactions, including the distribution of dividends, interest payments, trade
and service-related foreign exchange transactions. The conversion of Renminbi into other currencies and remittance of the converted foreign currency outside
China for capital account transactions, such as capital injections, loans, repatriation of investments and investments in securities outside the PRC, requires the
prior approval from, or registration with, SAFE or its local branches.
As an offshore holding company with PRC subsidiaries, we may (i) make additional capital contributions to our PRC subsidiaries; (ii) establish new
PRC subsidiaries and make capital contributions to these new PRC subsidiaries; (iii) make loans to our PRC subsidiaries or consolidated variable interest
entities; or (iv) acquire offshore entities with business operations in China in an offshore transaction. However, most of these uses are subject to PRC
regulations and approvals, such as:
· capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterparts;
· loans by us to our PRC subsidiaries cannot exceed the statutory limit which is the difference between the amount of total investment and the
amount of registered capital of such subsidiaries as approved by the Ministry of Commerce or its local counterpart, and must be registered with
SAFE or its local branches; and
· loans by us to our consolidated variable interest entities must be filed with the National Development and Reform Commission and must also be
registered with SAFE or its local branches.
The Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE
Circular 19, became valid on June 1, 2015. Under SAFE Circular 19, a foreign-invested enterprise may choose converting its registered capital from foreign
currency to Renminbi on self-discretionary basis, and the Renminbi capital converted can be used for equity investments within PRC, which will be regarded
as the reinvestment of foreign-invested enterprise. In addition, SAFE Circular 19 prohibits a foreign-invested enterprise from using Renminbi funds converted
from its foreign currency registered capital to provide entrustment loans or repay loans borrowed from non-financial enterprises. Violation of these circulars
could result in severe penalties, including heavy fines. These circulars may limit our ability to transfer funds to our consolidated variable interest entities and
the subsidiaries of our wholly foreign-owned subsidiaries in China, and we may not be able to convert foreign currency-denominated funds into Renminbi to
invest in or acquire any other PRC companies, or establish other consolidated variable interest entities in China. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiaries.”
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In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, or SAFE Circular 59, which substantially amends and simplifies the then current foreign exchange procedures. Under SAFE Circular 59,
the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee
account) no longer requires the approval of SAFE. Reinvestment of Renminbi proceeds by foreign investors in the PRC no longer requires SAFE approval or
verification.
In May 2013, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic
Direct Investment by Foreign Investors and the Supporting Documents, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration. Institutions and individuals shall register with SAFE and/or its local
branches for their direct investment in the PRC. Banks shall process foreign exchange business relating to the direct investment in the PRC based on the
registration information provided by SAFE and its branches.
In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration
Applicable to Direct Investment, or SAFE Circular 13, which will become effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange
procedures will be further simplified, and foreign exchange registrations of direct investment will be handled by banks instead of SAFE and its branches.
Foreign Exchange Registration of Offshore Investments by PRC Residents
The Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-Trip Investment Activities of Domestic
Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75, requires PRC residents to register with the relevant local branch of
SAFE before establishing or controlling any company outside of China, referred to as an offshore special purpose company, for the purpose of raising funds
from overseas to acquire or exchange the assets of, or acquiring equity interests in, PRC entities held by such PRC residents and to update such registration in
the event of any significant changes with respect to that offshore company. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange
Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on
July 4, 2014, which replaced the SAFE Circular 75. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with
their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” The
term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents
in the offshore special purpose vehicles by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE
Circular 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle,
such as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. If the shareholders
of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be
prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore
company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and
amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions.
We have requested our beneficial owners who are PRC residents to make the necessary applications, filings and amendments required by SAFE.
However, we cannot provide any assurances that all of our beneficial owners who are PRC residents will continue to make, obtain or amend any applicable
registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident beneficial owners to comply with the registration
procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our ability to contribute
additional capital into our PRC subsidiaries, or limit our PRC subsidiaries’ ability to pay dividends or make other distributions to our company or otherwise
adversely affect our business. Moreover, failure to comply with the SAFE registration requirements could result in liability under PRC laws for evasion of
foreign exchange restrictions.
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Foreign Exchange Registration of Employee Stock Incentive Plans
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In February 2012, SAFE issued 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 SAFE in
March 2007. Under the Stock Option Rules, a PRC entity’s directors, supervisors, senior management officers, other staff or individuals who have an
employment or labor relationship with a Chinese entity and are granted stock options by an overseas publicly listed company are required, through a qualified
PRC domestic agent which could be a PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.
Such PRC resident 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. The PRC agent shall, among other things, file on behalf of such PRC resident participants an
application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance with respect to
the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participants hold. 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 aspects. Such participating PRC residents’ foreign exchange income received from the sale of stock and
dividends distributed by the overseas publicly-listed company must be fully remitted into a PRC collective foreign currency account opened and managed by
the PRC agent before distribution to such participants. We and our PRC resident employees who have been granted stock options or other share-based
incentives of our company are subject to the Stock Option Rules as our company has become an overseas listed company upon the completion of initial public
offering. If we or our PRC resident participants fail to comply with these regulations in the future, we and/or our PRC resident participants may be subject to
fines and legal sanctions.
Regulations relating to Dividend Distributions
Under applicable regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in
accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in the PRC is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered
capital. These reserve funds, however, may not be distributed as cash dividends.
C. Organizational Structure
The following diagram illustrates our corporate structure, including our principal subsidiaries and variable interest entities as of the date hereof.
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Note:
(1) Beijing Yisheng Leju Information Services Co., Ltd., or Beijing Leju, is a variable interest entity established in China in 2008 and is 80% owned by
Mr. Xudong Zhu and 20% owned by Mr. Zuyu Ding, and each of Shanghai Yi Xin E-Commerce Co., Ltd., or Shanghai Yi Xin and Beijing Jiajujiu E-
Commerce Co., Ltd., or Beijing Jiajujiu is a variable interest entity established in China in 2011 and is 70% owned by Mr. Zuyu Ding and 30% owned by
Mr. Weijie Ma. We effectively control Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu through contractual arrangements. See more information below
in this section.
The registered business scope of each of Shanghai Yi Yue, Leju IT, Shanghai SINA Leju, Shanghai Fangxin and Beijing Maiteng contains the business of
development of computer software, which falls in the encouraged category for foreign investment in the new Foreign Investment Industrial Guidance
Catalogue that became effective on April 10, 2015. The registered business scope of each of City Rehouse and all its subsidiaries contains the business of
real estate brokerage service which was removed from the restricted category for foreign investment in the new Foreign Investment Industrial Guidance
Catalogue. Therefore, the business of real estate brokerage service now fall in the permitted category for foreign investment under PRC law, along with
the other businesses listed in the registered business scope of each of Shanghai Yi Yue, Leju IT, Shanghai SINA Leju, Shanghai Fangxin, Beijing
Maiteng, and City Rehouse and all its subsidiaries, which are not listed in the new Foreign Investment Industrial Guidance Catalogue.
PRC laws and regulations currently prohibit foreign investors from holding more than 50% of a foreign-invested telecommunications enterprise that
provides commercial internet information services, which are one type of value-added telecommunications services. In addition, PRC laws and regulations
currently do not allow foreign entities with less than two years of direct experience operating an advertising business outside of China to invest in an
advertising business in China. Because of such restriction, our internet information services and advertising services activities are conducted through
consolidated variable interest entities in China, namely Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu, or the consolidated variable interest entities.
We have entered into, through our PRC subsidiaries, Shanghai SINA Leju, Shanghai Yi Yue and Beijing Maiteng, a series of contractual
arrangements with Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their respective shareholders. These contractual arrangements enable us to (i) direct the
activities that most significantly affect the economic performance of Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their subsidiaries and branches;
(ii) receive substantially all of the economic benefits from the three consolidated variable interest entities and their subsidiaries in consideration for the
services provided by our PRC subsidiaries; and (iii) have an exclusive option to purchase all or part of the equity interests in the consolidated variable interest
entities, when and to the extent permitted by PRC law, or request any existing shareholder of the consolidated variable interest entities to transfer all or part of
the equity interest in the consolidated variable interest entities to another PRC person or entity designated by us at any time in our discretion.
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As a result of these contractual arrangements, we, through our PRC subsidiaries, have become the primary beneficiary of these PRC entities and
account for them as variable interest entities, and consolidate the financial results of these entities into our financial statements in accordance with
U.S. GAAP. Substantially all of our revenues are derived from our consolidated variable interest entities and we rely on dividends and service fees paid to us
by our PRC subsidiaries and our consolidated variable interest entities in China. Entities apart from our consolidated variable interest entities contributed in
aggregate 5.7%, 2.3% and 3.0% of our total net revenues in 2013, 2014 and 2015, respectively. Our operations not conducted through contractual
arrangements with the consolidated variable interest entities primarily consist of outsourcing arrangements business, support services for online advertising
business and agency services included with our e-commerce business. In 2013, 2014 and 2015, the total amount of service fees that our PRC subsidiaries
received from our consolidated variable interest entities under all the service agreements between our PRC subsidiaries and consolidated variable interest
entities was $24.5 million, $35.0 million and $25.7 million, respectively. As of December 31, 2015, the amount of service fees payable to us by the
consolidated variable interest entities was $158.2 million.
The following is a summary of the currently effective contractual arrangements relating to the consolidated variable interest entities:
Agreements that Provide Us with Effective Control over the consolidated variable interest entities
Exclusive Call Option Agreement. Our wholly owned indirect subsidiary, Shanghai SINA Leju, has entered into an exclusive call option agreement
with our variable interest entity, Beijing Leju, and its shareholders. Our wholly owned indirect subsidiary, Shanghai Yi Yue, has entered into an exclusive call
option agreement with our variable interest entity, Shanghai Yi Xin, and its shareholders. Our PRC subsidiary, Beijing Maiteng, has entered into an exclusive
call option agreement with our variable interest entity, Beijing Jiajujiu, and its shareholders. In each case, under the exclusive call option agreement each
shareholder of the applicable variable interest entity has granted an irrevocable and unconditional option to the applicable PRC subsidiary of our Company
that will entitle such PRC subsidiary or its designated entity or individual to acquire all or part of the equity interests held by such shareholders in such
variable interest entity at its sole discretion, to the extent as permitted by the then-effective PRC laws and regulations. The consideration for such acquisition
of all equity interests in the applicable variable interest entity will be equal to the registered capital of such variable interest entity, and if there is any
limitation imposed by PRC law that requires the consideration to be greater than the registered capital, the consideration will be the minimum amount as
permitted by PRC law. In addition, each such variable interest entity has irrevocably and unconditionally granted the applicable PRC subsidiary of our
Company an exclusive option to purchase, to the extent permitted under the PRC law, all or part of the assets of such variable interest entity. The exercise
price for purchasing the assets of such variable interest entity will be equal to the book value of such assets unless otherwise required by the PRC law. The
call option may be exercised by the applicable PRC subsidiary of our Company or any third party designated by it. Each exclusive call option agreement will
terminate after all the equity interests and assets of the applicable variable interest entity subject to the call option under such agreement have been transferred
to the applicable PRC subsidiary of our Company or its designated third party pursuant to the terms and conditions of such agreement. Each of Shanghai
SINA Leju, Shanghai Yi Yue and Beijing Maiteng is entitled to terminate the applicable exclusive call option agreement if any of the applicable consolidated
variable interest entity or its shareholders materially breaches the agreement and fails to rectify the breach within a reasonable period or within ten days upon
written request from Shanghai SINA Leju, Shanghai Yi Yue or Beijing Maiteng, as applicable. The applicable consolidated variable interest entity and its
shareholders are not entitled to terminate the agreement early unless otherwise provided by PRC law.
Loan Agreement. Pursuant to a loan agreement among Shanghai SINA Leju, Mr. Xudong Zhu and Mr. Zuyu Ding, Shanghai SINA Leju granted an
interest-free loan of RMB8.0 million to Mr. Xudong Zhu and RMB2.0 million to Mr. Zuyu Ding, respectively, solely for their capital contribution to or
purchase of equity interests in Beijing Leju. Pursuant to a loan agreement among Shanghai Yi Yue, Mr. Zuyu Ding and Mr. Weijie Ma, Shanghai Yi Yue
granted an interest-free loan of RMB10.5 million to Zuyu Ding and RMB4.5 million to Weijie Ma, respectively, solely for their capital contribution to
Shanghai Yi Xin. Pursuant to a loan agreement among Beijing Maiteng, Mr. Zuyu Ding and Mr. Weijie Ma, Beijing Maiteng granted an interest-free loan of
RMB10.5 million to Zuyu Ding and RMB4.5 million to Weijie Ma, respectively, solely for their capital contribution to Beijing Jiajujiu. Each loan under each
loan agreement has a term starting from the date when the applicable lender provides such loan to the applicable borrower and ending on the earliest of (i) the
twentieth anniversary of the signing date of such loan agreement; (ii) the expiry date of the applicable lender’s business operation term (including any
extension of such term); or (iii) the expiry date of the applicable consolidated variable interest entity’s business operation term (including any extension of
such term). None of the loan agreements includes a provision for early termination by any party.
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Shareholder Voting Rights Proxy Agreement. Our wholly owned indirect subsidiary, Shanghai SINA Leju, has entered into a shareholder voting
rights proxy agreement with our variable interest entity, Beijing Leju, and its shareholders. Our wholly owned indirect subsidiary, Shanghai Yi Yue, has
entered into a shareholder voting rights proxy agreement with our variable interest entity, Shanghai Yi Xin, and its shareholders. Our PRC subsidiary, Beijing
Maiteng, has entered into a shareholder voting rights proxy agreement with our variable interest entity, Beijing Jiajujiu, and its shareholders. Under each
shareholder voting rights proxy agreement, the shareholders of each variable interest entity have granted to any person designated by the applicable PRC
subsidiary of our Company the power to exercise all voting rights to which such shareholder is then entitled as a shareholder of the applicable variable interest
entity. Each shareholder voting rights proxy agreement has a term of twenty years. If the applicable PRC subsidiary requests for extension of the term by
written notice to the other parties to such agreement thirty days in advance, the term of such agreement shall automatically extend for one year after the expiry
of the original term, and such extension mechanism shall continue to apply to any extended term of such agreement. Each of Shanghai SINA Leju, Shanghai
Yi Yue and Beijing Maiteng is entitled to terminate the applicable shareholder voting rights proxy agreement if any of the applicable consolidated variable
interest entity or its shareholders materially breaches the agreement and fails to rectify the breach within a reasonable period or within ten days upon written
request from Shanghai SINA Leju, Shanghai Yi Yue or Beijing Maiteng, as applicable. The applicable consolidated variable interest entity and its
shareholders are not entitled to terminate this agreement early unless otherwise provided by PRC law.
Equity Pledge Agreement. Our wholly owned indirect subsidiary, Shanghai SINA Leju, has entered into an equity pledge agreement with our
variable interest entity, Beijing Leju, and its shareholders. Our wholly owned indirect subsidiary, Shanghai Yi Yue, has entered into an equity pledge
agreement with our variable interest entity, Shanghai Yi Xin, and its shareholders. Our PRC subsidiary, Beijing Maiteng, has entered into an equity pledge
agreement with our variable interest entity, Beijing Jiajujiu, and its shareholders. Under each such equity pledge agreement, all of the equity interest in the
applicable variable interest entity is pledged to the applicable PRC subsidiary of our Company to guarantee the performance of the obligations of such
variable interest entity and its shareholders under the relevant exclusive call option agreement, loan agreement, shareholder voting rights proxy agreement and
in the case of Beijing Leju, the exclusive technical support agreement. If any of the variable interest entity or their respective shareholders were to breach its
or such shareholder’s contractual obligations, as the case may be, the applicable PRC subsidiary of our Company, as pledgee, would be entitled to certain
rights, including the right to sell the pledged equity interests and to be compensated from the sales proceeds in priority. Furthermore, each shareholder of each
variable interest entity has agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their equity interest in such variable
interest entity without the prior written consent of the applicable PRC subsidiary of our Company. The equity pledge rights of each of our PRC subsidiaries
under the equity pledge agreement will expire when the applicable variable interest entity and its shareholders have fully performed their respective
obligations under each of the above agreements. None of the equity pledge agreements includes a provision for early termination by any party.
Agreements that Transfer Economic Benefits of the consolidated variable interest entities to Us
Exclusive Technical Support Agreement. Our wholly owned indirect subsidiary, Shanghai SINA Leju, has entered into an exclusive technical
support agreement with our variable interest entity, Beijing Leju. Our wholly owned indirect subsidiary, Shanghai Yi Yue, has entered into an exclusive
technical support agreement with our variable interest entity, Shanghai Yi Xin. Our PRC subsidiary, Beijing Maiteng, has entered into an exclusive technical
support agreement with our variable interest entity, Beijing Jiajujiu. Pursuant to each such exclusive technical support agreement the applicable PRC
subsidiary of our Company provides the applicable variable interest entity with a series of technical support services and is entitled to receive related fees.
Each exclusive technical support agreement will expire upon dissolution of the applicable variable interest entity. Each of Shanghai SINA Leju, Shanghai Yi
Yue and Beijing Maiteng is entitled to terminate the applicable exclusive technical support agreement early if (i) the applicable consolidated variable interest
entity breaches the agreement, and within 30 days upon written notice, fails to rectify its breach, take sufficient, effective and timely measures to eliminate the
effects of breach, and compensate for any losses incurred by the breach; (ii) the applicable consolidated variable interest entity is bankrupt or is subject to any
liquidation procedures and such procedures are not revoked within seven days; or (iii) due to any event of force majeure, the applicable consolidated variable
interest entity’s failure to perform its obligations under the agreement lasts for over 20 days. Except as provided in the preceding sentence, each of Shanghai
SINA Leju, Shanghai Yi Yue and Beijing Maiteng is entitled to terminate the agreement early at any time by sending a written notice 20 days in advance, for
any reason. None of the exclusive technical support agreements includes a provision for early termination by any consolidated variable interest entity. Unless
expressly provided by this agreement, without prior written consent of the applicable PRC subsidiary of our Company, the applicable variable interest entity
may not engage any third party to provide the services offered by such PRC subsidiary under this agreement.
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In the opinion of Fangda Partners, our PRC legal counsel:
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· The ownership structures of Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu described above are in compliance with existing PRC laws and
regulations; and
· Each of the contractual arrangements described above, in each case governed by PRC law, is valid and binding and enforceable in accordance
with their respective terms based on currently effective PRC laws and regulations, and do not violate PRC laws or regulations currently in effect.
However, as advised by Fangda Partners, our PRC legal counsel, there are substantial uncertainties regarding the interpretation and application of
current or future PRC laws, rules and regulations, and accordingly, there can be no assurance that the PRC regulatory authorities will not ultimately take a
contrary view from that of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC regulatory authorities determine
that our contractual arrangements for operating our internet and advertising business in China do not comply with PRC government restrictions on foreign
investment in such industries, we could be subject to severe penalties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate
Structure—If the PRC government finds that the agreements that establish the structure for operating our advertising services business and online real estate
business in China do not comply with PRC governmental restrictions on foreign investment in the advertising industry or the internet information service
industry, we could be subject to severe penalties” and “—Our ability to enforce the equity pledge agreements between us and the shareholders of Beijing
Leju, Shanghai Yi Xin or Beijing Jiajujiu may be subject to limitations based on PRC laws and regulations.” In addition, see “Item 3. Key Information — D.
Risk Factors — Risks Related to Doing Business In China — 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
Our principal executive offices are located at Beijing Shoudong International Plaza, with approximately 6,377 square meters of office space. Our
headquarters has been at this location since January 2012. As of December 31, 2015, we leased properties with an aggregate gross floor area of approximately
54,194 square meters for our 57 local offices across China and at our Hong Kong office. Our leased properties mainly consist of office premises, a portion of
which are leased from related parties. We believe our existing leased premises are adequate for our current business operations and that additional space can
be obtained on commercially reasonable terms to meet our future requirements.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated
financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements
based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on
Form 20-F.
A. Operating Results
Overview
We are a leading O2O real estate services provider in China. We offer real estate e-commerce, online advertising and online listing services through
our online platform, which comprises local websites covering over 260 cities and various mobile applications. We integrate our online platform with
complementary offline services to facilitate residential property transactions. In addition to our own websites, we also operate various real estate and home
furnishing websites of SINA. We had also operated Baidu’s real estate and home furnishing websites until December 31, 2015. Moreover, we operate official
accounts on various mobile platforms, including over 50,000 on Weibo and over 70,000 on Weixin.
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E-Commerce. We offer e-commerce services primarily in connection with new residential property sales. Our O2O services for new residential
properties include selling discount coupons and facilitating online property viewing, physical property visits and pre-sale customer support. We earn revenue
primarily from the sale of discount coupons used for property purchases. Our revenues from e-commerce services in 2013, 2014 and 2015 were $170.2
million, $326.7 million and $420.6 million, respectively, representing 50.7%, 65.9% and 73.0%, respectively, of our total revenues for those periods.
Online Advertising. We currently sell advertising primarily on the SINA new residential properties and home furnishing websites, which are operated
by us. We also had similar arrangement with Baidu until December 31, 2015. In addition, we are the exclusive advertising agent for the SINA home page and
non-real estate websites with respect to advertising sold to real estate and home furnishing advertisers. We also had the exclusive right to sell Baidu’s Brand-
Link product within the real estate industry until December 31, 2015. Our revenues from online advertising services in 2013, 2014 and 2015 were $145.4
million, $155.1 million and $134.2 million, respectively, representing 43.4%, 31.2% and 23.3%, respectively, of our total revenues for those periods.
Listing. We offer fee-based online property listing services to real estate agents and free services to individual property sellers. We currently operate
the SINA real estate websites for listings of existing residential properties for sale or lease. We also operated the Baidu real estate websites for such listing
until December 31, 2015. Our revenues from listing services in 2013, 2014 and 2015 were $19.8 million, $14.3 million and $21.0 million, respectively,
representing 5.9%, 2.9% and 3.7%, respectively, of our total revenues for those periods.
We have experienced substantial growth in recent years. Our total revenues have increased from $335.4 million in 2013 to $496.0 million in 2014
and to $575.8 million in 2015. We generated net income of $42.7 million, $66.7 million and $34.8 million in 2013, 2014 and 2015, respectively. We had
adjusted net income of $63.4 million, $90.9 million and $56.9 million in 2013, 2014 and 2015, respectively. Substantially all of our operations are in China.
For information regarding adjusted net income, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures”.
Significant Factors Affecting Our Results of Operations
The PRC real estate industry
Our results of operations have been, and are expected to continue to be, affected by the general performance of China’s real estate industry.
Conditions in China’s real estate industry have a significant impact on each of our business segments, and in particular on our new home business, which
relies significantly on the volume of new property launches by property developments and market transaction volume. The following factors typically have a
significant impact on China’s real estate industry:
· Economic growth, speed of urbanization and demand for residential and commercial properties in China. China’s economic growth has been
primarily concentrated in China’s urban areas, and economic growth, higher standards of living, population growth and urbanization are primary
drivers of demand for the purchase or rental of residential properties. Because we focus on China’s urban areas, China’s economic growth and
urbanization are important to our operations. The PRC property industry is dependent on the overall economic growth in China and the
associated demand for residential properties.
· Government policies. The PRC government exercises considerable direct and indirect influence over the real estate industry through its policies
and other economic measures. The PRC government regulates real estate purchases and taxation associated with real estate transactions. For
greater detail see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our business is susceptible to fluctuations in
China’s real estate industry, which may materially and adversely affect our results of operations” and “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business—Our business may be materially and adversely affected by government measures aimed at China’s real
estate industry.” The imposition of new policies, laws and regulations, or changes to current polices, laws and regulations, could have a material
impact on the real estate market in China, which would affect our business, financial condition and results of operations.
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· Availability and cost of credit. The availability and cost of credit have a substantial effect on customers’ ability to purchase properties and the
prices they can afford to pay. This impacts the number of properties that developers are able to market and sell, which is a significant factor
affecting our results of operations. The PRC government regulates the proportion of the purchase price of a property that may be financed with
credit and the price of credit is generally a function of benchmark interest rates. To the extent that fluctuations in interest rates or regulatory
changes impact the availability and cost of financing for property purchases, conditions in the real estate industry, and our results of operations,
would be affected.
· Supply of new residential real estate projects. The growth of the PRC real estate industry depends largely on the launch of new residential real
estate projects at affordable prices. Factors such as the overall economy, competition and government land policies can affect the price and
availability of new projects. The PRC government and relevant local authorities control various aspects of new projects, including the amount
and cost of land for development, each of which affects the supply of new developments and our results of operations.
The PRC internet industry
We are an internet company and a majority of our revenue is generated from our e-commerce and online advertising services provided on our
websites. Therefore, our results of operations are heavily dependent on the continued development of China’s internet industry. The internet has emerged as
an increasingly attractive and cost-effective advertising channel in China. However, the internet industry in China is heavily regulated. PRC laws, rules and
regulations cover virtually every aspect of the internet industry, including entry into the industry, the scope of permissible business activities and foreign
investment. Furthermore, the PRC government levies business taxes, value-added taxes, surcharges and cultural construction fees on advertising-related sales
in China, such as sales of our e-commerce, online advertising, listing and other value-added services. In addition, because certain of our PRC subsidiaries and
consolidated variable interest entities currently qualify as “high and new technology enterprises,” they enjoy tax holidays from the relevant PRC tax
authorities or under local governmental policies. The imposition of new laws and regulations, or changes to current laws and regulations, could have a
material impact on our business, financial condition and results of operations.
Our ability to innovate and market acceptance of our e-commerce services
We operate in a competitive industry and the extent to which we are able to provide innovative e-commerce services that are attractive to developers
and prospective property purchasers has a material effect on our results of operations. For example, we pioneered e-commerce services in China’s real estate
market in April 2011 by offering online auctions as a promotional tool for our partner developers. In early 2012, we introduced property price discount
coupons as a means of generating buyers for our partner developers in conjunction with online advertising and offline customer origination. In
November 2013, we formed a strategic partnership with CITIC, pursuant to which CITIC introduced Leju Loan through our online platform. Our results of
operations will continue to be significantly affected by the extent to which our evolving e-commerce services, including any future innovations that we may
introduce, achieve success in the market.
Our ability to maintain and expand our online platform
Consumers are able to access our services through various websites and mobile applications, our telephone call center and at property showrooms
and other physical locations. Our internet presence includes local websites across China that we either operate directly or outsource to local outsourcing
partners. We operate a variety of websites pursuant to our arrangements with SINA. Since many of our customers in our new home business are one-time
property buyers, we depend on our online platform as a key driver for bringing in new business. The costs of maintaining and expanding our online platform
in order to continue to reach a broad base of customers, and our ability to maintain our relationships with SINA, has a significant effect on our results of
operations.
Our ability to compete effectively
We face competition in each of our main business activities. We compete with other e-commerce providers for market share in key markets,
relationships with developers and for the acquisition of web traffic. We compete for talent with other online businesses and to a lesser extent with traditional
businesses. Our industry has become increasingly competitive, and such competition may continue to intensify in future periods. As the barriers to entry for
establishing internet-based businesses are typically low, it is possible for new entrants to emerge and rapidly scale up their operations. We expect additional
companies to enter the online real estate and home-related internet service industry in China and a wider range of online services in this area to be introduced.
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Our ability to expand into new geographic areas in China
60
A majority of our revenues is concentrated in China’s major urban centers including Beijing, Shanghai, Guangzhou, Chongqing and Tianjin. We
expect them to continue to represent a significant portion of our revenues in the near term. We also may expand into new geographic areas and sectors and
increase our market share in areas and sectors where we currently operate. As of December 31, 2015, we had established real estate-related content, search
services, marketing and listing coverage of over 260 cities across China. Our ability to succeed in newly penetrated cities and cities where we intend to
increase our presence will have a substantial impact on our results of operations, and we may incur significant additional operating expenses, including hiring
new sales and other personnel, in order to expand our operations.
Selected Statement of Operations Items
Revenues
E-commerce. Our e-commerce services primarily include discount coupon advertising and online property auctions. We also provide property
viewing and pre-sale customer support free of charge in connection with the sale of discount coupons and online property auctions. E-commerce revenues are
principally generated from selling discount coupons to potential property buyers, which allow buyers to purchase specified properties from real estate
developers at discounts greater than the face value of the fees charged by us. The discount coupons are refundable to the buyers at any time before they are
used to purchase the specified properties. We recognize such e-commerce revenues upon obtaining confirmation letters that prove the use of coupons by
property buyers, and when collections are reasonably assured. Revenues are recognized based on the net proceeds received as we act as a marketing agent of
the property developer in such transactions.
Online advertising. Revenues from online advertising services are generated principally from online advertising arrangements, sponsorship
arrangements, and to a lesser extent, outsourcing arrangements and keyword advertising arrangements. Online advertising arrangements allow advertisers to
place advertisements on particular areas of the websites we operate, in particular formats and over particular periods of time. Advertising revenues from
online advertising arrangements are recognized ratably over the contract period of display when collectability is reasonably assured. Sponsorship
arrangements allow advertisers to sponsor a particular area on our websites in exchange for a fixed payment over the contract period. Advertising revenues
from sponsorship arrangements are recognized ratably over the contract period. We also generate online advertising revenues from outsourcing certain
regional sites for a fixed period of time to local outsourcing partners. In such cases, we earn a fixed advertising fee payable by the local outsourcing partner,
who are responsible for both website operation and related advertising sales. Advertising revenues from hosted websites are recognized ratably over the term
of the contract. Keyword advertising revenues are recognized ratably over the contract period when collectability is reasonably assured.
Listing. We provide online property listing services to secondary brokers and individual property sellers. Listing services entitle secondary brokers to
post and make changes to information for properties in a particular area on the website for a specified period of time, in exchange for a fixed fee. Listing
revenues are recognized ratably over the contract period of display when collectability is reasonably assured.
Deferred revenues are recognized when payments are received in advance of revenue recognition.
Cost of revenues
Cost of revenues consists of costs associated with the production of websites, which includes fees paid to third parties for internet connection,
content and services, editorial personnel related costs, amortization of intangible assets, depreciation associated with website production equipment and fees
paid to SINA for advertising on non-real estate channels.
Selling, general and administrative expenses
Selling, general and administrative expenses comprise marketing expenses, compensation and benefits for personnel other than editorial personnel,
expenses of third-party professional services, rental payments relating to office and administrative functions and depreciation, amortization of property and
equipment used in our corporate offices and other administrative expenses. Our selling, general and administrative expenses also include amortization of
intangible assets that do not relate to internet content, including our license agreement with SINA. Selling general and administrative expenses also include
bad debt expenses. Bad debt can result from developer customers not paying amounts owing to us for services rendered and in cases where third parties to
whom we outsource certain websites fail to pay fixed fees owed to us.
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Marketing and advertising expenses consist primarily of targeted online and offline marketing costs for promoting our e-commerce projects,
increasing our visibility and building our brand, such as Leju property visit, sponsored marketing campaigns, online or print advertising, public relations and
sponsored events. We expense all marketing advertising costs as incurred and record these costs within “Selling, general and administrative expenses” on the
consolidated statements of operations when incurred. Our direct marketing activities are intended to attract subscribers for online advertising and potential
property buyers to purchase the discount coupon.
Share-based compensation expense
In 2013, 2014 and 2015, a portion of our share-based compensation expense related to E-House’s allocation to us of share-based compensation
expenses of their senior management. These allocations were made using a proportional cost allocation method and were based on revenues, headcount as
well as estimates of actual time spent on the provision of services attributable to our company.
In November 2013, we adopted a share incentive plan, or the Leju Plan, which allows us to offer a variety of share-based incentive awards to
employees, officers, directors and individual consultants who render services to us. The plan permits the grant of three types of awards: options, restricted
shares and restricted share units. The maximum number of shares that may be issued pursuant to all awards under the Leju Plan is 10,434,783 ordinary shares
initially, and will be increased automatically by 5% of the then total outstanding shares on an as-converted fully diluted basis on each of the third, sixth and
ninth anniversaries of the effective date of the Leju Plan.
On December 1, 2013, we granted options to certain of our employees and certain of E-House’s employees for the purchase of 7,192,000 ordinary
shares at an exercise price of $4.60 per share, pursuant to the Leju Plan. The options expire ten years from the date of grant. The options vest ratably at each
grant date anniversary over a period of three years. The grant-date fair value of the options granted was $2.21 per share. On December 16, 2013, we replaced
600,000 options granted to two of our directors with the same number of restricted shares, with all other substantive terms remaining unchanged. On
January 21, 2014, we replaced 60,000 options granted to one E-House employee with the same number of restricted shares, with all other substantive terms
remaining unchanged. There is no incremental compensation cost from the replacement.
On March 18, 2014, we granted 866,000 restricted shares to certain of our employees and independent directors. The restricted shares vest ratably at
each grant date anniversary over a period of three years. On August 21, 2014, we granted 229,400 restricted shares to certain of our employees. These
restricted shares have fully vested on April 21, 2015.
Pursuant to the Leju Plan, we granted (i) options to certain of our employees for the purchase of 501,000 ordinary shares at an exercise price of $9.68
per share, on April 28, 2015, (ii) options to certain of our employees for the purchase of 30,000 ordinary shares at an exercise price of $7.00 per share, on
August 7, 2015, (iii) options to certain of our employees and certain of E-House’s employees for the purchase of 1,986,000 ordinary shares at an exercise
price of $5.54 per share, on December 14, 2015. The options expire ten years from the date of grant and vest ratably at each anniversary of the grant date over
a period of three years.
As of March 31, 2016, the aggregate number of our ordinary shares underlying outstanding options granted under the Leju Plan is 7,931,718 and the
aggregated number of outstanding restricted shares granted under the Leju Plan is 506,672.
In 2015, we recorded compensation expenses of $9.3 million for the options and restricted shares granted to our employees and directors under the
Leju Plan, and $1.1 million in dividends to E-House for the options and restricted shares granted to employees and directors of E-House under the Leju Plan.
As of December 31, 2015, we had $15.9 million of total unrecognized compensation expenses related to unvested share options and restricted shares granted
under the Leju Plan, which we expect to be recognize over a weighted-average period of 1.9 years.
In 2015, our subsidiary, Omnigold adopted a share incentive plan, or the Omnigold Plan, pursuant to which (i) the maximum number of shares of
Omnigold available for issuance pursuant to all awards under the Omnigold Plan, or the Omnigold Award Pool, is initially 5,000,000 as of the date on which
the Omnigold Plan was approved and adopted by the board of directors of Omnigold, or the Omnigold Plan Effective Date, and (ii) the Omnigold Award Pool
is increased automatically by 5% of the then total issued and outstanding shares of Omnigold on an as-converted fully diluted basis on each of the third, sixth
and ninth anniversary of the Omnigold Plan Effective Date.
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On August 11, 2015, Omnigold granted 2,400,000 options to purchase its ordinary shares to certain of our employees at an exercise price of $1.50
per share. The options expire ten years from the date of grant and vest ratably at each anniversary of the grant date over a period of three years.
In 2015, we recorded compensation expenses of $80,577 for the options and restricted shares granted to our employees and directors under the
Omnigold Plan. As of December 31, 2015, we had $0.5 million of total unrecognized compensation expenses related to unvested share options and restricted
shares granted under the Omnigold Plan, which we expect to be recognize over a weighted-average period of 2.6 years.
Other Operating Income
Our other operating income primarily relates to cash subsidies received by our subsidiaries in the PRC from local governments to encourage us to
operate in certain local districts.
Interest Income
We earn interest income primarily from bank deposits.
Other loss, net
Other loss (net) relates to amortized discounts relating to liability for our exclusive rights purchased from Baidu, in addition to foreign exchange
loss/(gain).
Our reporting currency is the U.S. dollar, while certain of our subsidiaries have functional currencies other than the U.S. dollar, such as the Renminbi
and Hong Kong dollar. Transactions in other currencies are recorded at the rates of exchange prevailing when the transactions occur. Transaction gains and
losses are recognized in the consolidated statements of operations.
Income Tax
We are incorporated in the Cayman Islands as an exempted company. Under the current law of the Cayman Islands, we are not subject to income or
capital gains tax in the Cayman Islands. Our subsidiaries in the British Virgin Islands are not subject to income or capital gains tax in the British Virgin
Islands. Our subsidiaries in Hong Kong are subject to a profit tax at the rate of 16.5% on assessable profit determined under relevant Hong Kong tax
regulations.
The EIT Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where a special
preferential rate applies. In addition, the EIT Law also provides a five-year transitional period starting from its effective date for those enterprises that were
established before March 16, 2007, the date of promulgation of the EIT Law, and that were entitled to preferential income tax rates under the then effective
tax laws or regulations.
Shanghai SINA Leju and Shanghai Fangxin, our subsidiaries in China, were granted software enterprise status, which qualifies these companies for
certain tax exemptions. Shanghai SINA Leju is exempt from 100% of income taxes for 2009 and has a 50% income tax rate reduction to 12.5% from 2010
through 2012. Shanghai Fangxin is exempt from 100% of income taxes for 2012 and 2013 and has a 50% reduction in its income tax rate, or a rate of 12.5%,
from 2014 through 2016. Shanghai SINA Leju was designated a “High and New Technology Enterprise” entitled to a favorable statutory tax rate of 15% for
2013 and 2014. Shanghai SINA Leju renewed its qualification of “high and new technology enterprise” in 2015 and is entitled to enjoy a favorable statutory
tax rate of 15% from 2015 through 2017.
We have a tax benefit due to losses incurred in past years. Under PRC tax law we are permitted to carry forward losses for up to five years. We may
have a tax benefit for periods for which we were profitable on a consolidated basis to the extent our consolidated entities that incurred losses during the period
were subject to income tax at a higher effective tax rate as compared with consolidated entities that earned profits during the period.
Under the EIT Law, dividends payable to a non-PRC resident enterprise from our PRC subsidiaries are subject to a withholding tax which may be as
high as 20%, although under the detailed implementation rules of the EIT Law promulgated by the PRC authorities the effective withholding tax is currently
10%. Dividends of PRC subsidiaries that are directly held by Hong Kong entities may benefit from a reduced withholding tax rate of 5% pursuant to the
Arrangement between Mainland China and Hong Kong for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on
Income, subject to the approval from the relevant local branch of the State Administration of Taxation in accordance with the Administrative Measures on Tax
Treaty Treatment of Nonresidents (Trial) and other relevant tax rules. Our Hong Kong subsidiaries have not sought approval for such preferential withholding
tax rate, given that no dividends have been paid by their respective PRC subsidiaries. Dividends from our Hong Kong subsidiaries are exempt from
withholding tax. Dividend payments are not subject to withholding tax in the British Virgin Islands or the Cayman Islands.
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Under the EIT Law, enterprises that are established under the laws of foreign countries or regions and whose “de facto management bodies” are
located within the PRC territory are considered PRC resident enterprises, and will be subject to the PRC enterprise income tax at the rate of 25% on their
worldwide income. Under the implementation rules of the EIT Law, “de facto management bodies” are defined as the bodies that have material and overall
management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition. We cannot
assure you that we will not be deemed to be a PRC resident enterprise under the EIT Law and be subject to the PRC enterprise income tax at the rate of 25%
on our worldwide income. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Dividends payable to us by our PRC
subsidiaries may be subject to PRC withholding taxes or we may be subject to PRC taxation on our worldwide income, and dividends distributed to our
investors may be subject to PRC withholding taxes under the EIT Law and our investors may be subject to PRC withholding tax on the transfer of our
ordinary shares or ADSs.”
Loss from equity in affiliates
Affiliate companies are entities over which we have significant influence but do not control. Investment in affiliates is accounted for using the equity
method of accounting. Under this method, our share of the post-acquisition profits or loss of affiliated companies is recognized as income/(loss) from equity
in affiliates in the income statement.
Net income attributable to non-controlling interest
Net income attributable to non-controlling interest relates to the minority interest in non-wholly-owned subsidiaries that we consolidate.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together
with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily
indicative of the results that may be expected for any future period.
2013
Year Ended December 31,
2014
(in thousands of $, except share and per share data)
2015
Revenues:
E-commerce
Online advertising
Listing
Total revenues
Cost of revenues
Selling, general and administrative expenses
Other operating income
Income from operations
Interest income
Other income (loss), net
Investment income
Income before taxes and equity in affiliates
Income tax expense
Income before equity in affiliates
Loss from equity in affiliates
Net income
Less: Net income (loss) attributable to non-controlling interest
Net income attributable to Leju shareholders
Earnings per share:
Basic
Diluted
Weighted average numbers of shares used in computation:
Basic
Diluted
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170,205
145,445
19,772
335,422
(63,991)
(226,143)
600
45,888
1,082
(1,185)
—
45,785
(3,066)
42,719
(69)
42,650
125
42,525
0.35
0.35
326,680
155,050
14,293
496,023
(51,130)
(366,342)
2,526
81,077
1,316
36
—
82,429
(15,546)
66,883
(224)
66,659
138
66,521
0.51
0.50
420,552
134,229
21,023
575,804
(60,314)
(475,445)
3,568
43,613
1,167
290
271
45,341
(10,307)
35,034
(228)
34,806
(524)
35,330
0.26
0.26
120,000,000
120,000,000
129,320,666
132,502,100
134,528,971
136,223,974
64
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Total revenues. Total revenues increased 16% from $496.0 million in 2014 to $575.8 million in 2015, primarily driven by the growth of revenues
from our e-commerce services and listing services, partially offset by a decrease in revenues from online advertising services. E-commerce revenues
increased 29% from $326.7 million in 2014 to $420.6 million in 2015 primarily due to an increase in the average price per discount coupon redeemed,
partially offset by the decrease in the number of discount coupons redeemed. We began to sell discount coupons in the first quarter of 2012 and this business
grew substantially from 2013 to 2015. We sold a total of 303,946 discount coupons in 2015, 203,394 of which were redeemed. Online advertising revenues
decreased 13% from $155.1 million in 2014 to $134.2 million in 2015 primarily due to a decrease in online advertising demand from property developers.
Listing revenues increased 47% from $14.3 million in 2014 to $21.0 million in 2015 primarily due to growth in secondary home sales.
Cost of revenues. Cost of revenues increased 18% from $51.1 million in 2014 to $60.3 million in 2015 primarily due to increased staff cost of
editorial department as a result of increased headcount in that department, as well as and increased amortization expenses of intangible assets consisting of
exclusive rights.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 30% from $366.3 million in 2014 to $475.4
million in 2015 primarily due to increased marketing expenses related to the growth of the our e-commerce business as a result of our efforts to maintain our
market shares in the increasingly competitive market.
Other operating income. Other operating income was $3.6 million in 2015, compared to $2.5 million in 2014, due to increased cash subsidies
received from local governments.
Income (loss) from operations. As a result of the foregoing, our income from operations was $43.6 million in 2015, compared to $81.1 million in
2014.
Interest income. Interest income was $1.2 million in 2015, remaining relatively flat compared to $1.3 million in 2014.
Other income (loss), net. We had other net income of $0.3 million in 2015, compared to $35,799 in 2014, due to a foreign exchange gain of $0.2
million in 2015 and reimbursement income of $133,398 from our depository agent.
Income tax expense. Income tax expense was $10.3 million in 2015, compared to $15.5 million 2014, due to decreased income before taxes and
equity in affiliates from $82.4 million in 2014 to $45.3 million in 2015.
Net income. As a result of the foregoing, our net income decreased by 48% from $66.7 million in 2014 to $34.8 million in 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Total revenues. Total revenues increased 47.9% to $496.0 million in 2014 from $335.4 million in 2013, primarily due to increased revenues from our
e-commerce business. E-commerce revenues increased 91.9% to $326.7 million in 2014 from $170.2 million in 2013 primarily due to a substantial increase in
discount coupon redeemed as a result of the expansion of our e-commerce business through partnerships with more property developers. We began to sell
discount coupons in the first quarter of 2012 and this business grew substantially in 2013 and 2014. We sold a total of 323,495 discount coupons in 2014,
219,557 of which were redeemed. Online advertising revenues increased 6.6% to $155.1 million in 2014 from $145.4 million in 2013 primarily due to
increased revenues from our new home and home furnishing channels. Listing revenues decreased 27.7% to $14.3 million in 2014 from $19.8 million in 2013
primarily due to slowdown in the market of secondary home sales.
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Cost of revenues. Cost of revenues decreased 20.1% to $51.1 million in 2014 from $64.0 million in 2013 primarily due to decreased fees paid to
third parties for services in connection with our listing business and decreased amortization expenses of intangible assets related to internet content.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 62.0% to $366.3 million in 2014 from $226.1
million in 2013 primarily due to increased marketing expenses related to the growth of our e-commerce business, as well as increased staff costs and bonuses
resulting from increased headcount and improved profits.
Other operating income. Other operating income was $2.5 million in 2014, compared to $0.6 million in 2013, due to increased cash subsidies
received from local governments.
Income from operations. As a result of the foregoing, our income from operations was $81.1 million in 2014, compared to $45.9 million in 2013.
Interest income. Interest income was $1.3 million in 2014, compared to $1.1 million in 2013, due to increased funds on deposit.
Other income (loss), net. We had other net income of $0.04 million in 2014, compared to other net loss of $1.2 million in 2013 due to a foreign
exchange gain of $0.09 in 2014, partially offset by a 94.3% reduction in amortized discounts related to liability for exclusive rights with Baidu to $0.05
million in 2014 from $0.9 million in 2013 resulting from a decrease in the balance payable to Baidu as a result of installments paid and an extended period for
exclusive rights.
Income tax expense. Income tax expense was $15.5 million 2014, compared to $3.1 million in 2013, due to increased income before taxes and equity
in affiliates to $82.4 million in 2014 from $45.8 million in 2013, and decreased preferential tax treatment received by a major subsidiary, which was exempted
from income tax in 2013 and entitled to a 50% reduction in 2014.
Net income. As a result of the foregoing, our net income increased by 56.3% to $66.7 million in 2014 from $42.7 million in 2013.
Critical Accounting Policies
We prepare our 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 that the following accounting policies involve a
higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical
accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this
annual report.
Revenue Recognition
We recognize revenue when there is persuasive evidence of an arrangement, service has been rendered, the sales price is fixed or determinable and
collectability is reasonably assured. Revenues are recorded, net of sales related taxes.
We generate online real estate revenues principally from e-commerce, online advertising, and listing services.
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We offer e-commerce services primarily in connection with our O2O services for new residential properties, including facilitating property viewing,
pre-sale customer support, discount coupon advertising, and online property auctions. Property viewing and pre-sale customer support are supporting services
provided free of charge in connection with discount coupon sales and online property auctions. We earn revenue primarily from the sale of discount coupons
used for property purchases. Those discount coupons allow buyers to purchase specified properties from real estate developers at discounts greater than the
purchase price of the discount coupons charged by us. The discount coupons are refundable at any time before they are redeemed by the buyer to purchase the
specified properties. We recognize such e-commerce revenues upon obtaining confirmation letters that prove the use of coupons by property buyers, and
when collections of the revenue from sales of discount coupons are reasonably assured. Revenues are recognized based on the net proceeds received.
Revenue from online advertising services is generated principally from online advertising arrangements, sponsorship arrangements, and to a lesser
extent, outsourcing arrangements, and keyword advertising arrangements. Online advertising arrangements allow advertisers to place advertisements on
particular areas of the websites we operate, in particular formats and over particular periods of time. Advertising revenues from online advertising
arrangements are recognized ratably over the contract period of display when collectability is reasonably assured. Sponsorship arrangements allow advertisers
to sponsor a particular area on our websites in exchange for a fixed payment over the contract period. Advertising revenues from sponsorship arrangements
are recognized ratably over the contract period. We also generate online advertising revenues from outsourcing certain regional sites for a fixed period of time
to local outsourcing partners, who are responsible for both website operation and related advertising sales. Advertising revenues from outsourced websites are
recognized ratably over the term of the contract. Keyword advertising revenues are recognized ratably over the contract period when collectability is
reasonably assured.
We also provide listing services to real estate brokers. Listing services entitle real estate brokers to post and make changes to information for
properties in a particular area on the website for a specified period of time, in exchange for a fixed fee. Listing revenues are recognized ratably over the
contract period of display when collectability is reasonably assured.
Deferred revenues are recognized when payments are received in advance of revenue recognition.
Variable Interest Entities
PRC laws and regulations currently restrict foreign entities without the required operating track record from investing in companies that provide
internet content and advertising services in China. Since we have not been involved in internet information services or advertising services outside China to
satisfy the track record requirement, to comply with the PRC laws and regulations, we conduct substantially all of our online advertising and e-commerce
business through Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu, our consolidated variable interest entities, and their subsidiaries and branches. We have,
through three of our subsidiaries in the PRC, entered into contractual arrangements with Beijing Leju, Shanghai Yi Xin, Beijing Jiajujiu and their
shareholders such that Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu are considered variable interest entities for which we are considered their primary
beneficiary. We believe we have substantive kick-out rights pursuant to the terms of the exclusive call option agreements, which give us the power to control
the shareholders of these consolidated variable interest entities. More specifically, we believe that the terms of the exclusive call option agreements are
currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the
applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive call option
agreements. Under our shareholder voting rights proxy agreements with the consolidated variable interest entities and their shareholders, each of the
shareholders of the consolidated variable interest entities irrevocably grants any person designated by us the power to exercise all voting rights to which he is
entitled to as shareholder of the consolidated variable interest entities at that time. Therefore, we believe this gives us the power to direct the activities that
most significantly impact the consolidated variable interest entities’ economic performance. We believe that our ability to exercise effective control, together
with the exclusive technical support agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from
the consolidated variable interest entities in consideration for the services provided by our subsidiaries in China. Accordingly, as the primary beneficiary of
the consolidated variable interest entities and in accordance with U.S. GAAP, we consolidate their financial results and assets and liabilities in our
consolidated financial statements.
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In 2013, 2014 and 2015, entities apart from our consolidated variable interest entities contributed in aggregate 5.7%, 2.3% and 3.0%, respectively, of
our total net revenues. Our operations not conducted through contractual arrangements with our consolidated variable interest entities primarily consist of
outsourcing arrangements business, support services for online advertising business and agency services included with our e-commerce business. The
following table sets forth our revenues, cost of revenues and net income for the consolidated variable interest entities and other group entities which are not
our consolidated variable interest entities for the years indicated:
Total revenues
Cost of revenues
Net income
Total revenues
Cost of revenues
Net income
Total revenues
Cost of revenues
Net income
Variable interest
entities
558,715
(48,032)
3,308
Variable interest
entities
484,512
(41,219)
2,532
Variable interest
entities
316,272
(58,254)
1,285
2015
Other entities
(in thousands of $)
17,089
(12,282)
31,498
2014
Other entities
(in thousands of $)
11,511
(9,911)
64,127
2013
Other entities
(in thousands of $)
19,150
(5,737)
41,365
Total
575,804
(60,314)
34,806
Total
496,023
(51,130)
66,659
Total
335,422
(63,991)
42,650
As of December 31, 2013, 2014 and 2015, entities apart from our consolidated variable interest entities accounted for an aggregate of 46.6%, 57.3%
and 54.2%, respectively, of our total assets. The assets not associated with our consolidated variable interest entities primarily consist of cash, intangible
assets and goodwill. The total assets held by the consolidated variable interest entities and other group entities which are not our consolidated variable interest
entities were $215.2 million and $187.7 million, respectively, as of December 31, 2013, $272.6 million and $365.7 million, respectively, as of December 31,
2014, and $287.2 million and $339.6 million, respectively, as of December 31, 2015.
Pursuant to contractual arrangements that Shanghai SINA Leju, Shanghai Yi Yue and Beijing Maiteng have with our consolidated variable interest
entities, the earnings and cash of our consolidated variable interest entities are used to pay service fees in Renminbi to three of our PRC subsidiaries in the
manner and amount set forth in these agreements. After paying the applicable withholding taxes and making appropriations for its statutory reserve
requirement, the remaining net profits of our PRC subsidiaries would be available for distribution to our offshore companies. As of December 31, 2015, the
net assets of our PRC subsidiaries and our consolidated variable interest entities which were restricted due to statutory reserve requirements and other
applicable laws and regulations, and thus not available for distribution, was in aggregate $33.8 million. As an offshore holding company of our PRC
subsidiaries and consolidated variable interest entities, we may make loans to our PRC subsidiaries and consolidated variable interest entities. Any loans to
our PRC subsidiaries are subject to registrations with relevant governmental authorities in China. We may also finance our subsidiaries by means of capital
contributions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries.”
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Furthermore, cash transfers from our PRC subsidiaries to our offshore companies are subject to PRC government control of currency conversion.
Restrictions on the availability of foreign currency may affect the ability of our PRC subsidiaries and our consolidated variable interest entities to remit
sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect the value of your
investment.” Cash and cash equivalents held by the consolidated variable interest entities was denominated in RMB and amounted to RMB389 million ($63.8
million, based on an exchange rate of RMB6.0969 to $1.00 as of December 31, 2013), RMB587 million ($95.9 million, based on an exchange rate of
RMB6.1190 to $1.00 as of December 31, 2014), and RMB384 million ($59.2 million, based on an exchange rate of RMB6.4936 to $1.00 as of December 31,
2015) as of December 31, 2013, 2014 and 2015, respectively.
We believe that our contractual arrangements with the consolidated variable interest entities are in compliance with PRC law and are legally
enforceable. However, uncertainties in the PRC legal system could limit the our ability to enforce these contractual arrangements and the interests of the
shareholders of the consolidated variable interest entities may diverge from that of our company and that may potentially increase the risk that they would
seek to act contrary to the contractual terms, for example by influencing the consolidated variable interest entities not to pay the service fees when required to
do so.
Allowance of Accounts Receivable and customer deposit
We regularly review the creditworthiness of our customers, and require collateral or other security from our customers in certain circumstances,
including existing properties or a right to properties under construction, when accounts receivable become significantly overdue or customer deposits, which
was paid to obtain the exclusive e-commerce agent agreement of the real estate development projects, become due but are not duly paid by the real estate
developers. In the event of nonpayment, we would then resell the properties or the right to properties under construction for cash. The collection of these
secured accounts receivable and customer deposit is dependent on the resale price of the underlying properties, which is subject to the then market conditions.
The carrying value of accounts receivable and customer deposit is reduced by an allowance that reflects our best estimate of the amounts that will
not be collected. We make estimations of the collectability of accounts receivable and customer deposit. Many factors are considered in estimating the
allowance, including but not limited to reviewing delinquent accounts receivable and customer deposit, performing aging analyses and customer credit
analyses, and analyzing historical bad debt records and current economic trends. Additional allowance for specific doubtful accounts and customer deposit
might be made if our customers are unable to make payments due to their deteriorating financial conditions.
Evaluation of Goodwill
We perform an annual goodwill impairment test comprised of two steps. The first step compares the fair value of the company to its carrying
amount, including goodwill and indefinite lived intangible assets. If the fair value of the company exceeds its carrying amount, goodwill is not considered to
be impaired and the second step will not be required. If the carrying amount of the company exceeds its fair value, the second step compares the implied fair
value of goodwill and indefinite lived intangible assets to the carrying value of the company’s goodwill. The implied fair value of goodwill is determined in a
manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities
of the company. The excess of the fair value of the company over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This
allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or
liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
We perform a goodwill impairment test for the company as of December 31 of each year or when there is a triggering event causing us to believe it is
more likely than not that the carrying amount of goodwill may be impaired.
We utilized the income approach valuation method (level 3). When determining the fair value of the company, we are required to make significant
judgments that we believe are reasonable and supportable considering all available internal and external evidence at that time.
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However, these estimates and assumptions by their nature require a higher degree of judgment. Fair value determinations are sensitive to changes in
the underlying assumptions and factors including (i) those relating to estimating future operating cash flows to be generated from the company, which is
dependent upon internal forecasts and projections developed as part of our routine, long-term planning process; (ii) our strategic plans; and (iii) estimates of
long-term growth rates taking into account our assessment of the current economic environment and the timing and degree of any economic recovery.
The assumptions with the most significant impact on the fair value of the company are those relating to (i) future operating cash flows, which are
forecasted for a five-year period from management’s budget and planning process; (ii) the terminal value, which is included for the period beyond five years
from the balance sheet date based on the estimated cash flow in the fifth year and a terminal growth rate of 2%; and (iii) discount rates, which are identified
and applied by market-based inputs based on an estimation of weighted average cost of capital considering cost of debt, risk-free rate, equity risk premium,
beta, size premium, company-specific risk premium and capital structure. The discount rates used for the year ended December 31, 2013, 2014 and 2015 were
16.7%, 17.0% and 16.0%, respectively.
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact
the estimated fair values of the company may include: (i) deterioration of local economies or further slowdown of China’s real estate market under the
government’s continued restrictive policies and further credit tightening measures, which could lead to changes in projected cash flows of us; (ii) an economic
recovery that significantly differs from our assumptions, which could change the future growth rate and the terminal growth rate; and (iii) higher cost of
capital in the markets, which could result in a higher discount rate. If the assumptions used in the impairment analysis are not met or materially change, we
may be required to recognize a goodwill impairment loss which may be material to the financial condition of us.
2015:
Under the first step of the goodwill impairment testing for the year ended December 31, 2015, the fair value of the company was approximately
26.3% in excess of its carrying value. We were not at risk of failing the first step of impairment testing.
2014:
Under the first step of the goodwill impairment testing for the year ended December 31, 2014, the fair value of the company was approximately
215.7% in excess of its carrying value. We were not at risk of failing the first step of impairment testing.
2013:
Under the first step of the goodwill impairment testing for the year ended December 31, 2013, the fair value of the company was approximately
135.5% in excess of its carrying value. We were not at risk of failing the first step of impairment testing.
Significant increases in discount rate or decrease in future operating cash flows or terminal value in isolation would result in a significantly lower
fair value measurement. We performed the following sensitivity analysis to show the maximum change (in isolation) of discount rate, future operating cash
flow and terminal grow rate used in the income approach that would still result in the fair value of the company to be higher than its carrying value:
Discount rate increase:
From
To
Future free cash flow
decreased by:
Terminal growth rate decrease:
From
16.5%
18.6%
13.0%
2.0%
To
—
Based on the impairment tests performed, there was no goodwill impairment as of December 31, 2013, 2014 and 2015.
Share-based compensation
In November 2013, we adopted the Leju Plan, which allows us to offer a variety of share-based incentive awards to employees, officers, directors
and individual consultants who render services to us. The plan permits the grant of three types of awards: options, restricted shares and restricted share units.
The maximum number of shares that may be issued pursuant to all awards under the plan is 10,434,783 ordinary shares initially, and will be increased
automatically by 5% of the then total outstanding shares on an as-converted fully diluted basis on each of the third, sixth and ninth anniversaries of the
effective date of the plan.
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On December 1, 2013, we granted options to certain of our employees and certain of E-House’s employees for the purchase of 7,192,000 ordinary
shares at an exercise price of $4.60 per share, pursuant to the Leju Plan. The options expire ten years from the date of grant. The options vest ratably at each
grant date anniversary over a period of three years. The grant-date fair value of the options granted was $2.21 per share. On December 16, 2013, we replaced
600,000 options granted to two of our directors with the same number of restricted shares, with all other substantive terms remaining unchanged. On
January 21, 2014, we replaced 60,000 options granted to one E-House employee with the same number of restricted shares, with all other substantive terms
remaining unchanged. There is no incremental compensation cost from the replacement.
On March 18, 2014, we granted 866,000 restricted shares to certain of our employees and independent directors. The restricted shares vest ratably at
each grant date anniversary over a period of three years. On August 21, 2014, we granted 229,400 restricted shares to certain of our employees. These
restricted shares have fully vested on April 21, 2015.
Pursuant to the Leju Plan, we granted (i) options to certain of our employees for the purchase of 501,000 ordinary shares at an exercise price of $9.68
per share, on April 28, 2015, (ii) options to certain of our employees for the purchase of 30,000 ordinary shares at an exercise price of $7.00 per share, on
August 7, 2015, (iii) options to certain of our employees and certain of E-House’s employees for the purchase of 1,986,000 ordinary shares at an exercise
price of $5.54 per share, on December 14, 2015. The options expire ten years from the date of grant and vest ratably at each anniversary of the grant date over
a period of three years.
As of March 31, 2016, the aggregate number of our ordinary shares underlying outstanding options granted under the Leju Plan is 7,931,718 and the
aggregated number of outstanding restricted shares granted under the Leju Plan is 506,672.
In 2015, we recorded compensation expenses of $9.3 million for the options and restricted shares granted to our employees and directors under the
Leju Plan, and $1.1 million of dividends to E-House for the options and restricted shares granted to employees and directors of E-House under the Leju Plan.
As of December 31, 2015, we had $15.9 million of total unrecognized compensation expenses related to unvested share options and restricted shares granted
under the Leju Plan, which we expect to be recognize over a weighted-average period of 1.9 years.
In 2015, our subsidiary, Omnigold, adopted the Omnigold Plan, pursuant to which (i) the Omnigold Award Pool is initially 5,000,000 as of the
Omnigold Plan Effective Date, and (ii) the Omnigold Award Pool is increased automatically by 5% of the then total issued and outstanding shares of
Omnigold on an as-converted fully diluted basis on each of the third, sixth and ninth anniversary of the Omnigold Plan Effective Date.
On August 11, 2015, Omnigold granted 2,400,000 options to purchase its ordinary shares to certain of the our employees at an exercise price of
$1.50 per share. The options expire ten years from the date of grant and vest ratably at each anniversary of the grant date over a period of three years.
In 2015, we recorded compensation expenses of $80,577 for the options and restricted shares granted to our employees and directors under the
Omnigold Plan. As of December 31, 2015, we had $0.5 million of total unrecognized compensation expenses related to unvested share options and restricted
shares granted under the Omnigold Plan, which we expect to be recognize over a weighted-average period of 2.6 years.
We apply ASC 718, Compensation—Stock Compensation, or ASC 718, to account for our employee share-based payments.
In accordance with ASC 718, 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 financial statements based on their grant date fair values. Specifically,
the grant date fair value of share options are calculated using an option pricing model. We have elected to recognize compensation expense using the straight-
line method for all employee equity awards granted with graded vesting based on service conditions provided that the amount of compensation cost
recognized at any date is at least equal to the portion of the grant-date value of the options that are vested at that date. To the extent the required vesting
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense 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.
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Forfeiture rates are estimated based on historical and future expectations of employee turnover rates and are adjusted to reflect future changes in
circumstances and facts, if any. 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. 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. We, with the assistance of an independent third party valuation firm, determined the fair value of the stock
options granted to employees. The binominal option-pricing model was applied in determining the estimated fair value of the options granted to employees.
The following table presents the assumptions used to estimate the fair values of the share options granted in 2013:
(1)
Risk-free rate of return
Contractual life of option
(3)
Estimated volatility rate
Dividend yield
(4)
(2)
2013
2.98%
10 years
56.74%
0.00%
Notes:
(1) The risk-free rate of return is based on the 10 years US Sovereign Strips curve in effect at the time of grant for a term consistent with the expected term
of the awards.
(2) The contractual life of option is developed giving consideration to vesting period, contractual term and historical exercise pattern of options granted.
(3) The estimated volatility rate is estimated based on the historical volatility of ordinary shares of several comparable companies in the same industry.
(4) The dividend yield was estimated based on our expected dividend policy over the expected term of the options.
Determining the fair value of our ordinary shares required us to make complex and subjective judgments, assumptions and estimates, which involved
inherent uncertainty. Had our management used different assumptions and estimates, the resulting fair value of our ordinary shares and the resulting share-
based compensation expenses could have been different. We took into consideration of the guidance prescribed by the American Institute of Certified Public
Accountants (AICPA) Audit and Accounting Practice Aid, Valuation of Privately- Held-Company Equity Securities Issued as Compensation, or the Practice
Aid.
As we were a private company with no quoted market prices for our ordinary shares prior to our initial public offering in April 2014, we had to make
estimates of the fair value of our ordinary shares at the date of the grant of share options to our senior management. The fair value of our ordinary shares as of
December 1, 2013 and March 18, 2014 is $4.55 and $12.10 per share, respectively. Given the absence of an active market for our ordinary shares prior to this
offering, we engaged an independent appraiser, Jones Lang LaSalle Corporate Appraisal and Advisory Limited, or JLL, to assist in performing
contemporaneous valuations of our ordinary shares. The appraisal was performed using the contemporaneous method to determine the fair value of our
ordinary shares as of the valuation date. Such appraisal provided us with guidelines in determining the fair value of the ordinary shares, but the determination
was made by our management. The fair value of our ordinary shares was developed through the application of the income valuation technique known as the
discounted cash flow method, or the DCF method. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be
made regarding our projected financial and operating results, our unique business risks, our operating history and prospects as of the valuation date, the
liquidity of our shares such as the anticipated timing of a sale of our company or an initial public offering, which is based on the plans made by our board and
management. In addition to our estimated cash flows, which were based on our business prospects and financial forecasts as of valuation date, the following
major assumptions were used in calculating the fair value of our ordinary shares:
Weighted average cost of capital or WACC
The WACCs were determined by using the capital asset pricing model, or CAPM, a method that market participants commonly use to price
securities. Under CAPM, the discount rate was estimated based on a consideration of a number of factors, including risk-free rate, country risk premium,
equity risk premium, size risk premium, and company-specific risk premium as of the valuation date. The risks associated with achieving our forecasts were
appropriately assessed in our determination of the appropriate discount rates. If different discount rates had been used, the valuations could have been
significantly different. WACC of 17.20% and 17.15% was used for date as of December 1, 2013 and March 18, 2014, respectively.
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Comparable companies
In deriving the WACCs, which are used as the discount rates under the income approach, certain publicly traded companies in similar industry, have
similar business, and are subject to similar risks were selected for reference as our guideline companies.
Discount for lack of marketability
Discount for lack of marketability, or DLOM, was also applied to reflect the fact that there is no ready public market for our shares as we are a
closely held private company. Under the Asian 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. Based on the analysis, DLOM of 6.3% and 3.8% was used
for the valuation of our ordinary shares as of December 1, 2013 and March 18, 2014, respectively.
The option-pricing method was used to allocate equity value of our company to ordinary shares, taking into account the guidance prescribed by the
Practice Aid. This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public
offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management.
However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair values are consistent with our
business plan. These assumptions include: (i) no material changes in the existing political, legal and economic conditions in China; (ii) our ability to retain
competent management, key personnel and staff to support our ongoing operations; and (iii) no material deviation in market conditions from economic
forecasts.
After our initial public offering, in determining the fair value of the ordinary shares and restricted shares granted, the closing market price of the
underlying shares on the last trading date prior to the grant dates is applied. In determining the fair value of the ordinary shares on April 17, 2014, the date
when our ADSs first commenced trading on NYSE, the per share equivalent of our initial public offering price to the public is applied.
Recent Accounting Pronouncements
In May 2014, the FASB and International Accounting Standards Board (“IASB”) issued their converged standard on revenue recognition. The
objective of the revenue standards ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, is to provide a single, comprehensive revenue
recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue
standard contains principles that an entity will apply to determine the measurement of revenue and timing of revenue recognition. The underlying principle is
that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange
for those goods or services. For public companies, the revenue standards is effective for the first interim period within annual reporting periods beginning
after December 15, 2016 and early adoption is not permitted. We are in the process of evaluating the impact of the standard on our consolidated financial
statements.
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 year-over-year percent changes in the consumer price index for December 2013, 2014 and 2015 were increases of 2.5%, 1.5% and 1.6%, respectively.
Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates
of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a
result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly
reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.
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Impact of Foreign Currency Fluctuation
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value of the RMB may have a
material and adverse effect on your investment.” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Risk.”
Impact of Governmental Policies
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our business may be materially and adversely affected by
government measures aimed at China’s real estate industry,” “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China” and
“Item 4. Information on the Company—B. Business Overview—Regulation.”
B. Liquidity and Capital Resources
Our principal sources of liquidity have been capital contributions from E-House, our initial public offering and concurrent private placement to
Tencent, and cash generated from operating activities. In April 2014, we completed our initial public offering in which we issued and sold an aggregate of
11,500,000 ADSs, representing 11,500,000 ordinary shares resulting in net proceeds to us of approximately $101.4 million, after deducting underwriting
commissions and the offering expenses payable by us. Concurrently with our initial public offering, we also raised from Tencent in a private placement $18.9
million in net proceeds after deducting estimated fees and expenses payable by us. Our cash and cash equivalents consist of cash on hand and deposits placed
with banks, which are unrestricted as to withdrawal or use and have original maturities of three months or less. We currently anticipate that we will be able to
meet our needs to fund operations for at least the next twelve months with operating cash flow and existing cash balances.
The following table sets forth a summary of our cash flows for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Operating Activities
2013
Year Ended December 31,
2014
(in thousands of $)
2015
83,423
(16,657)
(41,360)
27,639
71,090
98,730
124,831
(12,355)
107,080
219,081
98,730
317,811
51,275
(15,100)
(85,174)
(57,515)
317,811
260,296
Net cash provided by operating activities in 2015 was $51.3 million, primarily comprising net income of $34.8 million adjusted for non-cash
transactions including depreciation and amortization of $29.3 million, allowance for doubtful accounts of $19.0 million, share-based compensation of $11.5
million, and a $48.4 million increase in advances for amounts due to related parties, partially offset by a $12.2 million increase in accounts receivable, a $58.8
million increase in customer deposit, and a $16.3 million decrease in other current liabilities (primarily resulting from the decrease in accrued marketing and
advertising expenses).
Net cash provided by operating activities in 2014 was $124.8 million, primarily comprising net income of $66.7 million adjusted for non-cash
transactions including depreciation and amortization of $26.1 million, allowance for doubtful accounts of $11.6 million, share-based compensation of $8.9
million, a $24.5 million increase in income tax payable and other tax payable, a $17.5 million increase in accrued payroll and welfare expense, and a $14.7
million increase in other current liabilities (primarily resulting from the increase in accrued marketing and advertising expenses in line with the increase in
revenues), partially offset by a $45.4 million increase in accounts receivable.
Net cash provided by operating activities in 2013 was $83.4 million, primarily comprising net income of $42.7 million adjusted for non-cash
transactions including depreciation and amortization of $38.3 million, a $28.4 million increase in income tax payable and other tax payable, and a $10.4
million increase in accrued payroll and welfare expense, partially offset by a $21.6 million decrease in amounts due to related parties and a $18.3 million
change in deferred tax.
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Investing Activities
Net cash used in investing activities in 2015 was $15.1 million, primarily comprised of $14.8 million for the purchase of property and equipment as
well as intangible assets, including $12.0 million for our exclusive rights with Baidu.
Net cash used in investing activities in 2014 was $12.4 million, primarily comprising $12.1 million for deposit for and purchase of property and
equipment and intangible assets including $9.0 million for our exclusive rights with Baidu.
Net cash used in investing activities in 2013 was $16.7 million, primarily comprising $17.0 million for deposit for and purchase of property and
equipment and intangible assets including $15.3 million for our exclusive rights with Baidu, partially offset by $0.5 million of proceeds from disposal of
property and equipment.
Financing Activities
Net cash used in financing activities in 2015 was $85.2 million, mainly comprised of a payment of $26.9 million for dividend, a payment of $42.5
million to repay the loans to related parties, and a payment of $17.4 million for acquisition of non-controlling interests which were acquired in 2014.
Net cash provided by in financing activities in 2014 was $107.1 million, resulting from the net proceeds of $120.3 million from our initial public
offering and a concurrent private placement to Tencent in April 2014, partially offset by a payment of $14.4 million to acquire non-controlling interests in
subsidiaries.
Net cash used in financing activities in 2013 was $41.4 million, resulting from our repayment of loans from E-House.
Holding Company Structure
In the future, we may rely significantly on dividends and other distributions paid by our PRC subsidiaries for our cash and financing requirements.
There may be potential restrictions on the dividends and other distributions by our PRC subsidiaries. The PRC tax authorities may require us to adjust our
taxable income under the contractual arrangements that each of Shanghai SINA Leju, Shanghai Yi Yue and Beijing Maiteng currently has in place with the
relevant consolidated variable interest entity in a way that could materially and adversely affect the ability of Shanghai SINA Leju, Shanghai Yi Yue and
Beijing Maiteng to pay dividends and make other distributions to us. In addition, under PRC laws and regulations, our PRC subsidiaries including Shanghai
SINA Leju, Shanghai Yi Yue and Beijing Maiteng, each as a wholly foreign-owned enterprise in China, may pay dividends only out of their accumulated
profits as determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of
their accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate amount of such fund reaches 50% of their respective
registered capital. At their discretion, our PRC subsidiaries may allocate a portion of their 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. Furthermore, our investments made as
registered capital and additional paid in capital of our PRC subsidiaries, consolidated variable interest entities and consolidated variable interest entities’
subsidiaries are also subject to restrictions on their distribution and transfer according to PRC laws and regulations.
As a result, our PRC subsidiaries, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries in China are restricted
in their ability to transfer their net assets to us in the form of cash dividends, loans or advances. As of December 31, 2015, the amount of the restricted net
assets, which represents registered capital and additional paid-in capital cumulative appropriations made to statutory reserves, was $33.8 million.
As an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund
raising activities to our PRC subsidiaries only through loans or capital contributions, and to our consolidated variable interest entities only through loans, in
each case subject to the satisfaction of the applicable government registration and approval requirements. As a result, there is uncertainty with respect to our
ability to provide prompt financial support to our PRC subsidiaries and consolidated variable interest entities when needed. Notwithstanding the forgoing, our
PRC subsidiaries may use their own retained earnings (rather than RMB converted from foreign currency denominated capital) to provide financial support to
our consolidated variable interest entities either through entrustment loans from our PRC subsidiaries to our consolidated variable interest entities, or direct
loans to such variable interest entities’ nominee shareholders, which would be contributed to the variable interest entities as capital injections. Such direct
loans to the nominee shareholders would be eliminated in our consolidated financial statements against the consolidated variable interest entities’ share
capital.
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Capital Expenditure
Our capital expenditures amounted to $17.0 million, $12.1 million and $14.8 million in 2013, 2014 and 2015, respectively. In the past, our capital
expenditures consisted principally of purchases of property and equipment and intangible assets used in our operations. In 2013, 2014 and 2015 our capital
expenditures also included $15.3 million, $9.0 million and $12.0 million in payments that we made for exclusive rights to operate the Baidu channels and sell
the Baidu Brand Link product, respectively. We funded our capital expenditures primarily with cash on hand and cash generated from operating activities.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We believe that the continual development of our technology will be vital to maintaining our long-term competitiveness. As of December 31, 2015,
we employed 375 software developers and other technology-related personnel. We have developed a technology infrastructure that is specifically used for our
real estate and home related internet website services. In addition, we have also developed our proprietary mobile applications including “Pocket Leju,”
“Fang Niu Jia”, “Leju Er Shou Fang”, and “Pocket Renovation.” We plan to further develop new, proprietary mobile applications tailored to the needs of
home purchasers, developer partners and real estate agents. We will develop our mobile applications with a focus on enhancing mobile user experience and
engagement and to achieve seamless integration with the websites we operate.
Intellectual Property
Our copyrights, trademarks, trade secrets, domain names and other intellectual property are important to our business. We rely on intellectual
property laws and contractual arrangements with our key employees and certain of our customers, collaborators and others to protect our intellectual property
rights. Despite these measures, we cannot assure you that we will be able to prevent unauthorized use of our intellectual property, which would adversely
affect our business.
As of December 31, 2015, we owned 71 registered copyrights, owned or licensed 193 registered trademarks in China, had 50 trademark applications
in various industry categories pending with the China Trademark Office and owned or licensed 189 registered domain names.
We own the software copyrights of our mobile applications “Pocket Leju,” “Fang Niu Jia,”“Leju Er Shou Fang”, and “Pocket Renovation.” We have
registered our software copyrights of all our mobile applications.
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
2015 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused
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. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development services with us.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2015:
Operating Lease Obligations
(1)
Total
Less than 1
year
24,017
9,446
Payments Due by Period
1-3 years
(in thousands of $)
11,848
3-5 years
More than 5
years
1,688
1,035
Note:
(1) Our operating lease obligations relate to our obligations under lease agreements with lessors of our corporate offices and business store fronts.
Table of Contents
G. Safe Harbor
76
This annual report on Form 20-F contains forward-looking statements. These statements are made under the “safe harbor” provisions of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as “will,” “expects,”
“anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “may,” “intend,” “is currently reviewing,” “it is possible,” “subject to” and similar
statements. Among other things, the sections titled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company,” and “Item 5.
Operating and Financial Review and Prospects” in this annual report on Form 20-F, as well as our strategic and operational plans, contain forward-looking
statements. We may also make written or oral forward-looking statements in our filings with the SEC, in our annual report to shareholders, in press releases
and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking statements and are subject to change, and such change may be material and may
have a material and adverse effect on our financial condition and results of operations for one or more prior periods. Forward-looking statements involve
inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained, either expressly or
impliedly, in any of the forward-looking statements in this annual report on Form 20-F. Potential risks and uncertainties include, but are not limited to,
continued low real estate transaction volume in China, government measures that may materially and adversely affect our business, a further slowdown in the
growth of China’s economy, failure of the real estate services industry in China to develop or mature as quickly as expected, diminution of the value of our
brand or image due to our failure to satisfy customer needs and/or other reasons, our inability to successfully execute the strategy of expanding into new
geographical markets in China or the business plans for strategic alliances and other new business initiatives, our failure to manage growth, our loss of
competitive advantage, our reliance on our parent company E-House, and other risks outlined in our filings with the SEC. All information provided in this
annual report on Form 20-F and in the exhibits is as of the date of this annual report on Form 20-F, and we do not undertake any obligation to update any such
information, except as required under applicable law.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
Xin Zhou
Yinyu He
Li-Lan Cheng
Charles Chao
Canhao Huang
Martin Chi Ping Lau
Zhe Wei
David Jian Sun
Min Fan
Winston Li
Weijie Ma
Keyi Chen
Min Chen
Age
48
41
51
50
58
43
45
51
50
49
40
43
42
Position/Title
Executive Chairman
Chief Executive Officer
Executive Director
Director
Director
Director
Independent Director
Independent Director
Independent Director
Independent Director
Co-President
Co-President
Chief Financial Officer
Xin Zhou has served as our Executive Chairman since our inception. He is one of the co-founders of our parent company, E-House, and has served as
E-House’s chairman from 2003 to April 2012 and currently co-chairman. Mr. Zhou served as E-House’s chief executive officer from 2003 to 2009, and has
been serving as E-House’s chief executive officer since April 2012. Mr. Zhou currently is a director of Jupai. He also served as co-chairman and chief
executive officer of E-House’s subsidiary, China Real Estate Information Corporation, from 2009 to April 2012. Mr. Zhou has over 20 years of experience in
China’s real estate industry. From 1997 to 2003, he served as director and general manager of Shanghai Real Estate Exchange Co., Ltd., and as deputy general
manager of Shanghai Jinfeng Investments Co., Ltd., a company listed on the Shanghai Stock Exchange. Mr. Zhou was awarded the “Special Contribution
Award in China’s Real Estate Services Industry” in 2005, named one of the “ten most influential people in the real estate services industry in 2005” from
China City Property Exposition Commission and received the “Outstanding Entrepreneur Award” from Enterprise Asia in 2010. Mr. Zhou currently serves as
vice chairman of China Real Estate Association, director of The Nature Conservancy China, vice chairman of China Real Estate Developers and Investors
Associations, and chairman of Real Estate Service Committee of China Real Estate Association. He is also chairman of Shanghai Real Estate Broker Industry
Association, executive director of Real Estate Industry Research Center of Shanghai Academy of Social Sciences, honorary vice chairman of Shanghai Young
Entrepreneur Association and rotating chairman of Shanghai Entrepreneur Association. Mr. Zhou received his bachelor degree from Shanghai Industrial
University in China.
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Yinyu He has served as our chief executive officer since September 2011 and vice-president from January 2011 to August 2011. He served as our
director of strategic planning from August 2008 to December 2010. Prior to joining Leju, Mr. He was the publisher and chief editor of UBM’s
InformationWeek China from 2004 to 2008. From 2000 to 2004, he served as a senior reporter and researcher covering China’s IT, telecom, financial, and
media industries at Interfax (China) News Agency, where he was a founding member. He also worked as a journalist, reporter, commentator, and anchor for a
number of media outlets including the China Business Network (CBN), Shanghai Television, Eastern Radio, Securities Herald, Eastday.com, and Finance
Director magazine (part of The Economist Group). He received his bachelor’s degree and master’s degree from Shanghai University.
Li-Lan Cheng has served as our executive director since March 2014. Mr. Cheng currently serves as the chief operating officer of E-House, a
position he has held since April 2012. He was E-House’s chief financial officer from November 2006 to April 2012. Prior to joining E-House, Mr. Cheng
served as the chief financial officer of SouFun Holdings Limited, a real estate internet company in China, from 2005 to 2006. From 2002 to 2004, Mr. Cheng
served as an executive director and the chief financial officer of SOHO China Limited, a real estate developer in Beijing. Mr. Cheng was an assistant director
and the head of the Asian transportation sector investment banking group of ABN AMRO Asia from 1997 to 2002. Mr. Cheng is an independent director of
Country Style Cooking Restaurant Chain Co., Ltd., a China-based quick service restaurant chain listed on the NYSE and 51job, Inc., a human resource
service provider listed on NASDAQ. Mr. Cheng received a bachelor’s degree in Economics from Swarthmore College and a Ph.D. degree in Economics from
the Massachusetts Institute of Technology. Mr. Cheng is a chartered financial analyst (CFA).
Charles Chao has served as our director since April 2014. He has served as the co-chairman of the board of our parent company, E-House, since
April 2012. Mr. Chao currently serves as the chairman and chief executive officer of SINA and the chairman of Weibo Corporation, a leading social media
platform in China and a majority owned subsidiary of SINA. Since joining SINA in September 1999, Mr. Chao has served various managerial positions,
including as vice president of finance, chief financial officer, co-chief operating officer and president. Prior to that, Mr. Chao served as an audit manager at
PricewaterhouseCoopers, LLP in Silicon Valley, California. Mr. Chao is currently an independent director of NetDragon Websoft Inc., a Hong Kong Stock
Exchange listed company providing technology for online games. Mr. Chao received his master’s degree in professional accounting from University of Texas
at Austin. He also holds a master’s degree in journalism from University of Oklahoma and a bachelor’s degree in journalism from Fudan University in China.
Canhao Huang has served as our director since March 2014. Mr. Huang currently serves as a director of E-House. He was E-House’s chief operating
officer from September 2007 to December 2009, and vice president from 2000 to 2007. Prior to joining E-House, Mr. Huang served as a manager at Shanghai
No. 1 Department Store Co., Ltd. from 1985 to 2000. Mr. Huang received a bachelor’s degree from Shanghai University.
Martin Chi Ping Lau has served as our director since March 2014. Mr. Lau is an executive director and President of Tencent. He joined Tencent in
2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, merger and acquisitions and investor relations. In
2006, Mr. Lau was promoted as President of Tencent to manage the day-to-day operation of Tencent. In 2007, he was appointed as an executive director of
Tencent. Prior to joining Tencent, Mr. Lau was an executive director at Goldman Sachs (Asia) L.L.C.’s investment banking division and the Chief Operating
Officer of its Telecom, Media and Technology Group. Prior to that, he worked at McKinsey & Company, Inc. as a management consultant. Mr. Lau received a
Bachelor of Science Degree in Electrical Engineering from the University of Michigan, a Master of Science Degree in Electrical Engineering from Stanford
University and an MBA Degree from Kellogg Graduate School of Management, Northwestern University. On July 28, 2011, Mr. Lau was appointed as a non-
executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider listed in Hong Kong.
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Zhe Wei has served as our independent director since April 2014. Mr. Wei has over 15 years of experience in both investment and operational
management in the People’s Republic of China. Prior to launching Vision Knight Capital (China) Fund I, L.P., a private equity investment fund in 2011,
Mr. Wei was an executive director and chief executive officer of Alibaba.com Limited, a leading worldwide B2B e-commerce company. Mr. Wei was the
president, from 2002 to 2006, and chief financial officer, from 2000 to 2002, of B&Q China, a subsidiary of Kingfisher plc, a leading home improvement
retailer in Europe and Asia. From 2003 to 2006, Mr. Wei was also the chief representative for Kingfisher’s China sourcing office, Kingfisher Asia Limited.
Prior to that, Mr. Wei served as the head of investment banking at Orient Securities Company Limited from 1998 to 2000, and as corporate finance manager
at Coopers &Lybrand (now part of PricewaterhouseCoopers) from 1995 and 1998. Mr. Wei was a non-executive director of HSBC Bank (China) Company
Limited and The Hongkong and Shanghai Banking Corporation Limited, and was also the vice chairman of China Chain Store & Franchise Association. He
was voted as one of “China’s Best CEO” by Finance Asia magazine in 2010. Mr. Wei currently serves as an independent director of Zall Development Group
Ltd., a company listed on the Hong Kong Stock Exchange, and a director of Shenzhen United Financial Services Group Holdings Co., Ltd. Mr. Wei holds a
bachelor’s degree in international business management from Shanghai International Studies University and has completed a corporate finance program at
London Business School.
David Jian Sun has served as our independent director since April 2014. Mr. Sun has served as an independent director and a member of the
compensation committee of E-House since March 2014. Mr. Sun also has served as an independent director and a member of the compensation committee of
eHai Car Services Ltd., a NYSE-listed car service provider, since November 2014. In addition, Mr. Sun also serves as director and the chief executive officer
of Homeinns Hotel Group, a NASDAQ-listed economy hotel chain company, and also serves as an independent director of Mecox Lane Limited, a
NASDAQ-listed online platform for apparel and accessories company. Mr. Sun has over ten years of consumer industry experience. From 2003 to 2004,
Mr. Sun served as a vice president of operations for B&Q (China) Ltd., a subsidiary of Kingfisher plc, the third largest home improvement retail group in the
world, overseeing the operation of 15 B&Q superstores in China. From 2000 to 2003, Mr. Sun served as a vice president of marketing for B&Q (China) Ltd.,
leading B&Q’s market positioning and branding efforts in China. Mr. Sun received a bachelor’s degree in management from Shanghai Medical University.
Min Fan has served as our independent director since April 2014. Mr. Fan is the co-founder of CTRIP.com International Limited, a NASDAQ listed
travel service provider in China, and currently serves as the vice chairman of its board and its president. Mr. Fan has been the president of CTRIP.com
International Limited since February 2009. He also served as the chief executive officer, from January 2006 to February 2013, the chief operating officer,
from November 2004 to January 2006, and the executive vice president, from 2000 to November 2004, of CTRIP.com International Limited. From 1997 to
2000, Mr. Fan served as the chief executive officer of Shanghai Travel Service Company, a leading domestic travel agency in China. From 1990 to 1997, he
served as the deputy general manager and in a number of other senior positions at Shanghai New Asia Hotel Management Company, which was one of the
leading hotel management companies in China. Mr. Fan currently serves on the board of directors of China Lodging Group, Limited, a NASDAQ listed
company operating an economy hotel chain in China. Mr. Fan received his master’s degree in management sciences and bachelor’s degree in industrial
management sciences from Shanghai Jiao Tong University.
Winston Li has served as our independent director since April 2014. Mr. Li currently serves as an independent director of E-House. Mr. Li is the chief
financial officer of BabySpace Corp., a PRC-based provider of cross-border e-commerce services. He is also an independent director of Country Style
Cooking Restaurant Chain Co., Ltd., a China-based quick service restaurant chain listed on the NYSE. From 2004 to 2010, Mr. Li served as an independent
director of ZTE Corporation, a large public telecom equipment manufacturing company in China. Mr. Li served as a partner at the Hong Kong office of
Linklaters LLP from 2002 to 2004 and an attorney at the Hong Kong office of Skadden Arps Slate Meagher & Flom LLP from 1997 to 2002. Mr. Li received
his bachelor’s degree in biochemistry from Peking University and master of science degree from the University of Michigan, Ann Arbor. He received his juris
doctor degree from Columbia Law School.
Weijie Ma has served as our co-president since January 2014. He currently serves as the deputy chief financial officer of E-House and was E-House’s
financial controller from August 2007 to December 2013. From August 2000 to July 2007, Mr. Ma was the financial controller of E-House’s subsidiary
Shanghai Real Estate Sales (Group) Co., Ltd. From July 1997 to July 2000, he was a senior auditor at Ernst & Young. Mr. Ma received a bachelor’s degree
from Shanghai University of Finance and Economics.
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Keyi Chen has served as our co-president since September 2011 and was the general manager of our Beijing branch from January 2011 to
August 2011. Prior to that, Mr. Chen was the general manager of Beijing Jiahua Hengshun Media & Advertising Co., Ltd., an internet advertising company
focused on real estate and home furnishing sectors in China, from 2007 to 2010. From 2006 to 2007, Mr. Chen served as the general manager of Langtian
Interactive Advertising Co., Ltd., an affiliate to Allyes Group, an online advertising service provider in China. From 2003 to 2005, Mr. Chen founded and
served as the general manager of Langtian Jiaxun Advertising Co., Ltd., which focused on internet advertising in real estate and education industries.
Mr. Chen received a bachelor’s degree from North China University of Technology.
Min Chen has served as our chief financial officer since March 2014. Prior to joining Leju, Ms. Chen worked for Bank of America Merrill Lynch
Hong Kong office from June 2006 to March 2014, most recently serving as managing director, head of Asia corporate finance and head of China real estate
and lodging within the global corporate and investment banking division. Prior to that, Ms. Chen served as a vice president at Citigroup in New York from
July 2002 to April 2006. Ms. Chen received her bachelor’s degree in political science and economics from Yale University and an MBA degree from Harvard
Business School.
B. Compensation of Directors and Executive Officers
For the year ended December 31, 2015, we paid an aggregate of approximately $1.5 million in cash to our executive officers, and we did not pay any
compensation to our directors. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers
and directors. Our PRC subsidiaries and consolidated variable interest entities are required by law to make contributions equal to certain percentages of each
employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is
employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the
executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, gross negligence or dishonest acts to our detriment,
or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon sixty days advance written
notice. In such case of termination by us, we will provide severance payments to the executive officer as set forth in the employment agreement. The
executive officer may resign at any time with a one-month advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence
and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our
confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary
information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in
confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with
us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions,
designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her
employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) solicit from any of our
customers, business of the same or similar nature to our business; (ii) solicit from any known potential customer, business which of the same or similar nature
to business which has been the subject or substantially prepared to be subject of a written or oral bid, offer or proposal by us; (iii) solicit the employment or
service of any person who is known to be employed or engaged by us; or (iv) otherwise interfere with our business or accounts including, but not limited to,
any relationship or agreement between us and any vendor or supplier.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to
indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of
their being a director or officer of our company.
Share Incentive Plan
In November 2013, we adopted the Leju Plan, which allows us to offer a variety of share-based incentive awards to employees, officers, directors
and individual consultants who render services to us. The plan permits the grant of three types of awards: options, restricted shares and restricted share units.
The maximum number of shares that may be issued pursuant to all awards under the Leju Plan is 10,434,783 ordinary shares of Leju initially, and will be
increased automatically by 5% of the then total outstanding shares on an as-converted fully diluted basis on each of the third, sixth and ninth anniversaries of
the effective date of the Leju Plan. The Leju Plan was amended and replaced in July 2014 containing substantially the same terms as the original Leju Plan.
Table of Contents
The following paragraphs describe the principal terms of the Leju Plan.
80
Plan Administration. Our board of directors, or a committee designated by our board or directors, will administer the plan. The committee or the
full board of directors, as appropriate, will determine the provisions and terms and conditions of each option grant.
Award Agreements. Options and other awards granted under the plan are evidenced by an award agreement that sets forth the terms, conditions and
limitations for each grant. In addition, the award agreement may also provide that securities granted are subject to a 180-day lock-up period following the
effective date of a registration statement filed by us under the Securities Act, if so requested by us or any representative of the underwriters in connection with
any registration of the offering of any of our securities. The exercise price of granted options may be amended or adjusted in the absolute discretion of our
board of directors, or a committee designated by our board of directors, without the approval of our shareholders or the recipients of the options.
Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our
subsidiaries or any entities in which we hold a substantial ownership interest.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will terminate and accelerate upon occurrence of a change-of-
control corporate transaction where the successor entity does not assume our outstanding awards under the plan. In such event, each outstanding award will
become fully vested and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights will
terminate immediately before the date of the change-of-control transaction provided that the grantee’s continuous service with us shall not be terminated
before that date.
Term of the Options. The term of each option grant shall be stated in the award agreement, provided that the term shall not exceed ten years from
the date of the grant.
Vesting Schedule. In general, our board of directors, or a committee designated by our board of directors, determines, or the award agreement
specifies, the vesting schedule.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of succession and incentive
share options may be exercised during the lifetime of the optionee only by the optionee.
Termination of the Plan. Unless terminated earlier, the plan will terminate automatically in 2023. Our board of directors has the authority to amend
or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may impair the rights of
any award recipient unless agreed by the recipient.
As of March 31, 2016, the aggregate number of our ordinary shares underlying outstanding options granted under the Leju Plan was 7,931,718 and
the aggregated number of outstanding restricted shares granted under the Leju Plan was 506,672.
The following table summarizes, as of March 31, 2016, the options and restricted shares granted under the plan to our executive officers and
directors and to other individuals as a group (including certain of our employees and E-House’s employees), without giving effect to the options that were
exercised or restricted shares that had vested, if any.
Table of Contents
Name
Xin Zhou
Yinyu He
Li-Lan Cheng
Charles Chao
Canhao Huang
Zhe Wei
David Jian Sun
Min Fan
Winston Li
Weijie Ma
Keyi Chen
Min Chen
81
4.6
5.54
4.6
N/A
5.54
4.6
5.54
4.6
5.54
4.6
5.54
N/A
5.54
N/A
5.54
N/A
5.54
N/A
5.54
4.6
5.54
4.6
5.54
N/A
5.54
Ordinary Underlying
Options/ Restricted
Shares
Exercise
(2)
Price
($/Share)
*(1)
*(1)
360,000
100,000
720,000
100,000
*
120,000
240,000
30,000
360,000
50,000
30,000
15,000
60,000
*
20,000
40,000
*
15,000
40,000
*
15,000
40,000
*
15,000
240,000
80,000
240,000
80,000
500,000*
80,000
Other individuals as a group
6,564,836
**
4.6 to 9.68
Date of Grant
December 1, 2013
December 14, 2015
December 1, 2013
March 18, 2014
December 14, 2015
December 1, 2013
December 14, 2015
December 1, 2013
December 14, 2015
December 1, 2013
December 14, 2015
March 18, 2014
December 14, 2015
March 18, 2014
December 14, 2015
March 18, 2014
December 14, 2015
March 18, 2014
December 14, 2015
December 1, 2013
December 14, 2015
December 1, 2013
December 14, 2015
March 18, 2014
December 14, 2015
December 1, 2013 to
December 14, 2015
Date of Expiration
(2)
N/A
December 13, 2025
November 30,2023
N/A
December 13, 2025
N/A
December 13, 2025
November 30,2023
December 13, 2025
November 30,2023
December 13, 2025
N/A
December 13, 2025
N/A
December 13, 2025
N/A
December 13, 2025
N/A
December 13, 2025
November 30, 2023
December 13, 2025
November 30, 2023
December 13, 2025
N/A
December 13, 2025
November 30,2023 to December 13,
2025 or N/A
Notes:
(1) These options were subsequently surrendered for cancellation in exchange for the same number of restricted shares having the same vesting schedule and
a purchase price equal to the original option exercise price.
(2) The options and most of our restricted shares are subject to a three-year vesting schedule, with one-third of the underlying ordinary shares vesting on
each of the first, second and third anniversary of the grant date.
*
Represents restricted shares.
**
Includes options and restricted shares.
C. Board Practices
Our board of directors consists of nine directors. A director is not required to hold any shares in our company by way of qualification. A director
who is in any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or transaction with our company must declare the
nature of his interest at a meeting of the directors. Subject to the NYSE rules and disqualification by the chairman of the relevant board meeting, a director
may vote in respect of any contract or transaction or proposed contract or transaction notwithstanding that he may be interested therein and if he does so his
vote shall be counted and he may be counted in the quorum at the relevant board meeting at which such contract or transaction or proposed contract or
transaction is considered. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and
uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or
of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
In 2015, our board of directors held meetings or passed unanimous written resolution in lieu of meeting four times.
Committees of the Board of Directors
We have two committees under the board of directors: an audit committee and a compensation committee. We have adopted a charter for each of the
two committees.
A company of which more than 50% of the voting power is held by a single entity is considered a “controlled company” under Section 303A of the
Corporate Governance Rules of the NYSE. A controlled company need not comply with the applicable NYSE corporate governance rules requiring its board
of directors to have a majority of independent directors and independent compensation and nominations/corporate governance committees. Because more
than 50% of the voting power of our company is held by E-House, we qualify as a “controlled company” under the Corporate Governance Rules of the
NYSE, and have relied on the controlled company exception provided under those rules. As a result, we do not have a majority of independent directors nor a
separate nominating committee. In addition, our compensation committee does not consist entirely of independent directors and we are not required to have
an annual performance evaluation of the compensation committee.
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Audit Committee. Our audit committee consists of Mr. Zhe Wei, Mr. Min Fan and Mr. Winston Li, and is chaired by Mr. Zhe Wei. We have
determined that Messrs. Wei, Fan and Li satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE and
Rule 10A-3 under the Exchange Act. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial
statements of our company. The audit committee will be responsible for, among other things:
· appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;
· reviewing with the independent auditors any audit problems or difficulties and management’s response;
· discussing the annual audited financial statements with management and the independent auditors;
· reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and
control major financial risk exposures;
· reviewing and approving all proposed related party transactions;
· meeting separately and periodically with management and the independent auditors; and
· monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance.
In 2015, our audit committee held meetings or passed unanimous written resolutions in lieu of meeting four times.
Compensation Committee. Our compensation committee consists of Mr. Li-Lan Cheng and Mr. Jian Sun, and is chaired by Mr. Cheng. Mr. Sun
satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of NYSE. The compensation committee will assist 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 will be
responsible for, among other things:
· reviewing the total compensation package for our executive officers and making recommendations to the board with respect to it;
· approving and overseeing the total compensation package for our executives other than the three most senior executives;
· reviewing the compensation of our directors and making recommendations to the board with respect to it; and
· periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
and employee pension and welfare benefit plans.
In 2015, our compensation committee held meetings and passed unanimous written resolutions in lieu of meeting four times.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties 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, and the
class rights vested thereunder in the holders of the shares. Our company may in certain circumstances have rights to damages if a duty owed by the directors
is breached.
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Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers
of our board of directors include, among others:
· convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
· declaring dividends and distributions;
· appointing officers and determining the term of office of the officers;
· exercising the borrowing powers of our company and mortgaging the property of our company; and
· approving the transfer of shares in our company, including the registration of such shares in our share register.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office until
such time as they are removed from office by ordinary resolution of the shareholders or by the board. A director will cease to be a director if, among other
things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be or becomes
of unsound mind; (iii) resigns his office by notice in writing to the company; (iv) without special leave of absence from our board of directors, is absent from
meetings of our board of directors for six consecutive meetings and the board resolves that his office be vacated; or (v) is removed from office pursuant to any
other provision of our memorandum and articles of association.
D. Employees
As of December 31, 2013, 2014 and 2015, we had 4,204, 4,931 and 5,297 employees, respectively. The table sets forth the number of employees by
area of business as of December 31, 2015:
Sales
Software Developers and Other Technology-related
Editorial
Customer Support
Corporate Offices
Total
Number of Employees
Percentage of
Employees
1,276
375
1,095
1,130
1,421
5,297
24.1%
7.1%
20.7%
21.3%
16.8%
100.0%
We pay our sales staff a combination of salaries and sales commissions and pay salaries to all other employees. We consider our relations with our
employees to be good.
We place special emphasis on the training of our employees, whom we consider to be our most valuable asset. All newly hired employees must
undergo intensive training during their three-month probation period. We also invite outside experts, including experts from the E-House Research and
Training Institute, to provide ongoing classroom training to our employees. The human resources department is responsible for implementing the training
plans, including engaging trainers, preparing training materials, selecting training venues and collecting feedback.
Because sales of online marketing services are highly competitive, we strongly emphasize training programs designed to improve the sales and
marketing skills of our sales staff. In addition to training for new hires, our sales staff participate in weekly operating meetings that include additional training
opportunities.
We conduct quarterly performance evaluations for all employees and use both performance-based bonuses and job promotions as incentives to
encourage strong performance. We strive to maintain a collaborative corporate culture and our mid-level and senior employees are generally eligible to
participate in our share incentive plan.
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E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2016 by:
· each of our directors and executive officers; and
· each person known to us to own beneficially more than 5.0% of our ordinary shares.
As of March 31, 2016, we had 139,489,416 ordinary shares issued. Among the 139,489,416 ordinary shares issued, 4,243,550 ordinary shares that
had been issued to our depositary and reserved for future grants under our share incentive plan are not deemed as outstanding for the purpose of calculating
the beneficial ownership in the following table. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. 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 from March 31, 2016, including through the exercise of any option, warrant or other right or the conversion of any other security. These
shares, however, are not included in the computation of the percentage ownership of any other person.
(1)
Directors and Executive Officers:
Xin Zhou
Yinyu He
Li-Lan Cheng
Charles Chao
Canhao Huang
Martin Chi Ping Lau
(2)
Zhe Wei
Jian Sun
Min Fan
Winston Li
Weijie Ma
Keyi Chen
Min Chen
All Directors and Executive Officers as a Group
(4)
(3)
(†)
Principal Shareholders:
E-House (China) Holdings Limited
Tencent Holdings Limited
(6)
(5)
Shares Beneficially Owned
Number
%
1,826,829
*
*
*
*
*
*
*
*
*
*
*
*
3,442,971
93,694,920
21,231,220
1.4
*
*
*
*
*
*
*
*
*
*
*
*
2.5
69.3
15.7
Notes:
* Less than 1% of our total outstanding shares.
(†) Except where otherwise disclosed in the footnotes below, the business address of each of our directors and executive officers is 15/F, Beijing Shoudong
International Plaza, No. 5 Building, Guangqu Home Dongcheng District, Beijing 100022, People’s Republic of China.
(1) The business address of Mr. Martin Chi Ping Lau is 39/F, Tencent Building, Kejizhongyi Avenue, Nanshan District, Shenzhen, People’s Republic of
China.
(2) The business address of Mr. Zhe Wei is 3301, Kerry Parkside Office Building, 1155 Fangdian Rd., Pudong District, Shanghai, People’s Republic of
China.
(3) The business address of Mr. Jian Sun is No. 124 Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China.
(4) The business address of Mr. Min Fan is No. 99 Fuquan Road, Changning District, Shanghai 200335, People’s Republic of China.
(5) E-House (China) Holdings Limited, or E-House, is our parent company and is incorporated in the Cayman Islands, and its business address is 11/F,
Qiushi Building, No. 383 Guangyan Road, Shanghai, 200072, People’s Republic of China. E-House is a reporting company under the Exchange Act and
listed on the New York Stock Exchange. On January 15, 2015, E-House completed a partial spin-off of us by distributing in the form of a dividend of
0.05 of our ordinary shares, par value $0.001, for each of its ordinary shares outstanding as of December 3, 2014, or 0.05 of our ADSs, for each of its
ADSs outstanding as of December 3, 2014. E-House distributed a total of 7,103,280 of our ordinary shares to holders of its ordinary shares in this
manner, which include a total of 3,877,658 of our ordinary shares in the form of 3,877,658 ADSs to its ADS holders through its depositary bank.
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(6) Represents 21,231,220 held by THL O Limited, or THL, a British Virgin Islands company and an indirect wholly owned subsidiary of Tencent Holdings
Limited. or Tencent. See “Item 7. Related Party Transactions—Transactions and Agreements with Tencent” for more information. Tencent Holding
Limited is incorporated in the Cayman Islands and its business address is 29/F., Three Pacific Place, No.1 Queen’s Road East, Wanchai, Hong Kong.
Tencent is listed on the Hong Kong Stock Exchange.
To our knowledge, E-House entered into a merger agreement with E-House Holdings Ltd., or the Parent, and E-House Merger Sub Ltd., or the
Merger Sub, a wholly owned subsidiary of the Parent, on April 15, 2016. The Parent is an acquisition vehicle whose shareholders will consist of the members
of the buyer consortium that proposed to acquire all of E-House’s outstanding shares other than the shares owned by the consortium members or their
affiliates. Subject to satisfaction of the terms and conditions under the merger agreement, the Merger Sub will merge with and into E-House, with E-House
continuing as the surviving corporation and a wholly owned subsidiary of the Parent. E-House had been previously informed that SINA had agreed to
exchange all the E-House shares held by SINA at the closing of the going-private transaction for a portion of the ordinary shares of Leju held by E-House at
the closing, based on an exchange ratio determined in accordance with a mutually agreed formula. If the merger and the share exchange is consummated as
contemplated, SINA will become a principal shareholder of our company. In addition, we cannot rule out the possibility that the buyer consortium will create
security interest over E-House’s assets, including E-House’s shares in our company, at the closing of the going-private transaction, in order to obtain financing
from their financing sources, which may result in a reduction of E-House’s shareholding in our company in the event of default. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Carve-out from E-House and Our Relationships with E-House—The proposed going private transaction
of E-House may materially affect our corporate structure, business and operations. ”
To our knowledge, as of March 31, 2016, 20,483,008 of our ordinary shares were held by one record holder in the United States, which was
JPMorgan Chase Bank, N.A., the depositary of our ADS program. 4,243,550 of the 20,483,008 ordinary shares held by JPMorgan Chase Bank, N.A. are
reserved for future grants under our share incentive plan. 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.
For the options granted to our directors, executive officers and employees, please refer to “—B. Compensation of Directors and Executive Officers.”
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Transactions and Agreements with E-House
Agreements Related to Our Carve-out from E-House
We have entered into agreements with E-House with respect to various ongoing relationships between us. These include a master transaction
agreement, an offshore transitional services agreement, an onshore transitional services agreement, a non-competition agreement and an onshore cooperation
agreement. The following are summaries of these agreements.
Master Transaction Agreement
The master transaction agreement contains provisions relating to our carve-out from E-House. The master transaction agreement provides for cross-
indemnities that generally will place the financial responsibility on us for all liabilities associated with the current and historical real estate online services
business and operations that have been conducted by or transferred to us, and generally will place on E-House the financial responsibility for liabilities
associated with all of E-House’s other current and historical businesses and operations, in each case regardless of the time those liabilities arise. The master
transaction agreement also contains indemnification provisions under which we and E-House will indemnify each other with respect to breaches of the master
transaction agreement or any related inter-company agreement.
In addition, we have agreed to indemnify E-House against liabilities arising from misstatements or omissions in our SEC filings and from
information we provide to E-House specifically for inclusion in E-House’s annual or quarterly reports following the completion of our initial public offering,
but only to the extent that the information pertains to us or our business or to the extent E-House provides us prior written notice that the information will be
included in its annual or quarterly reports and the liability does not result from the action or inaction of E-House. Similarly, E-House will indemnify us
against liabilities arising from misstatements or omissions in its subsequent SEC filings or with respect to information that E-House provided to us
specifically for inclusion in our SEC filings.
The master transaction agreement contains a general release, under which the parties will release each other from any liabilities arising from events
occurring on or before the initial filing date of the registration statement for our initial public offering, including in connection with the activities to
implement our initial public offering. The general release does not apply to liabilities allocated between the parties under the master transaction agreement or
the other inter-company agreements.
Furthermore, under the master transaction agreement, we have agreed to use our reasonable best efforts to use the same independent certified public
accounting firm selected by E-House and to maintain the same fiscal year as E-House until the first E-House fiscal year-end occurring after the earlier of
(i) the first date when E-House no longer owns at least 20% of the voting power of our then outstanding securities and (ii) the first date when E-House ceases
to be the largest beneficial owner of our then outstanding voting securities (without considering holdings by certain institutional investors). We also have
agreed to use our reasonable best efforts to complete our audit and provide E-House with all financial and other information on a timely basis so that E-House
may meet its deadlines for its filing of annual and quarterly financial statements.
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The master transaction agreement will automatically terminate five years after the first date upon which E-House ceases to own in aggregate at least
20% of the voting power of our then outstanding securities. This agreement can be terminated early by mutual written consent of the parties.
Offshore Transitional Services Agreement
Under the offshore transitional services agreement, E-House agrees that, during the service period, E-House will provide us with various corporate
support services, including:
· accounting support;
· administrative support;
· marketing support;
· internal control support;
· customer service support; and
· legal support.
E-House also may provide us with additional services that we and E-House may identify from time to time in the future. It may engage third parties
to provide services covered by the offshore transitional service agreement.
The offshore transitional service agreement provides that the performance of a service according to the agreement will not subject the provider of
such service to any liability whatsoever except as directly caused by the gross negligence or willful misconduct of the service provider. Liability for gross
negligence or willful misconduct is limited to the lower of the price paid for the particular service or the cost of the service’s recipient performing the service
itself or hiring a third party to perform the service. Under the offshore transitional services agreement, the service provider of each service is indemnified by
the recipient against all third-party claims relating to provision of services or the recipient’s material breach of a third-party agreement, except where the
claim is directly caused by the service provider’s gross negligence or willful misconduct.
The price to be paid for the services provided under the offshore transitional service agreement shall be the actual direct costs and indirect costs of
providing such services. Direct costs include compensation and travel expenses attributable to employees, temporary workers, and contractors directly
engaged in performing the services as well as materials and supplies consumed in performing the services. Indirect costs include occupancy, information
technology supervision and other overhead costs of the department incurring the direct costs of providing the service.
The offshore transitional services agreement provides for a service period commencing on the date when the registration statement on Form F-1 for
our initial public offering is first publicly filed with the SEC, and ending on the date when E-House ceases to own in aggregate at least 20% of the voting
power of our then outstanding securities or ceases to be the largest beneficial owner of our then outstanding voting securities, without considering holdings of
institutional investors that have acquired our securities in the ordinary course of their business and not with a purpose nor with the effect of changing or
influencing our control.
Either party may terminate the offshore transitional services agreement with respect to either all or part of the services by giving a 90-day prior
written notice to the other party. The agreement provides for an early termination fee in the case of early termination by E-House, but does not quantify the
amount of or specify the calculation method, for such fee.
Onshore Transitional Services Agreement
The onshore transitional services agreement adopts terms and conditions similar to those of the offshore transitional services agreement. Under the
onshore transitional services agreement, Shanghai Real Estate Sales (Group) Co., Limited, an indirectly wholly owned subsidiary of E-House, or E-House
Shanghai, agrees, during the applicable service period, to provide Beijing Leju, Beijing Jiajujiu, Shanghai Yi Xin, Shanghai SINA Leju, Beijing Maiteng,
Shanghai Yi Yue and E-House City Rehouse Real Estate Broker (Shanghai) Co., Ltd., or the Leju PRC Entities, and/or their designated PRC affiliates, with
various corporate support services, including accounting support, administrative support, internal control and internal audit support, marketing support,
customer service support and legal support. E-House Shanghai also may provide the Leju PRC Entities with additional services that the Leju PRC Entities
and E-House Shanghai may identify from time to time in the future. E-House Shanghai may engage its PRC affiliates or other third parties to provide services
covered by the onshore transitional services agreement.
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The price to be paid for the services provided under the onshore transitional services agreement shall be the actual direct costs and indirect costs of
providing such services. Direct costs include compensation and travel expenses attributable to employees, temporary workers, and contractors directly
engaged in performing the services as well as materials and supplies consumed in performing the services. Indirect costs include occupancy, information
technology supervision and other overhead costs of the department incurring the direct costs of providing the service.
The onshore transitional services agreement provides for a service period commencing on the date when the registration statement on Form F-1 for
our initial public offering is first publicly filed with the SEC, and ending on the date when E-House ceases to own in aggregate at least 20% of the voting
power of our then outstanding securities or ceases to be the largest beneficial owner of our then outstanding voting securities, without considering holdings of
institutional investors that have acquired our securities in the ordinary course of their business and not with a purpose nor with the effect of changing or
influencing our control.
Either E-House Shanghai or the Leju PRC Entities may terminate either all or part of the services by giving a 90-day prior written notice to the other
party. The agreement provides for an early termination fee in the case of early termination by the Leju PRC Entities, but does not quantify the amount of or
specify the calculation method, for such fee.
E-House charged us a fee based on an estimate of the actual costs incurred to provide services under the offshore and onshore transitional services
agreements, which amounted to $10.4 million for the period from April 17, 2014, the date of our initial public offering, to December 31, 2014, and $6.0
million for the year ended December 31, 2015.
Non-competition Agreement
The non-competition agreement provides for a non-competition period beginning on the date of the agreement and ending on the later of (i) three
years after the first date when E-House ceases to own in aggregate at least 20% of the voting power of our then outstanding securities and (ii) five years after
the date that the registration statement on Form F-1 for our initial public offering is first publicly filed with the SEC. This agreement can be terminated early
by mutual written consent of the parties.
E-House has agreed not to compete with us during the non-competition period in the business of providing real estate e-commerce, online
advertising and listing services, anywhere in the world. We have agreed not to compete with E-House during the non-competition period in any business
conducted by E-House as described in its periodic filings with the SEC, other than the businesses we are engaged in as described in the prospectus for our
initial public offering.
The non-competition agreement also provides for a mutual non-solicitation obligation that neither E-House nor we may, during the non-competition
period, hire, or solicit for hire, any active employees of or individuals providing consulting services to the other party, or any former employees of or
individuals providing consulting services to the other party within six months of the termination of their employment or consulting services, without the other
party’s consent, except for solicitation activities through generalized non-targeted advertisement not directed to such employees or individuals that do not
result in a hiring within the non-competition period.
Onshore Cooperation Agreement
Under this onshore cooperation agreement, E-House Shanghai, Beijing Leju, Beijing Jiajujiu and Shanghai Yi Xin agree that they will cooperate
with each other in sharing information about potential demands for products and/or services and developing clients. If any party is aware that its customers,
suppliers or other business partners may have demands for the products and/or services of the primary business of any other party, it will share such
information with such other party, to the extent not in violation of any applicable law and its confidentiality obligations or other terms under any contract
binding on such party. Furthermore, the parties agree to cooperate with each other, to the extent commercially reasonable and in the manner deemed to be
appropriate, in referring the principal products and/or services of any other party, joint pitching for and negotiating with clients, and entering into agreements
with clients. In the event the parties jointly enter into an agreement with a client, they shall determine their respective rights and obligations in writing through
amicable negotiations, and based on the principle of fairness and the fair market values of the products and/or services offered by the parties. The parties
agree not to charge any fees for their cooperation and assistance provided under the agreement unless they separately and explicitly agree otherwise.
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The onshore cooperation agreement provides for a term commencing on its date of execution and ending on the date when E-House ceases to own in
aggregate at least 20% of the voting power of our then outstanding securities or ceases to be the largest beneficial owner of our then outstanding voting
securities, without considering holdings of institutional investors that have acquired our securities in the ordinary course of their business and not with a
purpose nor with the effect of changing or influencing our control. The onshore cooperation agreement does not provide any early termination right.
Other Transactions and Agreements with E-House
Expenses allocated from E-House for corporate selling, general and administrative services amounted to $15.5 million and $2.9 million, respectively,
for the year ended December 31, 2013, and the period from January 1, 2014 to April 16, 2014, one day before our initial public offering. The amounts of
these expenses were based on a variety of factors and dependent on the nature of the expenses being allocated. These expenses consist primarily of share-
based compensation expenses of senior management and shared marketing and management expenses including marketing, finance, legal, technology, human
resources, administration and internal audit. These allocations were made using a proportional cost allocation method based on revenues and headcount as
well as estimates of actual time spent on the provision of services attributable to us. We believe that these allocations are reasonable.
For the years ended December 31, 2013, 2014, and 2015, we derived revenues in the amount of $10,614, $0.2 million and $28,679 from providing
online advertising services to E-House. For the years ended December 31, 2013, 2014, and 2015, we recognized expenses for services provided by E-House
of $0.9 million, $1.2 million and $5.9 million, respectively.
In March 2015, we declared a cash dividend of $0.20 per ordinary share, or $0.20 per ADS, and paid an aggregate of $18.7 million to E-House
directly from our additional paid-in capital account in May 2015.
As of December 31, 2014 and 2015, we had a payable to E-House of $1.6 million and $7.8 million, respectively.
With respect to our sales of discount coupons for property developments in Beijing, for regulatory reasons the fees for such discount coupons are
collected by E-House on our behalf and either remitted to us or used to offset amounts owed by us to E-House. In the past, E-House did not charge any fee or
commission for its provision of this service to us.
Loans Outstanding
As of December 31, 2013, 2014 and 2015, we had outstanding loan payables to E-House in the amount of $42.5 million, $42.5 million and nil,
respectively, which are interest free and settleable on demand. The loans were advanced by E-House primarily for general working capital requirements.
During the years ended December 31, 2013 and 2014, respectively, E-House loaned $1,000 and nil, respectively, to us to fund capital injections into
our PRC subsidiaries. Such loans were waived by E-House pursuant to a release agreement entered into in January 2014 and have been recorded as capital
contributions as of the dates on which such loans were originally made.
For the years ended December 31, 2013, 2014 and 2015, the largest aggregate amount outstanding under loans made to us by E-House was
$86.3 million, $42.5 million and $42.5 million, respectively. As of March 31, 2016, we had no principal amount outstanding under these loans.
Transactions and Agreements with SINA
In 2008, SINA reorganized its real estate and home furnishing websites and online real estate advertising business into a separate unit with its own
legal entities, management team, advertising operations, systems and physical facilities. Pursuant to the reorganization, SINA and E-House formed a joint
venture, China Online Housing, which subsequently became our wholly owned subsidiary in December 2013 as part of a corporate reorganization by E-
House. The terms of the joint venture provided China Online Housing with the rights, for an initial term of ten years, to use the E-House real estate
information database and operate the SINA real estate and home furnishing websites, including licenses to use SINA’s trademark, domain names, website
technologies and certain software.
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In 2009, SINA and China Online Housing entered into an amended and restated advertising inventory agency agreement, a domain name and content
license agreement, a restated trademark license agreement and a software license and support services agreement. In March 2014, we and SINA entered into
an advertising inventory agency agreement, an amended and restated domain name and content license agreement, an amended and restated trademark license
agreement and an amended and restated software license and support services agreement. The principal effect of the agreements entered into in March 2014 is
to extend the term of our agreements with SINA through 2024.
Advertising Inventory Agency Agreement
Under the advertising inventory agency agreement, we have the exclusive right to sell advertising to real estate, home furnishing and construction
materials advertisers on all SINA non-real estate websites. We are required to pay SINA fees of approximately 15% of the revenues generated from sales of
advertising on SINA non-real estate websites, subject to certain limitations on the amount of advertising that we may sell and fees payable by us to SINA
based on the amount of advertising sold. In addition, we authorize SINA as our exclusive agent to sell non-real estate-related advertising on our directly
operated websites. We are entitled to receive approximately 85% of the revenues generated from these sales. The initial term of the amended and restated
advertising inventory agency agreement is ten years, expiring in 2024.
Domain Name and Content License Agreement
Under the amended and restated domain name and content license agreement, an affiliate of SINA, or licensor, granted to us an exclusive license to
use its five domain names, namely, house.sina.com.cn , jiaju.sina.com.cn , construction.sina.com.cn , dichan.sina.com.cn , and esf.sina.com.cn in connection
with our real estate internet operations in China. In addition, the licensor also granted to us an exclusive license to use all contents, whose copyrights are
owned by the licensor or owned by a third-party provider but is sub-licensable by the licensor without requiring payment of any additional fees and without
violating the terms of any agreement with such third party provider, in connection with websites associated with the domain names licensed to us. For other
operating contents, we may enter into an agreement with the owner independently and will be responsible for the costs associated with procuring the contents.
The licenses are for an initial term of ten years expiring in 2024.
Amended and Restated Trademark License Agreement
Under the amended and restated trademark license agreement, an affiliate of SINA granted to us a non-exclusive license to use three SINA
trademarks and an exclusive license to use four SINA related trademarks in connection with our real estate online operations in China through websites
located at leju.com and the websites located at house.sina.com.cn , jiaju.sina.com.cn , construction.sina.com.cn , dichan.sina.com.cn and esf.sina.com.cn . The
licenses are for an initial term of ten years expiring in 2024.
Amended and Restated Software License and Support Services Agreement
Under the amended and restated software license and support services agreement, a subsidiary of SINA, or licensor, granted to us a non-exclusive
license to use (i) the proprietary software used for, among other things, internet content publishing, advertising publishing, sales management, procurement
reimbursement, financial management flow, statistics, monitoring and censoring; (ii) certain current software products and interfaces necessary to facilitate
our use of such current software products; (iii) the databases; (iv) certain improvements to the licensed software; and (v) related documentation and hardware,
in each case to the extent such items (other than licensor improvements) exist and have been delivered to us under the software license and support service
agreement executed in 2009. The licensor also provided to us infrastructure necessary to operate our websites and facilitate our use of the licensed software.
In addition, the licensor also provided support services, including routine maintenance, technical support and hardware support. The licenses are for an initial
term of ten years expiring in 2024 and free of any fees (subject to certain exceptions). However, to the extent that there are any reasonable, incremental costs
for use of the licensed software or the infrastructure, or provision of the support services, due to a change in the business needs, we are required to reimburse
the licensor for all such costs.
Transactions and Agreements with Tencent
Strategic Cooperation Agreement
On March 10, 2014, we entered into a strategic cooperation agreement with Tencent, a provider of comprehensive internet services serving the
largest online community in China. Pursuant to the strategic cooperation agreement, we and Tencent have agreed to jointly develop software and tools for use
on Tencent’s social communication platform, Weixin, to facilitate our opening of Weixin public accounts associated with real estate projects, which we
believe will provide real estate information to Weixin users, enable us to better connect with our users through such accounts and expand payment solutions
provided to users. We have agreed to adopt Weixin payment solutions as the default payment method for real estate O2O e-commerce transactions conducted
by our users on Weixin. We and Tencent have also agreed to explore and pursue additional opportunities for potential cooperation, including but not limited to
cooperation involving Tencent’s social communications platform, including Weixin, “QQ” and “mobile QQ;” the social media service, “Tencent Weibo;” the
social networking service, “Qzone;” and/or certain other Tencent wholly-owned internet properties in China.
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Share Purchase and Subscription Agreement
On March 21, 2014, we entered into a share purchase and subscription agreement with E-House and Tencent, pursuant to which Tencent acquired
from E-House 19,201,800 of our ordinary shares, or 15% of our total outstanding shares on a fully diluted basis, including all options and restricted shares
and any other rights to acquire our shares that were granted and outstanding, for $180 million in cash. Concurrent with the consummation of our initial public
offering, Tencent purchased 2,029,420 ordinary shares from us at a price per ordinary share equal to the initial public offering price per ordinary shares to
maintain a 15% equity interest in us (on a fully diluted basis, including all options and restricted shares and any other rights to acquire our shares that were
granted and outstanding, and assuming the underwriters exercised their over-allotment options to purchase additional ADSs in full) as of the consummation of
our initial public offering.
The share purchase and subscription agreement provides for certain restrictions on the transfer of the ordinary shares purchased pursuant to the share
purchase and subscription agreement. For an 18-month lock-up period that commenced on the purchase date, Tencent may not directly or indirectly transfer
or pledge any of the ordinary shares purchased from E-House without our prior written consent. For a six month lock-up period that commenced on the
purchase of the ordinary shares from us concurrent with our initial public offering, Tencent may not directly or indirectly transfer or pledge any of such
ordinary shares without our prior written consent.
Investor Rights Agreement
On March 31, 2014, being the closing of the sale of shares to Tencent by E-House under the share purchase and subscription agreement, we entered
into an investor rights agreement with E-House and Tencent, which granted E-House and Tencent certain registration rights with respect to our ordinary
shares owned by them, granted certain board representation rights to Tencent and placed certain restrictions on the transfer of our ordinary shares by E-House
or Tencent.
Demand registration rights. Both E-House and Tencent have the right to demand that we effect a registration covering the offer and sale of their
ordinary shares. E-House and Tencent are each entitled to an aggregate of three such registrations. We, however, are not required to prepare and file (i) more
than two demand registration statements in any 12-month period, or (ii) any demand registration statement within 120 days following the date of effectiveness
of any other registration statement. If the demand registration relates to an underwritten public offering and the managing underwriter advises in its
reasonable opinion that the number of securities requested to be included in the demand registration exceeds the largest number which reasonably can be sold
in such offering without having a material adverse effect on such offering, we will include in such demand registration, up to the maximum offering size,
following the order of priority: (i) the registrable securities that the requesting parties propose to register; and (ii) any securities we propose to register and any
securities with respect to which any other security holder has requested registration. If the managing underwriter determines that less than all of the
registrable securities proposed to be sold can be included in such offering, then the registrable securities that are included in such offering shall be allocated
pro rata among the respective requesting parties on the basis of registrable securities sought to be registered by each requesting party.
Shelf registration rights. Once we are eligible to file a shelf registration statement pursuant to Rule 415 promulgated under the Securities Act, both
E-House and Tencent will have the right to demand that we file a shelf registration statement covering their ordinary shares. We, however, will not be required
to prepare and file more than two shelf registration statements in any 12-month period.
Piggyback registration rights. If we propose to file a registration statement for an offering of our ordinary shares, other than in a transaction of the
type referred to in Rule 145 under the Securities Act or to our employees pursuant to any employee benefit plan, then we must offer E-House and Tencent an
opportunity to include in the registration all or any part of their registrable securities. If the piggyback registration relates to an underwritten public offering
and the managing underwriter advises in its reasonable opinion that the number of securities requested to be included in the piggyback registration together
with the securities being registered by us or any other security holder exceeds the largest number which reasonably can be sold in such offering without
having a material adverse effect on such offering, then (i) if we initiate the piggyback registration, we will include in such registration the securities we
propose to register first, and allocate the remaining part of the maximum offering size to all other selling security holders on a pro rata basis; (ii) if any holder
of our securities initiated the piggyback registration, we will include, up to the maximum offering size, first the securities such initiating security holder
proposes to register, then the securities of any other selling security holders on a pro rata basis, and lastly the securities we propose to register.
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Blackout periods. We are entitled to two blackout periods, aggregating to no more than 90 days in any consecutive 12-month period, during which
we can delay the filing or effectiveness of a registration statement, if we would, in the good faith judgment of our board of directors, be required to disclose in
the prospectus information not otherwise then required by law to be publicly disclosed, and there is a reasonable likelihood that such disclosure, or any other
action to be taken in connection with the prospectus, would materially and adversely affect or interfere with any significant financing, acquisition, merger,
disposition of assets, corporate reorganization or other material transaction of negotiations involving us.
Expenses of registration. We will pay all expenses relating to any demand or piggyback registration, except that either E-House and Tencent shall
bear and pay all (i) brokerage commissions, (ii) ADS issuance fees payable to any depositary institution, (iii) commissions, fees, spreads, discounts, transfer
taxes, stamp duties, (iv) fees and expenses of its counsel or other advisers, subject to certain amounts that we will pay, and (v) their own out-of-pocket
expenses, in each case, with respect to only such holder’s registrable securities.
Board representation. For so long as Tencent is the beneficial owner of at least 10% of our issued and outstanding ordinary shares, Tencent will
have the right to designate one director to our board of directors.
Restrictions on transfer. For so long as Tencent is the beneficial owner of at least 10% of our issued and outstanding ordinary shares, Tencent’s
prior written consent will be required for (i) a change of control of our company that results in certain specified entities, as agreed by us and Tencent,
controlling us, (ii) the issuance, by way of a privately negotiated transaction, of equity securities representing more than 10% of our issued and outstanding
share capital to certain specified entities, or (iii) the transfer or other disposition, by way of a privately negotiated transaction, of equity securities representing
more than 10% of our issued and outstanding share capital by E-House to certain specified entities, in each case, subject to certain exceptions. Tencent will
not, without our prior written consent, transfer or otherwise dispose, by way of a privately negotiated transaction, of our equity securities held by Tencent to
certain specified entities, subject to certain exceptions.
Transactions with Certain Related Customers and Suppliers, Shareholders, Directors and Affiliates
Transactions with Related Customers and Suppliers
Transactions with SINA. As of December 31, 2014 and 2015, we had a payable balance of $1.7 million and $1.4 million, respectively, to SINA,
representing online advertising agency fee payable to SINA. The total cost recognized for the advertising agency fee purchased from SINA was $6.0 million,
$6.6 million and $6.1 million for the years ended December 31, 2013, 2014 and 2015, respectively. Mr. Charles Chao, SINA’s chief executive Officer and
chairman of SINA’s board, serves as a co-chairman of E-House’s board of directors. We also derived revenues in the amount of nil, nil and $19,899 from
providing online advertising services to SINA for the years ended December 31, 2013, 2014 and 2015, respectively.
Transactions with Beijing China Real Estate Research Association Technology Ltd., or CRERAT. CRERAT is a joint venture formed by E-House
with China Real Estate Research Association and China Real Estate Association. As of December 31, 2014, we had a receivable balance from CRERAT of
$684, representing the cash paid to suppliers on behalf of CRERAT for the purchase of marketing services. As of December 31, 2015, we had a receivable
balance from CRERAT of $8,906, representing the cash paid to suppliers on behalf of CRERAT for the purchase of marketing services. We also provided
online advertising services to CRERAT of nil, nil and $3.174, respectively, in 2013, 2014 and 2015.
Transactions with Management
See “Item 6. Directors, Senior Management and Employees Management—B. Compensation of Directors and Executive Officers.”
Amount due to management as of December 31, 2014 and 2015 were $1.8 million and $0.9 million, respectively. The amount due to management
represents consideration paid by management for unvested restricted shares. Amount due to E-House management as of December 31, 2014 and 2015 were
$0.2 million and $92,000, respectively. The amount due to E-House management represents consideration paid by E-House management for unvested
restricted shares.
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Contractual Arrangements with Beijing Leju, Shanghai Yi Xin and Beijing Jiajujiu (the consolidated variable interest entities)
See “Item 4. Information on the Company—C. Organizational Structure.”
Share Options and Restricted Shares
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan.”
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 currently not involved in any material legal or arbitration proceedings. From time to time, we may be subject to claims and legal actions
arising in the ordinary course of business, such as intellectual property infringement claims against us for use of others’ articles or photographs and
employment disputes and claims against us for use of our discount coupons. Such claims or legal actions, even if without merit, could result in the
expenditure of significant financial and management resources and potentially result in civil liability for damages.
Dividend Policy
Subject to our memorandum and articles of association and the laws of the Cayman Islands, our board of directors has complete discretion on
whether to distribute dividends. Our shareholders may by ordinary resolution declare a dividend, but not exceeding the amount recommended by our board of
directors. Our board of directors intends on paying dividends only to the extent cash is available in the offshore entities. 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. Cash
dividends on our ordinary shares, if any, will be paid in U.S. dollars.
We rely principally on dividends from our PRC subsidiaries for our cash requirements, to the extent existing cash in our offshore entities is fully
utilized, including any debt we may incur.
As authorized by our board of directors, we paid a cash dividend of $0.20 on or about May 15, 2015, for each of our ordinary shares issued and
outstanding as of April 10, 2015, or each of our ADSs outstanding as of April 10, 2015. Our board of directors decides the timing, amount and form of any
future dividends, if any, based 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.
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our subsidiaries in China for our cash
requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to
us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations relating to Dividend Distributions.”
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 NYSE since April 17, 2014 under the symbol “LEJU”. Each ADS represents one of our ordinary shares.
In 2015, the trading price of our ADSs on the NYSE ranged from $13.30 to $4.38 per ADS.
The following table sets forth, for the periods indicated, the high and low trading prices on the NYSE for our ADSs.
Sales Price ($)
High
Low
Annual Highs and Lows
2014 (Since April 17, 2014)
2015
Quarterly Highs and Lows
2014
Second Quarter (Since April 17, 2014)
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
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
18.60
13.30
13.37
18.60
16.14
13.30
10.82
8.47
7.57
7.30
7.57
6.00
5.68
4.06
5.83
5.69
8.01
4.38
8.01
10.49
9.76
6.66
7.36
4.38
5.39
5.39
5.47
5.39
3.88
3.28
3.70
4.94
Our ADSs, each representing one of our ordinary shares, have been traded on the NYSE since April 17, 2014 under the symbol “LEJU.”
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
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We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, as
amended and restated from time to time, the Companies Law (2013 Revision) of the Cayman Islands, which is referred to as the Companies Law below, and
the common law of the Cayman Islands.
The following are summaries of material provisions of our current amended and restated memorandum and articles of association that became
effective immediately prior to the completion of our initial public offering in April 2014, insofar as they relate to the material terms of our ordinary shares.
Registered Office and Objects
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, or at such other place as our board of directors may from time to time decide. The objects for which our company is
established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from time to time,
or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
Ordinary Shares
General. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form, and
are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary
shares. Our company will not issue bearer or negotiable shares.
Register of Members. Under Cayman Islands law, we must keep a register of members and there should be entered therein:
· the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as
paid, on the shares of each member;
· the date on which the name of any person was entered on the register as a member; and
· the date on which any person ceased to be a member.
Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e., the register of
members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a
matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members.
If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering
on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our
company itself) may apply to the Grand Court of the Cayman Islands for an order that the register be rectified, and the Court may either refuse such
application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. 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, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, provided that a
dividend may not be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
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Voting Rights. Each shareholder is entitled to one vote on a show of hands or, on a poll, to one vote for each share registered in his name on the
register of members, on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of such meeting or any one or more shareholders present in person or by proxy entitled to vote
and who together hold not less than ten percent of the paid up voting share capital.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes cast by those shareholders
entitled to vote who are present in person or by proxy at a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds
of the votes cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special
resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Law and our
memorandum and articles of association. A special resolution will be required for important matters such as a change of name or making changes to our
memorandum and articles of association.
Transfer of Ordinary Shares. Any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or
common form or any other form approved by our board of directors.
However, our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on
which our company has a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
· the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as
our board of directors may reasonably require to show the right of the transferor to make the transfer;
· the instrument of transfer is in respect of only one class of shares;
· the instrument of transfer is properly stamped, if required;
· the ordinary shares transferred are fully paid and free of any lien in favor of us;
· any fee related to the transfer has been paid to us; or
· in the case of a transfer to joint holders, the transfer is not to more than four joint holders.
If our directors refuse to register a transfer they are required, within two months after the date on which the instrument of transfer was lodged, to
send to each of the transferor and the transferee notice of such refusal.
Liquidation. On a winding up of our company, if the assets available for distribution among our shareholders shall be more than sufficient to repay
the whole of the share capital at the commencement of the winding up, the surplus will be distributed among our shareholders in proportion to the par value of
the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all
monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the
assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them. We are a “limited liability”
company registered under the Companies Law, and under the Companies Law, the liability of our members is limited to the amount, if any, unpaid on the
shares respectively held by them. Our memorandum of association contains a declaration that the liability of our members is so limited.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any
amounts unpaid on their ordinary shares. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
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Redemption, Repurchase and Surrender of Ordinary Shares. We may issue shares on terms that such shares are subject to redemption, at our option
or at the option of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of directors. Our
company may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by ordinary resolution of our
shareholders, or are otherwise authorized by our memorandum and articles of association. Under the Companies Law, the redemption or repurchase of any
share may be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out
of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they
fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (i) unless it is fully paid up;
(ii) if such redemption or repurchase would result in there being no shares outstanding; or (iii) if the company has commenced liquidation. In addition, our
company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares. If at any time, our share capital is divided into different classes or series of shares, all or any of the special rights
attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series) may be varied with the consent in
writing of the holders of a majority of the issued shares of that class or series or with the sanction of a special resolution passed at a general meeting of the
holders of the shares of that class or series. The rights conferred upon the holders of the shares of any class or series issued with preferred or other rights will
not, unless otherwise expressly provided by the terms of issue of the shares of that class or series, be deemed to be varied by the creation or issue of further
shares ranking pari passu with such existing class of shares.
General Meetings of Shareholders and Shareholder Proposals. As a Cayman Islands exempted company, we are not obligated by the Companies
Law to call shareholders’ annual general meetings. Our memorandum and articles of association provide that we may (but are not obligated to) in each year
hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general
meeting shall be held at such time and place as may be determined by our directors.
Shareholders’ annual general meetings and any other general meetings of our shareholders may be convened by a majority of our board of directors.
Advance notice of at least seven calendar days is required for the convening of our annual general meeting and any other general meeting of our shareholders.
A quorum required for a general meeting of shareholders consists of shareholders present in person or by proxy, representing not less than one-third of the
votes attaching to the issued and outstanding shares in our company entitled to vote at general meetings.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right
to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our memorandum and articles of
association allow our shareholders holding shares representing in aggregate not less than one-third of the votes attaching to the issued and outstanding shares
of our company entitled to vote at general meetings, to requisition an extraordinary general meeting of the shareholders, in which case our directors are
obligated to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our memorandum and articles of association do
not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such
shareholders.
Election and Removal of Directors. Unless otherwise determined by our company in general meeting, our articles of association provide that our
board will consist of not less than three directors. There are no provisions relating to retirement of directors upon reaching any age limit.
The directors have the power to appoint any person as a director either to fill a casual vacancy on the board or as an addition to the existing board.
Our shareholders may also appoint any person to be a director by way of ordinary resolution.
A director may be removed with or without cause by ordinary resolution.
In addition, the office of any director shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his
creditors, (ii) dies or is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the Company; (iv) without special leave of
absence from our board of directors, is absent from meetings of our board of directors for six consecutive meetings and the board resolves that his office be
vacated; or (v) is removed from office pursuant to any other provision of our memorandum and articles of association.
Proceedings of Board of Directors. Our memorandum and articles of association provide that our business is to be managed and conducted by our
board of directors. The quorum necessary for board meetings may be fixed by the board and, unless so fixed at another number, will be a majority of
the directors, including the chairman.
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Our memorandum and articles of association provide that the board may from time to time at its discretion exercise all powers of our company to
raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of our company
and to issue debentures, bonds and other securities of our company, whether outright or as collateral security for any debt, liability or obligation of our
company or of any third party.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our
list of shareholders or our corporate records. However, we intend to provide our shareholders with annual audited financial statements. See “Where You Can
Find Additional Information.”
Changes in Capital. Our shareholders may from time to time by ordinary resolution:
· increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
· consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
· sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the
amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share
is derived; or
· cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the
amount of our share capital by the amount of the shares so cancelled.
Our shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for
an order confirming such reduction, reduce our share capital or any capital redemption reserve in any manner permitted by law.
Exempted Company. We are an exempted company with limited liability under the Companies Law. The Companies Law in the Cayman Islands
distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business
mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the
same as for an ordinary company except for the exemptions and privileges listed below:
· an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
· an exempted company’s register of members is not required to be open to inspection;
· an exempted company does not have to hold an annual general meeting;
· an exempted company may issue no par value, negotiable or bearer shares;
· an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years
in the first instance);
· an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
· an exempted company may register as a limited duration company; and
· an exempted company may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the
company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other
circumstances in which a court may be prepared to pierce or lift the corporate veil).
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We are subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Except as otherwise
disclosed in this annual report, we currently intend to comply with the NYSE rules in lieu of home country practice.
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,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual report on
Form 20-F.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulation—Foreign Exchange Registration of Offshore Investments by PRC
Residents.”
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 brought within the jurisdiction of the Cayman Islands, or produced before a
court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the EIT Law, and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the PRC is
considered a resident enterprise. The implementation rules of the EIT Law define the term “de facto management body” as the body that exercises full and
substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State
Administration of Taxation issued a circular, known as 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. Although this circular only applies to offshore enterprises
controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect
the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status
of all offshore enterprises including Leju Holdings Limited. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise
or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following
conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and
human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books
and records, company seals, board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior
executives habitually reside in the PRC.
Although Leju Holdings Limited does not meet condition (iii) above as its primary assets in the form of shareholding in offshore entities, and its
accounting books and records, company seals, and board and shareholder resolutions are located and maintained outside the PRC, there are uncertainties as to
the interpretation of relevant PRC regulations including SAT Circular 82 and condition (iii) above as well as the applicability of SAT Circular 82 to Leju
Holdings Limited, and the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to
the interpretation of the term “de facto management body.”
If the PRC tax authorities determine that Leju Holdings Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required
to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In
addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition
of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including
our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined
to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is
available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of Leju Holdings Limited would be able to claim the
benefits of any tax treaties between their country of tax residence and the PRC in the event that Leju Holdings Limited is treated as a PRC resident enterprise.
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The State Administration of Taxation issued an SAT Circular 59 together with the Ministry of Finance in April 2009 and a SAT Circular 698 in
December 2009. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect
transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise. SAT Bulletin 7 was recently promulgated in February 2015 and
replaced previous rules under SAT Circular 698. Under SAT Bulletin 7, an “indirect transfer” of assets of a PRC resident enterprise, including equity interests
in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable properties, if such
transaction arrangement lacks a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a
result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT Bulletin 7, “PRC taxable assets” include
assets attributed to an establishment in China, immovable properties located in China, and equity interests in PRC resident enterprises. In respect of an
indirect transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment being
transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. If the underlying transfer relates to the immovable properties
located in China or to equity interests in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident
enterprise, a PRC enterprise income tax at 10% would apply, subject to preferential tax treatment under applicable tax treaties or similar arrangements, and
the party who is obligated to make payments for the transfer has a withholding obligation. Although it appears that SAT Bulletin 7 does not apply to share
transfers of publicly traded companies, there is uncertainty as to the application of SAT Bulletin 7 and we and our non-PRC resident investors may be at risk
of being subject to tax filing or withholding obligations under SAT Bulletin 7 and we may be required to expend valuable resources to comply with SAT
Bulletin 7 or to establish that we should not be taxed under SAT Bulletin 7.
U.S. Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations relating to the ownership and disposition of our ADSs or ordinary
shares by a U.S. holder (as defined below) that holds our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the U.S.
Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. 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, or the IRS, with respect to any U.S.
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 discuss all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances, including
investors subject to special tax rules that differ significantly from those summarized below (for example, certain financial institutions, insurance companies,
broker-dealers, 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 acquire their ADSs or ordinary shares pursuant to any
employee share option or otherwise as compensation, investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion,
constructive sale, or other integrated transaction for U.S. federal income tax purposes, or investors that have a functional currency other than the U.S. dollar).
In addition, this discussion does not address U.S. federal estate, gift, Medicare, and alternative minimum tax considerations, or any non-U.S., state, and local
tax considerations. Each U.S. holder is urged to consult its tax advisors regarding the U.S. federal, state, local, and non-U.S. tax considerations of an
investment in our ADSs or ordinary shares.
General
For purposes of this discussion, a “U.S. holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. 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 U.S. 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 U.S. 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 U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust; or (B) that
has otherwise elected to be treated as a U.S. person.
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If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or 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
our ADSs or ordinary shares and partners in such partnerships are urged to consult their tax advisors as to the particular U.S. federal income tax consequences
of an investment in our ADSs or ordinary shares.
For U.S. federal income tax purposes, it is generally expected that a U.S. holder of ADSs will generally be treated as the beneficial owner of the
underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. holder of our ADSs will be treated in this manner.
Accordingly, deposits or withdrawals of ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a “passive foreign investment company,” or “PFIC,” for U.S. 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 value of its assets (as determined on the basis of a quarterly average) during such year produce or are held for the production of
passive income (the “asset test”). For this purpose, cash and assets readily convertible into cash are categorized as a passive asset and the company’s goodwill
and other 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 our proportionate share
of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of
the stock.
Although the law in this regard is not entirely clear, we treat our consolidated variable interest entities as being owned by us for U.S. 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 operating results in our consolidated financial statements. If it were determined that we are not the
owner of our consolidated variable interest entities for U.S. federal income tax purposes, our risk of being classified as a PFIC may substantially increase.
Assuming that we are the owner of our consolidated variable interest entities for U.S. federal income tax purposes, and based upon our current income and
assets and projections as to the value of our ADSs and ordinary shares, we do not presently expect to be classified as a PFIC for the current taxable year or the
foreseeable future.
While we believe we were not a PFIC for the taxable year ended December 31, 2015, and do not expect to be a PFIC for the current taxable year and
the foreseeable future, no assurance can be given in this regard because the determination of whether we will be or become a PFIC is a factual determination
made annually that will depend, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to be
classified as a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value of our goodwill
and other unbooked intangibles, may be determined by reference to the market price of our ADSs from time to time (which may be volatile). In estimating the
value of our goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other matters, if market capitalization is
less than anticipated or subsequently declines, we may be classified as a PFIC for the current or future taxable years.
Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets. Under circumstances
where our revenue from activities that produce passive income significantly increase relative to our revenue from activities that produce non-passive income,
or where we determine not to deploy significant amounts of cash for active purposes, our risk of being classified as a PFIC may substantially increase. In
addition, because there are uncertainties in the application of the relevant rules, it is possible that the IRS may challenge our classification of certain income
and assets as non-passive or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC for the current or
subsequent table years. If we were classified as a PFIC for any year during which a U.S. holder held our ADSs or ordinary shares, we generally would
continue to be treated as a PFIC for all succeeding years during which such U.S. holder held our ADSs or 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
classified as a PFIC for U.S. federal income tax purposes. The U.S. federal income tax rules that apply if we are classified as a PFIC for any taxable year are
generally discussed below under “Passive Foreign Investment Company Rules.”
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Dividends
Subject to the PFIC rules discussed below, any cash distributions (including the amount of any tax withheld) paid on our ADSs or ordinary shares
out of our current or accumulated earnings and profits, as determined under U.S. 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 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 U.S. federal income tax principles, any
distribution paid will generally be reported as a “dividend” for U.S. 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 U.S. federal tax rate rather than the marginal tax rates generally
applicable to ordinary income provided that certain holding period and other requirements are met.
A non-U.S. corporation (other than a corporation that is classified as 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 (i) 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 (ii) 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 will be
considered readily tradable on the NYSE for as long as the ADSs continue to be listed on such exchange. Thus, we believe that dividends we pay on our
ADSs will meet the conditions required for the reduced tax rate, but there can be no assurance that our ADSs will continue to be considered readily tradable
on an established securities market in later years. Since we do not expect that our ordinary shares will be listed on established securities markets, it is unclear
whether dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate.
However, in the event that we are deemed to be a PRC “resident enterprise” under the EIT Law (see “People’s Republic of China Taxation”), we
may be eligible for the benefits of the U.S.-PRC income tax treaty (which the Secretary of Treasury of the United States has determined is satisfactory for this
purpose) and be treated as a qualified foreign corporation with respect to dividends paid to our ADSs or ordinary shares. Dividends received on the ADSs or
ordinary shares will not be eligible for the dividends-received deduction allowed to corporations. Each 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 our ADSs or ordinary
shares.
Dividends will generally be treated as income from foreign sources for U.S. 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 EIT Law, a U.S. holder may be subject to PRC withholding taxes on
dividends paid on our ADSs or ordinary shares. A U.S. holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in
respect of any foreign withholding taxes imposed on dividends received on ADSs or ordinary shares. A U.S. holder who does not elect to claim a foreign tax
credit for foreign tax withheld may instead claim a deduction, for U.S. 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. Each U.S. holder is
advised to consult its 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 ordinary shares. Any capital gain or loss will be long-term gain or loss if the ADSs or ordinary shares have been held for more than one year and will
generally be U.S.-source gain or loss for U.S. foreign tax credit purposes. 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 EIT Law and gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, such
gain may be treated as PRC-source gain for foreign tax credit purposes under the U.S.-PRC income tax treaty. U.S. holders are advised to consult their tax
advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the foreign
tax credit under their particular circumstances.
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Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares, and unless the U.S. holder makes a
mark-to-market election (as described below) with respect to the ADSs, the U.S. holder will generally be subject to special tax rules that have a penalizing
effect, regardless of whether we remain a PFIC, 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 ordinary shares); and (ii) any gain realized on the sale or other disposition, including, under certain
circumstances, a pledge, of ADSs or ordinary shares. Under the PFIC rules:
· the excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or ordinary shares;
· the 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 classified as a PFIC (each, a pre-PFIC year) will be taxable as ordinary income;
· the 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 additional tax equal to the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior
taxable year, other than a pre-PFIC year.
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares and any of our non-U.S. 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. Each U.S. holder is advised to consult its 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 our
ADSs, provided that the ADSs are regularly traded on the NYSE. We anticipate that the ADSs should qualify as being regularly traded on the NYSE, but no
assurances may be given in this regard. 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 corporation classified as a PFIC and such corporation ceases to be classified as 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
classified as a PFIC.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. holder who makes a mark-to-market election
with respect to our 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-U.S.
subsidiaries that is classified as 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 the general tax treatment for PFICs described above.
As discussed above under “Dividends,” dividends that we pay on our ADSs or ordinary shares will not be eligible for the reduced tax rate that
applies to qualified dividend income if we are classified as 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 our ADSs or ordinary shares during any taxable year that we are a PFIC, such holder is generally required to file U.S. IRS Form 8621
and other information as the U.S. Treasury Department may require. Each U.S. holder is advised to consult its tax advisors regarding the potential tax
consequences to such holder if we are or become classified as a PFIC, including the possibility of making a mark-to-market election.
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Information Reporting
Certain U.S. holders are required to report information to the IRS relating to an interest in “specified foreign financial assets,” including shares
issued by a non-U.S. corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds $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 U.S. 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 our ADSs or ordinary shares. U.S. holders are advised to consult with their tax advisors regarding the application of the U.S. 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 (Registration No. 333-194505), as amended, including the prospectus
contained therein, to register the issuance and sale of our ordinary shares represented by ADSs in relation to our initial public offering. We have also filed
with the SEC our registration statement on Form F-6 (Registration No. 333-195067) to register our ADSs.
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or 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
no later than four months after the close of each fiscal year, which is December 31. All information filed with the SEC can be obtained over the internet at the
SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You can request copies of documents, upon payment of a duplicating fee, by writing to the SEC.
We will furnish JPMorgan Chase Bank, N.A., 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.
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.
Our website is www.leju.com. We make our annual reports on Form 20-F and any amendments to such reports available free of charge on our website
as soon as reasonably practicable following the electronic filing of each report with the SEC. In addition, we provide electronic or paper copies of our annual
reports free of charge to our shareholders and ADS holders upon request. The information contained on our website is not part of this or any other report filed
with or furnished to the SEC.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by bank deposits with original maturities of three months or less.
We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk.
We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes
in market interest rates.
Foreign Exchange Risk
Substantially all of our revenues and most of our expenses are denominated in Renminbi. We do not believe that we currently have any significant
direct foreign exchange risk and we have not used any forward contracts, currency borrowings or derivative instruments to hedge exposure to such risk.
Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign
exchange rate between U.S. dollars and Renminbi because substantially all of our revenues and expenses are denominated in Renminbi and the functional
currency of our principal operating subsidiaries and consolidated variable interest entities is the Renminbi, while we use the U.S. dollar as our functional and
reporting currency and our ADSs are traded in U.S. dollars.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by
China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this
appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated
against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the
exchange rate between the RMB and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into RMB for our operations, acquisitions or other uses within the PRC, appreciation of the RMB
against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. To the extent that we seek to convert RMB into
U.S. dollars, depreciation of the RMB against the U.S. dollar would have an adverse effect on the U.S. dollar amount we receive from the conversion. As of
December 31, 2015, we had RMB or HKD denominated cash balances of $174.9 million and U.S. dollar-denominated cash balances of $85.4 million.
Assuming we had converted the U.S. dollar-denominated cash balance of $85.4 million as of December 31, 2015 into RMB at the exchange rate of $1.00 for
RMB6.4778 as of December 31, 2015, this cash balance would have been RMB553.1 million. Assuming a further 1% appreciation of the RMB against the
U.S. dollar, this cash balance would have decreased to RMB547.7 million as of December 31, 2015. Assuming a 1% depreciation of the RMB against the
U.S. dollar, this cash balance would have increased to RMB558.7 million as of December 31, 2015.
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.
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D. American Depositary Shares
Fees and Charges Our ADS Holders May Have to Pay
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in
respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a
merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for
withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued,
delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received
in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering
ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock
regarding the ADSs or the deposited securities or a distribution of ADSs), whichever is applicable:
· a fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
· a fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
· a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which
fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record
dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);
· a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of its agents (including, without
limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or
any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of
securities (including, without limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the
depositary’s or its custodian’s compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate
basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing
such holders or by deducting such charge from one or more cash dividends or other cash distributions);
· a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the $0.05
per ADS issuance fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities
(treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by
the depositary to those holders entitled thereto;
· stock transfer or other taxes and other governmental charges;
· cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares;
· transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or
withdrawal of deposited securities;
· in connection with the conversion of foreign currency into U.S. dollars, JPMorgan Chase Bank, N.A. shall deduct out of such foreign currency
the fees, expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed in connection with
such conversion; and
· fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private
sale of securities under the deposit agreement.
JPMorgan Chase Bank, N.A. and/or its agent may act as principal for such conversion of foreign currency.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time
to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
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Fees and Other Payments Made by the Depositary to Us
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program upon
such terms and conditions as we and the depositary may agree from time to time. The depositary may make available to us a set amount or a portion of the
depositary fees charged in respect of the ADR program or otherwise upon such terms and conditions as we and the depositary may agree from time to time.
The depositary collects its fees for issuance and cancellation 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 will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not
timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until
such fees and expenses have been paid. At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or
when declared owing by the depositary.
For the year ended December 31, 2015, we received $133,398 of reimbursement from the depositary for our expenses incurred in connection with
the establishment and maintenance of the ADS program.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10.—Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of securities
holders, which remain unchanged.
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-194505) in relation to our
initial public offering, which was declared effective by the SEC on April 16, 2014. In April 2014, we completed our initial public offering in which we issued
and sold an aggregate of 11,500,000 ADSs, representing 11,500,000 ordinary shares, resulting in net proceeds to us of approximately $101.4 million after
deducting underwriting discounts and the estimated offering expenses payable by us. Credit Suisse Securities (USA) LLC was the representative of the
underwriters for our initial public offering.
For the period from April 16, 2014, the date that the F-1 Registration Statement was declared effective by the SEC, to December 31, 2015, we used
the net proceeds from our initial public offering as follows:
· approximately $45.1 million for geographic expansion, including adding new business lines in existing cities and converting outsourced
operations to direct operations in approximately 30 smaller cities in various provinces in China;
· approximately $4.5 million for general corporate purposes, including funding acquisitions of complementary businesses and strategic
investments; and
· approximately $26.9 million for dividend payments to our shareholders.
We still intend to use the remainder of the proceeds from our initial public offering, as disclosed in our registration statements on Form F-1, (i) to
enhance our technology infrastructure and develop new products and services for our online platform, (ii) for geographic expansion, including adding new
business lines in existing cities and converting outsourced operations to direct operations in additional cities in various provinces in China, and (iii) for
general corporate purposes, including funding potential acquisitions of complementary businesses and strategic investments.
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ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this annual report, 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 within the meaning of Rules 13a-15(e) and 15d-15(e) of the
Exchange Act. Based upon this evaluation, our management has concluded that, as of the end of the period covered by this annual report, our existing
disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we
file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,
and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-
15(f) under the Securities Exchange Act of 1934, as amended). Our internal control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial statement preparation and presentation. 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 required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our
management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this
assessment, it used the criteria established within the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Based on this assessment, our management has concluded that, as of December 31, 2015, our internal control over financial reporting was effective.
Our independent registered public accounting firm, Deloitte Touche Tohmatsu Certified Public Accountants 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 annual report on Form 20-F.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during 2015 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Zhe Wei, Min Fan and Winston Li, members of our audit committee, are audit committee financial
experts. Each of Zhe Wei, Min Fan and Winston Li is an independent director (under the standards set forth in Section 303A of the Corporate Governance
Rules of the NYSE and Section 10A-3 of the Exchange Act).
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers and employees. We have filed our
code of business conduct and ethics as an exhibit to our registration statement on Form F-1 (No. 333-194505) and the code is also available on our official
website under the investor relations section at ir.leju.com.
108
Table of Contents
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 Deloitte
Touche Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors
during the periods indicated below.
Audit fees
(1)
For the Years Ended December 31,
2014
1,610,642
2015
805,992
Tax fees
(2)
72,038
23,807
Notes:
(1) “Audit fees” means the aggregate fees billed for professional services rendered by our principal auditors for the audit of our annual financial statements
and the review of our comparative interim financial statements.
(2) “Tax fees” means aggregate fees billed for professional services rendered by our principal auditors, primarily in connection with our transfer price study
activities.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public
Accountants LLP, including audit services, audit-related services, tax services and other services as described above, other than those for de minimis services
which are approved by the audit committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Because E-House owns more than 50% of the total voting power of our ordinary shares, we are a “controlled company” under Section 303A of the
Corporate Governance Rules of the NYSE. A controlled company need not comply with the applicable NYSE corporate governance rules requiring its board
of directors to have a majority of independent directors and independent compensation and nominating and corporate governance committees. We avail
ourselves of these controlled company exemptions. As a result, we do not have a majority of our board of directors comprised of independent directors, nor
do we have a separate nominating and corporate governance committee. In addition, our compensation committee does not consist entirely of independent
directors and we will not be required to have an annual performance evaluation of the compensation committee.
The Corporate Governance Rules of the NYSE 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 listing standards. Currently, we do not rely on home country exemption for corporate governance matters. However, if we choose to follow home
country practice in the future, our shareholders may be afforded less protection than they otherwise would under the Corporate Governance Rules of the
NYSE applicable to U.S. domestic issuers.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
109
Table of Contents
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 Leju Holdings Limited and its subsidiaries 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
Amended and Restated Memorandum and Articles of Association (incorporated herein by reference to Exhibit 3.2 to the registration
statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12,
2014)
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on
Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
Deposit Agreement, among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated herein by
reference to Exhibit 4.3 to the registration statement on Form S-8 (File No. 333-197609), as amended, initially filed with the Securities
and Exchange Commission on June 27, 2014)
2013 Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1 (File No. 333-
194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to
Exhibit 10.2 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
4.3
4.4
4.5
4.6
4.7
4.8
Table of Contents
Exhibit
Number
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
Exchange Commission on March 12, 2014)
Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.3 to
the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission
on March 12, 2014)
English translation of Exclusive Call Option Agreement dated September 10, 2011 between Shanghai SINA Leju Information
Technology Co., Ltd., Beijing Yisheng Leju Information Services Co., Ltd., Xudong Zhu and Zuyu Ding (incorporated herein by
reference to Exhibit 10.4 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities
and Exchange Commission on March 12, 2014)
English translation of Loan Agreement dated September 10, 2011 between Shanghai SINA Leju Information Technology Co., Ltd.,
Xudong Zhu and Zuyu Ding (incorporated herein by reference to Exhibit 10.5 to the registration statement on Form F-1 (File No. 333-
194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
English translation of Shareholder Voting Rights Proxy Agreement dated September 10, 2011 between Shanghai SINA Leju Information
Technology Co., Ltd., Beijing Yisheng Leju Information Services Co., Ltd., Xudong Zhu and Zuyu Ding (incorporated herein by
reference to Exhibit 10.6 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities
and Exchange Commission on March 12, 2014)
English translation of Power of Attorney dated September 10, 2011 issued by Xudong Zhu to Xin Zhou (incorporated herein by reference
to Exhibit 10.7 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Power of Attorney dated September 10, 2011 issued by Zuyu Ding to Xin Zhou (incorporated herein by reference
to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
110
Description of Document
English translation of Equity Pledge Agreement dated September 10, 2011 between Shanghai SINA Leju Information
Technology Co., Ltd., Beijing Yisheng Leju Information Services Co., Ltd., Xudong Zhu and Zuyu Ding (incorporated herein by
reference to Exhibit 10.9 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities
and Exchange Commission on March 12, 2014)
English translation of Exclusive Technical Support Agreement dated May 8, 2008 between Shanghai SINA Leju Information
Technology Co., Ltd. and Beijing Yisheng Leju Information Services Co., Ltd. (incorporated herein by reference to Exhibit 10.10 to the
registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on
March 12, 2014)
English translation of Exclusive Call Option Agreement, dated December 5, 2011, between Shanghai Yi Yue Information
Technology Co. Ltd., Shanghai Yi Xin E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to
Exhibit 10.11 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Loan Agreement, dated September 20, 2011, between Shanghai Yi Yue Information Technology Co. Ltd., Zuyu
Ding and Weijie Ma (incorporated herein by reference to Exhibit 10.12 to the registration statement on Form F-1 (File No. 333-194505),
as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
English translation of Shareholder Voting Right Proxy Agreement, dated December 5, 2011, between Shanghai Yi Yue Information
Technology Co. Ltd., Shanghai Yi Xin E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Power of Attorney dated December 5, 2011 issued by Zuyu Ding to Xin Zhou (incorporated herein by reference to
Exhibit 10.14 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Power of Attorney dated December 5, 2011 issued by Weijie Ma to Xin Zhou (incorporated herein by reference to
Exhibit 10.15 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Equity Pledge Agreement, dated December 5, 2011, between Shanghai Yi Yue Information Technology Co. Ltd.,
Shanghai Yi Xin E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to Exhibit 10.16 to the registration
statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12,
2014)
English translation of Exclusive Technical Support Agreement, dated December 5, 2011, between Shanghai Yi Yue Information
Technology Co. Ltd. and Shanghai Yi Xin E-Commerce Co., Ltd. (incorporated herein by reference to Exhibit 10.17 to the registration
statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12,
2014)
English translation of Exclusive Call Option Agreement, dated April 1, 2012, between Beijing Maiteng Fengshun Science and
Technology Co., Ltd., Beijing Jiajujiu E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to
Exhibit 10.18 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Loan Agreement, dated February 1, 2012, between Beijing Maiteng Fengshun Science and Technology Co., Ltd.,
Zuyu Ding and Weijie Ma (incorporated herein by reference to Exhibit 10.19 to the registration statement on Form F-1 (File No. 333-
194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
English translation of Shareholder Voting Right Proxy Agreement, dated April 1, 2012, between Beijing Maiteng Fengshun Science and
Technology Co., Ltd., Beijing Jiajujiu E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to
Exhibit 10.20 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Power of Attorney dated April 1, 2012 issued by Zuyu Ding to Xin Zhou (incorporated herein by reference to
Exhibit 10.21 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
4.22
English translation of Power of Attorney dated April 1, 2012 issued by Weijie Ma to Xin Zhou (incorporated herein by reference to
Exhibit 10.22 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
111
Table of Contents
Exhibit
Number
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
Description of Document
English translation of Equity Pledge Agreement, dated April 1, 2012, between Beijing Maiteng Fengshun Science and
Technology Co., Ltd., Beijing Jiajujiu E-Commerce Co., Ltd., Zuyu Ding and Weijie Ma (incorporated herein by reference to
Exhibit 10.23 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
English translation of Exclusive Technical Support Agreement, dated April 1, 2012, between Beijing Maiteng Fengshun Science and
Technology Co., Ltd. and Beijing Jiajujiu E-Commerce Co., Ltd. (incorporated herein by reference to Exhibit 10.24 to the registration
statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12,
2014)
English translation of Advertising Inventory Sale Agency Agreement, dated March 7, 2014, between SINA Corporation and Leju
Holdings Limited. (incorporated herein by reference to Exhibit 10.25 to the registration statement on Form F-1 (File No. 333-194505), as
amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
Amended and Restated Domain Name and Content License Agreement, dated March 7, 2014, between Beijing SINA Internet
Information Service Co., Ltd. and Beijing Yisheng Leju Information Services Co., Ltd. (incorporated herein by reference to Exhibit 10.26
to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange
Commission on March 12, 2014)
Amended and Restated Trademark License Agreement, dated March 7, 2014, between Beijing SINA Internet Information
Service Co., Ltd. and Beijing Yisheng Leju Information Services Co., Ltd. (incorporated herein by reference to Exhibit 10.27 to the
registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on
March 12, 2014)
Amended and Restated Software License and Support Services Agreement, dated March 7, 2014, between SINA.com Technology
(China) Co. Ltd. and Shanghai SINA Leju Information Technology Co., Ltd. (incorporated herein by reference to Exhibit 10.28 to the
registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on
March 12, 2014)
Master Transaction Agreement, dated March 2014, between the Registrant and E-House (China) Holdings Limited. (incorporated herein
by reference to Exhibit 10.29 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the
Securities and Exchange Commission on March 12, 2014)
Offshore Transitional Services Agreement, dated March 2014, between the Registrant and E-House (China) Holdings Limited.
(incorporated herein by reference to Exhibit 10.30 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially
filed with the Securities and Exchange Commission on March 12, 2014)
Non-Competition Agreement, dated March 2014, between the Registrant and E-House (China) Holdings Limited. (incorporated herein
by reference to Exhibit 10.31 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the
Securities and Exchange Commission on March 12, 2014)
English translation of Onshore Transitional Services Agreement, dated March 2014, between Shanghai Real Estate Sales
(Group) Co., Ltd. and certain subsidiaries of the Registrant (incorporated herein by reference to Exhibit 10.32 to the registration
statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12,
2014)
English translation of Onshore Cooperation Agreement, dated March 2014, by and among Shanghai Real Estate Sales (Group) Co., Ltd.,
Beijing Yisheng Leju Information Services Co., Ltd., Shanghai Yi Xin E-Commerce Co., Ltd. and Beijing Jiajujiu E-Commerce Co., Ltd.
(incorporated herein by reference to Exhibit 10.33 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially
filed with the Securities and Exchange Commission on March 12, 2014)
English translation of Internet Channel Cooperation Agreement, dated April 29, 2010, between Beijing Baidu Netcom Science and
Technology Co., Ltd., China Online Housing (Hong Kong) Co., Ltd. and Beijing Yisheng Leju Information Services Co., Ltd.
(incorporated herein by reference to Exhibit 10.34 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially
filed with the Securities and Exchange Commission on March 12, 2014)
English translation of Further Strategic Cooperation Agreement, dated June 2011, between Beijing Yisheng Leju Information
Services Co., Ltd. and Beijing Baidu Netcom Science and Technology Co., Ltd. (incorporated herein by reference to Exhibit 10.35 to the
registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on
March 12, 2014)
112
Table of Contents
Exhibit
Number
4.36
4.37
4.38
Description of Document
English translation of Supplement to Further Strategic Cooperation Agreement and the Cooperation Agreement between Beijing Yisheng
Leju Information Services Co., Ltd. and Beijing Baidu Netcom Science and Technology Co., Ltd. (incorporated herein by reference to
Exhibit 10.36 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and
Exchange Commission on March 12, 2014)
Strategic Cooperation Agreement, dated March 10, 2014, between Shanghai Yi Yue Information Technology Co., Ltd. and Shenzhen
Tencent Computer Systems Company Limited (incorporated herein by reference to Exhibit 10.37 to the registration statement on Form F-
1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
Share Purchase and Subscription Agreement, dated March 21, 2014, between, E-House (China) Holdings Limited, THL O Limited,
Shenzhen Tencent Computer Systems Company Limited, Shanghai Yi Yue Information Technology Co., Ltd. and the Registrant
4.39
4.40
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*
(incorporated herein by reference to Exhibit 10.38 to the registration statement on Form F-1 (File No. 333-194505), as amended, initially
filed with the Securities and Exchange Commission on March 12, 2014)
Amendment to Share Purchase and Subscription Agreement, dated March 21, 2014, between, E-House (China) Holdings Limited, THL
O Limited and the Registrant (incorporated herein by reference to Exhibit 10.39 to the registration statement on Form F-1 (File No. 333-
194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
English translation of 2015 Further Strategic Cooperation Framework Agreement, dated March 9, 2015, between Beijing Yisheng Leju
Information Services Co., Ltd. and Beijing Baidu Netcom Science and Technology Co., Ltd. (incorporated by reference to Exhibit 4.40
from our annual report on Form 20-F (File No. 001-36396), filed with the Commission on April 21, 2015)
Principal Subsidiaries and Consolidated Variable Interest Entities of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on
Form F-1 (File No. 333-194505), as amended, initially filed with the Securities and Exchange Commission on March 12, 2014)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
Consent of Fangda Partners
XBRL Instance Document
XBRL Taxonomy Extension Scheme 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
Table of Contents
113
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
LEJU HOLDINGS LIMITED
By:
Name:
Title:
/s/ Yinyu He
Yinyu He
Chief Executive Officer
114
Date: April 22, 2016
Table of Contents
LEJU HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2014 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2014 and 2015
Consolidated Statements of Changes in Equity 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
Notes to Consolidated Financial Statements for the Years Ended December 31, 2013, 2014 and 2015
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Leju Holdings Limited
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
We have audited the accompanying consolidated balance sheets of Leju Holdings Limited and subsidiaries (the “Group”) as of December 31, 2014 and 2015,
and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period
ended December 31, 2015. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2014 and
2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over
financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated April 22, 2016 expressed an unqualified opinion on the Group’s internal control
over financial reporting.
The accompanying consolidated financial statements were prepared to present the assets and liabilities and related results of operations and cash flows of Leju
Holdings Limited and its subsidiaries, one operating segment of E-House (China) Holdings Limited. These consolidated financial statements may not
necessarily be indicative of the conditions that would have existed or the results of operations and cash flows if Leju Holdings Limited and its subsidiaries
had operated as a stand-alone group during the periods presented
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 22, 2016
Table of Contents
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Leju Holdings Limited
We have audited the internal control over financial reporting of Leju Holdings Limited and subsidiaries (the “Group”) as of December 31, 2015, based on the
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Group’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 Group’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 by, or under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2015 of the Group and our report dated April 22, 2016 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 22, 2016
Table of Contents
ASSETS
Current assets:
F-3
LEJU HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(In U.S. dollar except for share data)
December 31,
2014
$
2015
$
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $15,471,020 and $26,350,814 as of
317,811,056
260,295,909
December 31, 2014 and 2015, respectively
Deferred tax assets
Customer deposits
Prepaid expenses and other current assets
Amounts due from related parties
Total current assets
Property and equipment, net
Intangible assets, net
Investment in affiliates
Goodwill
Other non-current assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities:
119,741,936
29,857,574
—
13,355,174
684
480,766,424
7,158,780
105,418,808
272,850
40,563,075
4,085,597
638,265,534
113,991,480
31,073,758
58,833,225
20,880,667
8,906
485,083,945
6,800,614
90,736,828
668,938
39,807,243
3,740,797
626,838,365
Accounts payable (including accounts payable of the consolidated VIEs without recourse to Leju of $370,652
and $327,140 as of December 31, 2014 and 2015, respectively)
Accrued payroll and welfare expenses (including accrued payroll and welfare expenses of the consolidated VIEs
without recourse to Leju of $40,946,532 and $34,784,706 as of December 31, 2014 and 2015, respectively)
Income tax payable (including income tax payable of the consolidated VIEs without recourse to Leju of
370,652
327,140
48,007,240
45,691,874
$26,702,856 and $27,599,392 as of December 31, 2014 and 2015, respectively)
57,246,193
66,814,874
Other tax payable (including other tax payable of the consolidated VIEs without recourse to Leju of $15,883,568
and $17,268,065 as of December 31, 2014 and 2015, respectively)
27,804,416
31,930,296
Amounts due to related parties (including amounts due to related parties of the consolidated VIEs without
recourse to Leju of $30,147,834 and $1,418,096 as of December 31, 2014 and 2015, respectively)
5,289,491
10,214,007
Advance from customers and deferred revenue (including advance from customers and deferred revenue of the
consolidated VIEs without recourse to Leju of $4,617,183 and $5,366,944 as of December 31, 2014 and 2015,
respectively)
Liability for accrued marketing and advertising expenses (including liability for accrued marketing and
advertising expenses of the consolidated VIEs without recourse to Leju of $3,691,831 and $733,473 as of
December 31, 2014 and 2015, respectively)
Liability for unpaid consideration for acquiring non-controlling interest (including liability for unpaid
consideration for acquiring non-controlling interest of the consolidated VIEs without recourse to Leju of
$25,645,630 and $7,338,593 as of December 31, 2014 and 2015, respectively)
Other current liabilities (including other current liabilities of the consolidated VIEs without recourse to Leju of
$5,137,314 and $6,340,375 as of December 31, 2014 and 2015, respectively)
Total current liabilities
Deferred tax liabilities (including deferred tax liabilities, non-current of the consolidated VIEs without recourse to
Leju of $469,579 and $523,874 as of December 31, 2014 and 2015, respectively)
Total liabilities
Commitments and contingencies (Note 15)
Equity:
Ordinary shares ($0.001 par value): 500,000,000 and 500,000,000 shares authorized, 134,015,621 and
134,930,870 shares issued and outstanding, as of December 31, 2014 and 2015, respectively
Additional paid-in capital
Accumulated deficit
Subscription receivable
Accumulated other comprehensive income (loss)
Total Leju equity
Non-controlling interest
Total equity
TOTAL LIABILITIES AND EQUITY
5,054,408
5,703,085
19,269,565
3,914,990
25,645,630
7,338,593
8,613,203
197,300,798
26,041,591
223,342,389
7,672,494
179,607,353
22,997,731
202,605,084
134,015
788,246,874
(377,876,220)
(688,989)
5,029,663
414,845,343
77,802
414,923,145
638,265,534
134,931
773,766,165
(343,658,094)
(9,200)
(5,521,547)
424,712,255
(478,974)
424,233,281
626,838,365
The accompanying notes are an integral part of these consolidated financial statements.
F-4
LEJU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollar except for share data)
Table of Contents
Revenues
E-commerce
Online advertising
Listing
Total revenues
Cost of revenues
Selling, general and administrative expenses
Other operating income
Income from operations
Interest income
Other income (loss), net
Investment income
Income before taxes and equity in affiliates
Income tax expense
Income before equity in affiliates
Loss from equity in affiliates
Net income
Less: Net income (loss) attributable to non-controlling interest
Net income attributable to Leju shareholders
Earnings per share:
Basic
Diluted
Shares used in computation:
Basic
Diluted
2013
$
Year Ended December 31,
2014
$
2015
$
170,204,545
145,444,790
19,772,181
335,421,516
(63,990,693)
(226,142,936)
599,894
45,887,781
1,082,287
(1,185,121)
—
45,784,947
(3,065,725)
42,719,222
(69,194)
42,650,028
125,066
42,524,962
326,679,871
155,049,818
14,293,184
496,022,873
(51,129,730)
(366,341,900)
2,525,496
81,076,739
1,316,203
35,799
—
82,428,741
(15,545,964)
66,882,777
(223,389)
66,659,388
138,494
66,520,894
420,552,177
134,229,255
21,022,504
575,803,936
(60,313,726)
(475,445,516)
3,567,965
43,612,659
1,167,005
290,039
271,501
45,341,204
(10,307,322)
35,033,882
(227,977)
34,805,905
(524,184)
35,330,089
$
$
0.35
0.35
$
$
0.51
0.50
$
$
0.26
0.26
120,000,000
120,000,000
129,320,666
132,502,100
134,528,971
136,223,974
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
LEJU HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In U.S. dollar)
Net income
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments
2013
$
42,650,028
Year Ended December 31,
2014
$
2015
$
66,659,388
34,805,905
2,712,069
(605,736)
(10,586,435)
Comprehensive income
Less: Comprehensive income (loss) attributable to non-controlling interests
45,362,097
280,424
66,053,652
129,794
24,219,470
(559,409)
Comprehensive income attributable to Leju shareholders
45,081,673
65,923,858
24,778,879
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
LEJU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollar)
Balance at December 31, 2012
Net income
Capital contribution in connection with business acquisition
Capital contribution by non-controlling interest
Dividend to non-controlling interest
Ordinary Shares
Number
120,000,000
—
—
—
—
$
120,000
—
—
—
—
Additional
Paid-in
Capital
$
672,821,496
—
(6,459)
—
—
Accumulated
Deficit
$
(485,712,966)
42,524,962
—
—
—
Accumulated
Other
Comprehensive
Income
$
3,064,865
—
—
—
—
Subscription
Receivable
$
(120,000)
—
—
—
—
Total Leju
Equity
$
190,173,395
42,524,962
(6,459)
—
—
Non-controlling
Interest
$
3,105,711
125,066
—
36,904
(338,941)
Total Equity
$
193,279,106
42,650,028
(6,459)
36,904
(338,941)
Share-based compensation
Cash contribution from E-House
Contribution from E-House
Deemed distribution to E-House associated with tax liability
Foreign currency translation adjustments
Balance at December 31, 2013
Net income
Issuance of ordinary shares, net of issuance cost
Share-based compensation
Changes in equity ownership on acquisition of non-controlling
interest
Changes in equity ownership on partial disposal of subsidiary
Payment for subscription receivable from E-House
Contribution from E-House
Deemed distribution to E-House associated with tax liability
Vesting of restricted shares
Exercise of share options
Foreign currency translation adjustments
Balance at December 31, 2014
Net income
Dividends to shareholders
Dividends to non-controlling interest
Share-based compensation
Vesting of restricted shares
Exercise of share options
Foreign currency translation adjustments
—
—
—
—
—
120,000,000
—
13,529,420
—
—
—
—
—
—
220,000
266,201
—
134,015,621
—
—
—
—
719,064
196,185
—
—
—
—
—
—
120,000
—
13,529
—
—
—
—
—
—
220
266
—
134,015
—
—
—
—
719
197
—
416,632
1,000
15,527,623
(2,381,799)
—
686,378,493
—
120,244,055
9,448,778
(32,659,173)
312,659
—
2,857,251
(571,227)
1,011,780
1,224,258
—
788,246,874
—
(26,873,022)
—
10,478,778
1,011,281
902,254
—
(106,128)
—
—
—
—
(443,294,132)
66,520,894
—
(1,102,982)
—
—
—
—
—
—
—
—
(377,876,220)
35,330,089
—
—
(1,111,963)
—
—
—
—
—
—
—
2,556,711
5,621,576
—
—
—
—
5,123
—
—
—
—
—
(597,036)
5,029,663
—
—
—
—
—
—
(10,551,210)
—
—
—
—
—
(120,000)
—
—
—
—
—
120,000
—
—
—
(688,989)
—
(688,989)
—
—
—
—
—
679,789
—
310,504
1,000
15,527,623
(2,381,799)
2,556,711
248,705,937
66,520,894
120,257,584
8,345,796
(32,659,173)
317,782
120,000
2,857,251
(571,227)
1,012,000
535,535
(597,036)
414,845,343
35,330,089
(26,873,022)
—
9,366,815
1,012,000
1,582,240
(10,551,210)
Balance at December 31, 2015
134,930,870
134,931
773,766,165
(343,658,094)
(5,521,547)
(9,200)
424,712,255
—
—
—
—
155,358
3,084,098
138,494
—
—
(3,127,703)
(8,387)
—
—
—
—
—
(8,700)
77,802
(524,184)
—
(10,260)
12,893
—
—
(35,225)
(478,974)
310,504
1,000
15,527,623
(2,381,799)
2,712,069
251,790,035
66,659,388
120,257,584
8,345,796
(35,786,876)
309,395
120,000
2,857,251
(571,227)
1,012,000
535,535
(605,736)
414,923,145
34,805,905
(26,873,022)
(10,260)
9,379,708
1,012,000
1,582,240
(10,586,435)
424,233,281
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
LEJU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollar)
Operating activities:
Net income
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Loss from equity in affiliates
Investment income
Allowance for doubtful accounts
Share-based compensation
Amortization of discounts related to liability for exclusive rights
Others
Changes in operating assets and liabilities:
Accounts receivable
Customer deposits
Amounts due from related parties
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accrued payroll and welfare expenses
Income tax payable
Other tax payable
Amounts due to related parties
Other current liabilities and accrued expenses
Deferred taxes
Net cash provided by operating activities
Investing activities:
Deposit for and purchase of property and equipment and intangible assets
Investment in affiliates
Proceeds from disposal of property and equipment
Net cash used in investing activities
Financing activities:
Contribution from non-controlling interest
Refund loans to related parties
Advance from related parties
Contribution from E-House
Dividends to non-controlling interests
Proceeds from issuance of ordinary shares, net of paid issuance costs of $15,036,616
Proceeds from exercise of options
Acquisition of non-controlling interest of subsidiaries
Dividends to shareholders
Proceeds from partial disposal of subsidiaries
Net cash provided by (used in) financing activities
2013
$
Year Ended December 31,
2014
$
2015
$
42,650,028
66,659,388
34,805,905
38,342,931
69,194
—
6,373,132
310,504
935,177
20,664
(7,325,344)
—
(3,882,437)
(1,531,557)
(281,717)
(301,228)
10,398,953
20,119,753
8,320,720
(21,644,489)
8,930,136
(18,081,440)
83,422,980
(16,957,279)
(246,027)
546,373
(16,656,933)
36,904
(43,818,894)
2,760,000
1,000
(338,941)
—
—
—
—
(41,359,931)
26,118,778
223,389
—
11,599,708
8,880,397
52,922
35,709
(45,417,127)
—
3,471,274
(4,236,540)
(247,654)
(1,051,548)
17,515,586
15,249,420
9,297,217
4,381,372
14,668,180
(2,369,482)
124,830,989
(12,122,678)
(245,138)
12,400
(12,355,416)
—
—
276,000
120,000
—
120,257,584
535,535
(14,418,056)
309,395
107,080,458
29,279,835
227,977
(271,501)
18,959,895
11,518,112
—
274,263
(12,189,414)
(58,833,225)
(8,222)
(8,334,672)
(264,398)
(42,576)
(2,265,584)
9,774,416
4,214,594
48,449,802
(16,319,318)
(7,700,893)
51,274,996
(14,810,650)
(369,595)
80,472
(15,099,773)
—
(42,513,286)
—
—
(10,260)
—
1,582,240
(17,360,080)
(26,873,022)
—
(85,174,408)
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Supplemental disclosure of cash flow information:
Income taxes paid
Non-cash investing and financing activities:
Additional paid in capital recognized in connection with business acquisition
Consideration payable for amount recognized in purchase of exclusive rights
Related party loans waived and recorded as a capital contribution
Related party payable recorded as a capital contribution
Deemed distribution to E-House associated with tax liability
Decrease in amount due to related party due to vesting of restricted shares
Payables for acquisition of non-controlling interest
2,233,257
27,639,373
71,090,266
98,729,639
(474,614)
219,081,417
98,729,639
317,811,056
(8,515,962)
(57,515,147)
317,811,056
260,295,909
1,478,483
1,953,177
5,196,133
(6,459)
(8,967,972)
1,000
15,527,623
(2,381,799)
—
—
—
—
—
2,857,251
(571,227)
1,012,000
(25,645,630)
—
—
—
—
—
1,012,000
(7,338,593)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
LEJU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015
(In U.S. dollar)
1. Organization and Principal Activities
Leju Holdings Limited (the “Company” or “Leju”) was incorporated on November 20, 2013 in the Cayman Islands as an exempted company with limited
liability under the Companies Law of the Cayman Islands. The Company, through its subsidiaries and consolidated variable interest entities (“VIEs”), is
principally engaged in providing online advertising, e-commerce services and listing services in the People’s Republic of China (“PRC”). The Company, its
subsidiaries and consolidated VIEs are collectively referred to as the “Group”.
E-House (China) Holdings Limited (“E-House Holdings”) is the Company’s parent company. E-House Holdings, its subsidiaries and VIEs, excluding the
Group, are collectively referred to as “E-House”.
On February 24, 2008, E-House entered into a joint venture agreement with SINA Corporation (“SINA”) to form China Online Housing Technology
Corporation (“COHT”), a joint venture to operate SINA’s real estate and home furnishing channels and related business and provide online advertising
services related to the real estate and home furnishing industries in China through a consolidated VIE, Beijing Yisheng Leju Information Service Co., Ltd.
(“Beijing Leju”). SINA and E-House owned 66% and 34%, respectively, of the equity interest in COHT.
In October 2009, China Real Estate Information Corporation (“CRIC”), a subsidiary of E-House, acquired SINA’s 66% interest in COHT and COHT became
a wholly-owned subsidiary of CRIC.
In April 2012, E-House Holdings acquired all the outstanding shares of CRIC that it did not already own (the “Merger”). As a result, CRIC became a wholly-
owned subsidiary of E-House Holdings. E-House retained the controlling interest in CRIC before and after the Merger.
In October 2010, CRIC established a new subsidiary, Omnigold Holdings Limited (“Omnigold”), in the British Virgin Islands. In March 2012, COHT
transferred its assets and staff relating to the home furnishing business to Beijing Jiajujiu E-Commerce Co., Ltd. (“Beijing Jiajujiu”), which is a VIE
controlled by Omnigold.
In June 2011, CRIC established another subsidiary, China E-Real Estate Holdings Limited (“E-Real”), in the British Virgin Islands. In November 2011,
Shanghai Yi Xin E-Commerce Co., Ltd. (“Shanghai Yi Xin”), was established to operate e-commerce business. Shanghai Yi Xin is a VIE controlled by E-
Real through contractual arrangements.
E-House City Rehouse Real Estate Agency (Shanghai) Limited (“City Rehouse”) was incorporated in 2010 as a wholly owned subsidiary of E-House China
(Tianjin) Holdings Limited (“E-House Tianjin”), a company incorporated in the British Virgin Islands and ultimately wholly controlled by E-House Holdings.
Historically City Rehouse was engaged in providing secondary real estate brokerage services in Shanghai and e-commerce business. As part of the
Reorganization as defined below, the secondary real estate brokerage services have been transferred to entities outside of the Group, and City Rehouse will
only be engaged in e-commerce business subsequent to the Reorganization. Therefore the historical financial results associated with the secondary real estate
brokerage services were not included in the Group’s consolidated financial statements, while the historical financial results of e-commerce business have been
included in the consolidated financial statements for all periods presented.
F-9
Table of Contents
In December 2013, E-House transferred all its equity interests in COHT, Omnigold, E-Real and E-House Tianjin to the Company. The restructuring process
has been accounted for as a legal reorganization of entities under common control (the “Reorganization”).
Upon incorporation, the Company had 500,000,000 ordinary shares authorized, 50,000 ordinary shares issued and outstanding with a par value of $1.00 per
share, all of which were held by E-House Holdings. On December 19, 2013, the Company effected a 1:1,000 share split, resulting in 50,000,000 ordinary
shares issued and outstanding with a par value of $0.001 per share. The Company also issued additional 70,000,000 ordinary shares to E-House Holdings for
par value, or $70,000. As a result, the Company has 120,000,000 ordinary shares issued and outstanding, all of which are held by E-House Holdings. The
ordinary share issuance to E-House Holdings has been retroactively reflected for all periods presented herein.
In addition, E-House historically has provided intercompany loans to COHT, Omnigold and E-House Tianjin in order for these entities to fund capital
injections of their respective PRC subsidiaries. These loans were capital in nature and considered permanently invested in the subsidiaries. As part of the
Reorganization, E-House transferred such investments to the Company in the legal form of waived loans, which were reflected as a capital contribution from
E-House in the Company’s consolidated statements of changes in equity. The accompanying consolidated financial statements have been prepared as if the
current corporate structure has been in existence throughout the periods presented, and the waived loans were reflected as a capital contribution as of the date
such loans were originally made due to their nature of capital investment.
On March 21, 2014, the Company entered into a share purchase and subscription agreement with E-House Holdings and THL O Limited, a wholly-owned
subsidiary of Tencent Holdings Limited (“Tencent’’ are to Tencent Holdings Limited or certain of its affiliates which have entered into agreements with the
Company), pursuant to which Tencent has acquired from E-House Holdings 19,201,800 of Leju’s ordinary shares for $180 million in cash.
On April 17, 2014, the Company’s ADSs began trading on the NEW YORK STOCK EXCHANGE, or the NYSE under the symbol “LEJU”. Including the
exercise of an over-allotment option, the Company issued a total of 11,500,000 ADSs, representing 11,500,000 ordinary shares, at an initial offering price of
$10.00 per ADS. Concurrent with this offering, the Company also issued and sold 2,029,420 ordinary shares in the private placement to Tencent at $10.00 per
share. The Company raised from this initial public offering approximately $101.4 million in net proceeds after deducting underwriting commissions and the
offering expenses payable by the Company. Concurrently with the initial public offering, the Company also raised from Tencent in a private placement $18.9
million in net proceeds after deducting estimated fees and expenses payable by the Company.
The following table lists major subsidiaries and the consolidated VIEs of the Company as of December 31, 2015:
Shanghai SINA Leju Information Technology Co., Ltd (“Shanghai SINA
Leju”)
City Rehouse
Shanghai Yi Yue Information Technology Co., Ltd (“Shanghai Yi Yue”)
Beijing Maiteng Fengshun Science and Technology Co., Ltd (“Beijing
Maiteng”)
Beijing Leju
Shanghai Yi Xin
Beijing Jiajujiu
Table of Contents
Date of
Incorporation
Place of
Incorporation
Percentage of
Ownership
08-May-08
04-Mar-10
16-Sep-11
04-Jan-12
13-Feb-08
05-Dec-11
22-Mar-12
PRC
PRC
PRC
PRC
PRC
PRC
PRC
F-10
100%
100%
100%
84%
VIE
VIE
VIE
The Group’s consolidated financial statements for the periods prior to the Company’s initial public offering (“IPO”) in April 2014 have been prepared on a
carve-out basis and represent the assets and liabilities and the related results of operations and cash flows of the Group, which represent the online segment of
E-House. The financial data of previously separate entities have been combined, to the extent included in the online segment of E-House, for all periods
presented as all such entities were under common control. However, such presentation may not necessarily reflect the results of operations, financial position
and cash flows if the Group had actually existed on a stand-alone basis during the periods presented. Transactions between the Group and E-House are herein
referred to as related party transactions.
In connection with a contemplated IPO of the Company, the Company entered into non-competition arrangements with E-House Holdings, according to
which E-House has agreed not to compete with the Group in online services business anywhere in the world and the Group has agreed not to compete with E-
House in any services currently provided or contemplated by E-House other than online services. Prior to these non-competition arrangements, E-House and
the Group did not have competition in the services provided.
The consolidated financial statements include the Group’s direct expenses as well as allocations for various selling, general and administrative expenses of E-
House that are not directly related to online services. These expenses consist primarily of share-based compensation expenses of senior management and
shared marketing and management expenses including accounting, administrative, marketing, internal control, customer service support and legal support
services. These allocations were made using a proportional cost allocation method and were based on revenues, headcount as well as estimates of actual time
spent on the provision of services attributable to the Group. Management believes these allocations are reasonable. Total selling, general and administrative
expenses allocated from E-House are $15,527,623 and $2,857,251 for the year ended December 31, 2013 and for the period from January 1, 2014 to the IPO
date, respectively, recorded as capital contribution by E-House. Income tax provision reflected in the Company’s Consolidated Statements of Operations is
calculated based on a separate return basis as if the Group had filed a separate tax return. Subsequent to the IPO, E-House began charging the Group
transitional corporate service fees pursuant to agreements entered into in March 2014 in connection with the IPO. Under these transitional services
arrangements, E-House provides various corporate support services to the Group, including general finance and accounting, human resource management,
administrative, internal control and internal audit, operational management, legal and information technology. E-House charges the Group a fee based on an
estimate of the actual cost incurred to provide such services, which amounted to $10,399,978 and $6,040,071 for the period from the IPO date to
December 31, 2014 and for the year ended December 31, 2015.
2. Summary of Principal Accounting Policies
(a) Basis of presentation
The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”).
(b) Basis of consolidation
The consolidated financial statements include the financial statements of Leju, its majority owned subsidiaries and its VIEs, Beijing Leju, Shanghai Yi Xin
and Beijing Jiajujiu. All inter-company transactions and balances have been eliminated in consolidation.
F-11
Table of Contents
The Group evaluates each of its interests in private companies to determine whether or not the investee is a VIE and, if so, whether the Group is the primary
beneficiary of such VIE. In determining whether the Group is the primary beneficiary, the Group considers if the Group (1) has power to direct the activities
that most significantly affects the economic performance of the VIE, and (2) receives the economic benefits of the VIE that could be significant to the VIE. If
deemed the primary beneficiary, the Group consolidates the VIE.
The VIE arrangements
PRC regulations currently prohibit or restrict foreign ownership of companies that provide internet content and advertising services. To comply with these
regulations, the Group provides such activities relating to real estate projects through its VIEs and their subsidiaries. To provide the Group effective control
over and the ability to receive substantially all of the economic benefits of its VIEs and their subsidiaries, certain of the Company’s subsidiaries, Shanghai
SINA Leju, Shanghai Yi Yue and Maiteng (collectively, the “Foreign Owned Subsidiaries”) entered into a series of contractual arrangements with Beijing
Leju, Shanghai Yi Xin and Beijing Jiajujiu (collectively the “VIEs”) and their respective shareholders, respectively, as summarized below:
Name of Foreign
Owned
Subsidiaries
Shanghai SINA Leju
Shanghai Yi Yue
Beijing Maiteng
Foreign Owned
Subsidiaries’
Economic Ownership
of VIES
Name of VIEs
Activities of VIEs
100%
100% Shanghai Yi Xin
Beijing Leju
Operate the online advertising and
listing business
Operate the e-commerce business
Operate the online home furnishing
100%
Beijing Jiajujiu
business
The VIEs hold the requisite licenses and permits necessary to conduct internet content and advertising services activities relating to real estate projects from
which foreign ownership of companies are prohibited or restricted. In addition, the VIEs hold leases and other assets necessary to operate such business and
generate a majority of the Group’s revenues.
Agreements that Transfer Economic Benefits of the VIEs to the Group
Exclusive Consulting and Technical Support Agreement. Pursuant to an exclusive consulting and technical support agreement between the Foreign Owned
Subsidiaries and the respective VIEs, the Foreign Owned Subsidiaries provide the respective VIEs with a series of consulting and technical support services
and are entitled to receive related fees. The term of this exclusive technical support agreement will expire upon dissolution of the VIEs. Unless expressly
provided by this agreement, without prior written consent of the Foreign Owned Subsidiaries, the VIEs may not engage any third party to provide the services
offered by the Foreign Owned Subsidiaries under this agreement.
Agreements that Provide Effective Control over VIEs
Exclusive Call Option Agreement. Each of shareholders of the VIEs has entered into an exclusive call option agreement with the respective Foreign Owned
Subsidiaries. Pursuant to these agreements, each of the shareholders of the VIEs has granted an irrevocable and unconditional option to the respective Foreign
Owned Subsidiaries or their designees to acquire all or part of such shareholder’s equity interests in VIEs at its sole discretion, to the extent as permitted by
PRC laws and regulations then in effect. The consideration for such acquisition of all equity interests in the VIEs will be equal to the registered capital of the
VIEs, and if PRC law requires the consideration to be greater than the registered capital, the consideration will be the minimum amount as permitted by PRC
law. In addition, the VIEs irrevocably and unconditionally granted the respective Foreign Owned Subsidiaries an exclusive option to purchase, to the extent
permitted under the PRC law, all or part of the assets of the VIEs. The exercise price for purchasing the assets of the VIEs will be equal to their respective
book values, and if PRC law requires the price to be greater than the book value, the price will be the minimum amount as permitted by PRC law. The call
option may be exercised by the respective Foreign Owned Subsidiaries or their designees.
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Loan Agreement. Under the loan agreement among shareholders of the VIEs and the respective Foreign Owned Subsidiaries, the respective Foreign Owned
Subsidiaries granted an interest-free loan to the shareholders of the VIEs, solely for their purchase of the equity interest of the VIEs, investing or operating
activities conducted in the VIEs. Each loan agreement has a term of twenty years.
Shareholder Voting Right Proxy Agreement. Each of the shareholders of the VIEs irrevocably grant any person designated by the respective Foreign
Owned Subsidiaries the power to exercise all voting rights to which he will be entitled to as shareholder of the VIEs at that time, including the right to declare
dividends, appoint and elect board members and senior management members and other voting rights.
Each shareholder voting right proxy agreement has a term of twenty years, unless it is early terminated by all parties in writing or pursuant to provision of this
agreement. The term of the agreement will be automatically extended for one year upon the expiration, if the Foreign Owned Subsidiary gives the other
parties written notice requiring the extension thereof and the same mechanism will apply subsequently upon the expiration of each extended term.
Equity Pledge Agreement. Each of the shareholders of the VIEs has also entered into an equity pledge agreement with the respective Foreign Owned
Subsidiaries. Pursuant to which these shareholders pledged their respective equity interest in the VIEs to guarantee the performance of the obligations of the
VIEs. The Foreign Owned Subsidiaries, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. Pursuant to the
equity pledge agreement, each shareholder of the VIEs cannot transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their respective
equity interest in the VIEs without the prior written consent of the respective Foreign Owned Subsidiaries. The equity pledge right enjoyed by the Foreign
Owned Subsidiaries will expire when shareholders of the VIEs have fully performed their respective obligations under the above agreements. The equity
pledges of the VIEs have been registered with the relevant local branch of the State Administration for Industry and Commerce, or SAIC.
Risks in relation to the VIE structure
The Company believes that the Foreign Owned Subsidiaries’ contractual arrangements with the VIEs are in compliance with PRC law and are legally
enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements and the interests of
the shareholders of the VIEs may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the
contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so.
The Company’s ability to control the VIEs also depends on the power of attorney the Foreign Owned Subsidiaries have to vote on all matters requiring
shareholder approval in the VIEs. As noted above, the Company believes this power of attorney is legally enforceable but may not be as effective as direct
equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the Company may be
subject to fines or other actions. The Company does not believe such actions would result in the liquidation or dissolution of the Company, the Foreign
Owned Subsidiaries or the VIEs.
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The Company, through its subsidiaries and through the contractual arrangements, has (1) the power to direct the activities of the VIEs that most significantly
affect the entity’s economic performance and (2) the right to receive benefits from the VIEs. Accordingly, the Company is the primary beneficiary of the VIEs
and has consolidated the financial results of the VIEs.
The following financial statement amounts and balances of the Group’s VIEs were included in the accompanying consolidated financial statements:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Customer deposits
Amounts due from related parties
Other current assets
Total current assets
Total non-current assets
Total assets
Accounts payable
Accrued payroll and welfare expenses
Income tax payable
Other tax payable
Amounts due to related parties
Advance from customers
Liability for accrued marketing and advertising expenses
Liability for unpaid consideration of acquiring non-controlling interest
Other current liabilities
Total current liabilities
Deferred tax liabilities, non-current
Total liabilities
Total revenues
Cost of revenues
Net income
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
As of December 31,
2014
$
95,927,942
117,835,596
—
684
31,506,971
245,271,193
27,333,289
272,604,482
370,652
40,946,532
26,702,856
15,883,568
30,147,834
4,617,183
3,691,831
25,645,630
5,137,314
153,143,400
469,579
153,612,979
2013
$
316,271,620
(58,253,716)
1,285,139
64,832,510
(16,640,090)
(37,824,941)
Year Ended December 31,
2014
$
484,511,682
(41,218,756)
2,532,232
57,761,765
(10,927,762)
(14,418,056)
2015
$
59,170,627
111,300,756
38,710,027
13,238,930
42,795,082
265,215,422
22,008,141
287,223,563
327,140
34,784,706
27,599,392
17,268,065
1,418,096
5,366,944
733,473
7,338,593
6,340,375
101,176,784
523,874
101,700,658
2015
$
558,714,556
(48,032,280)
3,307,694
41,577,844
(13,884,075)
(59,873,366)
There are no consolidated VIEs’ assets that are collateral for the VIEs’ obligations or are restricted solely to settle the VIEs’ obligations. The Company has
not provided any financial support that it was not previously contractually required to provide to the VIEs.
F-14
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(c) Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from such estimates. Significant accounting estimates reflected in the Group’s financial
statements include useful lives and valuation of long-lived assets, evaluation of goodwill, allowance for doubtful accounts, assumptions related to share-based
compensation arrangements, assumptions related to the consolidation of entities in which the Group holds variable interests, valuation allowance on deferred
tax, and selling price hierarchy in multiple-deliverable revenue arrangements.
(d) Fair value of financial instruments
The Group may have certain of its financial assets and liabilities at fair value on a recurring basis. Fair value reflects the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in
which it would transact and considers assumptions that market participants would use when pricing the asset or liability.
The Group applies 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. There are three levels of inputs that may be used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or
corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair
value of the assets or liabilities.
There are no assets or liabilities measured at fair value on a recurring basis subsequent to initial recognition.
There were no assets or liabilities measured at fair value on a nonrecurring basis in 2013, 2014 and 2015.
For cash and cash equivalents, accounts receivable, customer deposits, other receivables, accounts payable, other payables, and amounts due from/to related
parties, the carrying value approximates the fair value due to their short-term nature.
(e) Business combinations
Business combinations are recorded using the purchase method of accounting and, accordingly, the acquired assets and liabilities are recorded at their fair
market value at the date of acquisition. Any excess of acquisition cost over the fair value of the acquired assets and liabilities, including identifiable intangible
assets, is recorded as goodwill.
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(f) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and demand deposits, which are unrestricted as to withdrawal and use, and which have original maturities
of three months or less.
(g) Customer deposits
The Group provides online e-commerce services for customers. Some real estate developers require the Group to pay an upfront and refundable deposit to
obtain the exclusive e-commerce services agreement of the real estate development projects. These deposits are refunded to the Group subject to certain pre-
determined criteria specified in the contracts. Customer deposits are recorded as either current or non-current assets based on the Group’s estimate of the date
of refund. As of December 31, 2015, all customer deposit are refundable within 12 months and none of them passed the original due date.
(h) Investment in affiliates
Affiliated companies are entities over which the Group has significant influence, but which it does not control. The Group generally considers an ownership
interest of 20% in common stock or higher to represent a presumption that they are able to exert significant influence.
Investments in affiliates are accounted for by the equity method of accounting. Under this method, the Group’s share of the post-acquisition profits or losses
of affiliated companies is recognized in the income statement and its share of post-acquisition movements in other comprehensive income is recognized in
other comprehensive income. Unrealized gains on transactions between the Group and its affiliated companies are eliminated to the extent of the Group’s
interest in the affiliated companies; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
When the Group’s share of losses in an affiliated company equals or exceeds its interest in the affiliated company, the Group does not recognize further
losses, unless the Group has incurred obligations or made payments on behalf of the affiliated company.
The Group is required to perform an impairment assessment of its investments whenever events or changes in business circumstances indicate that the
carrying value of the investment may not be fully recoverable. An impairment loss is recorded when there has been a loss in value of the investment that is
other than temporary. The Group has not recorded any impairment losses in any of the periods reported. As of December 31, 2014 and 2015, the Group
determined that no such events were present.
(i) Property and equipment, net
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Buildings
Over the shorter of the lease term or their estimated useful lives
30 years
Furniture, fixtures and equipment
Motor vehicles
3-5 years
5 years
Gains and losses from the disposal of property and equipment are included in income from operations.
(j) Intangible assets, net
Acquired intangible assets mainly consist of advertising agency agreement and license agreements with SINA, exclusive rights with Baidu, Inc. (“Baidu”),
customer relationships, Database license, and non-compete agreements from business combinations and are recorded at fair value on the acquisition date. All
intangible assets, with the exception of customer relationships, are amortized ratably over the contract period. Intangible assets resulting out of acquired
customer relationships are amortized based on the timing of the revenue expected to be derived from the respective customer.
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(k) Impairment of long-lived assets
The Group evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When these events occur, the Group measures 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, the Group would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets.
(l) Impairment of goodwill and indefinite lived intangible assets
The Group performs an annual goodwill impairment test comprised of two steps. The first step compares the fair value of the Group to its carrying amount,
including goodwill and indefinite lived intangible assets. If the fair value of the Group exceeds its carrying amount, goodwill is not considered to be impaired
and the second step will not be required. If the carrying amount of the Group exceeds its fair value, the second step compares the implied fair value of
goodwill and indefinite lived intangible assets to the carrying value of the Group’s goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the
Group. The excess of the fair value of the Group over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation
process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An
impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
Management performs a goodwill impairment test at the Group level as of December 31 of each year or when there is a triggering event causing management
to believe it is more likely than not that the carrying amount of goodwill may be impaired.
Intangible assets with an indefinite life are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying amount. If the carrying amount
exceeds the fair value, an impairment loss is recognized equal in amount to that excess.
(m) Income taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities, and their reported amounts in the financial
statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years when the reported amounts of the
asset or liability are expected to be recovered or settled, respectively. Deferred tax assets are reduced by a valuation allowance 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. Current income taxes are provided for in
accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and
non-current based on the classification of the related assets and liabilities for financial reporting purposes.
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The Group only recognizes tax benefits related to uncertain tax positions when such positions are more likely than not of being sustained upon examination.
For such positions, the amount of tax benefit that the Group recognizes is the largest amount of tax benefit that is more than fifty percent likely of being
sustained upon the ultimate settlement of such uncertain position. The Group records interest and penalties as a component of income tax expense.
(n) Share-based compensation
Share-based compensation cost is measured on the grant date, based on the fair value of the award, and recognized as an expense over the requisite service
period. Management has made an estimate of expected forfeitures and recognizes compensation cost only for those equity awards expected to vest.
(o) Revenue recognition
The Group recognizes revenue when there is persuasive evidence of an arrangement, service has been rendered, the sales price is fixed or determinable and
collectability is reasonably assured. Revenues are recorded, net of sales related taxes.
The Group generates real estate online revenues principally from e-commerce, online advertising, and listing services.
The Group e-commerce services primarily include discount coupon advertising and online property auctions. The Group also provides property viewing and
pre-sale customer support free of charge in connection with the sale of discount coupons and online property auctions. E-commerce revenues are principally
generated from selling discount coupons to potential property buyers. Those discount coupons allow buyers to purchase specified properties from real estate
developers at discounts greater than the face value of the fees charged by the Group. The discount coupons are refundable to the buyers at any time before
they are used to purchase the specified properties. The Group recognizes such e-commerce revenues upon obtaining confirmation letters that prove the use of
coupons by property buyers, and when collections are reasonably assured. Revenues are recognized based on the net proceeds received as the Group acts as a
marketing agent of the property developer in the transaction.
Revenue from online advertising services is generated principally from online advertising arrangements, sponsorship arrangements, and to a lesser extent,
outsourcing arrangements, and keyword advertising arrangements. Online advertising arrangements allow advertisers to place advertisements on particular
areas of the Group’s websites, in particular formats and over particular periods of time. Advertising revenues from online advertising arrangements are
recognized ratably over the contract period of display when collectability is reasonably assured. Sponsorship arrangements allow advertisers to sponsor a
particular area on the Group’s websites in exchange for a fixed payment over the contract period. Advertising revenues from sponsorship arrangements are
recognized ratably over the contract period. The Group also generates online advertising revenues from outsourcing certain regional sites for a fixed period of
time to local outsourcing partners, who are responsible for both website operation and related advertising sales. Advertising revenues from hosted websites
are recognized ratably over the term of the contract. Keyword advertising revenues are recognized ratably over the contract period when collectability is
reasonably assured.
The Group also provides listing services to real estate brokers. Listing services entitle real estate brokers to post and make changes to information for
properties in a particular area on the website for a specified period of time, in exchange for a fixed fee. Listing revenues are recognized ratably over the
contract period of display when collectability is reasonably assured.
There are no multiple elements arrangements within the services provided by the Group. However, E-House has multiple element arrangements that may
include provision of online advertising services provided by the Group. The total amounts of revenue earned by the Group related to agreements that have
been accounted for as multiple element arrangements by E-House were $5,556,867, $4,836,931 and $3,689,272 in 2013, 2014 and 2015, respectively.
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Deferred revenues are recognized when payments are received in advance of revenue recognition.
(p) Cost of revenue
Cost of revenue consists of costs associated with the production of websites, which includes fees paid to third parties for internet connection, content and
services, editorial personnel related costs, amortization of intangible assets, depreciation associated with website production equipment and fees paid to SINA
for advertising on non-real estate channels.
(q) Marketing and advertising expenses
Marketing and advertising expenses consists primarily of targeted online and offline marketing costs for promoting our e-commerce projects, increasing our
visibility and building our brand, such as Leju property visit, sponsored marketing campaigns, online or print advertising, public relations and sponsored
events. The Company expenses all marketing advertising costs as incurred and record these costs within “Selling, general and administrative expenses” on the
consolidated statements of operations when incurred. The nature of the Company’s direct marketing activities is such that they are intended to attract
subscribers for the online advertising and potential property buyers to purchase the discount coupons. The Group incurred marketing and advertising expenses
amounting to $96,288,501, $196,396,734 and $306,846,482 for the years ended December 31, 2013, 2014 and 2015, respectively.
(r) Foreign currency translation
The functional currency of the Company is the United States dollar (“U.S. dollar”) and is used as the reporting currency of the Group. Monetary assets and
liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollar at the rates of exchange ruling at the balance sheet date. Equity
accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation
adjustments are reported as foreign currency translation adjustment and are shown as a separate component of other comprehensive income in the
consolidated statements of changes in equity and comprehensive income.
The financial records of certain of the Company’s subsidiaries are maintained in local currencies other than the U.S. dollar, such as Renminbi (“RMB”) and
Hong Kong dollar (“HKD”), which are their functional currencies. Transactions in other currencies are recorded at the rates of exchange prevailing when the
transactions occur. Transaction gains and losses are recognized in the consolidated statements of operations.
The Group recorded an exchange loss of $249,944, an exchange gain $88,721 and $156,641 for the years ended December 31, 2013, 2014 and 2015,
respectively, as a component of other loss, net.
(s) Government subsidies
Government subsidies include cash subsidies received by the Company’s subsidiaries in the PRC from local governments. These subsidies are generally
provided as incentives for conducting business in certain local districts and are typically granted based on the amount of value-added tax, business tax, and
income tax payment generated by the Group in certain local districts. Such subsidies allow the Group full discretion in utilizing the funds and are used by the
Group for general corporate purpose. The local governments have final discretion as to the amount of cash subsidies. Cash subsidies of $599,894, $2,525,496
and $3,567,965 were included in other operating income for the years ended December 31, 2013, 2014 and 2015, respectively. Subsidies are recognized when
cash is received and when all the conditions for their receipt have been satisfied.
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(t) Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and
customer deposit. The Group places its cash and cash equivalents with reputable financial institutions.
The Group regularly reviews the creditworthiness of its customers, and requires collateral or other security from its customers in certain circumstances when
accounts receivables’ aging is over one year. The Group establishes an allowance for doubtful accounts primarily based upon factors surrounding the credit
risk of specific customers, including creditworthiness of the clients, aging of the receivables and other specific circumstances related to the accounts.
Movement of the allowance for doubtful accounts for accounts receivable is as follows:
Balance as of January 1
Provisions for doubtful accounts
Write offs
Changes due to foreign exchange
Balance as of December 31
The allowance for other receivables was nil for all periods presented.
(u) Earnings per share
2013
$
7,393,312
6,373,132
(4,667,466)
254,711
9,353,689
Year Ended December 31,
2014
$
9,353,689
11,599,708
(5,437,380)
(44,997)
15,471,020
2015
$
15,471,020
18,959,895
(6,827,314)
(1,252,787)
26,350,814
Basic earnings per share are computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares
outstanding during the period.
Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or
converted into ordinary shares.
The following table sets forth the computation of basic and diluted income per share for the periods indicated:
Net income attributable to Leju ordinary shareholders—basic and diluted
Weighted average number of ordinary shares outstanding—basic
Stock options
Weighted average number of ordinary shares outstanding—diluted
Basic earnings per share
Diluted earnings per share
Table of Contents
2013
42,524,962
Year Ended December 31,
2014
66,520,894
$
120,000,000
—
120,000,000
129,320,666
3,181,434
132,502,100
0.35
0.35
$
$
0.51
0.50
2015
35,330,089
134,528,971
1,695,003
136,223,974
0.26
0.26
$
$
$
$
$
$
F-20
Diluted earnings per share do not include the following instruments as their inclusion would have been anti-dilutive:
Share options and restricted shares
(v) Non-controlling interest
2013
599,333
Year Ended December 31,
2014
—
2015
2,464,500
Non-controlling interest are classified as a separate line item in the equity section and disclosures in the Company’s consolidated financial statements have
distinguished the interest of Leju from the interest of non-controlling interest holders.
(w) Comprehensive income
Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. For the years presented,
total comprehensive income included net income and foreign currency translation adjustments.
(x) Recently issued accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The
guidance replaces almost all exiting revenue recognition guidance, including industry specific guidance, in current US GAAP. The core principle of the
guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the
following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 is originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
ASU 2015-14, Revenue from Contracts with Customers, defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for
annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is permitted to the original effective date. The Group
is in the process of evaluating the impact of adoption of this guidance on the Group’s consolidated financial statements.
In August 2015, the FASB issued a new pronouncement, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The
amendments in this ASU provide that public business entities should apply the guidance in ASU 2014-09 to 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 Company is in the process of evaluating the impact
of the standard on our consolidated financial statements.
In February 2015, the FASB issued, ASU 2015-02, “Amendments to the Consolidation Analysis”, regarding consolidation of legal entities such as limited
partnerships, limited liability corporations, and securitization structures. The guidance eliminates the deferral issued by the FASB in February 2010 of the
accounting guidance for VIE for certain investment funds, including mutual funds, private equity funds and hedge funds. In addition, the guidance amends the
evaluation of fees paid to a decision maker or a service provider, and exempts certain money market funds from consolidation. The guidance will be effective
for accounting periods beginning after December 15, 2015 with early adoption permitted. The Group early adopted ASU 2015-02 for the year ended
December 31, 2015. In adopting the guidance, the Company re-evaluated the existing consolidated VIEs and assessed that the adoption neither changes the
conclusion of the consolidated VIEs and nor requires new VIEs to be consolidated, and as such has not had a material impact on the Group’s consolidated
financial statements.
In September 2015, the FASB issued ASU2015- 16 related to the accounting for measurement period adjustments recognized in a business combination.
Under the previous standard, when adjustments were made to amounts previously reported as part of a business combination during the measurement period,
entities were required to revise comparative information for prior periods. Under the new standard, entities must recognize these adjustments in the reporting
period in which the amounts are determined rather than retrospectively. The new standard is effective for fiscal years beginning after December 15, 2015,
including interim periods within that reporting period and early adoption is permitted. The Group does not expect the adoption of this guidance will have a
significant effect on the Group’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires deferred
income tax liabilities and assets to be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The guidance is
effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption being
permitted. The ASU will only have an impact on the Group’s presentation of tax assets and liabilities in the Group’s consolidated balance sheets upon
adoption.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”), which requires that equity investments, except for those accounted for under the equity method or those that result in
consolidation of the investee, be measured at fair value, with subsequent changes in fair value recognized in net income. However, an entity may choose to
measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also impacts the presentation and
disclosure requirements for financial instruments. ASU 2016-01 is effective for public business entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted only for certain provisions. The Group is in the process of evaluating the
impact of adoption of this guidance on the Group’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. This ASU
requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees are permitted to make an
accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. The ASU does not significantly change the
lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is
largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and
lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The provisions of this guidance are effective
for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Group is in the process of
evaluating the impact of adoption of this guidance on the Group’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, which eliminates the requirement to retroactively adopt the equity method of accounting. The amendments
require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held
interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments in this
Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should
be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity
method. Earlier application is permitted. The Group is in the process of evaluating the impact of adoption of this guidance on the consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-08, which amends the principal-versus-agent implementation guidance and illustrations in the Board’s new
revenue standard (ASC 606). The amendments in this update clarify the implementation guidance on principal versus agent considerations. When another
party, along with the reporting entity, is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its
promise is to provide that good or service to the customer (as a principal) or to arrange for the good or service to be provided to the customer by the other
party (as an agent). The guidance is effective for interim and annual periods beginning after December 15, 2017. The Group is in the process of evaluating the
impact of adoption of this guidance on the consolidated fin0ancial statements.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions for both
public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. For public entities, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within those annual reporting periods. Early adoption will be permitted in any interim or annual period for which financial statements have not yet
been issued or have not been made available for issuance. The Group is in the process of evaluating the impact of adoption of this guidance on the
consolidated financial statements.
3. Acquisition of Non-controlling Interests
There were 3 significant acquisitions of non-controlling interests completed in 2014. As a result of the below transactions, the equity attributable to Leju’s
shareholders is decreased by $32,469,069 in the year ended December 31, 2014.
In January 2014, the Group entered into an equity transfer agreement with two individual shareholders of Beijing Lotta Times Advertising Co., Ltd (“Beijing
Lotta”), a subsidiary of Beijing Leju, to purchase the remaining 40% shares of Beijing Lotta that it did not already own with a total consideration of
$16,254,600 (RMB100,000,000). After the acquisition, Beijing Lotta became a wholly-owned subsidiary of the Group. As the Group retains the controlling
interest in Beijing Lotta before and after the acquisition, the acquisition was accounted for as an equity transaction. The carrying amount of the non-
controlling interest in the subsidiary was adjusted to reflect the change in Group’s ownership interest in Beijing Lotta. Any difference between the fair value
of the consideration paid and the amount by which the non-controlling interest was adjusted was recognized in equity. As a result of the transaction,
$15,112,828 additional paid capital and $1,141,772 non-controlling interest were derecognized in the year ended December 31, 2014. As of December 31,
2014 and 2015, $7,190,700 (RMB44,000,000) and $3,387,956 (RMB22,000,000)was unpaid, respectively.
F-21
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In September 2014, the Group entered into an equity transfer agreement with six individual shareholders (five of them are employees of the Group) of Beijing
Yisheng Leju Advertising Co., Ltd (“Beijing Leju Advertisement”) and Yisheng Leju (Shanghai) Information Service Co., Ltd.( “Yisheng Shanghai”), two
subsidiaries of Beijing Leju, to purchase the remaining 24.5% shares of Beijing Leju Advertisement and Yisheng Shanghai that it did not own with a total
consideration of $19,074,412 (RMB117,355,000). Considerations to the five employees shareholders are $16,054,493 (RMB98,775,000) for 19.5% equity
interest, equivalent to $823,307 per 1% equity interest, while the consideration for the rest 5.0% to the non-employee shareholder is $3,019,919
(RMB18,580,000), equivalent to $603,984 per 1% of equity interest. In connection with the equity transfer, the five employees are also required to serve for
the Group for two years from the closing date of the transaction. The Group considers the purchase price to the nonemployee shareholder represent fair value
of the equity interest on the date of transfer. The consideration premium of $4,276,810 paid to the employee shareholders was treated as share-based
compensation to be amortized over the 2-year service period. After the acquisition, Beijing Leju Advertisement and Yisheng Shanghai became wholly-owned
subsidiaries of the Group. As the Group retains the controlling interest in Beijing Leju Advertisement and Yisheng Shanghai before and after the acquisition,
the acquisition was accounted for as an equity transaction. The carrying amount of the non-controlling interest in two subsidiaries were adjusted to reflect the
change in Group’s ownership interest in them. Any difference between the fair value of the consideration paid and the amount by which the non-controlling
interest was adjusted was recognized in equity. As a result of the equity transaction, $12,906,772 additional paid capital and $1,890,830 non-controlling
interest were derecognized in the year ended December 31, 2014. As of December 31, 2014 and 2015, $15,534,635 and $3,706,648 was unpaid, respectively.
In September 2014, the Group entered into an equity transfer agreement with an individual shareholder of Tianjin Yisheng Leju Advertising Co., Ltd
(“Tianjin Leju”), a subsidiary of Beijing Leju, to purchase the remaining 30% shares of Tianjin Leju that it did not own with a total consideration of
$4,685,913 (RMB28,830,000). After the acquisition, Tianjin Leju becomes a wholly-owned subsidiary of the Group. As the Group retains the controlling
interest in Tianjin Leju before and after the acquisition, the acquisition was accounted for as an equity transaction. The carrying amount of the non-controlling
interest in the subsidiary was adjusted to reflect the change in Group’s ownership interest in Tianjin Leju. Any difference between the fair value of the
consideration paid and the amount by which the non-controlling interest was adjusted was recognized in equity. As a result of the transaction, $4,449,469
additional paid capital and $236,444 non-controlling interest were derecognized in the year ended December 31, 2014. As of December 31, 2014 and 2015,
$2,871,268 and $243,989 was unpaid, respectively.
4. Property and Equipment, Net
Property and equipment, net consists of the following:
Furniture, fixtures and equipment
Leasehold improvements
Buildings
Motor vehicles
Total
Accumulated depreciation
Property and equipment, net
As of December 31,
2014
$
11,892,101
4,976,638
763,240
1,806,268
2015
$
12,492,343
5,490,605
633,646
1,737,572
19,438,247
(12,279,467)
20,354,166
(13,553,552)
7,158,780
6,800,614
Depreciation expenses were $3,021,130, $3,030,451 and $2,626,264 for the years ended December 31, 2013, 2014 and 2015, respectively.
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5. Intangible Assets, Net
Intangible assets subject to amortization are comprised of the following:
Advertising agency agreement with SINA
106,790,000
106,790,000
8.75
As of December 31,
2014
$
2015
$
Weighted Average
Remaining
Amortization
Period in Years
License agreements with SINA
Exclusive rights with Baidu
Customer relationship
Database license
Non-compete agreements
Computer software licenses
Less: Accumulated amortization
Advertising agency agreement
License agreements with SINA
Exclusive rights with Baidu
Customer relationship
Database license
Non-compete agreements
Computer software licenses
8.75
—
3.63
2.25
—
2.64
8.46
80,660,000
45,151,494
10,795,384
8,300,000
1,657,256
898,421
80,660,000
54,096,827
10,538,309
8,300,000
1,575,336
1,023,321
254,252,555
262,983,793
51,286,536
39,377,764
43,034,803
7,530,732
5,126,472
1,645,402
832,038
57,341,459
43,881,281
54,096,827
8,424,820
6,102,942
1,575,336
824,300
Intangible assets subject to amortization, net
105,418,808
90,736,828
Total intangible assets, net
105,418,808
90,736,828
The advertising agency agreement and license agreements with SINA were recognized in connection with the Group’s acquisition of COHT in 2009, which
allows the Group to operate SINA’s existing real estate and home furnishing related channels and have the exclusive right to sell advertising relating to real
estate, home furnishing and construction materials on these channels as well as SINA’s other websites through 2019. If the Group sells advertising on SINA’s
websites other than above channels, it will pay SINA fees of approximately 15% of the revenues generated from these sales. The acquisition cost was
recognized as an intangible asset and amortized over the term of the agreement. In March 2014, the advertising agency agreement and license agreements
originally signed between Leju and SINA in 2009 were extended an additional five years to March 2024 for no additional consideration. All other terms of
the agreements remain the same.
In 2011, the Group purchased exclusive rights from Baidu, Inc (“Baidu”) which allow it to sell Baidu’s real estate related Brand Link product, which is a form
of keyword advertising, and to use and operate Baidu’s exclusive real estate-related web channel for $47,612,100 through August 2014. In October 2013, the
Group extended these rights with Baidu to March 2015, without paying additional consideration. The payment schedule of the remaining liability for
exclusive rights was also deferred through the extension period. The fair value of $43,847,992 was recognized in 2011 and calculated by discounting the
future cash payments to be made from 2012 to 2014. The difference between the fair value and the principal amount of $3,764,108 is being amortized using
the effective interest method over the term of the exclusive rights and amounted to $935,177, $52,922 and nil for the years ended December 31, 2013, 2014
and 2015, respectively. In April 2015, the Group extended these rights with Baidu from April to December 2015, with additional payment of $12,023,475
(RMB75,000,000). The Group paid $15,347,915, $9,004,710 and $12,023,475 in connection with the exclusive rights in 2013, 2014 and 2015, respectively.
Amortization expenses were $35,321,801, $23,088,327 and $26,653,571 for the years ended December 31, 2013, 2014 and 2015, respectively. The Group
expects to record amortization expenses of $12,416,185, $12,202,249, $11,304,846, $10,801,496 and $10,576,991 for the years ending December 31, 2016,
2017, 2018, 2019 and 2020, respectively.
F-23
Table of Contents
6. Goodwill
Changes in the carrying amount of goodwill for the years ended December 31, 2013, 2014 and 2015 are as follows:
Balance as of January 1
Exchange rate translation
Balance as of December 31
Goodwill, gross
Accumulated impairment charge
Goodwill, net
2013
$
40,215,987
394,633
2014
$
40,610,620
(47,545)
2015
$
40,563,075
(755,832)
40,610,620
40,563,075
39,807,243
As of December 31,
2014
$
458,385,379
(417,822,304)
2015
$
457,629,547
(417,822,304)
40,563,075
39,807,243
The Group utilized the income approach valuation method (Level 3) to compute the fair value of the Group. The key assumptions used in the income
approach, which requires significant management judgment, include forecasted cash flows which consider the historical financial trends, business growth rate
and market share, as well as terminal value and discount rate. Significant increases in discount rate or decrease in terminal value in isolation would result in a
significantly lower fair value measurement.
Based on the impairment tests performed, there was no goodwill impairment charged for the years ended December 31, 2013, 2014 and 2015, respectively.
7. Dividends
In March 2015, the Company’s board of directors approved the payment of a cash dividend of $0.20 per ordinary share ($0.20 per ADS) directly from the
additional paid-in capital account, for a total of $26,873,022, which was paid in May 2015 to shareholders of record as of the close of business on April 10,
2015.
F-24
Table of Contents
8. Other Income (Loss), Net
Amortized discounts related to liability for exclusive
rights
Foreign exchange (loss) gain
Others
Total
9. Income Tax
2013
$
Year Ended December 31,
2014
$
2015
$
(935,177)
(249,944)
—
(1,185,121)
(52,922)
88,721
—
35,799
—
156,641
133,398
290,039
The following table summarizes Income (loss) before income taxes incurred in the PRC and outside of the PRC:
Income (loss) before income taxes:
PRC
Outside of PRC
2013
$
Year Ended December 31,
2014
$
2015
$
91,779,478
(45,994,531)
111,905,366
(29,476,625)
70,382,855
(25,041,651)
Total
45,784,947
82,428,741
45,341,204
The expense (benefit) for income taxes is comprised of:
Current Tax
PRC
Outside of PRC
Deferred Tax
PRC
Outside of PRC
2013
$
Year Ended December 31,
2014
$
2015
$
21,147,165
—
17,905,374
10,072
17,990,790
17,425
21,147,165
17,915,446
18,008,215
(18,081,440)
—
(2,369,482)
—
(7,700,893)
—
(18,081,440)
(2,369,482)
(7,700,893)
Income tax expense
3,065,725
15,545,964
10,307,322
The Company is incorporated in the Cayman Islands, which is exempted from tax.
F-25
Table of Contents
Enterprise Income Tax Law in China applies a statutory 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises.
Shanghai SINA Leju was granted status as a high and new technology enterprise and was entitled to enjoy a favorable statutory tax rate of 15% from 2013
through 2014. Shanghai SINA Leju renewed its qualification of high and new technology enterprise in 2015 and was entitled to enjoy a favorable statutory
tax rate of 15% from 2015 through 2017.
In February 2012, Shanghai Fangxin information technology Co., Ltd., the Group’s subsidiary in China, was granted software enterprise status, which
exempted it from income taxes for 2012 and 2013 and provided a 50% reduction in its income tax rate, or a rate of 12.5%, from 2014 through 2016.
The Group’s subsidiaries in Hong Kong are subject to a profit tax at the rate of 16.5% on assessable profit determined under relevant Hong Kong tax
regulations. The Company’s subsidiaries incorporated in the BVI are not subject to taxation.
The Group does not have uncertain tax positions in accordance with ASC740-10, nor does it anticipate any significant increase to its liability for
unrecognized tax benefit within next 12 months. The Group will classify interest and penalties related to income tax matters, if any, in income tax expense.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to tax authority’s
mistake or due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are
not clearly defined, but an underpayment of tax liability exceeding RMB100,000 ($15,400) is specifically listed as a special circumstance. In the case of a
transfer pricing related adjustment, the statute of limitations is 10 years. There is no statute of limitations in the case of tax evasion.
The principal components of the deferred income tax assets/liabilities are as follows:
Deferred tax assets:
Accrued salary expenses
Bad debt provision
Net operating loss carry forwards
Advertising expenses temporarily non-deductible
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Analysis as:
Current
Non-current
Deferred tax liabilities:
Amortization of intangible and other assets
Total deferred tax liabilities
Analysis as:
Current
Non-current
Table of Contents
Movement of the valuation allowance is as follows:
Balance as of January 1
Reverse (additions)
Write off
Changes due to exchange rate translation
Balance as of December 31
As of December 31,
2014
$
2015
$
11,991,920
3,867,755
3,574,524
11,097,262
459,506
30,990,967
(957,162)
30,033,805
29,857,574
176,231
26,041,591
26,041,591
—
26,041,591
11,248,353
6,587,704
3,787,766
11,307,976
492,160
33,423,959
(654,267)
32,769,692
31,073,758
1,695,934
22,997,731
22,997,731
—
22,997,731
F-26
2013
$
(831,361)
(194,892)
—
(25,720)
(1,051,973)
Year Ended December 31,
2014
$
(1,051,973)
—
90,811
4,000
(957,162)
2015
$
(957,162)
255,264
—
47,631
(654,267)
The Group has recognized a valuation allowance against deferred tax assets on tax loss carry forwards of $194,892, nil and reversed $255,264 for the years
ended December 31, 2013, 2014 and 2015, respectively.
The Group assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred
tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three year period ended December 31, 2015.
Such objective evidence limits the Group’s ability to consider other subjective evidence such as our projections for future growth. In 2015, some entities start
to gain profit and the valuation allowance was reversed accordingly.
On the basis of this evaluation, as of December 31, 2015, a valuation allowance of $654,267 was recorded to reflect only the portion of the deferred tax assets
that is not more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future
taxable income during the carry forwards period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer
present and additional weight may be given to subjective evidence such as our projections for growth. In 2015, the Group has determined that the deferred tax
assets of several subsidiaries will be more likely than not utilized in the future and has reversed valuation allowance for the determined tax assets.
Reconciliation between the provision for income tax computed by applying the statutory tax rate to income before income taxes and the actual provision for
income taxes is as follows:
PRC income tax rate
Share based compensation expenses not deductible for tax purposes
Other expenses not deductible for tax purposes
Effect of tax holiday
Effect of different tax rate of subsidiary operation in other jurisdiction
Effect of different tax rate of DTA and DTL applied
Valuation allowance movement
Withholding tax
Other
Year Ended December 31,
2013
2014
2015
25.00%
3.45%
1.12%
(19.06)%
0.02%
(4.36)%
0.42%
—
0.11%
6.70%
25.00%
3.27%
0.72%
(13.69)%
1.08%
2.29%
—
0.19%
—
18.86%
25.00%
5.17%
3.71%
(13.18)%
2.05%
(2.37)%
(0.56)%
2.91%
—
22.73%
F-27
Table of Contents
The aggregate amount and per share effect of the tax holiday are as follows:
The aggregate dollar effect
Per share effect—basic
Per share effect—diluted
2013
$
8,725,381
0.07
0.07
Year Ended December 31,
2014
$
11,285,429
0.09
0.09
2015
$
5,977,806
0.04
0.04
As of December 31, 2014 and 2015, the Group had tax operating loss carry forwards of $14,298,098 and $15,151,067, respectively. These tax losses are
available for offset against future profits that may be carried forward until calendar year 2019 and 2020, respectively.
Undistributed earnings of the Company’s PRC subsidiaries of approximately $240,339,365 at December 31, 2015 are considered to be indefinitely reinvested
and, accordingly, no provision for PRC dividend withholding tax has been provided thereon. Upon distribution of those earnings generated after January 1,
2008, in the form of dividends or otherwise, the Group would be subject to the then applicable PRC tax laws and regulations. The amounts of unrecognized
deferred tax liabilities for these earnings are in the range of $12,016,968 to $24,033,937, as the withholding tax rate of the profit distribution will be 5% or
10% depending on whether the immediate offshore companies are able to maintain the preferential withholding tax rate of 5%.
Income tax payable balance of the Group represents the actual cash tax payments to be made by the legal entities within the Group. Income tax provision
reflected in the Company’s consolidated statements of operations is calculated based on a separate return basis as if the Group had filed a separate tax return,
which has considered the impact of general corporate expenses allocated from E-House. The difference between the income tax provision on a separate return
basis and the tax liability accrued was reflected as deemed distribution to E-House associated with tax liability in the consolidated statements of changes in
equity before the IPO. Such difference amounted to $2,381,799 and $571,227 for the years ended December 31, 2013 and for the period from January 1, 2014
to the IPO date, respectively.
10. Share-Based Compensation
Leju Plan
In November 2013, the Group adopted a share incentive plan (“Leju Plan”), which allows the Group to offer a variety of share-based incentive awards to
employees, officers, directors and individual consultants who render services to the Group. Under the Leju Plan, the maximum number of shares that may be
issued shall be 8% of the total outstanding shares on an as-converted and fully diluted basis as of the effective date of the plan. Options have a ten-year life.
Share Options:
On December 1, 2013, the Company granted 7,192,000 options to purchase its ordinary shares to certain of the Group’s employees and E-House’s employees
at an exercise price of $4.60 per share. The options expire ten years from the date of grant and vest ratably at each grant date anniversary over a period of
three years.
On December 16, 2013, the Company granted 600,000 restricted shares to a director and an E-House employee to replace the same number of options
previously granted under the Leju plan, with all other terms unchanged. The purchase price of the restricted shares is $4.60 per share, which were the exercise
prices of the options that were replaced. The modification did not result in any incremental compensation expense. Cash received from the advance payment
of the restricted shares are recorded as an amount due to related parties.
F-28
Table of Contents
In January, 2014, the Company granted 60,000 restricted shares to an E-House employee to replace the same number of options previously granted under the
Leju plan, with all other terms unchanged. The purchase price of the restricted shares is $4.60 per share, which were the exercise prices of the options that
were replaced. The modification did not result in any incremental compensation expense. Cash received from the advance payment of the restricted shares are
recorded as an amount due to related parties.
During 2015, the Company granted 2,517,000 options to purchase its ordinary shares to certain of the Group’s employees at an exercise prices from $5.54 to
$9.68 per share, respectively. The options expire ten years from the date of grant and vest ratably at each grant date anniversary over a period of three years.
The Company has used the binomial model to estimate the fair value of the options granted under the Leju Plan. The fair value per option was estimated at the
date of grant using the following assumptions:
Risk-free rate of return
Contractual life of option
Estimated volatility rate
Dividend yield
2013
2015
2.98%
10 years
56.74%
0.00%
2.14%
10 years
62.82%
2.56%
A summary of option activity under the Leju Plan during the year ended December 31, 2015 is presented below:
Outstanding, as of January 1, 2015
Granted
Number of
Options
6,133,799
2,517,000
Weighted
Average
Exercise Price
$
4.60
6.38
Weighted
Average
Remaining
Contractual
Term
Weighted
Average
Aggregate
Intrinsic
Value of
Options
8.92
37,784,202
Exercised
Forfeited
Outstanding, as of December 31, 2015
Vested and expected to vest as of December 31, 2015
Exercisable as of December 31, 2015
(196,185)
(390,896)
8,063,718
7,824,106
3,635,917
4.60
5.26
5.12
5.51
4.60
949,907
4,806,104
1,663,274
4,072,227
8.50
8.97
7.92
The weighted average grant-date fair value of the options granted in December 2013 was $2.21 and $3.44 per share of the options granted in 2015. For the
year ended December 31, 2013, 2014 and 2015, the Company recorded compensation expenses of $289,649, $3,464,140 and $4,025,809 for the share options
granted to the Group’s employees and recorded deemed distribution to E-House of $92,225, $1,061,412 and $1,070,383 for the share options granted to E-
House’s employees, respectively. During the years ended December 31, 2014 and 2015, 266,201 and 196,185 options were exercised having a total intrinsic
value of $1,668,693 and $949,907, respectively.
As of December 31, 2015, there was $11,525,658 of total unrecognized compensation expense related to unvested share options granted under the Leju Plan.
That cost is expected to be recognized over a weighted-average period of 2.13 years.
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Table of Contents
Restricted Shares:
On March 18, 2014, the Company granted 866,000 restricted shares to certain employees, directors and officers, under the terms of each restricted shares,
restricted shares vest over three years. On August 21, 2014, the Company granted 229,400 restricted shares to certain employees and officers, under the terms
of each restricted shares, restricted shares vest over eight months.
A summary of restricted share activity under the Leju Plan during the year ended December 31, 2015 is presented below:
Outstanding, as of January 1, 2015
Granted
Vested
Forfeited
Outstanding, as of December 31, 2015
Number of
Restricted
Shares
1,526,600
—
(719,064)
(10,200)
797,336
Weighted
Average
Grant-date
Fair Value
$
9.42
9.98
16.25
8.82
The total fair value of restricted shares vested in 2013, 2014 and 2015 was nil, $486,200 and $7,179,455, respectively.
For the years ended December 31, 2013, 2014 and 2015, the Company recorded compensation expenses of $20,855, $4,881,656 and $5,273,322 for the
restricted shares granted to the Group’s employees and recorded deemed distribution to E-House of $13,903, $41,570 and $41,580 for the share options
granted to E-House’s employees, respectively.
As of December 31, 2015, there was $4,384,344 of total unrecognized compensation expense related to unvested restricted shares granted under the Leju
Plan. That cost is expected to be recognized over a weighted-average period of 1.19 years.
Omnigold Plan:
In 2015, the Group’s subsidiary, Omnigold Holdings Limited (“Omnigold”), adopted a share incentive plan (“Omnigold Plan”), which proposed that (i) the
maximum number of shares of Omnigold available for issuance pursuant to all awards under the Ominigold Plan shall initially be 5,000,000 as of the date of
the Ominigold Plan was approved and adopted by the Board of Omnigold (the “Effective Dare”), and (ii) the Ominigold Plan shall be increased automatically
by 5% of the then total issued and outstanding shares of Omnigold on an as-converted fully diluted basis on each of the third, sixth and ninth anniversary of
the Effective Date.
On August 11, 2015, Omnigold granted 2,400,000 options to purchase its ordinary shares to certain of the Group’s employees at an exercise price of $1.50 per
share. The options expire ten years from the date of grant and vest ratably at each grant date anniversary over a period of three years.
The Company has used the binomial model to estimate the fair value of the options granted under the Omnigold Plan. The fair value per option was estimated
at the date of grant using the following assumptions:
Risk-free rate of return
Contractual life of option
Estimated volatility rate
Dividend yield
Table of Contents
2015
3.33%
10 years
63.69%
0.00%
F-30
A summary of option activity under the Omnigold Plan during the year ended December 31, 2015 is presented below:
Number of
Options
Exercise Price
Remaining
Contractual
Term
Aggregate
Intrinsic
Outstanding, as of January 1, 2015
Granted
Exercised
Forfeited
Outstanding, as of December 31, 2015
Vested and expected to vest as of December 31, 2015
Exercisable as of December 31, 2015
—
2,400,000
—
(130,000)
2,270,000
1,966,771
—
$
1.50
1.50
1.50
1.50
Value of
Options
—
—
—
—
10.00
9.61
9.61
The grant-date fair value of the options granted in August, 2015 was $0.30 per share. For the year ended December 31, 2015, the Company recorded
compensation expenses of $80,577.
As of December 31, 2015, there was $545,884 of total unrecognized compensation expense related to unvested share options granted under the Omnigold
Plan. That cost is expected to be recognized over a weighted-average period of 2.61 years.
E-House’s Share Incentive Plan (the “E-House Plan”)
In 2006, E-House Holdings adopted the E-House Plan, which allows E-House Holdings to offer a variety of share-based incentive awards to employees,
officers, directors and individual consultants who render services to E-house. Under the E-House Plan, E-House Holdings authorized 3,636,364 ordinary
shares, or 5% of the then total shares outstanding, to grant as options or restricted shares over a three-year period. In October 2010, E-House Holdings
authorized an increase of 4,013,619 ordinary shares to the award pool. In November 2012, E-House Holdings further authorized an increase of 1,273,000
ordinary shares to the award pool. In August, 2013, E-House Holdings authorized an increase of 6,644,659 ordinary shares to the award pool. Options have a
ten-year life. Share options granted under the E-House Plan can be settled by the employee either by cash or net settled by shares.
Share Options:
A summary of option activity under the E-House Plan during the year ended December 31, 2015 is presented below:
Outstanding, as of January 1, 2015
Exercised
Forfeited
Outstanding, as of December 31, 2015
Vested and expected to vest as of December 31, 2015
Exercisable as of December 31, 2015
Table of Contents
Number of
Options
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
9,476,704
(513,261)
(7,160)
8,956,283
8,956,283
8,956,283
F-31
4.52
1.86
4.74
4.67
4.67
4.67
4.80
4.80
4.80
Weighted
Average
Aggregate
Intrinsic
Value of
Options
25,776,635
1,745,007
14,509,178
14,509,178
14,509,178
E-House Holdings recorded compensation expense of $12,817,935, $5,950,940 and nil for the years ended December 31, 2013, 2014 and 2015, respectively.
During the years ended December 31, 2013, 2014 and 2015, 4,596,761, 3,446,585 and 513,261 options were exercised having a total intrinsic value of
$25,248,554, $23,679,729 and $1,745,007, respectively.
As of December 31, 2015, there is no unrecognized compensation expense related to unvested share options granted under the E-House Plan.
Restricted Shares:
E-House Holdings granted 1,303,000, 1,439,000 and nil restricted shares to certain employees, directors and officers in 2013, 2014 and 2015 respectively.
Under the terms of each restricted shares, restricted shares vest over three years.
A summary of restricted share activity under the E-House Plan during the year ended December 31, 2015 is presented below:
Unvested as of January 1, 2015
Granted
Vested
Forfeited
Unvested as of December 31, 2015
Number of
Restricted
Shares
2,697,049
—
(1,288,330)
(50,004)
1,358,715
Weighted
Average
Grant-date
Fair Value
$
8.50
7.69
7.90
8.50
The total fair value of restricted shares vested in 2013, 2014 and 2015 was $5,612,379, $6,094,602 and $9,909,868, respectively.
As of December 31, 2015, there was $11,558,404 of total unrecognized compensation expense related to restricted shares granted under the E-House Plan.
That cost is expected to be recognized over a weighted-average period of 1.53 years.
E-House Holdings recorded compensation expense of $5,668,460, $6,174,583 and $9,680,385, for the years ended December 31, 2013 and 2014 and 2015,
respectively, related to restricted shares.
Share-based compensation expenses under E-House Plan allocated to the Group
The share-based compensation expense under E-House Plan allocated to the Group was $6,000,438 and $572,340 for the years ended December 31, 2013 and
the period from January 1, 2014 to the IPO date, respectively. These expenses are part of the selling, general and administrative expenses allocated from E-
House, which were waived and have been reflected as capital contributions as of the date such expenses were originally allocated. Subsequent to the IPO, E-
House began charging the Group transitional corporate service fees, $1,857,996 and $1,066,477 share-based compensation expense under E-House Plan and
CRIC Plan were charged to Leju from the IPO date to December 31, 2014 and for the year ended December 31, 2015. (See Note 13)
F-32
Table of Contents
Other Equity Compensation
In September 2014, the Group acquired non-controlling interests from certain employee shareholders. The price premium paid over the fair value of the
ordinary shares amounting $4,276,810 was recorded as share-based compensation costs and to be amortized over the required two-year service period (See
Note 3). $534,601 and $2,138,404 stock compensation expense was recognized for the year ended December 31, 2014 and 2015. As of December 31, 2014
and 2015, there was $3,742,209 and $1,603,805 of total unrecognized compensation expense related to this compensation agreement.
11. Employee Benefit Plans
The Group’s PRC subsidiaries and VIEs are required by law to contribute a certain percentages of applicable salaries for retirement benefits, medical
insurance benefits, housing funds, unemployment and other statutory benefits. The PRC government is directly responsible for the payments of such benefits.
The Group contributed $14,174,182, $17,727,125, and $20,413,820 for the years ended December 31, 2013, 2014 and 2015, respectively, for such benefits.
12. Distribution of Profits
Relevant PRC statutory laws and regulations permit payment of dividends by the Group’s PRC subsidiaries and VIEs only out of their retained earnings, if
any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of the Group’s PRC subsidiaries and VIEs is required
to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of the
Group’s subsidiaries with foreign investment is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the
discretion of the board. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess
of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends, loans or advances except in the event of liquidation
of these subsidiaries.
The amount of the reserve fund for the Group as of December 31, 2014 and 2015 was $7,251,948 and $7,990,298 respectively.
As a result of these PRC laws and regulations, the Group’s PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets,
including general reserve and registered capital, either in the form of dividends, loans or advances. Such restricted portion amounted to $33,040,488 and
$33,778,838, of which $8,349,188 and $8,342,759 was attributed to general reserve and registered capital of the VIEs, as of December 31, 2014 and 2015,
respectively.
13. Segment Information
The Group operates and manages its business as a single segment. The Group uses the management approach to determine operating segments. The
management approach considers the internal organization and reporting used by the Group’s chief operating decision maker (“CODM”) for making decisions,
allocating resources and assessing performance. The Group’s CODM has been identified as the chief executive officer, who reviews the consolidated results
of the Group as a whole when making decisions about allocating resources and assessing performance.
F-33
Table of Contents
The following table summarizes the revenue information of the Group:
E-commerce
Online advertising
Listing
Geographic
2013
$
170,204,545
145,444,790
19,772,181
335,421,516
Year Ended December 31,
2014
$
326,679,871
155,049,818
14,293,184
496,022,873
2015
$
420,552,177
134,229,255
21,022,504
575,803,936
Substantially all of the Group’s revenues from external customers and long-lived assets are located in the PRC.
Major customers
There were no customers from whom revenue accounted for 10% or more of total revenue for the years ended December 31, 2013, 2014 and 2015,
respectively.
Details of the accounts receivable from customers accounting for 10% or more of total net accounts receivable are as follows:
Customer A
14. Related Party Balances and Transactions
As of December 31,
2014
$
2015
$
13,979,270
14,011,827
The table below sets forth major related parties and their relationships with the Group:
Company Name
E-House
SINA
Under the common control of E-House Holdings
Mr. Charles Chao, co-chairman of E-House, is SINA’s chairman and chief
Relationship with the Group
executive officer
Beijing China Real Estate Research Association
Technology Ltd. (“CRERAT”)
Mr. Xin Zhou, co-chairman and chief executive officer of E-House, is the
legal representative of CRERAT, and E-House owns 51% of CRERAT
These consolidated financial statements include transactions with E-House and its subsidiaries. Furthermore, E-House provided certain corporate services for
the consolidated financial statement periods presented (see Note 1).
During the years ended December 31, 2013, 2014 and 2015, E-House loaned $1,000, nil and nil respectively, to fund capital injections into the Group’s PRC
subsidiaries. Such amounts have been waived by E-House and have been reflected as capital contributions as of the date such loans were originally made.
During the years ended December 31, 2013, 2014 and 2015, significant related party transactions were as follows:
F-34
Table of Contents
Corporate expenses allocated from E-House
Corporate service provided by E-House under transitional service agreement
Online advertising agency fee recognized as cost of revenues purchased
from SINA
Services purchased from/rental paid to E-House
Online advertising services provided to CRERAT
Online advertising services provided to E-House
Online advertising services provided to SINA
Dividend declared and paid to E-House
2013
$
15,527,623
—
Year Ended December 31,
2014
$
2,857,251
10,399,978
6,033,036
949,584
—
10,614
—
—
6,630,010
1,191,469
—
160,238
—
—
2015
$
—
6,040,071
6,093,974
5,927,764
3,174
28,679
19,899
18,738,984
The transactions are measured at the amount of consideration established and agreed to by the related parties, which approximate amounts charged to third
parties.
As at December 31, 2014 and 2015, amounts due from related parties were $684 and $8,906 respectively, which were the cash paid to supplier on behalf of
CRERAT for the purchase of marketing services.
As at December 31, 2014 and 2015, amounts due to related parties were comprised of the following:
(1)
(2)
SINA
E-House
Management
E-House Management
Total
(3)
(3)
As of December 31,
2014
$
1,705,208
1,560,283
1,840,000
184,000
5,289,491
2015
$
1,418,096
7,783,911
920,000
92,000
10,214,007
(1) The amount due to SINA as of December 31, 2014 and 2015 represents online advertising agency fees payable to SINA.
(2) The amount due to E-House as of December 31, 2015 was primarily for corporate service fees charged to Leju, and partially offset by the amount due to
online services provided to E-House and revenues collected by E-House on behalf. The balance is interest free and settable on demand.
(3) The amount due to management/ E-House management represents consideration paid by management/ E-House management for unvested restricted
shares (see Note 10).
The rollforward of the payable (receivable) balance with E-House for the years ended December 31, 2013, 2014 and 2015 is as follows:
Table of Contents
F-35
2013
$
Year Ended December 31,
2014
$
2015
$
Balance at January 1
Refund loan to E-House for working capital
Loans from E-House for capital contribution
Dividend declared to E-House
Dividend paid to E-House
Corporate expenses allocated from E-House (Note 1)
Corporate service provided by E-House under transitional
service agreement (Note 1)
Revenues collected by E-House on behalf of the Company
Related party balance waived as capital contribution
Service provided to E-House
Service purchased from E-House
Net (payment) receipt for services
Balance at December 31
A
B
C
D
B
E
F
B
E
E
G
(A) Represents the movement of the loan payable to E-House
79,553,723
(43,818,894)
1,000
—
—
15,527,623
—
(45,449,972)
(15,528,623)
(10,614)
949,584
5,304,215
(3,471,958)
(3,471,958)
—
—
—
—
2,857,251
10,399,978
(4,803,958)
(2,857,251)
(160,238)
1,191,469
(1,595,010)
1,560,283
1,560,283
(42,513,286)
—
18,738,984
(18,738,984)
—
6,040,071
—
—
(28,679)
5,927,764
36,797,758
7,783,911
(B) Represents the movement of the loans from E-House for capital contributions and headquarter expenses allocated by E-House prior to Leju’s initial
public offering, which were subsequently 100% waived by E-House and recorded as capital contributions by Leju. Accordingly, the net balance at each
year end is zero.
(C) Represent the cash dividend declared by Leju to its shareholder E-house. In March 2015, the Company’s board of directors approved the payment of a
cash dividend of $0.20 per ordinary share ($0.20 per ADS) directly from the additional paid-in capital account.
(D) Represent the cash dividend paid to E-House.
(E) Represents the movement of service fees receivable from and payable to E-House
(F) Represents Leju revenues collected by E-House on behalf of the Company
(G) Represents the cash flow between the Company and E-House except to the loan from (refund to ) E-House
Loan payable to E-House (A)
Service payable to E-House (E)
Receivables for E-House collection on behalf of the Company (F)
Amounts due to E-House
As of December 31,
2014
$
42,513,286
9,852,476
(50,805,479)
1,560,283
2015
$
—
16,440,049
(8,656,138)
7,783,911
F-36
Table of Contents
15. Commitments and Contingencies
(a) Operating lease commitments
The Group has operating lease agreements principally for its office properties in the PRC. Such leases have remaining terms ranging from one to 120 months
and are renewable upon negotiation. Rental expenses were $7,669,866, $8,601,039 and $10,078,033, for the years ended December 31, 2013, 2014 and 2015,
respectively.
Future minimum lease payments under non-cancelable operating lease agreements at December 31, 2015 were as follows:
Year Ended December 31
2016
2017
2018
2019
2020
Then thereafter
Total
(b) Contingencies
Amount
$
9,446,098
8,059,931
3,787,386
974,745
713,510
1,035,233
24,016,903
The Group is subject to claims and legal proceedings that arise in the ordinary course of its business. Each of these matters is subject to various uncertainties,
and it is possible that some of these matters may be decided unfavorably to the Group. The Group does not believe that any of these matters will have a
material effect on its business, assets or operations.
16. Subsequent Events
No significant subsequent events have occured as of April 22, 2016.
F-37
PRINCIPAL SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITIES
Name of Entity
PLACE OF INCORPORATION
Exhibit 8.1
Subsidiaries
Branco Overseas Ltd
E-House China (Tianjin) Holdings Ltd.
E-House Property Consultancy Ltd.
E-House International Property Consultancy Ltd.
E-House City Rehouse Real Estate Broker (Shanghai) Co., Ltd.
China E-Real Estate Holdings Ltd.
China E-Real Estate Group Ltd.
Shanghai Yi Yue Information Technology Co., Ltd.
China Online Housing Technology Corporation
China Online Housing (Hong Kong) Co., Limited
Shanghai SINA Leju Information Technology Co., Ltd.
Shanghai Fangxin Information Technology Co., Ltd.
Leju (China) Internet Technology Co., Ltd.
Omnigold Holdings Ltd.
China Commercial Real Estate Group Ltd.
China Real Estate Business Group Ltd.
Beijing Maiteng Fengshun Science and Technology Co., Ltd.
Consolidated Variable Interest Entities
Shanghai Yi Xin E-Commerce Co., Ltd.
Beijing Yisheng Leju Information Services Co., Ltd.
Beijing Jiajujiu E-Commerce Co., Ltd.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
British Virgin Islands
British Virgin Islands
British Virgin Islands
Hong Kong
PRC
British Virgin Islands
Hong Kong
PRC
Cayman Islands
Hong Kong
PRC
PRC
PRC
British Virgin Islands
British Virgin Islands
Hong Kong
PRC
PRC
PRC
PRC
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.1
I, Yinyu He, certify that:
1. I have reviewed this annual report on Form 20-F of Leju Holdings Limited;
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:
Name:
Title:
/s/ Yinyu He
Yinyu He
Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.2
I, Min Chen, certify that:
1. I have reviewed this annual report on Form 20-F of Leju Holdings Limited;
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 function):
(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
/s/ Min Chen
By:
Name: Min Chen
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 Leju Holdings Limited (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, Yinyu He, 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:
Name:
Title:
/s/ Yinyu He
Yinyu He
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 Leju Holdings Limited (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, Min Chen, 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
/s/ Min Chen
By:
Name: Min Chen
Title:
Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-197069 on Form S-8 of our reports dated April 22, 2016, relating to
(1) the consolidated financial statements of Leju Holdings Limited and its subsidiaries (“the Group”) (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the basis of financial statement presentation), and (2) the effectiveness of the Group’s internal control financial
reports appearing in this Annual Report on Form 20-F of the Group for the year ended December 31, 2015.
Exhibit 15.1
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 22, 2016
[Letterhead of Fangda Partners]
Exhibit 15.2
April 22, 2016
Leju Holdings Limited
15/F, Beijing Shoudong International Plaza
No. 5 Building, Guangqu Home, Dongcheng District
Beijing 100022
People’s Republic of China
Dear Sirs,
We consent to the reference to our firm under “Item 4. Information on the Company—C. Organizational Structure” in Leju Holdings Limited’s
Annual Report on Form 20-F for the year ended December 31, 2015, which will be filed with the Securities and Exchange Commission (the “SEC”) in
April 2016, and further consent to the incorporation by reference into the Registration Statement No. 333-197069 on Form S-8. We also consent to the filing
with the SEC of this consent letter as an exhibit to the Annual Report on Form 20-F for the year ended December 31, 2015.
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.
Yours faithfully,
/s/ Fangda Partners
Fangda Partners